Hello all, and welcome to UMB Financial's Fourth Quarter and Full Year 2023 Financial Results Call. My name is Lydia, and I'll be your operator today. [Operator Instructions] I'll now hand you over to Kay Gregory with Investor Relations to begin. Please go ahead.

Good morning, and welcome to our fourth 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. 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 45 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, and unless otherwise indicated, comparisons are versus third quarter 2023. Net operating income discussed here and in our slides excludes the FDIC special assessment and certain other expenses and is reconciled in our press release and slide deck. Presentation materials are available online at investorrelations.umb.com. Now, I'll turn the call over to Mariner Kemper.

Thank you, Kay, and good morning. Before I get started, I've got to talk about some very important business by congratulating our hometown heroes, the Kansas City Chiefs, we are yet again headed to the Super Bowl in a couple of weeks. Now, I'd like to discuss our fourth quarter and full year performance for 2023, a year that played out very differently from what we were expecting and I think the rest of you are expecting last year. During a particularly challenging period for the banking industry, UMB delivered strong results, demonstrating the power and resilience of our diversified business model. We closed out the year with a solid fourth quarter. I'll review a few highlights, and then Ram will add more detail in the Financial and Driver section. As you know, most banks recognize the expense for the FDIC special assessment in the fourth quarter. Our share of the assessment was $52.8 million, an impact of about $1.08 per share pre-tax to net income. We presented our financial metrics both on a GAAP basis and adjusted to exclude this charge. For the full year of 2023, net income was $350 million or $7.18 a share. On an adjusted basis, net operating income was $397.1 million or $8.14 per share. For the fourth quarter, we earned $70.9 million or $1.45 a share. However, as adjusted, net operating income was $112 million or $2.29 per share, representing an increase of 13.9% compared to the third quarter of 2023 and 10.8% compared to the fourth quarter a year ago. Our results reflected strong loan growth and deposit growth, expanding net interest margin and net interest income, solid fee income growth and exceptional asset quality. Average loan balances increased 6.3% on an annualized basis from the third quarter to $23.1 billion. For…

Thanks, Mariner. Net interest income increased $8.2 million in the fourth quarter to $230.5 million driven primarily by loan growth and repricing along with higher levels of liquidity. Net interest margin was 2.46%, an increase of 3 basis points from the linked quarter. Loan repricing and mix provided a 9 basis point benefit. Other positives included 3 basis points from the benefit of free funds and liquidity levels, including stable levels of DDA balances, 2 basis points from the securities portfolio and 1 basis point from changes in borrowing levels. These benefits were partially offset by higher deposit costs. Cycle-to-date, our earning asset beta has been tracking along with our total cost of funds beta, both now at 53%. Average deposits increased 17.2% annualized from the third quarter, benefiting from the ongoing deposit gathering initiatives across all our lines of businesses. The typical seasonal increase in public fund balances during the month of December, added $157 million in average deposits for the quarter. These increases were partially offset by the intentional reduction in brokered CD balances. Excluding those broker deposits, average deposits increased 22% annualized from the prior quarter. Additionally, corporate trust deposits tend to be a little bit lumpy as clients build up cash and make payments throughout the year. As the third largest municipal trustee in the U.S., balances will ebb and flow driven by municipal bond distributions and other activity. I'll note that on an end of period basis, corporate trust deposits increased, pointing to the timing differences throughout the quarter in our escrow, specialty trust and paying agent businesses. Our deposit remix continued at a slower pace this quarter. DDA balances increased 1% from the third quarter and now represent 31% of total average deposits providing the benefit to margin I noted. Cycle-to-date betas on total…

[Operator Instructions] Our first question comes from Chris McGratty of KBW.

Hi, this is Nick Moutafakis on for Chris. Maybe just to start out on the margin, given the potential for rate cuts coming later in this year in '24. Can we see the margin continue to expand into '24 with more back book repricing and continued mix shift?

Sure, Nick. This is Ram. We don't give any forward guidance other than what I said in my prepared comments about there might be some modest compression in first quarter because of the excess liquidity that we saw in the fourth quarter going away. But as we've said in the past calls, right, the higher for longer scenario is a good scenario for us because as you've seen in the last couple of quarters, the pressure on deposit costs have largely abated for us. And then our loan yields are still repricing higher. So loan yields will at least do better than cost of funds for us. And then that's the $1.6 billion of securities that are rolling off at 2.2% that we can invest in the current rate environment. So, I think we're close to the trough on margin. Any particular quarter, it might ebb and flow a little bit, a few basis points here and there, but feel good about our margin trajectory, until the fed starts cutting at some point in '24.

