UMB Financial [UMBF] Conference call transcript for 2022 q1
2022-04-27 13:05:05
Fiscal: 2022 q1
Operator: Hello and welcome to today’s UMB Financial First Quarter 2022 Financial Results Conference Call. My name is Elliot and I will be coordinating your call today. [Operator Instructions] I would now like to hand over to Kay Gregory, Investor Relations. Please go ahead, when you are ready.
Kay Gregory: Good morning and welcome to our first quarter 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 43 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. Our presentation materials and press release are available online at investorrelations.umb.com. Now, I’ll turn the call over to Mariner Kemper.
Mariner Kemper: Thank you, Kay and thanks to everyone for joining us today. 2022 is off to a great start. Solid performance in the first quarter included 19.1% linked-quarter annualized growth in average loans. And we posted a $6.5 million provision release, reflecting the quality of our loan portfolio. Additionally, we had strong fee income, combined with expense levels that moderated from the previous quarter. For the first quarter, net income was $106 million or $2.17 per share. Pretax pre-provision income on an FTE basis was $125.7 million or $2.57 per share. First quarter net interest income was relatively flat on a linked-quarter basis. The positive impact from asset growth and balance sheet moves we made was offset by the sale of our factoring portfolio and the continued runoff of PPP balances, along with fewer days in the quarter. Non-interest income for the quarter totaled $123.7 million, an increase of 4.1%, compared to the fourth quarter. Ram will share more detail on the various drivers. But we saw positives across many of our fee businesses, highlighted in the line of business update in our presentation. In the current economic and regulatory environment, there are a few items that position us well from a fee income perspective. First, we don’t rely on mortgage gain on sale income, which is likely to be a drag for some of our peers, heading into a raising rate environment. Second, NSF and OD fees are a very small portion of our deposit service charges and represent well less than 1% of total revenue. And while early, we’ve begun to see a return of 12b-1 fees as interest rates rise. For the full year 2019, brokerage income where those fees are booked, was $31.3 million. As rates fell in subsequent years, that total dropped to just $12.2 million in 2021. A normalization of that income stream is a tailwind for us. Total non-interest expense fell 3.5% on a linked-quarter basis, as some of the higher than typical expenses we discussed in the fourth quarter moderated. Excluding contributions from PPP, we generated positive operating leverage in the first quarter of 2022, a 6.2% on a linked-quarter basis, and 7.8% versus first quarter of last year. Moving to the balance sheet, Slide 24 is a snapshot of our loan portfolio showing the drivers behind loan growth I mentioned. Average loans for the first quarter excluding PPP balances increased 15.6% year-over-year and more than 19% on a linked-quarter annualized basis. We saw phenomenal growth in C&I balances with balances increasing 35% on a linked-quarter annualized basis. Commercial real estate loan demand is strong, particularly in industrial projects, although developers are closely monitoring the cost of materials and labor. Most of our year-to-date activity and real estate has been in our Salt Lake City, Kansas City, Denver and St. Louis markets. Average residential mortgage balances grew 4.4% from the fourth quarter to just over 2 billion. As I mentioned, we don’t rely heavily on mortgage gain on sale revenue. However, we continue to grow our own portfolio and recently implemented a new Down Payment Assistance program. The program launched in December of 2021 is geared towards underserved markets, and it had 47 new applicants just in the first quarter. Total top-line loan production, as shown on slide 25, was again very strong coming in at $1.1 billion for the quarter. Pay-offs and pay-downs were 5.1% of loans, in line with recent quarters. While estimating pay-off can be unpredictable, we continue to see opportunities across all verticals in the second quarter. Based on what we see now, gross loan production is likely to be stronger than the first quarter. Asset quality as shown on slide 26 and 27 remains strong with net charge-offs 20 basis points for the first quarter, consistent with our outlook and our historical averages. We did see an increase in nonaccruals from the fourth quarter levels, which is largely driven by one relationship. At this time, we feel like we’re in a good position there and expect a favorable resolution in the coming weeks. As we head into the cycle, I look back on prior period and how our credit metrics has performed. The real test of quality comes when conditions are negative. Back to the balance sheet. Strong deposit growth continued in the quarter with average balances increasing nearly 12% on a linked-quarter annualized basis. Despite our strong loan growth, our average loan-to-deposit ratio remains low at just 53% for the first quarter. This provides us with flexibility in a raising rate environment. We have plenty of opportunity to fund growth potential we see in our pipeline. Yesterday, our Board approved a quarterly dividend of $0.37 per share and renewed the standard annual 2 million share repurchase authorization. These remain important in our toolkit for capital deployment in addition to opportunistic M&A. Finally, our latest corporate citizen report has just been published and is available on our website. It highlights our continued efforts and actions related to environmental, social and corporate governance issues. Our strong first quarter results position us well for the rest of the year, and we are encouraged by the activity we’ve seen so far in the second quarter. Now, I’ll turn it over to Ram. Ram?
