UMBF
#Good morning, and thank you for joining us.
On the call today are <UNK> <UNK>, President and CEO; <UNK> <UNK>, CFO; and Mike <UNK>, CEO of UMB Bank.
Before we begin, let me remind you that today's presentation contains forward-looking statements, all of which are subject to some assumptions, risks and uncertainties.
Actual results and other future events, circumstances or aspirations may differ from those set forth in any forward-looking statement.
Information about factors that may cause them to differ is contained in our SEC filings.
Forward-looking statements made speak only as of today, and we undertake no obligation to update them, except to the extent required by securities laws.
Our earnings release and supporting slides are available on our website at umbfinancial.com in the Investors section.
Reconciliations of non-GAAP financial measures have been included in the release and on Slides 32 and 33 of the supporting materials.
All earnings per share metrics discussed in this call are on a diluted share basis for continuing operations.
Please refer to the tables contained in the press release for details about basic and diluted earnings per share.
Now I'll turn the call over to <UNK> <UNK>.
Thank you, <UNK>.
Welcome, everyone, and thank you for joining us.
April marks the anniversary of our first charter in 1913, and we're wrapping up our 105th year.
2018 is off to a good start, with first quarter highlights that include a continued margin expansion, expense control and improved profitability metrics.
Beginning on Slide 4, we earned $57.5 million or $1.15 per share for the quarter.
On a non-GAAP basis, operating net income was $59.1 million or $1.18 per share.
Operating leverage continues to be a focus, and on a non-GAAP operating basis, first quarter leverage was a positive 6.5% year-over-year and a positive 5% linked quarter.
As we discussed last quarter, we are investing in 2018 toward building and solidifying our competitive position in the marketplace, and we highlighted plans in various growth businesses.
Even as we continue to ramp up these investments, we will maintain a diligent focus on efficiency and expense control.
Now I'd like to cover our lending and credit highlights.
Average loans balances of $11.3 billion for the first quarter represent a year-over-year increase of 6.9%.
Compared to the fourth quarter, average loans increased 1.8% or 7.3% on a linked-quarter annualized basis.
According to the Feds H.
8 data, total average loans increased 0.7% quarter-over-quarter.
Top line production for the quarter remained strong at $520 million, and we have an active pipeline.
Our outlook remains positive for loan production even as we continue to watch how excess customer liquidity may impact borrowing activity and pricing in the coming months.
Turning to Slide 7.
You'll see a chart that I share every quarter showing the history of our net charge-off ratio, which has averaged 23 basis points quarterly over the past 5 years.
You will note that the first quarter had net charge-offs of $10.3 million or 0.37% of average loans, driven largely by a single C&I credit relationship of $7 million.
This relationship was a contracting company dating back to 2013.
Even with our consistent track record of quality underwriting, credit trends will vary from quarter-to-quarter.
We don't see any systemic issues in our loan book, and as our general portfolio quality continues to be in line with historical performance, I remain extremely proud of our strong asset quality.
Provision expense increased to $10 million for the quarter consistent with our prescribed methodology, which considers loss history, the inherent risk in our loan book, growth rates and other factors, such as macroeconomic conditions.
Before I turn it over to <UNK>, I want to point out a few changes you'll see in our reporting beginning this quarter.
Following the sale of our Scout business, we reevaluated the way in which we present our operating segments.
What you see in the release and slide deck is a 4-segment view that more closely aligns with how we manage our company and with our ongoing emphasis on improving efficiency, aligning support functions with our growth strategies, and delivering products that meet our customers' needs.
The segments, structured around the customers they serve, are Commercial Banking, Institutional Banking, Personal Banking and Healthcare Services.
UMB Fund Services has been moved into the Institutional Banking segment in an effort to maximize synergies, as both entities serve the same institutional market and distribution channels.
We believe this change will give more transparency into the business and drive financial performance.
Now I'd like to turn the conversation over to <UNK>, who will talk about the drivers behind our results.
<UNK>.
Thanks, <UNK>, and good morning, everyone.
