UMB Financial Corp
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UMB Financial Corp
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Hello, everyone, and welcome to the UMB Financial Fourth Quarter 2022 Financial Results Call. My name is Davey, and I'll be coordinating your call today. [Operator Instructions]
I would now like to hand the call over to your host, Kay Gregory with Investor Relations to begin. So, Kay, please go ahead.
Good morning, and welcome to our fourth quarter and year-end 2022 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 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.
Thank you, Kaye, and Happy New Year, everyone. Thanks for joining us today. I'll make some brief comments about our quarter and 2022 and then turn the call over to Ram for a review of our results in more detail before we take your questions.
Our fourth quarter results closed out another record year of earnings driven by strong balance sheet growth, solid credit metrics [Technical Difficulty] from our differentiated fee income sources. Net income for the fourth quarter was $100.2 million or $2.06 per share. For the full-year 2022, net income of $431.7 million or $8.86 per share, an increase of 22.3%, compared to 2021.
Operating pre-tax, pre-provision EPS for the year was $11.73 per share, compared to $9.26 per share for the prior year. Net interest income for the fourth quarter increased 5% sequentially. This was driven largely by an over $1 billion increase in average loans, which is a 21% increase on an annualized basis, the impact of rising rates, positive asset mix shift and loan fees. This is partially negated by an increase in deposit costs, largely driven by deposit initiatives to attract new to bank customers, particularly in our commercial business. Additionally, we saw some continued market pressures in our rate sensitive institutional business.
As we've noted in the past, our business profile and funding mix is uniquely skewed in favor of commercial and institutional customers. These sources experience different pace and timing than some of our more retail heavy peers in the repricing environment we are in today. Cycle-to-date, we've had a beta of 54% on interest bearing deposits and 33% on total deposits. Our deposit pricing during this cycle is generally in line with our internal expectations and consistent with what we've been talking about publicly.
We tend to focus more on total funding costs, which considers the benefit of DDA balances and the impact of borrowing levels. That beta is 36% cycle-to-date. And we benefit on the asset side as well with the cycle-to-date beta of 3% on loan yields, 60% of our loans reprice within the next quarter and 70% in the next 12-months. We expect this repricing combined with our outlook for loan growth will continue to drive good growth in net interest income.
Pipelines and sales activity in our fee businesses continue to be strong across the company, driving year-over-year non-interest income growth notwithstanding some market related variances. I'm excited for the opportunities we see in 2023 and beyond. Updates on our various lines of business are included in our slides, and Ram will share a few details shortly. We've long focused on our goal positive operating leverage rather than specific revenue and expense levels. For the full-year of 2022, we generated leverage of 6.7%. This continues to be a focus for us and we expect to generate positive operating leverage again in 2023.
Moving to lending. The drivers behind our 21% linked quarter annualized growth and average balances this quarter are on slide 23. Total top line loan production as shown on slide 24 remained strong at $1.3 billion for the quarter bringing full-year 2022 originations to a record $5 billion.
Payoffs and paydowns represent 3.4% of loans for the fourth quarter. While we and fewer banks have seen some slowdown in the sale on refi markets, payoffs are hard to predict from quarter-to-quarter. The average for the year was just over 4% in line with our longer-term trends.
C&I lending provided nearly half of our $1 billion of average loan growth for the quarter with balances increasing 21% on a linked quarter annualized basis. Commercial demand continues to be strong and we're seeing robust activity within our existing customer base. Line utilization has ticked up from last year and was at 37% for the fourth quarter. Commercial real estate and construction loans posted 25% annualized growth in the fourth quarter, predominantly in multifamily and industrial properties. Construction represented a large portion of new commitments in 2022, so we'll see the additional impact and balances as those loans begin to fund.
Average residential mortgage balances have increased 21% over the fourth quarter of last year, despite the impact of rising rate environment. Our down payment assistance program for the first-time homebuyers had more than 1,600 new applications resulting in $2.9 million in assistance in 2022. Looking ahead to the first quarter, we see opportunity in our various verticals across the footprint and we expect continued strong growth to kick off 2023.
Credit quality remains excellent. Net charge offs were just 4 basis points of average loans for the fourth quarter and 21 basis points for the full-year. Non-performing assets comprised a modest 5 basis points of total assets. Provision for the quarter of $9 million was driven by our continued strong loan growth. Portfolio metrics and changes in the macroeconomic environment. Our reserve coverage is now at 0.91% of total loans.
