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Edited Transcript of UMBF earnings conference call or presentation 29-Jan-20 2:30pm GMT

Q4 2019 UMB Financial Corp Earnings Call

KANSAS CITY Feb 5, 2020 (Thomson StreetEvents) -- Edited Transcript of UMB Financial Corp earnings conference call or presentation Wednesday, January 29, 2020 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Mariner Kemper

UMB Financial Corporation - President, Chairman & CEO

* James D. Rine

UMB Bank, National Association - President, CEO & Director

* Kay Gregory

UMB Financial Corporation - Director of IR & Senior VP

* Ram Shankar

UMB Financial Corporation - Executive VP & CFO

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Conference Call Participants

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* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David Joseph Long

Raymond James & Associates, Inc., Research Division - Senior Analyst

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Gordon Reilly McGuire

Stephens Inc., Research Division - Research Analyst

* Nathan James Race

Piper Sandler & Co., Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the UMB Financial Corporation Fourth Quarter 2019 Financial Results Conference Call. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Kay Gregory, Director of Investor Relations. Please go ahead.

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Kay Gregory, UMB Financial Corporation - Director of IR & Senior VP [2]

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Good morning, and welcome to our fourth quarter and year-end call. Mariner Kemper, President and CEO; and Ram Shankar, CFO, will share a few comments about our results. Jim Rine, CEO of UMB Bank, 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, all of which are subject to assumptions, risks and uncertainties. Actual results and other future circumstances or aspirations may differ from those set forth in any forward-looking statement. Details about factors that may cause them to differ are contained in our SEC filings. Forward-looking statements speak only as of today, and we undertake no obligation to update them, except to the extent required by securities laws. Our earnings materials are available online at investorrelations.umb.com. All earnings per share metrics discussed on this call are on a diluted share basis.

Now I'll turn the call over to Mariner Kemper.

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [3]

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Thank you, Kay, and thanks, everyone, for joining us today as we recap our fourth quarter and full year 2019 performance. As I look back on the last 12 months, I'm proud of our team's ability to produce solid results, which includes strong loan and deposit growth and continued fee income momentum. We earned $66.5 million or $1.35 per share in the fourth quarter and $243.6 million or $4.96 per share for the full year of 2019 on total revenue of $1.1 billion. Average loan balances grew 10.6% on a linked-quarter annualized basis. For comparison purposes, publicly traded banks that have reported to date have shown a median linked-quarter annualized increase of 4.1% in average loan balances. For the total portfolio, fourth quarter top line loan production was a record $1 billion. Total payoffs and paydowns were slightly more elevated than usual at $656 million this quarter or 4.9% of loans.

Net average loan growth of $341 million for the quarter was led by C&I and CRE and the recent growth in residential real estate loans, originated both in private banking and consumer continued in the fourth quarter. In 2019, we added $111 million of mortgage balances on a year-over-year basis for an increase of 16.4% compared to an increase of 13.4% in 2018. We continue to see growth through both market share gains and in our under-penetrated markets as line utilization trends have remained fairly steady. The top 3 loan growth regions for the fourth quarter were St. Louis, Colorado and Texas. These are the areas with less than 2% market share for us. Full year 2019 production of $3.6 billion represented a 39% increase over 2018 levels and led to $1.2 billion of net growth on average.

We experienced both growth and payoffs as a result of robust M&A activity amongst our clients. And in several markets, have been able to take advantage of a disruption caused by bank mergers. We continue to see opportunity in our markets, and the production pipeline remains strong as we look forward into the first quarter.

Net charge-offs for the fourth quarter were 0.23% of average loans. And on a full year basis, net charge-offs were 0.27% of average loans, in line with our historic averages. And consistent with our comments last quarter, nonperforming loan balances did indeed decline by 22% from the third quarter. Our loan book remains well diversified, and I'm proud of our long-term track record of quality underwriting. These results and the quality of our portfolio drove the lower provision in the fourth quarter.

Now looking to the income statement. Net interest income increased 2.4% compared to the third quarter driven by strong asset growth and lower funding costs. As we mentioned last quarter, our strong loan pipeline should help us continue to grow net interest income even in the current rate environment. On the fee income side, we saw continued momentum with an increase of 6.5% compared to the third quarter. Corporate trust and fund services both posted strong results. And our investment banking teams saw increased underwriting activity and customer demand, which along with positive fixed income markets drove solid increases in agency, municipal and MBS trading revenue. Again, this quarter, there was some noise in our other income line related to market adjustments that often have expense offsets, including positive impacts from COLI and equity earnings income.

