Good morning. Thank you for attending today’s UMB Financial Third Quarter 2022 Results Conference Call. My name is Forum [ph] and I will be your moderator for today’s call. All lines will remain muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] It is now my pleasure to pass the call over to our host, Kay Gregory, UMB Investor Relations.

Good morning, and welcome to our third 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. All earnings per share metrics discussed on this call are on a diluted share basis. Our presentation materials and press release are available online at investorrelations.umb.com. Now, I’ll turn the call over to Mariner Kemper.

Thank you, Kay, and thanks, everyone for joining us today. Yesterday afternoon we reported our third quarter results reflecting positive momentum across our business lines. Highlights include robust loan growth coupled with strong asset quality and solid core revenue growth. Net income for the third quarter was $88 million or $1.81 per share. Operating pre-tax, pre-provision income was $131.2 million or $2.70 per share. Net interest income increased 3.9% sequentially driven by a nearly $1 billion increase in average loans, positive asset mix and the impact of rising rates. This was partially negated by increased deposit costs, largely driven by a transition from DDAs to rate bearing accounts, which is typical in an interest rate cycle such as the one we’re seeing today. The timing of deposit initiatives to attract new to bank customers and each of our business lines, the availability of attractive short tenure investment options and the impact of clients reacting to typical market pressures in a rising rate environment, particularly on our rate sensitive institutional businesses. This is consistent with what we’re seeing from other trust and custody banks like ourselves. Our cycle-to-date beta on interest-bearing deposits has been 46% and 27% on total deposits. As we’ve noted in the past, our business profile and funding mix is uniquely skewed in favor of our commercial and institutional sources. These sources experience different pace and timing than many of our peers in the re-pricing environment. Our fee businesses performed well, driving non-interest income growth, excluding the impact of the non-recurring gain from the sale of Visa Class B shares in the second quarter. Additional drivers are included in our slides and Ram will share more detail shortly. Excluding contributions from PPP and the market related impacts from the gains and losses on investment securities, we’ve generated operating…

Thanks, Mariner. Let me start with some commentary on balance sheet trends starting with our liquidity profile on Page 21. Our Fed account, reverse repo, and cash balances further declined to $1.5 billion and now comprised as 4.3% of average earning assets with a blundered yield of 2.30% compared to 83 basis points in the second quarter. As we’ve done in prior timing cycles, we deployed cash flows from our high quality securities portfolio to fund loan growth opportunities during the third quarter. As shown on Slide 28, the portfolio roll off the third quarter with $304 million at a yield of 1.96% while we purchase $54 million in securities primarily CLOs with a yield of 4.86%. Additionally, the portfolio is expected and generate over $1.1 billion of cash flow in the next 12 months. The yield of those securities rolling off is approximately 1.83%. While treasury yields present very attractive reinvestment levels, our priority is to fund the opportunities we continue to see at our lending verticals. In 2022, we reclassified securities to the health and maturity portfolio to help manage tangible capital and reduce the impact of rising rates on our equity. Average HTM balances for the third quarter, excluding the $1.2 billion of revenue bonds we’ve long held in that book, where $4.6 billion. Loan yields increased 74 basis points from the second quarter to 4.46% with a cycle-to-date beta of approximately 37%, 61% or about $12.1 billion of loans are variable rate with 60% of those repricing in the next quarter and 71% repricing within the next 12 months. These are largely tied to indices at the short end of the curve. The total cost of deposits, including DDA with 65 basis points up from 20 basis points last quarter and the cycle-to-date beta is approximately…

Thank you. [Operator Instructions] Our first question comes from the line of Jared Shaw with Wells Fargo. Jared, your line is now open.

Hey, good morning everybody.

Hey, Jared.

Good morning, Jared.

Maybe just starting on deposits, if we look at sort of the DDA levels, pre-COVID, you were around 32%. Should we expect that we sort of trend back towards that level with the pressure on DDA from the ECR and the other items you mentioned. Or do you think there’s some systemic or structural change that could keep that at a higher level?

Well, I think – this is Mariner. Some of the DDA draw down that’s happened over the quarter has been based on obviously the higher rate environment and customers looking to participate in that as well as higher costs and inflation, such as customers that put their money to work in an inflationary environment. I think as you look forward, just specifically thinking about DDAs as you look forward into a recessionary environment or beyond that in a normalized environment DDA should remain at strong levels as they have been in the past.