Back to the balance sheet, average total deposits for the quarter increased 5.3% or 21% on an annualized basis, compared to the third quarter. Our deposit initiatives in commercial banking brought in more than $1 billion during the quarter. DDA balances remained steady from the last quarter and represent 40% of average deposits, compared to 42% in the third quarter and 41% in the fourth quarter of last year. The economic data continues to be a paradox with the labor market signaling a soft landing, but other indicators like the LEI index are signaling a more prolonged recession.
We have ongoing dialogue with our clients about their business and outlooks and borrowers are generally seeing good pipeline and many are reporting that supply chain issues have mitigated somewhat. However, caution remains as finding talent to support growth may be ahead then.
As I mentioned, we see good growth opportunities in the first quarter and although we continue to closely monitor early warning indicators, we're not seeing any broad concerns. Overall, 2022 was a very strong year, while the unpredictability of the current rate environment is challenging, our time-tested business model and relationship-based culture continues to perform well and we're off and running as we start the 2023 year with a goal to maintain positive operating leverage regardless of the health and direction of the economy.
Now I'll turn it over to Ram with some additional comments. Ram?
Thanks, Mariner. Let me start with some commentary on balance sheet trends with our liquidity profile shown on slide 40. Our Fed account reverse repo and cash balances rebounded slightly to $1.8 billion and outcome price 5.1% of average earning assets with a blended yield of 3.65%, compared to 2.3% in the third quarter. This was driven by our deposit campaigns, as well as seasonal inflow of public funds deposits.
Cash flows from our securities portfolio continued to help fund loan growth opportunities during the quarter. As shown on slide 27, the portfolio roll-off for the fourth quarter was $246 million with a yield of 1.94%, while we purchased $84 million in securities, primarily CLOs with a yield of 5.04%.
Additionally, the portfolio is expected to generate over $1 billion of cash flows in the next 12-months. The yield of those securities rolling off is approximately 2.03%. While treasury yields present very attractive reinvestment levels, our priorities to fund the opportunities we continue to see in our lending verticals. Loan yields increased 89 basis points from the third quarter to 5.35% with a linked quarter beta of approximately 61%. The total cost of deposits, including DDAs, was 1.23% up from 65 basis points last quarter.
Net interest margin expanded 7 basis points for the third quarter, the largest positive NIM impacts included approximately 52 basis points from loan repricing, loan fees and mix, 34 basis points for the benefit of free funds and 7 basis points from reduced liquidity balances and rate. Offsets included a negative 94 basis point impact related to the cost and mix of interest-bearing liabilities.
As we look ahead, there are a lot of variables at play that will impact the trajectory of our net interest margin, including the depth and duration of Fed tightening cycle, outlook for equity markets and that impact on deposits expected disintermediation of DDA balances as ECR rates further increased and our own need to generate additional deposits through targeted campaigns to fund loan growth.
Based on our own simulations, we expect our first quarter net interest margin to be flat to slightly up from fourth quarter levels. Additionally, we stand to benefit with the Fed's positive and the pressures on our index deposit bill conveyed an asset yield benefit from the current re-pricing environment and rotation from investment securities.
As Mariner noticed, while the focus on deposit beta at NIM is important, we also focus on net interest income growth facilitated primarily by loan growth. Additionally, we typically manage to a loan to deposit ratio limit of 75%. In the fourth quarter, average deposit growth kept [indiscernible] loan growth keeping our ratio steady at just under 65%. Given our strong loan growth outlook, we will continue to focus on deposit and client acquisition across all our lines of businesses.
Back to the income statement, total fee income for the quarter was $125.5 million, compared to $128.7 million for the third quarter. We saw some market related declines, including a $2.3 million decrease in company-owned life insurance income, along with a $900,000 decrease in customer related derivative income. COLI income was just $21,000 in the fourth quarter versus $2.3 million in the third quarter had a similar offset in deferred compensation expense.
For the full-year 2022, the 18.6% increase in fee income, included investment security gains and losses, driven largely by a gain on our sale of Visa Class B shares in the second quarter. Outside of these gains, we saw positive results from several businesses, including $31 million of additional brokerage fees related to higher 12b-1 and money market revenue share income, despite market related compression of 11% in the underlying money market balances, compared to year end 2021.