Our expenses for the quarter increased $12.1 million compared to the third quarter, driven largely by incentives tied to business and revenue growth, hiring in several growth businesses and overall company performance.

The momentum in our fee income related businesses and the correlation with commission payments can add variability to our expense levels. We estimate that approximately 3/4 of the quarter-over-quarter increase in expense was tied to business growth. We continue to invest in our business, including the reinvigoration of our retail business. We've discussed before, rolling out the new teller platform, online banking upgrades and online account opening capabilities, which are nearing completion.

In the fourth quarter, we launched a retail credit card campaign, which drove some of the increases in advertising and postage expense. This campaign will build on the growth we've seen over the past year, with 2019 retail card account originations up 63% compared to 2018 levels.

Additionally, we've been opportunistically adding to our teams and to our revenue-producing capabilities. For example, we've hired an experienced team of middle market commercial bankers in the desirable twin cities area and a successful group of business banking professionals in Salt Lake City. Several of these new hires are on board now, and the rest are in process. We'll share more details on these teams in the coming quarters.

In closing, our success in 2019 has set the bar high for us in 2020. With the current rate backdrop, year-over-year revenue growth is likely to moderate from the 8.5% levels we experienced in 2019. However, we aren't slowing our focus, and we remain very diligent about controlling expenses as tightly as we can without mortgaging our future. As I shared earlier, we will continue to invest prudently in our business to enhance our revenue-generating capabilities and improved customer acquisition trends and experience, but we'll also have an eye on efficiency. While we typically do not give guidance, I believe we can do better than the current 2020 consensus earnings estimate, barring any material unexpected deterioration in the operating environment.

Now I'll turn the call over to Ram for a more detailed discussion of our results. Ram?

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [4]

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Thanks, Mariner. The benefits from our strong loan and securities growth balance and lower funding costs that drove the increase in net interest income were partially offset by declining asset yields and the payoff of some higher yielding balances that shifted the mix of our loan portfolio. Total earning asset yields fell 23 basis points to 3.76% from the linked quarter driven largely by a 30 basis point decline in loan yields. Approximately 61% of our loans are variable tied to short-term interest rates. 1-month LIBOR fell 26 basis points in the fourth quarter, impacting 56% of our loans that repriced during that period. Interest-bearing deposit cost declined 22 basis points, contributing to the 24 basis point reduction in the cost of interest-bearing liabilities and the 18 basis point decline in total cost of funds.

Net interest margin for the quarter was 3.02%, down 7 basis points from the prior quarter, while our net interest spread at 2.66% was virtually unchanged from the prior quarter, the benefit from free funds declined by 7 basis points sequentially as their value declined in a lower interest rate environment. Overall, margin was positively impacted by approximately 16 basis points from lower funding costs and balance sheet mix changes and 4 basis points from higher loan fees. Negative offsets included approximately 17 basis points related to loan pricing, 7 basis points from the decreased benefit of free funds and 3 basis points from excess liquidity, primarily driven by excess deposit flows in our institutional businesses.

Repricing in the AFS book provided about 1 basis point of net interest margin improvement as cash flow rolling off at 2.43% during the quarter was reinvested at 2.69%. Considering recent market dynamics and our expectation that the Fed will hold rates for now, we would expect approximately 4 to 5 basis points of net interest margin compression for the first quarter. As always, the actual outcome for net interest margin will depend on a variety of factors such as the pace at which LIBOR moves, loan growth, the potential variability in our aviation trust and public fund businesses and our overall balance sheet mix and need for funding.

Average total deposits increased 5.6% on a linked-quarter basis, largely in institutional and commercial money market balances along with the beginning of annual build-up of public funds. DDA balances rose by 5.2% to $6.4 billion, driven largely by corporate trust, including our aviation business, and the typical year-end buildup of cash for municipal payments. Our overall deposit composition by source is shown on Slide 14.