Okay. And then I guess, as…

And one of – Jared, this is Ram. And I would say, we’ve added a lot of new clients over the last 12 months on the heels of the PPP program that we talked about, the halo effect of the PPP program. So when you think about new clients, right, so yes, right the last grade cycle we did go down to 32% composition, but this time around I think we feel like it’ll be higher than that as the rate cycle peaks, because we’ve been adding new clients with DDA balances as well, particularly in small business, Mariner talk about the efforts in small business and how that has driven some DDA growth. So I would say, we probably end up doing better than last cycle.

Yes. So a temporary short squeeze on that I guess is the way we would describe it.

Okay. Okay. I guess, just following up on that or on the deposit side, how should we be thinking about through the cycle beta now? I think, we saw a little bit of an acceleration on interest bearing deposits costs this quarter. How are we thinking about – how should we think about through the cycle beta, either I guess, on interest bearing or on total since you’re – you seem to focus on that a little more.

Yes. We obviously think total is a way to think about it and the total was in the 30 – low 30 range. I think if you – last quarter or the quarter before we telegraphed that we would be early to go through the cycle as a more commercial and institutionally heavy deposit base for our company, and that’s basically what we’ve produced. We still expect to end whatever cycle we have similar to the last cycle and we don’t have any reason to expect that to be any different. We feel like we’re tracking that way. So we end up in is that around 50, 52 somewhere, a couple clicks one way or the other, we’re around 52 last time. We’ve telegraphed that in the last couple calls. It’s what our expectations are. We’ll see how that ends up, but don’t have anything telling us it’d be anything other than that, and the way we believe it as it looks at a relative basis, we just go through it earlier. And then you also have to think about obviously total costs, not just the interest bearing, just keep that in mind. And then lastly, you can’t forget the impact of what we’re able to do on the asset side. So with more than 50% of our loans repricing within 12 months, we’ve got the repricing of the current book, the back book, and then a significant portion of our loan growth is from new customers and all of that new customer growth comes in at a higher yield to our loan asset betas were 54 on a linked quarter basis and 37 cycles a day. We expect to continue to perform well on the asset side and particularly on the loan side.

Okay. And that just to confirm that 52% deposit beta is total, right?

Yes.

Yes. Okay. And then on the BOLI side, with the corresponding expense, is this a third quarter sort of a one-time thing or is this now a new level from additional purchases?

Go ahead, Ram.

No, it’s a – we have it quarter in, quarter out, that’s part of our deferred comp administration. So we try to mimic those assets and any mark-to-market fluctuations get written up or down in fee income, just like we have deferred comp expenses. So we tried to break it out. So last quarter, because of what happened to the equity markets, our deferred comp expense or COLI income came down by about $11 million, and this quarter had recovered to a positive $2 million, creating a $13 million. So this quarter’s impact of fee income and the benefit from COLI was only $2 million. Same thing on the deferred comp side. We had more expenses of about $2.5 million reflected in our $231 million expense base.

That activity happens every quarter.

Yes.

Got it. Thank you.

Thank you for your question. Our next question comes from the line of Chris McGratty with KBW. Chris, your line is now open.

Great. Good morning. Ram, I think you – in your prepared remarks, you talked about a 75 ultimate terminal loan to deposit ratio, so you got plenty of room. I’m kind of interested in, I guess, when and how you get there. Understand the comments on loan growth and also saw that you really didn’t buy any bonds in the quarter. But is the math deposits continue to be positive, but perhaps trail loan growth? Or do we see more down draft in the deposits in securities book?

Well, we fully expect to continue to grow our deposits and we’ve become much more active in the market competing in this environment where our customers have options and as a short end of the curve has come up the way it has, it’s a different environment than we’ve seen it in the past where obviously customers have lots of options in this rate environment. So we’ve been – we’ve remained competitive and more so – recently so that we can keep up with our loan growth. And then the real goal and job of ours is to remain disciplined on our loan pricing and we believe we can do that. So then it’s ultimately about maintenancing our margin and spread more and growing our net interest income than it is worrying about deposit betas, which we really can’t control in this environment. So we focus on all good stuff, the growth and the drivers. We think we can continue to produce above peer level growth both on the asset side and on the fee side. We’ve done that for a long time in the 20 years I’ve been CEO. We’ve met the expectations and delivered the growth we expect of ourselves and we expect to continue to do that. And when the fed pivots, when we get that announcement, that’ll re-normalize the cost side of our structure. So this is really a short-term problem. We don’t manage this company for the quarter. We manage it for multiple years in advance, and our growth profile remains very strong. And when the fed pivots things will normalize for us.

