Good morning, or good afternoon all, and welcome to the UMB Financial Second Quarter Investor Call. My name is Adam, and I'll be your operator for today. [Operator Instructions] I would now hand the floor to Kay Gregory, SVP and Director of Investor Relations to begin. So, Kay, please go ahead when you're ready.

Good morning, and welcome to our second quarter 2023 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 47 of our presentation. Actual results may differ from those set forth in any 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 good morning. Thanks, everyone, for joining us today. Despite the exaggerated noise from the recent crisis that is largely subsided, our second quarter results reflect strong trends highlighted by strong asset quality and overall portfolio health, strong and consistent fee income that helps us navigate this elevated interest rate environment, continue to get prudent opportunities in loan growth, particularly in commercial and industrial lending, strong client engagement and traction across our diverse lines of business. These solid results in several areas were masked by higher interest expense, driven by the Federal Reserve monetary tightening actions and the resulting increases in funding costs and the interest rate environment we live with today. As noted in our last call, the deposit pricing pressures the industry is experiencing is not dissimilar to the price of commodity or raw materials for other industries. As other industries would, we are reacting to our cost of raw material by pricing our products for this environment. As we have noted, 62% of our existing loans also reprice with movements in rates. Like others in the industry, we also maintained elevated levels of excess liquidity during the second quarter. This resulted in brokered CDs and borrowing levels higher than we've typically carried, which also impacted interest expense and our margin. To help mitigate the continued impact of liability pricing, we maintain flexibility on the asset side of our balance sheet. We have a loan-to-deposit ratio on the lower side of peer averages, a largely variable asset base and strategically planned cash flows. This is not to diminish the challenges the industry faces from higher interest expense or the rotation of deposits to rate bearing options. This has had an impact on margins and spread as evident during this earnings season. On the macro front,…

Thanks, Mariner. I'll share a few additional drivers of our second quarter results then I'll discuss some of the key balance sheet items that continue to be top of mind in the current environment. Net interest margin for the second quarter was 2.44%, a decrease of 32 basis points from the linked quarter. Drivers included negative impacts of approximately 45 basis points from deposit pricing and mix and 14 basis points related to changes in Fed funds purchase, repurchase agreements and short-term borrowing levels. Offsets included a positive 21 basis points from loan mix and repricing and 10 basis points from the benefit of free funds and changes in liquidity balances. The cost of total deposits for the quarter was 2.17%, excluding broker deposits that we added to enhance our liquidity levels, that cost was 1.95% compared to 1.62% in the first quarter for a linked quarter beta of 70%. As Mariner mentioned, betas on loan yields kept pace with this quarterly beta. We continue to benefit from the shorter tenor of our asset base, including the fact that 69% of our loan portfolio reprices within 12 months. Cycle-to-date, we've seen betas on loans and total earning assets, up 56% and 50%, respectively. Similarly, the beta on total funding costs, which consider the benefit of DDAs and the impact of borrowing levels has been 50%, while the cost of total deposits has experienced a 43% beta cycle-to-date. Our outlook for net interest income going forward will be impacted by a variety of factors, including the shape of the yield curve, anticipated Fed hikes, along with the timing of those hikes, the length of the Fed pause, timing of rotation out of wholesale funding sources and the replacement cost and potential for any additional disintermediation of DDAs to rate-bearing categories and…

Thank you. [Operator Instructions] Our first question comes from Chris McGratty from KBW. Chris, your line is open. Please go ahead.

Great. Good morning. Ram, maybe just starting with the top line, and you talked about a little bit more pressure on the margin. How should we think about just the level of NII, it feels like we're -- the trough was near given Mariner's growth comments, but interested in comments of where you see the cadence of NII going over the back half of the year? Thanks.