And some of the nuance one way or the other, the strength of what happens to our demand deposits also hangs in the balance.

And maybe also depends on the revenue outlook, I guess, a little bit, but could we see positive operating leverage in 2024 depending on the expense growth?

Well, I think the, we remain focused on operating leverage. And again, based on the guidance question, we don't really give guidance. What I would say is that, the environment that we come into 2024 with from 2023 remains from the standpoint of elevated interest expense and the interest rate environment. And because of that, demonstrating absolute strength on the operating leverage remains challenging. We'll continue to do everything we can and work against it. We believe on a relative basis that will outperform on operating leverage.

[Operator Instructions] We have a question from Nathan Race of Piper Sandler.

Just a question on the NII sensitivity. I appreciate the disclosure in the background 100 basis point decline in rates is about a 3.1% impact to NII in year two. Just curious to what extent you think that can be offset by just the volume kind of continued margin accretive growth in both loans and deposits going forward and also with the cash flow you have coming off the securities portfolio as well?

You hit the nail on the head there, Nate. That is a static analysis, as you know, right? So it's all based on just cash flows coming in and being reinvested in a new environment. And so the net interest income projected in that baseline scenario of minus 100 and year two does not include the impact of any growth. And any actions we might take, right? You've seen us and you've seen our disclosures that we put on some swaps synthetic hedges as well. So we'll do additional, we'll evaluate it on a periodic basis and put on additional hedges to protect ourselves from a down rate environment. But that's just a statistical modeling of what would happen to our balance sheet. If all things were kept the same on a static balance sheet basis. So we can take steps to mitigate it and so that's another layer that we'll add on to it.

And as you think about looking forward into '24, we typically give you a 90-day look forward. Loan growth in the first quarter, it looks stronger than it did in the fourth quarter. So signs continue to be good.

And then just within that context around kind of the NII trajectory and deposit costs, I think you guys have about $2.5 billion in wholesale funding maturing in the first half of this year. How are you guys thinking about replacing the cash flow securities book is going to be one lever and then, any other kind of thoughts on just how we should think about those wholesale sources in the first half of the year?

On Page 31, on the bottom right, we have all the wholesale funding. Obviously, as you can see, we have about $1.6 billion of brokered CDs. Given our deposit pipeline, which remains strong. We might not need all of it, right? So but there's a potential the way when market rates are at that point and we may lag in for half of it or something less than that. The other one that's maturing that will mature in the second quarter is the $1 billion of club advances and then we have BTSP, which will extend into January. Again, we'll evaluate it based on collateral needs. We'll base it on where market rates are. We'll look for spread and all those things. But we don't need any of those tools really given our liquidity position and our loan to deposit, but we'll take it as the environment evolves.

I think that Ram’s comment about the brokered CDs. We may -- we don't need them, but we may roll back into some of them just because by the time they come due, rates will likely have come down and we can have positive arbitrage on them. So, it might make sense to roll back into some of them just from a profitability standpoint.

Maybe just turning to credit. Curious to hear perhaps sometime in terms of what occurred in the quarter in terms of criticized classified trends and obviously charge-offs have been very low over the last few quarters. And I think in the past, we've talked about a normalized charge-off range in the 20 to 30 range. So just curious, just given where NPA stand and based on the commentary around criticized trends, if you think we're going to get back to that historical range at some point this year or into 2025?