Looking first at the income statement, net interest income of $147.9 million represented a year-over-year increase of 10.1% and 1.1% above the linked quarter.
Rates were the largest driver of the increased net interest income during the first quarter, followed by mix-shift, as higher-yieldings commercial real estate, asset-based and factoring loans continued to grow as a percentage of our loan portfolio.
As you know, the tax equal and gross up under the lower corporate tax rate impacts earning asset yield and net interest margin calculations.
Under the reduced tax rate, fourth quarter NIM would have been an approximately 11 basis points lower.
Net interest margin for the first quarter was 3.19%, which, on an apples-to-apples basis with the statutory tax rate change, represents a linked-quarter increase of about 9 basis points and a year-over-year increase of about 20 basis points.
Slide 10 details the changes in noninterest income, which hit $105.5 million, remained relatively flat on a linked-quarter basis, as improved deposit service charges, Bankcard and brokerage revenue was offset by lower revenue from bond trading, driven by continuing negative dynamics in the municipal bond market and a decrease in company-owned life insurance income recorded in the other income line.
Slide 12 and the press release contain detailed drivers of the changes in noninterest expense, which, on a non-GAAP operating basis, decreased $8.4 million or 4.6% compared to the fourth quarter.
As I mentioned last quarter, higher expected costs, due to resetting of FICA and other benefits, were offset by lower incentive compensation accruals following strong performance in the fourth quarter.
Other drivers of lower linked-quarter operating expense include timing-related decreases in legal and consulting and business development expense and lower regulatory assessment fees.
If you followed us, you'll know that the first quarter expense is typically lighter due to compensation review cycles and other seasonal activities.
Over the past several years, our core operating expense for the second quarter has been higher than the first quarter, driven by annual base pay increases; anticipated increases in performance-related incentive comp; higher legal, consulting and business development expenses, tied to contractor and consulting work related to our technology and strategic growth investments.
Now moving to the balance sheet on Slide 13.
Loan yields increased 13 basis point linked quarter to 4.53%, as more than half of our loan portfolio repriced during the quarter.
Looking ahead, 68% of our loans reprice within the next 12 months.
Slide 14 shows the strong loan production that <UNK> mentioned, along with payoff and paydown details.
Top line production for the quarter was $520 million, and we saw increases in revolving balances of $115 million.
Total payouts and paydowns of $456 million for the quarter represented 4.0% of loans, which is in line with the average levels over the past 4 quarters.
We continue to see some business consolidations among our customers.
And while that drove some of ---+ some level of payoffs, we're also seeing opportunities for acquisition financing.
The composition of our loan book and our regional view are shown on Slides 15 and 16, and we're seeing positive trends in several of our markets and verticals.
Mike will provide additional color in the segment discussions.
Slide 17 shows the composition of our investment portfolio.
The average balance in our AFS portfolio increased $78 million on a linked-quarter basis, and the purchase yield of 2.86% compares favorably to the adjusted roll-off yield of 1.91%.
Turning to liabilities on Slide 19.
Total average deposits held steady at $16.8 billion, and private wealth deposits were largely offset by decreased institutional deposits.
As we mentioned last quarter, we saw a buildup of cash towards the end of the year related to our Corporate Trust and Distressed Debt workout businesses.
In the first quarter, total cost of deposits and cost of interest-bearing liabilities increased 4 basis points and 10 basis points, respectively, impacted by rising rates, higher borrowing levels and a mix of DDAs to performance deposits.
Our total funding base is now about 25% hard index to short-term rates.
As some of you have noted, it's important to focus not only on deposit betas but also on the asset betas and total funding cost.
Since the third quarter of 2015, just before the Fed began raising rates, our total earning asset yields has expanded about 82 basis points after adjusting for the lower corporate tax rate to 3.61% for a 64% beta.
During the same period, our total cost of funds, including DDA, has risen just 31 basis points from 0.13% to 0.44% for a 24% beta, resulting in a total net interest margin expansion of approximately 53 basis points.
Now I'll turn it over to Mike for a few segment results and drivers.