Trust and securities processing income increased 5.8% year-over-year and included strong contributions from fund services and corporate trust. For the full-year, we had a decrease of $10 million of COLI income with a similar decrease in deferred compensation expense.
Slide 22 shows trends in non-interest expense. The 2.8% linked quarter increase was primarily driven by an increase of $2.6 million in processing fees, largely software costs related to the ongoing modernization of core systems $2.1 million in additional marketing and business development expense, driven by increased advertising for various campaigns and projects and $1.8 million of increased charitable giving included in other expense.
Additionally, as I mentioned last quarter, our amortization expense increase related to the acquisition of HSA deposits completed in the fourth quarter. A few items to note from the expense levels going forward. [indiscernible] fourth quarter expenses included several timing-related variances along with some non-recurring items. Considering those variances, we have put our quarterly starting point closer to the $225 million to $247 million range.
Also keep in mind that first quarter expenses are typically higher, due to seasonal reset of payroll taxes and other benefits expenses. The acquisition of HSA deposits will add approximately 4.5 million of additional amortization expense annually. And as previously mentioned, the increase in FDIC assessment rate takes effect in the first quarter. As a reminder, we estimate this will have an approximate annual impact of $6 million pre-tax.
As Mariner noted, our focus remains on generating positive operating leverage, while prudently investing in our businesses. Our effective tax rate was 19.1% for the fourth quarter and 18.9% for the full-year, reflecting a smaller portion of income from tax-exempt municipal securities along with changes in COLI valuations. For the full-year 2023, we anticipate it will be approximately 19% to 20%.
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] Our first question today comes from Jared Shaw from Wells Fargo. Jared, please go ahead. Your line is open.
Hi, this is John [indiscernible] on for Jared Shaw.
Hey, [Joe] (ph). Good morning.
Good. How are you? I guess this big picture, I guess, going into potentially a recessionary environment, we've heard a few banks talk about maybe tightening the credit box a little bit. I guess, could you just talk about if you're thinking about doing anything similar if you're seeing any signs of hesitation or caution from borrowers on the ground?
John, thanks for the question. This is Mariner, I would -- for us -- for those of you who followed us for a while, we really don't do anything different in any type of environment. So we stick to our knitting and look for the good quality opportunities and we don't reach during the good times and we don't retract during the tougher times or kind of just stick to what we know and stick to doing it and how we do it. And so that's the backdrop for how we're making decisions.
As it relates to kind of what we're hearing and seeing on the ground. Customers and prospects are still talking cautiously optimistically about the environment for the year. Revenue projections and conversations seem to still be pretty steady. I think the challenge that we hear from our customers really is about the hiring environment.
But as it relates to selling goods and moving goods, everybody seems to be cautiously optimistic about that. And we -- as we normally do we give you a little look into what we see for the first quarter and pipeline remains strong for the first quarter.
Okay, great. Thanks, that's a good color. And I guess just one other area. You closed the HSA acquisition in the fourth quarter. Could you just talk a little about the outlook for that -- for your competitive positioning, I guess, in that market with some pretty large players, kind of, dominating at this point?
Hi, this is Jim Rine. We did close the conversion went extremely well. We picked up -- they have a very successful direct-to-employer model and that has been our strategy moving forward. Backdrop looks good. As far as on a national level, the government and those entities has been very quiet. We don't anticipate any changes as far as the need for HSAs or HSAs going away. Our pipeline looks extremely strong. Regarding our competitors, we're obviously more focused on what we're doing. But we feel like we have an extremely competitive platform and this will allow us to deliver a better experience throughout our footprint.
With -- what the competitors are doing, we're truly more focused on us. But we've been able to compete in this space for a long time and we're one of the original pioneers in the space. So we feel very good about our position going forward, and we're in the space to say and we're excited about it.
Yes, the only thing I'd add is, the technology platform and the backdrop for the business is really using the rails we have already for all of our other businesses. So it's a very leverageable business. And being a big commercial bank, largely that’s being largely what we do with this direct-to-business model. There's a lot of opportunity within our own customer base to continue to grow. And it's all about the enrollment season and just current customers and new commercial customers adding employees to the enrollment season.
