UMB Financial Corporation

Hello all and welcome to UMB Financial's fourth quarter and full year 2023 financial results call. My name is Lydia and I'll be your operator today. If you'd like to ask a question during the Q&A session, you can do so by pressing star followed by one on your telephone keypad. I'll now hand you over to Kay Gregory with investor relations to begin. Please go ahead.

Good morning and welcome to our fourth quarter 2023 call. Mariner Kemper, President and CEO of 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. 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 45 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 law. All earnings per share metrics discussed on this call are on a diluted share basis. And unless otherwise indicated, comparisons are versus third quarter 2023. Net operating income discussed here and in our slides excludes the FDIC special assessment and certain other expenses and is reconciled in our press release and slide deck. Presentation materials are available online at investorrelations.umb.com. Now, I'll turn the call over to Mariner Kemper.

Thank you, Kay, and good morning. Before I get started, I've got to talk about some very important business by congratulating our hometown heroes, the Kansas City Chiefs, who are yet again headed to the Super Bowl in a couple weeks. Now, I'd like to discuss our fourth quarter and full year performance for 2023. a year that played out very differently from what we were expecting and I think the rest of you were expecting last year. During a particularly challenging period for the banking industry, UMB delivered strong results, demonstrating the power and resilience of our diversified business model. We closed out the year with a solid fourth quarter. I'll review a few highlights and then Ram will add more detail in the financial and driver section. As you know, most banks recognize the expense for the FDIC special assessment in the fourth quarter. Our share of the assessment was $52.8 million, an impact of about $1.08 per share pre-tax to net income. We presented our financial metrics both on a GAAP basis and adjusted to exclude this charge. For the full year of 2023, net income was $350 million, or $7.18 a share. On an adjusted basis, net operating income was $397.1 million, or $8.14 per share. For the fourth quarter, we earned $70.9 million, or $1.45 a share. However, as adjusted, net operating income was $112 million, or $2.29 per share, representing an increase of 13.9% compared to the third quarter of 2023 and 10.8% compared to the fourth quarter a year ago. Our results reflected strong loan growth and deposit growth, expanding net interest margin and net interest income, solid fee income growth, and exceptional asset quality. Average loan balances increased 6.3% on an annualized basis from the third quarter to $23.1 billion. For comparison, banks between $10 and $100 billion in assets that had reported results so far have shown an annualized increase of 3.6%. We posted strong top line production, 40% above third quarter, and in line with our levels in recent quarters. Construction and commercial real estate drove most of our loan growth in the fourth quarter, with continued draws on previously approved construction loans. Payoff levels increased to 4.4% of loans, impacting C&I balances. CRE growth has been largely in multifamily and industrial projects. Once again, we've included more detail on the portfolio in our slides, showing the mix of loans by type and geography, along with LTVs and other metrics. Asset quality in the book remains strong. We adhere to conservative standards, which includes underwriting to imputed or stressed interest rates and moderate loan-to-value ratios. We don't use trended rents, and we have very strong liquid sponsors with great cash flow. Ninety percent of our investment CRE portfolio is recoursed. Speaking of asset quality, we reported excellent metrics with improvements across the board. Non-performing loan levels improved again to six basis points while delinquency levels declined, and we saw an 11% decrease in classified loans. Net charge-offs were two basis points of average loans for the quarter and just five basis points for the full year of 2023. Again, we outperformed peer banks, which have reported a median net charge-off rate for the fourth quarter of 15 basis points so far. On slide 26, we included a longer-term history of charge-offs, which have averaged just 28 basis points over the last 20 years. In 2023, we experienced a 16 basis point reduction in our annual charge-off rate compared to 2022, reflecting the active management of our portfolio. I'm pleased with this result, especially given the environment and cautious narrative we're hearing across the industry. Again, we compare favorably to peer banks. which have reported a median six basis point increase in net charge off levels year over year. Moving to deposits, average balances increased 17.2% on an annualized basis from the third quarter. This