Great. Thanks for that color, Mariner. Ram, the $1 billion of bonds that come due over the next year. I guess, fair to say that new money, this is just more accretive to put those into the loan book and perhaps shrink the bond portfolio.

That’s right. Yes, we don’t – last three or four months, we have not reinvested other than a very tiny [indiscernible] CLOs. We’ve not reinvested our cash flows and it’s all part of the loan to deposit question that you asked previously managing that. We’ve done this in the past with balance sheet rotation, you tried to talk about it doing last cycle, so it’s same playbook.

And we’ve just become more active pursuing those deposits more recently as the excess liquidity has been absorbed into the market.

Yes. Got it. Maybe just one housekeeping question. The $6 million FDIC that’s a bump on an annual basis, right?

Yeah, that’s the annual number. Yes.

Okay. And then the – I think you said you’re still finalizing the incremental and expense from the deposit deal, but yes, I think old national disclosed, there was a roughly a $95 million premium paid for those 400 deposits. How do I think about just incremental and intangible assets and impact to capital? Is it that full amount of money that goes into intangibles?

No, that’s the part we’re still working on. So it’s hard to give you a number right now, but I just wanted to throw it out there. That expenses will include that. So the classification between business goodwill and the intangibles that gets amortized, we’re still going through the calculations of that.

Okay. But the, but the $95 million is just – it’s just a split, how that’s split, but the $95 million is the right number?

Correct.

Okay. Thanks. Thanks a lot.

Thanks, Chris.

Thanks for your question. [Operator Instructions] Our next question comes from the line of Nathan Race with Piper Sandler. Nathan, your line is now open.

Yes. Hi everyone, good morning. Thanks for taking the questions.

Good morning, Nathan.

Hi, Nathan.

Questions on the operating leverage outlook, obviously, some nice improvement this quarter. Do you think the improvement that we saw in your efficiency ratio here in the third quarter is sustainable in this type of rate environment? Or how you guys kind of think about managing expenses going forward apart from kind of the trip that you had in compensation costs in light of the strong production that you’ve seen so far this year?

Yes. A lot of the expenses as we’ve talked about in the past tend to be variable in nature and driven by overall company performance or widget production, right? So the fact that we’re focused on positive operating leverage for the fourth quarter and for the 2023 budget would suggest that the efficiency ratio will improve from here. So obviously, we’ll be investing. As we said in the prepared remarks will be investing in our businesses hiring for 2023 and 2024, but at the same time, we’ll react to the in revenue environment and what’s happening in the revenue set of the equation.

Okay. Got it. And then just maybe turn into the outlook for provision going forward. I imagine growth may moderate this macro environment to maybe the high-single digit range kind of consistent with your historical trajectory over time. How are you guys thinking about providing for that type of growth trajectory going forward in apps in any kind of CECL related adjustments on the Q factors?

Well, its hard to do with absent CECL, but – because that’s a big driver. I think a big portion of our third quarter provision was from loan growth. And so that’s – that was the largest number in there. And obviously, our loan quality is incredibly strong. So the combination really going forward for provisioning will be from outside loan growth and macro environment statistics driven by our Moody’s information. And I suppose your guess is as good as ours. So I would suggest that that data will not be getting any better anytime soon. So if you think about the fourth quarter, we expect to have strong loan growth and at least I don’t – who knows what Moody’s will say, I don’t see it getting – necessarily getting any worse, but it’s not – certainly not going to get any better that data. So it’s an algorithmic deal based on what’s going on in the economy with unemployment and what’s going on with that loan growth.

Okay. Great. And then just on the heels of the sub debt raise recently, obviously it seems like that was supportive of some pretty strong loan growth in the quarter. Just curious if that added capital buffer is perhaps supportive of some increased M&A dialogue of later if you’re feeling kind of more or less optimistic on additional acquisitions outside the deposits that’ll be coming on Board in the fourth quarter.

I – we remain active in pursuit of acquisitions continue to pursue those would like to add solid franchises to the base of our organization when we can find the right deal that fits. And so nothing new there, we’re active in our calling efforts.