Moving back to the income statement. Mariner discussed some of the opportunities we're seeing in fee income and the detail on specific drivers are shown on slides '21 and '22. Total reported noninterest income was $110.4 million for the quarter, an increase of $6.7 million compared to the third quarter. Positives include trust and securities processing income, which improved $1.6 million or 3.6% over the third quarter, driven largely by fund services and corporate trust revenue. Additionally, trading and investment banking income increased by $1 million due to higher trading volumes. Also included in the increase were some market and volume-related items reported in the other line. $2.6 million of COLI income or a $3 million increase from the third quarter, which has a proportional offset in deferred compensation expense. A $2.5 million increase in equity earnings on alternative investments, which is one contributor to the bonus and commission expense and a $1.4 million linked quarter increase in derivative income. $2.3 million of lower gains on sale of securities partially offset these increases.

Noninterest expense for the fourth quarter was $203.5 million, an increase of $12.1 million from the third quarter. More than 50% of the quarter-over-quarter increase in expenses were driven by higher bonus and commissions expense within the salaries line item tied to business and revenue growth and overall company performance. Deferred compensation expense, the offset for the increased COLI income, increased $2.5 million on a linked-quarter basis. More detail on quarterly expenses can be found on Slide 25.

Our effective tax rate was 13.9% for the fourth quarter and 14.8% for the full year 2019, benefiting from greater levels of income from tax-exempt sources, such as municipal bonds. For 2020, we expect our tax rate to be between 15% and 16%.

Finally, going back to Slide 17 in the asset quality section, we've provided some high-level preliminary detail about the implementation of CECL. We expect the day 1 impact on our reserves will be an increase of approximately 10%, with very minimal impact on our common equity Tier 1 ratio at adoption. These estimates were calculated using current economic outlook on the current characteristics of our portfolio. We plan to review, make any necessary modeling updates and present our final day 1 impact when we file our 10-K. Day 2 provisioning will depend on the mix of portfolio growth as well as expectations for the macroeconomic variables highlighted on this slide.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Chris McGratty with KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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Mariner and Ram, just wanted to start on the -- in the investments you're making. How should we be thinking about the level of expense growth in 2020 versus 2019 in light of this and in light of kind of the more challenging revenue outlook that we've been presented by lower rates?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [3]

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Well, we don't obviously give guidance on that. But what I would say is that the -- and we talked about some of the level of business investment expense related to revenue and investing in teams and things like that and some of the marketing dollars that hit the fourth quarter numbers, making them look a little higher than they have been. Some of the answer to that will be dependent on what the revenue picture looks like in 2020. And we certainly expect, we talked about in our comments, as we always do, that the loan growth and pipeline numbers look pretty good as we look into the first quarter. So -- and we are, as we mentioned in the comments, investing in a couple of teams in Salt Lake and in Minneapolis. So those things will kind of weigh, right, on the expenses. I don't know, Ram, do you want to add anything? We don't give any guidance on that. You shouldn't expect our -- a big reduction in our expense load, right? So I don't know if you have to say, Ram, anything?

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [4]

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Chris, we'll definitely be cautious on expenses. Obviously, internally, we focus a lot on operating leverage. But to your point, the operating -- and Mariner's comments, the revenue environment, the rate environment will be a tough one going into 2020. And as Mariner said, we set the bar pretty high for us in 2019. But that doesn't mean we will not focus on the expense side of the equation.

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [5]

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We're definitely focused on making sure that we operate as efficiently as we can in 2020 without mortgaging the bright future that we see by continuing to invest in our company. We -- I've never been as pumped as I am about the investments we've made and the team that we have as I look into the next 3 and 5 years. I mean 2020 is going to be a tough operating environment. But the investments we've made and the team I've got on the field, if we could go to the Super Bowl, like our chiefs are going to the Super Bowl, I would say we have a Super Bowl contention team.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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That's good color. I'm just trying to get a sense of where you are in the investments, right? The 2 teams, how much of the impact was felt in 2019 versus a continuation of what you see as some revenue opportunities to invest?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [7]

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I'm sorry, because I don't know that we can give you too much more color on that without becoming a company that gives guidance.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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All right. That's fine. In terms of the quarter, there was a comment in the release about a derivatives offset. Could you just -- I'm just trying to make sure that's kind of -- it seems like a onetime item, but just could you give some color on that?