Then, we'll be happy to take your questions.
Mike.
Yes.
Sure, Chris.
So without giving specific guidance, I would say, first quarter expenses were about $3 million to $4 million lighter because of the timing issues that we presented in the press release and in the slide deck.
So these are typically bonuses and commissions related to bond trading, which, as you know, had some headwinds from the muni market.
So I would go back to my prepared comments, 2Q expenses will be a tad higher.
It's always been historically higher for us.
Our annual comps cycle gets in ---+ goes into effect in April, so that will drive the cost a little bit higher.
And then, the other factors are $3 million to $4 million of lighter expenses in the first quarter.
Chris, it's <UNK>.
I'd say that there's nothing really to note.
No energy there in any particular direction that's unusual.
The national business growth is really just those businesses kind of hitting stride, really, after our acquisition of Marquette.
They're just really just trying to coming into their own and hitting their stride.
So that's really where that growth is coming from.
And as far as the credit metrics go, we've mentioned in the prepared remarks that it's largely due to 1 credit, and we do have from one quarter to another a little ups and downs in the activity.
But long-term trends we feel pretty good about.
My comments in that regard will be similar to previous quarters, which is, we do have an active M&A group reaching out, doing analysis on targets, maintaining relationships, et cetera.
And so we continue to look for opportunities.
And we would like to put some of that capital to work in that ---+ in M&A.
And the share repurchase deal is something that we just ---+ have been renewing every year.
So that just gives us the opportunity more than anything.
I mean, we've gotten better and stronger and are capable of doing a larger deal but willing to do whatever makes sense.
Just going back to the loan growth discussion.
It looks like revolving balances were up nice in the quarter.
So I imagine line utilization is picking up a little bit.
Just curious, if that trend is persisting here into 2Q.
And just kind of any early thoughts on what you're seeing on the payoff front.
I think you alluded to the possibility that payoffs may continue to occur in elevated pace going through this year, but just any updated thoughts on those 2 fronts would be appreciated.
So our payoff paydown number is running as it has, so it's around 4% of ---+ and so that hasn't really changed much.
As far as the look into the second quarter, the pipeline remains strong looking into the second quarter.
Okay.
And then in terms of new loan pricing.
Just kind of any updated thoughts on kind of where you're seeing loan pricing come in relative to the portfolio yield around 4.30% or so ---+ around ---+ sorry, 4.5% or so at this point.
Well, I mean, there's a few variables I would note.
Obviously, rates are coming up.
The short-term rates have been coming up.
So we benefit from that as we bring on new credits and credit's repriced.
So we're seeing that benefit.
Outside of that, I would say that the market remains very competitive, and so we're kind of looking at that deal-by-deal.
It's a ---+ most of the rate expansion is really just coming from short-term rates coming up.
Got it.
Makes sense.
And then, <UNK>, if I could sneak one last one in on deposits.
I think you mentioned that index deposits were back up to 25%.
I think they were around 23% last quarter.
So just any updated thoughts on what you're seeing on the deposit pricing spread across your various verticals.
And then also, just any updated thoughts on the appetite to allow some index deposits relationships that went off of the course of this year.
I'll take the first one, Nate.
So yes, as we said, it's 25% of our funding is hard-indexed.
And it moves from one quarter to another quarter, especially fourth to first because of our Public Funds business.
So obviously, fourth quarter is a low point for Public Funds and first quarter tends to be a high point.
So that number vacillates a little bit between the 23%, 25%.
But largely, it's been the same.
Just on the betas, I think that if you want to focus on interest-bearing deposits, just ---+ since this cycle, it's been about 17% beta.
If you just look at the last year, it's 24%.
So there's some pressure on deposit cost.
And we're testing and learning and we're launching deposit campaigns.
There's also a mix-shift that's happening within our portfolio and with other banks as well.
So that will continue.
But everything said, our betas are better than our simulations, what we do for interest rate risk management.
And I might also point you back to the assets.
We ---+ more than 60% of our loans repriced within 12 months.