Okay, great. Thank you for answering my questions.
Thanks, Joe.
Thank you. Thank you. Our next question is from Chris McGratty from KBW. Chris, please go ahead. Your line is open.
Great, good morning. Ram, maybe a question for you. Just on the balance sheet, if I'm thinking about your comments on loan to deposit, you have room there and you can be more selective on deposits. But if I look at just the total deposits, the company shrunk about 8% this year. How do I -- I guess how should we think about just the pace of incremental runoff, because it feels like you've got roughly $1 billion of cash flow coming up the bond book to fund loan growth. I'm just trying to get a sense of the moving pieces here?
Yes. Chris, this is Mariner. A couple of high-level comments and if there's more detail as you want, Ram can add some color. But I think really what I would focus on, we don't really expect runoff, we expect rotation. And so it's really more about what happens to demand deposits. We have a very, very strong pipeline and ability to grow deposits. So we can bring deposits on at market rates and fund growth, no problem. So really, really the challenge for us which we think we're good at is being disciplined at pricing the assets.
So as we bring on loan growth, kind of, as we discussed last quarter, our ability to be disciplined on maintaining and slightly growing margin is more important than what the absolute cost of deposits are coming on. So we're not concerned about that and we feel strongly that we can continue to price appropriately on the asset side to maintain our margin, if not grow it slightly.
And if you want to add anything, Ram?
No, the only thing I would add, Chris, to that is, as we said, our loan to deposit ratio is now 65%, right? If you look at the last couple of quarters of loan production and what's happened there, the same pace continues we could see our loan deposit ratio trickled up to close to 70% which we're comfortable with. As I said in my prepared comments, we managed to stay below 75% on the loan to deposit ratio. Will deposits fund one-to-one of what we see on the loan growth? Probably not, but that's where the $1 billion of securities that you talked about in terms of outflows comes in. So -- and as Mariner said, we're focused on making sure we stay liquid fund the balance sheet with customer acquisitions.
That's really great. Thanks, Ram. And on the mix of your deposits, I'm looking back pre-COVID, you were kind of in the mid-30s non-interest bearing, you got as high as 46% you are kind of low 40%. Now I guess how do I -- how are you thinking about just internal migration given competitive alternatives for rates today?
Yes. So I think that's the $1 million question, Chris. And when you get the answer, give us a call so we can plan. But I think the conservative way to think about it, right, is we got down to 32% last time. Could it get to 35% or something this time? Probably maybe based on just history, if that's possible. However, there are a lot of other things going on from the growth of our customer base in general. We've added a lot small business customers that have a low loan to deposit ratio over the last few years and we've got a lot of other initiatives and customer bases or our aviation and corporate trust business is relatively new and those demand deposit balances have been growing.
So last cycle we got down to 32% is the history repeat itself is the world different. It's our customer remains different. We're not sure exactly what happens. We do believe there will be some rotation from demand this year still to interest bearing. We're just not sure how much. The internal debate we have here, because we already saw a lot of that last year, has it already happened, right? So that's one of the budgets that we debate internally is as that shift taken place, has everybody who wants to move to higher interest-bearing deposits already taken that action. We don't really know the answer to that. But that's -- so that's some of the internal debates. But to be conservative, think about the last cycle I suppose.
That's helpful. I really appreciate it. The last one I would have is just to be kind of zooming out, right? If I think about the bullish comment on loan growth, call it, stable comment on margin, it would feel like the net interest income for your company has yet to peak, because I think that's a narrative that's going around among bank investors where a lot of your peers are seeing margins and revenues top out. I guess would you agree or offer any thoughts on that?
We expect to see net interest income continue to grow, because we're a growth company. Like I said earlier, two things we focus on would be net interest income growth based on just growth period, as well as the growth of the balance sheet. And then the other thing we think we can do during this environment is produce operating leverage. So we're less worried about the absolute expense levels of the company, because we're investing in our business for growth.
And then on the other side, because we have a long track record of building pipeline, we think we'll continue to grow. We've been doing double-digit loan growth since 2015, and it's -- there's nothing about our business model that would suggest that we can't continue to do that. We have new markets, great new markets we've expanded into, Utah, Minneapolis, Texas are our three young markets for us, so we have fabulous track records and great people on the ground. And we're seeing really good traction there. And along with all of our other great markets, we see the same great opportunities and traction.