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [9]

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Yes, sure. Chris, this is Ram. So just to give you some context for the full year 2019, our total derivative expenses were less than $200,000. So what you saw in this particular quarter was an adjustment or a benefit of $3.5 million that reduced our expenses. Basically, what it did was reversed out all the higher derivative expenses in the second and third quarters we've been talking about. So if you go to our press releases in the second and third, our derivative expense spiked because of some activity. So our notional book on the back-to-back swaps has increased about 50% in 2019. So as part of that, we revisited our valuation adjustments or valuation assumptions and made it more in line with where the industry is. So that's why you see that quarter-over-quarter spike of $5.1 million swing. But I would look at the total expense line item on a full year basis.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [10]

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That's great. And then last one on the seasonality in the deposits, how do we think about -- I mean it seems like this quarter's seasonality was even more meaningful than prior fourth quarters. How do we think about kind of first quarter -- first, second quarter of just the balance sheet as accordions up and down?

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [11]

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As I said in the prepared remarks, some of the seasonality is typical with public funds. Those come in the second half of December, really, so there wasn't a big impact in the fourth quarter because of public funds necessarily. A lot of the deposit inflows and the excess liquidity had to do with our institutional businesses, particularly asset servicing because funds weren't readily deploying some of the cash balances into the market and then the aviation trust business, which is fairly new to us, and so there's a little bit of volatility to it. Public funds typically peaks in the first quarter and then stops head down. So it's really hard to say what's going to happen to some of these deposit balances given their very nature, they tend to be very transient in nature, short-term, they get deployed pretty easily in the markets. So a lot of things can change on us, which is why it's really hard to give a clear answer on what will happen to deposits and margin for that matter.

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [12]

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I would add, though, the aviation trust business, it is new to us, so we don't have a lot of experience with it, but as the business continues to expand, one second here, something is going by on the road here, snowblower, snow truck just went by. Anyway our expectations for the aviation trust business are that as it expands and we have more business coming along that the growth in that deposit base stays behind should grow because the number of clients is growing. So there is an expectation that, that deposit base continues to grow, even though we don't have a lot of history with it.

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Operator [13]

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The next question is from Nathan Race with Piper Sandler.

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Nathan James Race, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [14]

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Great. Going back to the last question on deposit growth expectations, just perhaps more broadly, just thinking about 2020 in aggregate, deposits exceeded loan growth in 2019. So just curious, just given kind of where you're pricing and given some of the expansion on the corporate trust side of things, if you still expect deposit growth to exceed loan growth in 2020?

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James D. Rine, UMB Bank, National Association - President, CEO & Director [15]

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No, this is Jim, Nate. We don't anticipate that. However, on the increase in expenses that you saw in the fourth quarter, the increased marketing expense for the consumer division was to continue to attract consumer deposits. The increase in the consumer card spend that we're currently doing, that we've seen success is to continue to build our consumer franchise. So we are looking to balance some of that growth in our consumer division. We have been able to successfully attract, obviously, commercial deposits via yield. But with the new markets that we're going into, those teams are laser-focused on deposit collection as well, not just loan building balances. So we do anticipate those to be successful obtaining balances in Salt Lake as well as Minneapolis, but to exceed our loan balance expectations, I don't anticipate that.

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Nathan James Race, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [16]

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Got it. That's helpful color. Appreciate it, Jim. And then just changing gears and thinking about the institutional segment, the pretax margin ticked up nicely in the quarter. I think it's the highest level that we've seen in the last 7 or 8 quarters or so. So just curious, just given some of the investments that you've made in a number of those units and just given the scale that you guys are seeing there, if we can kind of see that as a sustainable pretax margin level going forward or if you think more investments there maybe going to limit that expansion of this level going forward?

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James D. Rine, UMB Bank, National Association - President, CEO & Director [17]

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I would think we could anticipate this level going forward. We continue to make investments. As you know, we closed on the last corporate trust acquisition. While smaller in revenue, we have made considerable investments. We've discussed what we're doing with the various fintech partnerships that we established as far as the FDI sweep relationships, but the corporate trust business as well as the traditional broker-dealer business, but we've seen increases in the bond trading month after month, quarter-after-quarter, which have been reflected in the year-end results, and we're very excited with what we're seeing with institutional. I think I'm confident you'll see continued results from that division.

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [18]

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Yes, it's all -- it's very leverageable at this point, the investments that have been made.

