UMB Financial Corp
NASDAQ:UMBF
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UMB Financial Corp
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Ladies and gentlemen, welcome to the UMB Financial First Quarter 2023 Financial Results Conference Call. My name is Glenn, and I will be the moderator for today's call. [Operator Instructions]
I would now hand the call 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 in 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 that 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 9x in the last 12 months would likely present some inherent, but manageable risks to the industry. By design this would also lead to eventual curtailment of credit and the slowing of the economy.
At UMB, we're 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 the 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 were 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. We're 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 pay downs 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 multi-family 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 lendings 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 8-K since March 9, balance has increased more than $1 billion to 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 base. 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. 55% of our deposit accounts span 10 years or more. Additionally, we have deep business relationships with depositors, with many using other products and services such as asset servicing, corporate trust, payments, and treasury management. Uninsured deposits adjusted to exclude affiliate and collateralized deposits were 43% of total deposits as of the March 31.
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 20.
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 peers. Ram?
Thanks Mariner. I'll share a few additional drivers of our first quarter results. Then I'll discuss some of the key balance sheet items that are top of mind in the current environment related to deposits, securities, liquidity, and capital. Net income for the first quarter was $92.4 million or $1.90 per share. Operating pre-tax pre-provision EPS for the quarter was $2.78 per share, compared to $2.44 for the first quarter of 2022.
Net interest income decreased 1.4% versus the fourth quarter as the positive benefit from asset repricing and the benefits from loan growth was offset by the mix shift in liabilities and the impact of fewer days in the quarter. Net interest margin for the first quarter was 2.76%, a decrease of seven basis points from the linked-quarter. Drivers included negative impacts of approximately 51 basis points from deposit pricing and mix, and 16 basis points related to changes in Fed funds purchased, repurchase agreements and short-term borrowing levels.
Offsets include a positive 34 basis points from loan mix and repricing and 29 basis points from the benefit of free funds and changes in liquidity balances. While deposit costs continue to increase, our earning asset beta of 49% is outpacing our total cost of deposits and total cost of fund betas of 36% and 41% respectively cycled to-date. We continue to benefit from the shorter tenor of our asset base, including the fact that 67% of our loan portfolio reprices within 12 months.
On a linked-quarter basis, our loan yield beta of 61% outperformed our total deposit beta of 48% and total cost of funds beta of 59%, but we're lower than our cost of interest bearing deposit beta of 69%. As I noted earlier, the beta on our cost of interest bearing deposits increased due to mix shift, including our issuances of brokered CDs with different tenors prior to and subsequent to the failure of SBB.
In the first quarter, approximately 38% of our average deposits were interest free DDAs down slightly from 40% in the fourth quarter. The flexibility embedded on our balance sheet from variable rate loans that repriced and a higher proportion of DDAs provides us the ability to absorb and mitigate increases in cost of liabilities in the current high interest rate environment. As we've noted before, given the larger corporate and institutional nature of our deposit base, our deposit betas are more pronounced than many of our peers. In the current interest rate environment, we’ve taken additional steps enhancing asset pricing discipline and further emphasizing lending that has deposit relationships as well. As we look ahead, there are many factors that play into our expectation for net interest margin, including the shape of the yield curve, anticipated changes to short-term interest rates, continuation of mix shift, higher cash level, and competitive pressures from other financial institution and off balance sheet products.
There is a greater degree of uncertainty today, given the confluence of all these factors. Looking ahead, we would expect mid-single digit growth in net interest income on a year-over-year basis. Additionally, we expect to generate positive operating leverage in 2023.
Our reported non-interest income of $130.2 million, contains some market related variances, including in company owned life insurance income of $4 million versus just $21,000 in the fourth quarter, and a $1.8 million increase in customer related derivative income.
COLI income has a similar offset in deferred compensation expense. Customer acquisition and solid performance in corporate trust fund services and private wealth drove a 5.3% increase in trust and securities processing income. Quarterly income in that category exceeded $62 million and continue to see opportunities for growth. The $5 million decrease in net investment security gains relate to an impairment in the value of one of our bank sub debt holdings.
The detail drivers of our $237 million in non-interest expense are shown in our slides and press release. A few items of note. Employee benefits expense increased $13.2 million, largely due to typical seasonal reset of payroll taxes, insurance, and 401(k) expense. As previously noted, the industry-wide increase in FDIC assessment fees added $1.3 million and we had a full quarter of increased amortization expense related to the HSA acquisition in the fourth quarter.