Ram Shankar: Thank you, Mariner. Net interest income was relatively flat compared to the fourth quarter at $210.4 million. The impact of the $1.2 billion in average earning asset growth was offset by the $4 million reduction in PPP income and fewer days in the quarter. We amortized $1.7 million of PPP origination fees into income and the overall PPP contribution to the first quarter net interest income was just under $2 million compared to $6 million last quarter and $13.4 million in the first quarter of 2021. At quarter-end, our PPP balances stood at $77.2 million, down from $136.5 million at December 31st, approximately $2 million in unamortized fees remain. Average earning asset yields decreased 2 basis points to 2.47% with loan yields impacted by the sale of the factoring book and the $118 million decline in average PPP balances. As shown on slide 21, our Fed account, reverse repo and cash balances moderated slightly and now comprised 18% of average earning assets with a blended yield of 30 basis points compared to 26 basis points in the fourth quarter, as this shows liquidity balances still remain elevated from pre-pandemic levels. The 3% increase in average deposits from the fourth quarter was driven by growth in DDA balances. And the total cost of deposits, including free funds remained at 8 basis points. First quarter net interest margin fell 2 basis points from the fourth quarter to 2.35%, driven largely by changes in loan mix offset by positive impacts from changes in the AFS book, the decline in liquidity levels and number of days in the quarter. We’ve added slide 30 in our deck show the estimated impact to net interest income in various rate scenarios. In a rate ramp scenario of plus 100 basis points on a static balance sheet, net interest income is predicted to rise 1.7% in year one and 7.5% in year two. On the asset side, 56% or about $9.7 billion of average loans are variable rate, and of those 63% repriced within 12 months. They are tied to short-term rates with just under 60% tied to LIBOR. Additionally, the securities portfolio is expected to generate nearly $1 billion of cash flow in the next 12 months available to be reinvested at higher rates. Notwithstanding our strong loan growth, our securities portfolio has continued to grow. And as we indicated in our press release, we transferred securities with a fair value of $2.9 billion from the AFS to HTM book in March to help manage tangible capital and reduce the impact of rising rates on our equity. At March 31st, 34% of our securities portfolio was classified as held to maturity. As expected, the rate environment drove changes in AOCI, which declined by $469 million from year-end. Although fluctuations in AOCI don’t affect earnings, we’re mindful of the impact on tangible book value and we’ll continue to evaluate potential opportunities to mitigate that impact. As you’ve heard us say before, we run our business by focusing on regulatory capital ratios, which remain strong with total risk-based capital at 13.55%, CET1 at 11.81% and leverage ratio at 7.53%. Back to the income statement. Noninterest income for the first quarter was $123.7 million, an increase of $4.9 million from the fourth quarter. Deposit service charges increased $3 million and included a $3.5 million increase in client transfer and conversion fees in our healthcare business. As Mariner mentioned, NSF/OD fees included in this line represent less than 1% of our total revenue and came in at just $1.4 million for the first quarter. Derivative income increased $1.9 million from the prior quarter and company-owned life insurance income increased $823,000 on a linked-quarter basis. Both are included in the other income line and the COLI income has a similar offset in deferred compensation expense. Other drivers to fee income, including the $2.4 million gain on the sale of our factoring business and reduced investment security gains are shown on slide 22. Non-interest expense trends are shown on slide 23. The $7.7 million linked-quarter decrease was driven by reductions from the elevated fourth quarter levels in variable costs such as incentive compensation and lower legal consulting and marketing costs. These were partially offset by the typical seasonal reset of payroll taxes, the increased deferred compensation I mentioned and higher bank card expense. Our effective tax rate was 15.7% for the first quarter. For the full year 2022, we anticipate it will approximate 17% to 19%. That concludes our prepared remarks. And I’ll turn it back to the operator to begin the Q&A portion of the call.
Operator: [Operator Instructions] Our first question today comes from Jared Shaw from Wells Fargo. Your line is open.
Operator: We now turn to Nathan Race from Piper Sandler.
Operator: Our next question comes from Chris McGratty from KBW.
Operator: [Operator Instructions] We now turn to David Long from Raymond James.
Operator: We have a follow-up question from Nathan Race from Piper Sandler.
Operator: Our final question comes from Jared Shaw from Wells Fargo. Please go ahead.
Operator: We have no further questions. I’ll now hand back to the management team for closing remarks.
Kay Gregory: All right. Well, thank you for joining us this morning. We appreciate your time and your interest. The recording replay will be on the website shortly. And if you have any follow-up calls, you may reach us at 816-860-7106. Thank you.
Operator: Today’s call has now concluded. We’d like to thank you for your participation. You may now disconnect your lines.