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Operator [19]

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The next question is from Gordon McGuire with Stephens.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [20]

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I wanted to follow up on the discussion around the bonus and commissions. Do you have what that -- how much of the, call it, $40 million increase in compensation this year was related to that and tied to the revenue side and volumes?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [21]

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So we didn't break it out exactly for you. We're probably going to stick with the answer we gave in our prepared remarks, which is that 3/4 of the expense increase came from business generation activities, of which included in bonus and -- we actually had the bonus and commissions tied to new business, we had some marketing dollars related to the increased activities for our credit card and deposit gathering activities. There are some expenses related to the hiring, the original hirings of the folks that we've added in Minneapolis and Salt Lake. And Ram, you might have a couple of additions on it?

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [22]

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Yes, Gordon, if you go to Page 25 of our slide deck, we kind of enumerate where the drivers of the salaries and benefits are. So I'll go back to what Mariner said, about 70% of the quarter-over-quarter increase was because of volume and revenue growth. And then my comments also, 50% of the expense growth is related to bonus and commissions again. So of the $10.7 million increase in salary and benes $6.8 million was tied to bonus and commissions. Again, overall company performance, rigid growth, revenue growth, all of that.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [23]

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I guess I was just trying to get at, given the really strong balance sheet growth, the strong fee growth, how you gauge whether you're kind of at a high level watermark for bonus and commissions specifically for this year?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [24]

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Well, I mean, it was a hell of a good quarter, I guess, love to repeat it. I mean, again, we don't give guidance on that, but it was a pretty, again, good quarter.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [25]

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Got it. And then just switching to fees, specifically, cards, purchase volumes were up double digits this year, but interchange fees kind of low single-digit growth. Can you talk about the headwinds you're seeing on interchange rates and whether you see that continuing?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [26]

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Yes. Well, I'll talk to high level and then Jim who reports them can go deeper. But as we talked in the past, 60-some-odd percent of our interchange income comes from the health care business, and we've talked about that business in the sense that we don't necessarily control what we get paid there because we have partners and we have sharing arrangements. So that pulls down what would be the numbers otherwise. So we carry better interchange in the commercial and in the consumer, but the volume you see on -- in our slide deck on Page 37, you can kind of see the breakdown of the percentages. And that's really what pulls it down. I don't know if you want to add anything to it, but it's the sharing relationships with our health care business pulls it down. Now the beauty is, if it's working right is it should be volume driven, right, so all those partners and all those relationships. So from just an earnings growth perspective, it's a lower margin, but a decent growth. So $3.2 billion in the quarter of interchange spend, right? So that -- we expect that number to continue to grow on a quarterly basis.

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James D. Rine, UMB Bank, National Association - President, CEO & Director [27]

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In that model, it's obviously tied together with the deposit growth, coupled with the account fees. So the cards is a piece of it, but certainly, the lower margin, which Mariner just described.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [28]

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Got it. That's helpful. And then Mariner, just any updates on M&A prospects, where the focus would be and just readiness for any kind of M&A, given the internal investments this year?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [29]

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Sure. So I mean as far as readiness goes, all of the things we talked about, the investments we've made, et cetera, we're ready. We very much would like to -- no new comments really from quarter-to-quarter as far as where we are with it. We've got an active effort, active team, active calling effort. Very much would like to do a deal that we can see all the right things from, whether it's synergies or cultural overlap to ultimately spread our expenses over a larger organization within our footprint or contiguous. So we're ready to go and would have an active effort and continue to look for the right deal on the banking side. And then, again, no new real comments, we continue to look for corporate trust opportunities, aviation trust. Anything related to our corporate trust and trust activities and our -- we've had our -- in our investment services business, where we're providing banking services to broker-dealers and fintech companies. And we're looking across that whole spectrum for either product additions, where we can add more products on the truck to the customer or bolt-on type acquisitions or consolidation opportunities. We believe that on the corporate trust side, we can continue to be a consolidator there, as we've been successful with that and are having -- already having a lot of success. We continue to see opportunities there. And we'd like to continue to see opportunities there.

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Operator [30]

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The next question is from Ebrahim Poonawala with Bank of America Securities.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [31]

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So most of my questions have been asked and answered. A couple of just follow-ups. And sorry if I missed this, the $2.2 billion in period-end deposit growth. Now I understand there are some seasonal outflows we should expect in the first quarter, but any sense of how much of that you expect to retain beyond 1Q of the $2.2 billion or $3 billion?