Nate, that's my favorite question, because it's the thing that we're really most proud of. And I think that when you think, I think about this investor community and looking at your alternatives and the investment pieces looking into banks, the thing that you look at with us I'm sitting at the table right here with two other guys that have been making credit decisions with me for 20 years through all of the cycles that we've looked at and we've outperformed the peer group in all of those cycles. And when we talk about 27, 28 basis points, we're just using math history. If you look at Page 26, you're just looking at our history. And one thing I would note about that in our investment deck is while, yes, the average over 20 years is higher than the 2 basis points we have in the fourth quarter. You have to recognize that comes with a lot of growth. So, if you go back 20 years ago, the first year I was CEO, we had $2.7 billion in loans, with 20 basis points of charge-off. Today, we have $23 billion in loans with 2 basis points of charge-off. So, in the context of much greater opportunity for loss, we've maintained a very, very low charge-off rate and that's because of consistency and continuity of approach. And we make this easy for you guys because you can look at the history. Most of the banks you look at have different teams and turnover and change and strategy change and acquisitions or whatever it is. You're staring at the same company with the same team with the same results. And what I would say about 28, when you think about this year, wherever we end up, we will outperform. And what I would, if you look at the charge-offs history over the last 20 years us against the peer, we have a chart the second the page before that shows. It's in a different, it's in a -- we have a chart that shows us against the peer group. And if you, the point is, if you look at our recessionary period, our line, our Dallas line stays very close to the bottom axis of the chart, while there's a sharp fin that takes place with the industry. So, that's what happened in the last crisis. We expect that to happen. If you look at it through the fourth quarter, you can see it already taking place. Our numbers don't move and the peer groups and the industry starting to move up. We expect that to be the case again. Whatever the absolute numbers are, I can't tell you. But the relationship to the peer group and the industry, we expect to remain the same.

And just one last one. It seems like a lot of the growth in the quarter came on the commercial real estate side of things. So, just curious, in terms of the composition of the pipeline entering 2024 and kind of where you guys are seeing pretty pronounced opportunities to grow loans today?

Loan growth, we've been saying this for a really long time. We call it we have a long runway for growth, both geographically, vertically, across our footprint and our national footprint related to our ABL business, largely because of market share gains. We expect that to remain the same. The caveat to that would be, if we do have a softening economy, the rate at which we would grow on an absolute basis may come down from what our expectations are of ourselves, but on a relative basis, we would expect ourselves to continue to outperform on loan growth for the same reasons we always have for 20 years we've done that. And we expect that to continue again for the very same reasons, which would be more market share driven than they are economic conditions driven. So, nothing new there. The absolute number could come down a bit from what we did last year based on what the economic conditions are. But again, year by and on a relative basis and we would expect ourselves to outperform on a relative basis, again.

Market specific, it's still coming from the major metros. Utah has been a nice growth market for us, and where we have loan production office and that seems to continue to build. But we are seeing a strong traditional operating company C&I and as Mariner stated, it's market share driven.

And first quarter, as I said, looks stronger than fourth quarter if that's any indication, right? We have a harder time ourselves looking beyond the first quarter, but first quarter is an indication of the rest of the year, it's stronger for fourth quarter pipeline wise.

And if I could just ask one last one. You guys see any change in credit ratings across I think around 4% of loans that are tied to office CRE?

I'm not sure I understand the credit rating question. What do you help me understand that?

Risk rating, excuse me, Mariner. We've seen this with the migration exercise classified risk rating, excuse me.

We've had very little if any deterioration in our office portfolio, it's remained strong. It's 4.5% of the portfolio as you said. A couple of statistics, 45% of our office portfolio is single tenant, which adds a layer of strength there in terms of rollover, strong sponsors which we've talked about in the past. We have seen basically no deterioration in that portfolio and don't really see anything coming on the horizon. They're performing a lot of the leases, the underlying leases on these office projects go out to 27 and beyond roughly 70% of those leases are 27 and beyond. So in terms of rollover in the short-term are very manageable.

Thanks everybody. It looks like that's the last question. Just want to reiterate something. We're really proud of the year we had in the quarter and I think at the end of the day, we do what we say and we say what we do and we've been doing it for a long time. And we've demonstrated strong outsized loan growth, deposit growth, fees, expense control, year-in and year-out. And I think the good news for the investor population as they think about us, is you should know what to expect from us. And we did it again in the fourth quarter and we're more thrilled than ever about the fourth quarter, because we were able to sort of put to bed a lot of the nonsense, and the narrative. And as I like to say, don't let facts get in the way of a real exciting narrative that the pundits like to deliver last year. And so on behalf of everybody on the call, we're happy to have delivered, what we did in the fourth quarter to kind of put some of that nonsense to bed. And so we'll just keep doing it for you. And we're really proud and excited about what we delivered and we're just going to keep doing it for you. So thanks.

Thanks, Mariner. If anyone has follow-up, you can always reach us at 816-860-7106. And we appreciate your time. Thanks for joining us today.

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