growth was led by commercial customers, including 11% annualized increase in commercial DDA balances. We are seeing traction from our efforts to bring clients' total banking relationships to UMB. Piers, so far, have seen average annualized deposit growth of just 2.5% thus far in the quarter. Net interest income increased 3.7% as margin improved three basis points sequentially. From industry reports so far, our NIM expansion compares favorably, with peers reporting a median decline of four basis points. We continue to deploy cash flows from the securities portfolio into loans, and the pace of increased funding costs has slowed each of the past two quarters. Ron will share more detail and drivers on our margin outlook for 2024. Non-interest income for the fourth quarter was $140.3 million, representing 38% of revenue, more than two times the 17% median reported by peers. Our fee businesses continue to build scale, and we're seeing momentum in several areas. A few highlights include fund services, where Asset Center Administration have eclipsed $411 billion, a $48 billion improvement over 2022 levels. And in our custody business, we have had a 27% increase in net new account this year. Our fixed income and trading team saw increased activity as the expectation that the Fed has finished raising rates and has provided a little more clarity and brought some participants back into the market. We've shared additional detail on our fee income businesses and the revenue that's provided by them in our slides. And Ram will add more detail when he speaks. Total revenue for the fourth quarter increased 4.3% from a linked quarter basis. We posted positive operating leverage of 1.3% on a linked quarter basis and 0.3% in the year-over-year quarter. As seen on slide 31, our capital position improved during the fourth quarter with a 17 basis point increase in both CET1 and total capital ratios, which stood at 10.94% and 12.85% respectively. Our earnings continue to support our capital position in spite of the impact of the FDIC special assessment. Finally, we saw increased profitability ratios with operating ROTCE of 16.62% versus 14.96% in the third quarter. Tangible book value improved nearly 12% from September 30 to $58.12 per share. Peer banks so far have reported a median tangible book value increase of 6.9% in the quarter. Overall, we had a very solid quarter, especially given the challenging year we all had. Before I turn it over to Ram, I'd like to share a few thoughts on the events of last spring that ultimately led to the FDIC's special assessment we recognized in the fourth quarter. It has become very clear that the underlying cause of the 2023 bank failures was interest rate mismatch, primarily on the asset side. A few banks were ill-positioned and poorly managed for the interest rate environment we found ourselves in. with a largely fixed asset base that lacked flexibility. One lesson learned during that time was the power of various market participants to fuel a largely media-based crisis and circus. As the panic spread across media outlets, the risk of a self-fulfilling prophecy became real. Our reputation with our clients and in our market is something we have earned and cherished over 110 years of history. It was extremely frustrating for us to watch these industry observers pontificate based on a lack of understanding of how the industry works and continue to focus on the wrong symptoms like unadjusted, uninsured deposits or AOCI. This was a classic case of facts getting in the way of a good narrative. As I've said before, thank you to you, the analysts and the investors on the call with us today who took the time and care to understand the semantics of what transpired in the spring. Year-end reports have confirmed what we already knew to be true. The fundamentals in this industry remain steady. The demise of regional banks didn't happen as predicted, and banks like ours that were well-prepared have not only weathered the storm, but emerged stronger and with positive results. The resiliency of the banking industry has been evident and on display in recent months, and the liquidity, regulatory capital levels, loan portfolio asset quality, and funding sources remain strong. In closing, I'm incredibly proud of our UMB associates that drove this performance, and I'm deeply grateful to our loyal client base that grew with us through this much exaggerated industry noise in 2023. It was extremely rewarding to see how our company and customers came together to support each other. As always, we run our company with a strong focus on both the short-term and the long-term performance through every stage and every economic cycle, and we feel good about our strategy. Looking ahead into 2024, we see a muted but resilient macro environment, and we remain well positioned for any environment with an attractive loan-to-deposit level, strong capital ratios, and high-quality loan portfolio. With that, I'll turn it over to Ram to give you more details on our results. Ram?