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [32]

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It's really tough to say -- Ebrahim, this is Ram. It's really tough to say with some of these businesses. There's the traditional seasonality that we've talked about historically about public funds. But as I said earlier, and Mariner added to it, some of these businesses were fairly new, especially the corporate trust aviation business, and that's growing really nicely on a steady basis. And then there's volatility, especially at the end of the quarter sometimes. So it's really hard to say long answer to say long, but it's really hard to say what the outflow is going to look like.

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [33]

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And then we've talked about the success really across the board on fee income, which is coupled in a lot of ways with deposit growth. So fund services is having success and with every account we bring on our fund services, there's a bit of institutional deposit business that comes with each and every 1 of those relationships. So hard to tell at this point. Certainly, there'll be some -- some contraction just because of the public funds business.

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [34]

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I talked about a 3 basis point impact of margin from excess liquidity. And if you look at it on a quarter-over-quarter basis, we're probably about $500 million to $600 million richer in liquidity. So that's probably a guide for you to consider and answering your question, too.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [35]

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And what was public funds at the end of the year in balances?

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [36]

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I don't have that handy, Ebrahim, but it's -- the second half of December is it when it starts peaking up. So first quarter is the seasonal peak for it. I can get back to you later.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [37]

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All right, I'll circle back. And just, I guess, separately, I think you've been -- so you had a very strong quarter on loan growth, you've been steadfast, I think, through back half of last year, even when things were macro-wise not looking great in terms of high single-digit loan growth expectations. Just talk to us in terms of anything in the markets that seems concerning. And what are the markets where you're seeing the best growth and industry verticals where you're seeing the best opportunities?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [38]

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It's really coming from everywhere. My remarks have been the same for quite some time about why we continue to see sort of better-than-industry loan growth, which is a lot of it is -- I'll hit them high level again, but under-penetration in a lot of our large markets. So just being able to execute, right people on the ground, plenty of opportunity for us to just get a decent market share in several large markets, and we continue to be under-penetrated vertically also, right, as it relates to stronger efforts over time to put specific specialty individuals and marketing and all that and hiring against particular verticals and marketing to them specifically, more than we were -- we used to be generalists. So those 2 things, which we've talked about for some time, continue to drive a lot of opportunity for us, and we think there's a long runway for that. We were also just -- have a really good team. There's a lot of tenure, putting people particularly in the commercial lending side is, I think a lot of you know, when you're able to put the same people in front of your prospects and clients for a long period of time, it bodes well for you. And it's a long sales cycle in this business. So we were uninterrupted from the crisis. So we don't have to retrain our prospects and customers. And again, that's kind of the same remarks I had about that for quite some time. I don't know, Jim, if you want to add to that?

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James D. Rine, UMB Bank, National Association - President, CEO & Director [39]

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We've seen -- we saw loan growth in every market, but one, and it was more of a rural market for us. Industry-wise, there hasn't been -- I mean there are pockets that we are seeing some slowdown in transportation. I believe I mentioned that last quarter as well. Nothing in our portfolio that we're concerned with, but just macro indicators that raise concerns, but our production last quarter, almost 50% was from C&I. So with that C&I business, we get the treasury business and the ancillary accounts. And so it's been exactly what we -- with the addition of the real estate, which is over the last 5 to 6 years on the CRE book, but it's -- what we have always done and our market penetration is, as Mariner addressed earlier, in the markets that have historically been under-penetrated. But we have a compelling story, and we're continuing to tell it in the markets that we've expanded into over the years. We've had great growth in Texas, in Colorado, St. Louis, and it continues to move forward on the St. -- on to Salt Lake and Minneapolis.

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Operator [40]

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The next question is from David Long with Raymond James.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [41]

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Ram, I think you indicated for the first quarter, what you were looking at, said that the NIM may be down 4 to 5 basis points. And just curious if you could provide a little color on how you see asset yields and the funding side of the balance sheet, both working in the first quarter to get to that point.