I'll take that, Chris. It's Mariner, and if Ram had something to add, he can. We've said in the previous comments, mid-single-digit growth. And I think that's probably still reasonable, a lot of things, a lot of variables, both headwinds and tailwinds to shake out for the rest of the year. But for what we can see right now that, that holds true with maybe some -- the headwinds remain, right? They're persistent to see how they play out, but it's a fair starting place.

The -- just so I'm clear, the net -- that mid-single digit is full year net interest income growth compared to 2022, right?

Correct. That's year-over-year.

Year-over-year

Last year's basis about $13 million Yes, again, a lot of -- as Mariner said, a lot of moving parts, some of which I highlighted, right? When the Fed is done, how long they keep it, what might happen with DDAs, some big deals that come our way from things like that.

Yes. I mean there's -- as you know, because of the institution and corporates, it's pretty lumpy. We can have a big corporate trust deal come in just as easily as we can have tax payments go out. I mean it's hard to tell exactly what happens from one quarter to the next.

Okay. But that would seemingly imply that the step down from Q1 to Q2 would reverse and you'd have growth off of these levels by math, right? That's kind of what you're messaging?

Again, a lot of moving parts, but to Mariner's earlier point about that mid-single, right? A lot of these things need to come together for that to happen, but I'm not ready to call a bottom out on NII, but at the same time, I'm not saying it's going to be much lower than where we are. The loan growth is going to be certainly a driver of this income. What happened--

Borrowings

Yes. And with the step down from 1Q to 2Q, as we highlighted was a lot of the excess liquidity that we carry, the brokered CDs that we issued in response to some of the things going on in March.

And those are coming down, right, as we go into the back half of the year.

Okay. Maybe just one more on your capital. Your balance sheet is in great shape from a capital perspective. I saw the 1 million share in the release last night from the buyback. Any updated thoughts on capital return given the market seems to settle a bit?

Well, I mean, the share repurchase approval is to give us that flexibility. We obviously don't have any plans to do that, but we want to have that flexibility as we watch the stock price in the market and our company performed in the back half of the year. I'm not sure how to--

Yes. What we did yesterday was the annual cadence that we have for the Board to approve some share repurchase authorization. Typically, we've done it in April for 2 million shares and this time around out of prudence. And just given the circumstances and environment we all find ourselves in, we just asked the Board to approve 1 million share authorization. At this point, I would say, probably not a lot of appetite to do that because we still see loan growth opportunity. Like we've said, our capital stack is largely going to be used up for loan growth.

That's probably the main answer is loan growth. That's where the capital is going.

Thanks a lot for the color.

Thanks Chris.

[Operator Instructions] And the next question comes from Nathan Race from Piper Sandler. Nathan, please go ahead, your line is open.

Great. Thank you. I hope everyone is doing well.

Good morning Nate.

Question just in terms of what you guys are seeing from a deposit pricing perspective outside of the portion of the funding base as index to short-term rates. We've heard from some banks that deposit pricing pressures have slowed to some degree more recently. Curious if you guys are seeing that? And to what extent you guys are maybe be more competitive on some rates into the second quarter?

Well, it's hard really to predict a lot of that. I think from my vantage point, I think we are coming to the back end. A lot of it has to do with what the Fed is yet to do, still to do. I think from our -- we believe that we went through most of this cycle early, right, having more of a commercial and institutional deposit base. So, if what the Fed is doing is leveling off, which seems to be with an announcement of another 25 today, maybe another 50 -- another 25, so 50 total, right? That -- the level of increase -- increases to the deposit rates for us should be leveling out. We've taken most of that pain, I believe. So that doesn't mean they're not going to go up slightly, but I just think that the rate of increase is definitely coming off.

Okay. Great. And then maybe just one longer-term question on the margin…? Sorry.

Sorry, I was just going to add that -- and when it does level off and the deposit increase rates level off, we should still see the increases on the loan side.

Yes. That can answers my second question, Mariner, in terms of in a theoretical higher for longer interest rate environment. I imagine we should see some pretty substantial margin expansion, just given the lagging repricing impact on loans and with those short-term deposits -- I'm sorry, those short-term index deposit repricing slowing. Is that a fair way to kind of think about the change of the margin and that type of rate environment?

