UMB Financial Corporation

Ladies and gentlemen, welcome to the UMB Financial First Quarter 2023 Financial Resource Conference call. My name is Glenn and I will be the moderator for today's call. If you would like to ask a question during the presentation, you may do so by pressing star 1 on the telephone keypad. I will now hand the floor over to Kay Gregory, Investor Relations. Kay, please go ahead.

Good morning and welcome to our First Quarter 2023 call. Mariner Kemper, President and CEO, and Ram Shankar, CFO, will share a few comments about our results. Jim Rine, 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 which are subject to assumptions, risks, and uncertainties. These risks are included in our SEC filings and are summarized on slide 47 of our presentation. Actual results may differ from those set forth in any 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.

Thank you, Kay, and good morning. Thanks everybody for joining us today. 2023 is certainly shaping up to be an interesting year. We've all had a front row seat to the recent volatility across the industry sparked by the failure of SVB and exacerbated by a few market participants and the media. While the events of the past several weeks that put banks in the spotlight may not have been anticipated, Trends in the latter part of 2022 and early 2023 have pointed to coming challenges. We expected the continuing inflation, changes in the yield curve, the outflows of excess liquidity built up during the pandemic, and the resulting deposit beta acceleration in response to the FOMC raising an unprecedented nine times in the last 12 months would likely present some inherent but manageable risk to the industry. By design, this would also lead to eventual curtailment of credit and the slowing of the economy. At UMB, we are always prepared for different environments with our variable asset base, diverse, deeply entrenched deposit base, ample sources of liquidity, growing fee income businesses, and a long track record of conservative underwriting, resulting in excellent asset quality. and we've taken the additional steps to enhance that risk profile over the past few weeks. Even with a more challenging environment in March, we had a strong first quarter. Like others, we saw rising deposit costs, which were already beginning to materialize before the recent market turmoil. The flexibility we've built on the asset side of our balance sheet, including a low loan to deposit ratio, 67% of total loans repricing within 12 months, and nearly $1.6 billion of securities cash flow expected over the same time will help mitigate this impact on liability pricing. Our first quarter results included average deposit growth of 2.4% and average loan growth of 19.3% on a linked quarter annualized basis. We had continued momentum in our fee businesses, and credit quality remains excellent, with net charge-offs of just 0.09% of average loans. Non-performing loans further improved from year-end, and we're at just 0.07% of total loans as of March 31st. As you'll see in our 10-Q, criticized loans were flat. Our watch list levels, which are still past loans, will bounce around as we manage our book. were quick to recognize trouble, take action, and address any issues. This proactive management has been consistent, and historically, we've seen very little migration to loss. Turning to the balance sheet, the drivers behind our 19.3% linked quarter annualized growth and average loan balances this quarter are on slide 24. Total top line loan production, as shown on slide 25, was $934 million for the quarter. Payoffs and paydowns represent 3.3% of loans in the first quarter. The average for the past five quarters was just under 4%, in line with our longer-term trends. Commercial real estate and construction growth in the first quarter came predominantly from industrial and multifamily categories. This quarter, we've provided additional disclosures on our CRE portfolio in our line of business section on slide 37 and 38. Credit quality is strong across our book, and the portfolio is well diversified by property classification, tenant type, and geography. As it relates to office CRE, our portfolio of just under 1 billion represents just 4.5% of total UMB loans. The average size of an office credit is 8.2 million, and approximately 70% of the portfolio matures in 2025 or later. The office portfolio is 82% recourse and has a weighted average loan-to-value of approximately 65%. The smaller non-recourse portion has a lower LTV ratio of 61% and is either leased to credit tenants long-term or with our strongest sponsors. We've generally limited our office lending to our strongest and most experienced sponsors, and we adhere to conservative standards, which include underwriting to imputed or stressed interest rates and moderate loan-to-value ratios. The majority of our office portfolio is located within UMB's Midwestern footprint, and we have no office exposure in major coastal markets. Given our Midwestern focus, our borrowers are seeing continued leasing interest and increasing return to office activity. This is supported by the makeup of our portfolio, which is 55% in suburban office parks and an additional 17% in medical offices. We continue to monitor the portfolio closely and stay ahead of any emerging risk. Looking ahead to the second quarter, we see opportunities in our various verticals across the footprint. We will continue to remain disciplined on our pricing and further emphasizing lending that come with deposit relationships. On the other side of the balance sheet, average deposits increased 2.4% on an annualized basis compared to the fourth quarter. As we shared earlier in our 8K, Since March 9th, balances increased more than a billion dollars through quarter end. For comparison purposes, the peers who have reported through the end of last week reported a median increase in average deposits of just over 0.05%. Looking at DDA, we saw a shift of less than half of what our peers reported. Importantly, as we point out each quarter, activity in our commercial and institutional customer base differentiates us from our peers with larger retail customer bases. On any given day, and particularly at month end and quarter end, deposit balances fluctuate for normal business purposes, such as payroll, dividends, and other expected activity. This is why we focus on average balances over the quarter. Slides 30 and 31 show the composition and the characteristics of our deposit portfolio. We have a very diverse deposit base across various industries, lines of business, and geographies. Fifty-five percent of our deposit accounts span ten years or more. Additionally, we have deep business relationships with depositors, with many using other products and services such as asset servicing, corporate trusts, payments, and treasury management. Uninsured deposits adjusted to exclude affiliate and collateralized deposits were 43% of total deposits as of March 31st. We have the opportunity to reduce this ratio even further, as much as 10 points, by using sweeps. Additionally, we continue to enhance our already strong contingent liquidity sources while increasing our proportion of insured deposits. As a result, our liquidity covered approximately 116% of uninsured deposits as of April 20th. Lastly, before I turn it over to Ram, I'd like to mention that I've appreciated the efforts of the research analyst community, including those of you on this call. You've made an effort to educate market participants and avoid contributing to unfounded fears. Ram?