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [42]

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Yes. So if you just look at 1-month LIBOR, right, since year-end, it's come down about 15 basis points. It's right now at 1.65%. So as I said in my prepared comments, about 40% of our book is tied to 1-month LIBOR. So assuming that the Fed doesn't do a whole lot just because of the movement in LIBOR, you should see some pressure on the asset yields or, I should say, loan yields, but that should be offset by the growth prospects that both Jim and Mariner talked about. And then on the portfolio side, if you look at our disclosures, we have about $1.1 billion of roll-offs, or cash flows coming due in the next 12 months and approximately 1/4 of them were in the first quarter. And the roll-on, roll-off difference is about positive 30, 35 basis points. So that should offset some of that asset yield pressure just from what's happening with the LIBOR rate. And then on the funding side, we're being very diligent on the funding side. Obviously, we'll be very cautious and react to the environment. And so we should see some alleviation of pressure on deposit costs. And overall, if the interest rate stays the way it is, same thing on net interest margin as well.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [43]

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Okay, got it. And then as it relates to the Commerce Trust acquisition, I believe that closed at the end of November. Did that contribute to any of the deposit growth that you had in the quarter?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [44]

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No, no.

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [45]

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No.

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [46]

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Not materially, no.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [47]

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Okay. And...

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [48]

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That's a small acquisition.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [49]

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Right. Okay. And lastly, as it relates to CECL, as you guys are getting closer to actually having to report results under CECL, have you thought of -- or does it change your appetite for any particular type of loan? Does it change how you're -- either your willingness to make that loan or the pricing that you have historically done versus what you may do in the future?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [50]

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Not really because I think whatever we would do is going to come on the margin and it's going to come in over time. As you've probably learned, there's different asset classes that carry different weighting, and the mortgage business, for example, is one of those. And currently, for us, that's not a big part of our balance sheet. So it doesn't have a big impact. We do plan on, and we've talked about that expanding our mortgage business, but it should happen over time and have an impact that you would imagine would come with something that happens measured and over time. So not really no -- nothing we expect to change the way we do business. Actually, the way we bring in business today and the type of business we bring in today is actually more beneficial to us than a lot of our peers as it relates to CECL.

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Ram Shankar, UMB Financial Corporation - Executive VP & CFO [51]

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And it all comes down to competition, right? So what the big banks do if they react to CECL, which is unlikely, then we'll have to change our terms to it, but otherwise, it's strictly on a street fight.

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Operator [52]

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(Operator Instructions). The next question is a follow-up from Chris McGratty with KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [53]

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Great. Just 2 quick ones. First, any thoughts -- any updated thoughts on the buyback. You obviously haven't been using it because of the organic growth, but any kind of change in philosophy on levels of where you might consider buying the stock?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [54]

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No. For those who haven't heard it before, I mean, we will obviously want to put our capital to work to build the business first. So we're going to prioritize our capital against acquisitions, lift-outs and things like that. And then to the extent that those aren't coming as quickly as we'd like, we can obviously always do buybacks and/or increase our dividend and do smaller acquisitions. So it can be a mix of all of it. We keep an eye on it. You've seen us do it before. So we have a willingness. Did our first ASR not long ago. So certainly willing to do it when the time is right and it's appropriately priced, and we feel good about it. But other than that, where -- we're going to be focused on putting our capital to work building the business.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [55]

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Great. And Mariner, on the M&A front, I think your last deal was Marquette, it was $1.5 billion in assets. What's the -- can you remind us the range of what you might be considering? Obviously, 2019 and 2020 seems to be the market moving towards more transactional and transformational deals, but maybe your appetite for size?

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [56]

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There is no hard and fast rule there. The smaller the deal, you're doing all the same amount of work to do that and you don't get the lift-out of it. So certainly, the Marquette deal would be a nice bottom end of the range. And the bigger the -- so and then the only other thing I would say because we have -- we take risk very seriously, the bigger the opportunity the less risk we're going to want to take doing the deal. So those are going to have to be banks who look a lot like us, if they're bigger, if that makes sense. But we're prepared to do deals Marquette or larger.

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Operator [57]

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This concludes our question-and-answer session. I would like to -- now like to turn the conference back over to Kay Gregory for any closing remarks.

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Kay Gregory, UMB Financial Corporation - Director of IR & Senior VP [58]

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Thank you, and thanks for joining us today. This call can be accessed via replay at our website. And as always, you can contact UMB Investor Relations at (816) 860-7106 with any follow-up questions. Again, we appreciate your interest and time. Thank you.

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J. Mariner Kemper, UMB Financial Corporation - President, Chairman & CEO [59]

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Go chiefs.

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Kay Gregory, UMB Financial Corporation - Director of IR & Senior VP [60]

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Thanks, everyone.

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Operator [61]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.