As we discussed last quarter, we expect approximately $4.5 million of additional amortization expense annually. These increases were offset by normalization of accruals related to various incentive plan and timing of marketing and other spends from elevated fourth quarter levels. Considering those variances, we would put our quarterly starting point closer to $227 million or non-interest expenses.
Despite positive trends and credit metrics, provision for the first quarter increased to $23.3 million and included approximately $9 million related to forecasted changes to key economic variables and $7 million for growth in our loan portfolio. The quality of our loan portfolio remains excellent as Mariner mentioned. Our coverage ratio increased to 97 basis points of total loans from 91 basis points at year end.
Our effective tax rate was 17.2% for the first quarter compared to 15.7% in the first quarter of 2022. The increase rate was driven primarily by excess tax benefits related to equity based compensation. For full year 2023, we anticipate the tax rate will be approximately 17% to 19%.
Now, looking in more detail at the balance sheet, I’ll start with the details on our investment portfolio Slide 28 and 29. Our average investment security balances remain relatively flat from the fourth quarter at $11.6 billion, excluding the $1.2 billion of industrial revenue bonds in the health maturity category.
During the quarter, $250 million of securities with an average yield of 2.42% rolled off. The yield on our AFS portfolio increased 15 basis points to 2.69%, and the HDM portfolio, excluding of the IRBs I mentioned, had an average yield of 2.36% for the first quarter, an increase of seven basis points. The portfolio split roughly 60/40 between available for sale and health maturity, and the AFS book has a duration of four years.
Additionally, the portfolio is expected to generate nearly $1.6 billion of cash flows in the next 12 months, providing further funding flexibility. The roll off of these securities will also improve our AOCI position over that period.
Our unrealized loss position has improved from year end benefiting from the reduced marks on the AFS portfolio and HTM portfolios as interest rates have come down since December 31.
As of March 31, the unrealized pre-tax loss on the AFS portfolio narrowed to $678 million or 8.9% of the amortized cost. For the HDM portfolio, this loss was $490 million relative to the amortized cost. As we’ve shared previously, we transferred securities with an amortized cost of $4.1 billion from AFS to HDM in 2022. The remaining balance of the unrealized pre-tax losses related to the transfer was $237 million as of March 31.
Additionally, an after-tax gain of $57 million related to fair value of hedges was included in AOCI. We have no need to sell bonds, which could result in real life losses. We intend to hold these securities as they are important asset class used to collateralize municipal and trust deposits and can be used to bolster our liquidity.
Slide 33 highlights our liquidity position along with the contingent sources of funding available to meet customer and operational needs. As of March 31, we had $13.4 billion in available liquidity sources. As Mariner mentioned, liquidity coverage of uninsured deposits has increased to 116% as of last week.
Also on that slide, we’ve included our regulatory capital ratios. Our CET 1 of 10.57% compares favorably to the peer median. Our tangible common equity ratio improved five basis points from the fourth quarter to 6.28%. Excluding AOCI, TCE was 7.83%.
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.
Thank you. [Operator Instructions] We have our first question comes from Jared Shaw from Wells Fargo. Jared, your line is now open.
Hey, everybody. Good morning. Thanks for the…
Hey, Jared.
First just good job during a difficult environment with the deposit balances that’s nice to see the resilience of the model there. As we look at deposits, I think in the past you’ve talked about DDA as a percentage of total, maybe troughing around 35%. Is that still a good sort of floor to expect on the zero cost deposits?
Well, this is Mariner. I mean, we watch it closely. We still expect to maintain the overall outsize balances. Who knows exactly what the pressure short term will be on higher interest rates. It’s possible that a little bit could move yet from where we are at 38 today, but we don’t necessarily expect that. We just can’t really tell you one way or the other. If there’s a little more movement, because of a higher rate environment, don’t expect it to leave the balance sheet however.
The only thing, hey, this is Ram, Jared. The only thing I would add is last cycle we bottomed out at 32%, and since then we have a lot of new businesses like corporate trust on the aviation side that contribute a lot of DDAs as well. So arguably we would assume that it would be higher than where we bottomed out on that last time. But as Mariner said, this is unprecedented great environment and rates are much higher than anybody ever foresaw that.