And so while we do monitor closely what's happening on the deposit-liability side, we have some flexibilities that some of our peers don't have on the asset side.
Well, first, I might say that you have to recognize that they as a percentage of their own base are up significantly.
But as a percentage of our total, they're still pretty small.
So they are having success within their own right.
But as a percent of total, really the loan volume is driven in the first quarter by commercial real estate.
It's a majority of that growth.
So that's the first place I'd pause there.
So we do expect continued success and growth out of those 2.
But as you look at the sheer volume of our growth, it still remain to be a pretty small part of the total.
So I'll put some dimensions around it just to follow up.
So the ABL loan balances were about $330 million.
That's up about $100 million on a year-over-year basis.
The yields on those are about 6.5%.
And the factoring business is about $225 million, and it's up from $150 million last year.
And the yields on those are about 11.5%.
Yes.
That's pretty much as simple as a pipeline push, is what I would call it.
It's some stuff moving from one quarter to the next, not closing.
As I said, with no assurances, but the pipeline looks pretty strong as we look into the next quarter.
So sometimes, the gross number will push around a little bit from quarter-to-quarter as projects are delayed.
I would ---+ I'm not going to ---+ so the geography, I think, is not important because it's not a trend.
So I'll just leave it at that related to the geography because it's irrelevant.
But what I'd say about the deal is that it's ---+ like I said, it's down the middle fairway credit for us.
It's been with us since 2013, nothing unusual about it.
And so I said, I think, in our prepared remarks, just from one quarter to the next, we'll have a periodic spike.
As you reflect on our numbers, the fourth quarter was a pretty light quarter, as an example.
So we're going to have a quarter now and then where we take a lump on a credit or 2.
So obviously, we look at both tangible capital but focus more on total ---+ the regulatory capital ratios from a constraint perspective.
The total risk-based capital is more constraining one.
So we're at 14%, close to 14% now.
It depends on the M&A opportunity and what <UNK> talked about, right.
If there's a good way for us to redeploy some of this capital, the excess capital that we have, we can certainly support the loan growth that we have or look after deals like we've been doing.
So there is ---+ we haven't communicated a minimum, what we're shooting for, but it will depend on the opportunity that we see to deploy this capital.
I would say more normalized run rate getting into the second quarter.
So this isn't it.
So accounts is 26.9% on HSA.
26.9% for HSA, which is the driver, year-on-year.
The business model would suggest that it will continue over time.
We have a business model that allows us to capitalize on that.
As it does grow, we have an open-architecture business model, with a strong investment vehicle.
And we are prepared to take advantage of that trend.
We believe that trend will accelerate.
Very excited about that.
And this whole business is about education.
So as you look forward, and the education levels increase and people understand the value of an HSA account, and the fact that it's triple tax advantaged and is actually better than the 401(k) as it relates to a savings vehicle.
As that education takes place and more and more people understand that, the investment side of this business model will pick up and we will benefit from that.
Not really.
I think it's still very manageable.
Obviously, we are watching it.
This is what happens in the bond market when rates go up.
We're comfortable with where the AOCI level is.
Obviously, to my earlier point, we focus a lot on the regulatory capital ratios.
And as you are aware, this doesn't impact our regulatory capital ratios.
And we're at 9.5% TCE today.
<UNK>, the tax rate going forward is 16% to 17%.
Still a good number or.
Yes.
I would use that.
16% to 17% is still good.
Okay.
And then just one follow-up, <UNK>.
Other noninterest income, $10.6 million for the quarter.
I know you talked about company-owned life insurance being down a little bit.
Anything else in there that was maybe unusual or the like.
Nothing unusual, I would say, in the other income line item.
Obviously, that was down on a quarter-over-quarter basis.
Last quarter, we talked about a bully payout that was about $1.5 million or so.
Obviously, we didn't have that this quarter.
So that's the reason for the quarter-over-quarter decline.
Thank you.
And thank you for joining us today.
As always, if you have follow-up questions, you can reach UMB Investor Relations at (816) 860-7106.
Thank you and have a great day.