And remember, we don't project or predict our loan growth based on what's happening in GDP anyway. We've -- our loan growth is based on market share gains. So depending on regardless of what's going on, economically, we think we can continue to deliver the same kind of loan growth that we've been delivering.
Great. Thank you very much.
Thanks, Chris.
Thank you. [Operator Instructions] Our next question today comes from Nathan Race from Piper Sandler. Nathan, please go ahead. Your line is open.
Yes. Good morning, everyone. I appreciate you guys taking the questions.
Good morning, Nathan.
Question on just kind of the longer term or perhaps full-year margin trajectory over the course of this year. As you guys, kind of, think about what you're paying on incremental deposits outside of the index deposits [Technical Difficulty]. Do you see some additional margin expansion potential in the back half of this year just given maybe some lagging repricing within the loan book relative to maybe kind of the incremental cost of deposits that you guys are gathering based on some of the initiatives that you guys outlined earlier in the prepared comments? Assuming the Fed policy, you know, [indiscernible]
Yes. Yes, Nathan, this is Ram. Yes, definitely we'd see some opportunity for margin expansion, if the Fed does pause and hold, right? So the pressure on our index deposits and as Mariner said earlier, where we are being disciplined on the loan side and paying market rates on the deposit side, that will still be accretive to our margin. So that's been our focus. So when you think about what happened last night, because the same thing repeated itself where our margin did expand when the Fed paused.
Okay, great.
And some of the margin expansion benefit also -- sorry, margin benefit expansion also comes from the rotation that we talk about from, you know, look at the next 12-months cash flows from the securities book that have the 2% exit yield and obviously our loan pricing is much better than that and we pick up yield on that.
Got you. And within that context, you guys had the spot rate on deposits at the end of the quarter. If you can exclude or isolate the index deposits?
We don't disclose that, Nate. We don't get into that kind of the details.
Okay, fair enough. And changing gears, Ram, I think in your prepared comments, you mentioned a starting point for expenses in the [$245 million to $240 million] (ph) range for the fourth quarter, did I correctly?
No, $225 million to $227 million.
Okay. Great. And within that guidance, I mean, as you guys, kind of, think about some additional monetization initiatives that you guys are outlining on the core system side of things or otherwise. How does that, kind of, factor into just kind of overall expense growth for this year in light of the inflationary environment that we're seeing for wages and so forth these days?
So I mean high level, I mean, so the run rate that Ram is talking about is inclusive of whatever spending we're doing to modernize and invest in the business. It's all in there. In that step off that he's referring to.
Yes. The step off of the $227 million that I talked about, obviously, the inflation on top of that new contracts are coming up. We are making some selective investments in people or in technology. And then as we said in the first quarter, we'll have the reset of payroll taxes and other benefits expense and there's obviously less -- a couple of less salary days. So I would expect the trajectory from the $227 million for the first quarter to go up just, because of the pressure from primarily seasonal increase in expenses.
Yes. And as you guys look at, kind of, criticized classified trends across portfolio. Obviously, non-performers are pretty negligible amount as we ended the year. Are you seeing anything across portfolios and you're in discussions with clients that would perhaps cause you guys to come in, kind of, below your historical charge off guidance. I think you guys have spoken to around the $25 million to $35 million -- historically?
When you say below, do you mean more losses or do you mean better performance? I might ask that question, which way you're asking the question?
I would just think that perhaps charge offs this year can come in below or better than that historical, kind of, talked about Mariner?
Well, I guess, I would suggest, you know that -- as has been referenced on the call already, it's a softer environment. I wouldn't suggest us to -- we're going to do a lot better or anything because for any reason. I mean, we expect that we can continue to perform the way we have been performing. Don't see anything that on the rise that makes it anything better based on any information that's out there. I think we can just keep doing what we've been doing.
Okay, great. I appreciate you guys taking the questions. Thanks for the color.
Thanks, Nate.
Thank you. This is all the questions we have today. So I will now hand back over to the management team for any closing remarks.
All right. Well, thank you everyone for joining us today. The replay will be up on the website shortly, and if you have follow-up questions, you can reach us at 816-860-7106. Thank you and have a great day.
Thank you everyone for joining today's call. You may now disconnect your lines and have a lovely day.