But I mean, it’s been more stable than we – it’s been more stable than we would’ve expected it to be. I’ve really given the higher rate environment. So I don’t – we don’t expect a whole lot of movement.
Okay. And then as we look at the beta sort of the cumulative beta through the cycle, what should we expect for a peak through the cycle beta on overall cost of deposits or [indiscernible] however, you want to look at it?
Yes, probably, we’re at 36, as I said in my prepared comments. We’re probably assuming another rate hike, and we stay at 5.25. I would expect our total cost of beta to be around 40%, Jared.
And Jared, I would just add, we like to focus everybody on, the whole balance sheet anyway. We expect our asset pricing to remain strong and disciplined. And obviously our asset base is very flexible and with 60% of our loans repricing within interest rates and 70 within 12 months is really, really important from our perspective and not just focus on deposits.
Maybe once we see rate cuts at some point in the future what’s the – what type of – how quickly can that pass through to margin or what type of lag should we expect once we actually see cuts in the future?
This is such a different environment. I guess it’s hard to tell. I mean, if you look at past cycles, the deposits will move faster on the way down, which is the opposite on the way up, right? So on the way down, historically, we’ve benefited faster because the deposits move first on the way down. So if that’s in the – if the past is any indication of the future, we’re positioned pretty well for that. It’s probably too early to talk about how much is – how prepared we are with the assets on what’s term and what’s – what floors are and all that. I mean, it’s awfully early in the cycle. We’ll be moving on that, but we’ll be prepared for you when it comes.
Okay. All right. And then just finally for me. I appreciate the color on the office space and the detail around how high quality it is. As you’re talking to sponsors that are maybe coming due in the next 18 months, is your sense that as those come due that they’d be – that there’s access to additional equity to put into those deals as they come due to keep those strong metrics? Or would you – do you think that they’re more willing to sell properties at renewal now?
No, this – I’ll take a stab at that and then Tom can add to it. I mean, these are very, very strong borrowers with low loan to values, stressed interest rates on the front end. We do all our work on the front end is probably the best answer I’d give you. We stress these up front and to very, very strong liquid sponsors with big portfolios of other real estate and strong cash flow coming off of other projects. I don’t know Tom if you could add anything. Office is – we just, it’s the wrong – we’re the wrong bank to be focused on the office portfolio. It’s less than 4.4%. It’s super strong. We don’t think about it over here. But Tom?
Yes. This is Tom Terry. Just to reiterate, 4.5% of our total portfolio and we are more suburban in terms of more mobile [ph] and medium rise office as opposed to downtown office. And so, we have very strong sponsors but we don’t have any worries about their ability to put in more equity if that’s required at the time of renewal.
And I think in our remark, we talked about how much of it reprices in 2025 and beyond. And think about the cycle and the changes in interest rates. I mean, that we're probably pretty well protected anyway by the time 2025 rolls around.
Great. Appreciate the additional colors. Thank you.
Thank you. [Operator Instructions] We have our next question comes from Chris McGratty from KBW. Chris, your line now open,
Good morning , Chris.
Oh, great. Hi, good morning everybody. Just going back to credit, obviously this earning season has been a lot about office real estate. Mariner or team, is this where we need to focus for your company the most? Is there are other portfolios that perhaps are getting more attention?
Just a moment ago I tried to reference we don't worry about our office at all here. Again, it's a very, very small part of our portfolio that we don't worry about office here. And I don't – if you go to our provision expense, $9 million as we've mentioned in our comments, $9 million at tied to the CECL process that we now use with the economic factors, $7 million of it was based on loan growth. We have zero expectation that we fall outside of our historic charge-off metrics regardless of what the environment is. We've been at this a long time. You got in this room with me I've got Jim Rine and Tom Terry. The three of us have been doing this together through the last three cycles and we've had outstanding credit metrics. We're really proud of and we don't expect anything different.
Thank you for that. In terms of maybe a question on the ratings boundary, which has gotten a lot of attention for the group, does this change your business at all other deposits that either are tied or correlated to your rating? Obviously, we could argue if it's backwards looking or even right to begin with. But is there any effect on your deposits from what happened?