Okay. Great. I appreciate you guys taking the questions and all the color.

Thanks, Nate.

Thank you for your question. Our next question comes from the line of John Rodis with Janney. John, your line is now open.

Good morning, everybody.

Good morning, John.

Ram, just back to the expense, looking at expenses for the quarter, what is the right number to back out for this quarter for the COLI impact? Is it the $2 million or is it the $11.5 million just to sort of get a good run rate going forward?

Yes. Just on the deferred comp, I would take out $2.5 million and then we talked about a operating loss for about $4 million, and then there were some $1 million to $2 million of timing related expenses on travel and marketing campaign. So if you started the $231 million of reported expenses there were some one-time items I would’ve put them in the $7 million to $8 million category of things that we don’t control or don’t expect to recur. So the run rate I would say is closer to $223-ish million. And then it’s all the other items that I talked about in terms of the charitable contribution just for the fourth quarter, the FDIC assessment increase for starting 2023 and then the AMR related to the HSA purchase.

Yes. Okay. So okay, so $223 million for the third quarter. Okay. Thank you.

I thank the third quarter, correct. Yes.

Yes. Okay. Thank you.

Thank you for your question. [Operator Instructions] Our next question comes from the line of David Long with Raymond James. David, your line is now open.

Good morning, everyone.

Hey, good morning, David.

Hey, David.

Looking at the reserve build in the quarter, I know you’re pointing to the loan growth side of things. Was the loans that you added require additional reserves? It just looks to me like the addition if you’re using the – using your overall reserve level loan growth sort of been a smaller contributor. Just curious what maybe loans you added and then what else may have contributed to the build in the quarter?

Well, I mean the loan growth in the quarter was 900…

$90 million.

$990 million. And so it was pretty significant component of it. It’s driven by CECL. It’s a mathematical equation that requires us to do what we do. I don’t know if that answers your question, but that’s – it was a significant quarter in loan growth. And so we provision against it.

Each new loan that comes on the books requires a reserve, a percentage of reserve. So by definition, new loans we’ll add to the reserve requirement right out of the gate.

Sure. Got it. Okay. And then taking this a step for further looking at your total reserve level, when CECLs came out, we thought it was going to be very quantitative in what we’ve heard since then is there’s a good qualitative portion. Can you discern between the two? Is there a portion of your reserve that you’d say is qualitative versus quantitative, and how much of it would be qualitative if so?

It’s hard to give you that specifically, but there is, I would call the qualitative piece on the margin is what I would describe that as. And the majority of it is driven by quantitative mathematical – mathematically driven based on lost history, roll on and roll off, loan growth and macroeconomic environment. And then you’ve got a piece of it that we can use our own assessment of the environment and our own balance sheet and our own dynamics on a qualitative basis to move that up or down on a margin basis.

Got it. Thank you.

Thank you for your question. There are no more questions leading at this time. So I will pass the call back to our management team for closing remarks. Thank you.

Yes. This is Mariner. I might just wrap it up by reiterating our thesis for where we stand and some of the concerns in the marketplace for the industry around deposit betas and how we see that shaping up for us specifically. As we’ve been saying it for a few quarters, we are largely institutional commercial. That’s not new. Our base – deposit base is not new and we’ve been here before. I’ve been CEO 20 years, we’ve seen this before. We do have telegraph that we’re going to go through it early. We’ve gone through it early. We still expect to come in right where we thought we would in the 50 – low-50 range on the beta side. And we think that you as analysts and investors should focus more on the whole balance sheet and NII as they are the drivers for our success and performance long-term, our ability to grow our loans, our ability to have strong quality with 2 basis points of charge-offs and 10 basis points on the non-performing side. So we think that on a risk adjusted basis with the growth that we have, we think you should focus more on the profile of the business and less on the short-term Fed action squeeze. And the Fed will pivot soon, that will normalize our costs. And you will be left with what you normally see with us, which is an outside growth profile with a better than average risk profile. So that us all remains the same and we expect to see fourth quarter loan growth as strong as it was in the third quarter with the same kind of quality. And so there’s nothing new here on our end. We’ve just got to live through the short squeeze from the fret and we appreciate your continued interest and we’ll keep after it.

Thanks, Mariner, and thanks, everyone for joining us today. If you have further questions, you can reach Investor Relations at 816-860-7106. Thank you and have a good day.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.