Directionally, yes.

Yes, rate for sure.

Okay. And I understand -- I appreciate that you guys don't pay much attention to end up your balances versus average, but end of period deposit growth was fairly pronounced in the quarter. And just curious how you guys are thinking about the pipeline for deposit growth? And it sounds like the loan growth pipeline remains pretty solid. But should we kind of expect deposit growth to lag loan growth going forward? And I think some of the margin or NII lift that you guys are speaking to for this year should be a function of just some of the remix and maybe less deposit growth relative to loan growth going forward, or at least over the next couple of quarters. Does that make sense?

Yes. I mean, I think, the way to think about it is in this environment with an inverted yield curve and the attractiveness of money market funds, off-balance sheet funds in this environment, it is more challenging, right, to grow your deposits at the rate that we were before the inverted yield curve. So, we always have the broker CDs, and we can always do campaign money to keep up with loan growth in the short period before the rate cycle normalizes. And when that happens, we should be able to pick up the deposit rate of growth again. But I think from the standpoint of UMB, it's important to note that we come into the cycle with a very low loan-to-deposit ratio. So we have a lot of room to run with loan growth without feeling like we are stressing our balance sheet. So we're sitting at what 70-ish loan deposit

Yes, 70% of loan.

70%. So we have room to run there during this rate cycle that we're in to protect us there to wait for the environment to change and normalized deposit growth. I don't know if you'd add anything to that one on that, Ram.

Okay. Great.

No, just I’d like to add the prepared comments that we said about on the institutional side, particularly, we have an active deposit pipeline that we're pursuing. So to your question, yes, it's a difficult deposit environment but unlike most peers, we have a lot of different sources of funding that's available to us that Mariner walked us through. So I would go back to what we said in our prepared comment.

Yes, I think, but I was reacting to a specific question about keeping up with the same rate. Our deposit book will not keep up with the same rate -- will not grow at the same rate of our loans and we're protected by our loan-to-deposit ratio with that. We definitely expect our deposits to grow. And I think that, to Ram's point about the nuance of all our institutional businesses from one month or quarter to the next, we can have an $800 million, $900 million corporate trust piece of business come in and sit on our balance sheet for six or nine months, just as easily as we can have a tax payment go out on the other end. So, that's why we focus on the average instead of a point in time.

Got you. Okay. One last one for me, just in terms of what you're seeing from a lending competition perspective, I imagine some of the consistency in your pipeline is a function of maybe competitors pulling back that are maybe more liquidity constraints as you guys, but would just be curious kind of here where you guys are seeing particular growth and what's going on competitively that's also kind of supporting the strong pipeline coming out of the second quarter?

Yeah, this is Jim Rine. We're seeing plenty of opportunity still and rates remain competitive as they ever happen. We have seen competitors pulling back. I think it's a common theme right now as it relates to banks are looking for full relationship more than transactional lending. And if it doesn't come, if the opportunity doesn't come with additional funding, folks are taking a much stronger look at whether or not they want to take on a particular large opportunity like CRE, for instance, or even participations. So especially in the syndication banks without additional fee income or additional deposits are definitely pulling away from those. Regarding pricing, banks are still looking for loans and the good credits are still able to command a decent rate. Marginally, we're seeing more rate on everything though, obviously, with the -- which is why our betas are doing so well. We expect -- as we've been doing in the past, we tell you what the next quarter looks like pipeline-wise. And this quarter's, coming quarters, pipeline looks just as good as last quarter.

Okay. Great. I appreciate all the color. Thank you.

Thanks, Dave.

We have no further questions at this time. So I'll hand the call back to the management team for any concluding remarks.

Thank you, everyone, for joining us today. And as usual, if you have any further questions, you can reach us at 816-860-7106. Thanks, and have a great day.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.