Not, no, not long-term. We had – there was a little disruption at the very beginning that Monday after SVB failed where it cost us a little bit to with a few clients, but since then that's all recovered. I would point you to something pretty important, which is when the interest rates go up 9x in a year, and the expectation of the Fed is that we slowed the economy, guess what happens, we slowed the economy. Thanks for a big part of that. There's going to be a contraction of loan growth for the industry. All of this is anticipated. All of it is expected. It's a cyclical outcome of what the federal government is doing intended to slow the economy. Was it exacerbated slightly by what's happened to SVB? Sure. But we have way, way overblown the impact of two failed banks in expecting that that has something to do with the rest of us. You guys on this phone are way smarter than some of these market participants. You ask way better questions that are researched. And I would just suggest that we move on and stop talking about the rating agencies, which had no value.
Yes, thank you for that. That's good context. And then maybe one for Ram, if I could. I think you said I want to make sure I got my notes, mid single digit growth and net interest income, that's on a full year 2023 over 2022.
Correct.
In terms of like to get to that number you mentioned $1.6 billion coming off the bond portfolio. I assume that'll get redirected into the loan book. Is the assumption still there even with your slowing economy comments? I mean, the last quarter you talked about double-digit grower regardless. Is that still kind of baked into that or did you tempered that at all?
I might just re-ask, make sure I got your question right. Do we expect the same kind of loan growth? Is that the question?
Yes, yes. Like what are the assumptions to get into that mid single digit growth in NII? Is it – I assume it's remixing of the balance sheet a little bit.
Yes, yes.
Yes.
Everything that you said. Yes, in terms of, we talked in a little bit in our prepared comments about how we're going to be really visible in on our asset pricing, making sure that our asset betas are exceeding what we do on the deposit side, so whatever that means from market. Mariner also talked in his prepared comments about the expected contraction in just availability of credit.
Yes.
But that said, one of our tenants of our investment thesis has always been outperformance in terms of loan growth.
Yes.
So we still see opportunities. We still see expansion opportunities in our verticals out of pipeline looks pretty good. So it's just no real softening of demand from our – from what we see.
Yes. I mean, it – I think naturally loan growth will slow. That doesn't mean we stop growing. I just think that naturally system-wide loan growth will slow a little bit. But that's off a pretty decent growth base anyway. And you include that – solid asset pricing, our ability, we believe we can continue to have strong loan beta and strong pricing discipline, which coupled with a – what we believe will be a flattening of expansion on the deposit side will allow that that mid single-digit expansion that Ram is talking about.
Yes. And you mentioned the $1.6 billion of securities books are rolling off at slightly north of two handles and being reinvested into new loans. That will be a big part of net interest income driving as well.
Got it. That's great. Thank you.
Thank you, Chris. [Operator Instructions] We have our next question comes from Nathan Race from Piper Sandler. Nathan, your line is now open.
Yes. Hi, good morning everyone and I appreciate taking the questions. Nice quarter.
Good morning, Nathan.
Going back to the NII growth assumptions, your guidance for 2023, does that just contemplating one more fed rate hike in May and then kind of the Fed on pause from there in the back half of the year?
That's right. Yes.
That's correct, Nate.
Okay, great. And then just in terms of some of the balance sheet dynamics of the quarter, it looks like you had about $2.8 billion in short-term debt. I guess curious what the impetus behind that was and kind of what the near-term or intermediate term plans are for that debt that was added in the quarter?
Yes, I'll take that. So if you look at our balance sheet, if you look at on the asset side, our interest bearing deposit, the banks was also elevated at close to $3 billion, which is up $2 billion on a quarter-over-quarter basis. So it's just out of abundance of caution that we have both sides of our balance sheet. We did have some, some excess borrowings and they were at – parked at the Fed accounts. So we're going to evaluate that periodically based on the current climate and environment, but it's not a long-term obviously strategy for us to be dependent on a whole lot of wholesale without funding.
We're watching closely. Our expectation is that things continue to improve and normalize, and we reduce those levels.
Okay, great. So I guess, under those kind of assumptions, is the expectation that you got to eternally fund loan growth, which just sounds like, the pipeline is still pretty strong and the second quarter with both cash flow coming off securities book and deposit growth as well going forward?
Yes, I mean, we expect that we can continue to fund loan growth with deposits. We're recentering I think as everybody is around relationship banking which is what we've always been, it's kind of, I think it's somewhat important to note that – after over the last decade you come off of the great recession, banks like us benefited pretty handsomely from flight to safety. So our balances grew then. And then you go into the pandemic and the government pumped money into the system and there was an enormous amount of excess liquidity dumped into the system, which has been absorbed.
And during that time, a few banks like ourselves and many others, I think started placing some high quality loans on our balance sheet that maybe didn't come with as much deep relationship and deposits. And if there's anything we've reminded ourselves over the last 45 days, it's a who we are and what we've always been, which is a fantastic relationship based bank with really deep relationships.
And so I think if – how we're going to go forward with funding our loans is, we'll just be more recentered around deeper relationships and that's how we expect to fund loan growth going forward.
Okay, great. And then turn into some – the income drivers in the quarter, it looks like you guys had a pretty strong quarter when it comes to fund services and the corporate trust and institutional segment. Is the rate of growth that we saw in those lines kind of sustainable as you look out over the next few quarters? Or I guess kind of what are some of the underlying kind of growth drivers that you guys are seeing in terms of new client adds and just overall pipelines within those segments?
Yes, I think – yes, Nate, I think largely that a lot of which is just coming from multi-year investments made in those businesses. So we've talked actually in the last few quarters about what the pipeline looks and fund services, for example, based on consolidation in the space and private equity backed firms being sidelined for new business. So we've benefited a lot by some of that pipeline coming, actually coming to fruition on the fund services side, for example. And also obviously, private equity has – because of what's happened to the public and liquid markets, private equity has been really strong over the last many years and continues to be, and that's a strength for that space.
All of our investments in corporate trust are paying off. We have that new office in Europe that allow – in Dublin that allows us to do business with 72 more states as it relates to airline business than any of you have been in an airport recently, you know, that the travel business is on fire and therefore airlines are investing. And so I just really kind of across the board, the investments we've been making over the past many years have paid off. We bought some healthcare accounts from Old National, our healthcare business is expanding, growing, broadening. It's just really across the board. I'll let Jim talk, he's probably going to say, I said everything, but…
You did, but it's a combination of new client acquisition, but we've also had fees turned on. Mariner really did cover it, but that business has been extremely steady and growing for us and the real contributor to our fee income growth. And we don't see that flowing down for us anytime soon.
And our credit card, we didn't mention this in the comments, but we saw a spend go over 4 billion for the first time in the last quarter that's in our deck. You can find that in there. So it's really just kind of, I would suggest hitting on all cylinders. And as far as our business model goes, you talk about the tightening of credit and the cycle that we're in right now, what we've said forever is our fee income is buoys us. And the diversity of our business model is what takes us through economic cycles like this and allows us to outperform against our peers. And we don't expect that to be any different this time.
And whereas other banks are more reliant upon their mortgage operations for their fee income, that's just a friendly reminder that's just completely different.
Yes, that latter point is not lost on, if I could just ask one final one, just going back to the office CRE portfolio. Appreciate all the disclosures there. Can you speak to kind of how recent that [indiscernible] across this portfolio to get to that average LTV disclosed in the deck and just internally how rent rolled are trending across that portfolio?
I'm not sure I heard that totally. Well, did you hear that, Tom?
Well, if you asked about loan-to-values, the thing to remember is our average loan in the office portfolio is $8.2 million. And when we underwrite out of the gate, we don't trend rents. And so we're underwriting these to a lower sizing than a lot of our competitors do. And so by virtue of how we underwrite on the front end, we do have lower loan-to-values than I think some of our competitors would have.
And again, back to the nature of our portfolio beings more suburban, more low and moderate size versus a high rise type product. We've not seen a lot of change in rental rates thus far. But again a lot of our portfolio goes out past 2025, 2026, we just haven't seen it yet, but today they're performing as expected.
And our borrowers are all pretty large diversified borrowers of big portfolios of other – that have cash flows and have the demonstrated capability to resize things if they need to. But the real point about all this is how we do them from the beginning, how we underwrite from the beginning, which is worst case, we underwrite from the beginning with a worst case scenario type thinking, and it gives us a lot of room.
Okay, great. I appreciate all color. Thanks everyone.
Thanks Nate.
Thank you, Nathan. We have no further questions on the line. I'll now hand back to the management team for any closing comments.
I don't think we have anything else to say. Appreciate it. We had a great quarter and look forward to seeing you in the next quarter.
And the replay will be available on the website shortly. If you have any follow up questions, you can always reach us at 816-860-7106. Thank you for joining us and have a great day.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.