UMB Financial Corporation (UMBF) Q1 2020 Earnings Report, Transcript and Summary

Welcome to the UMB Financial Corp. First Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Kay Gregory with Investor Relations. Please go ahead.

Good morning, and welcome to our first quarter 2020 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, including the currently unknown potential impacts of the COVID-19 crisis. These risks are included in our SEC filings and are summarized on Page 2 of our presentation. Actual results and other future circumstances or aspirations may differ from those set forth in any forward-looking statement. Forward-looking statements speak only as of today and we undertake no obligation to update them except to the extent required by applicable 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. I hope you and all your family and friends are safe and healthy. Our thoughts are with the most impacted by this pandemic and our deepest gratitude goes to those on the frontlines, including health care workers and first responders. I'm going to go off script a bit this morning. Like everyone on this call, I've had a great deal of time over the last 45 days to think and prepare for what lies ahead. In my 25 years at UMB, 16 of those as CEO, I've primarily been a risk Manager. I've come to believe a few simple truths about what we're likely to experience over the next couple of years. I believe that CECL is the worst designed accounting rule in U.S. history, poorly timed and horribly mismanaged by FASB and accounting industry. If we were to return to the incurred loss model, investors would have a much easier time understanding the underlying risk at any particular bank. But that's not a reality. And with CECL now deployed it will nearly be impossible to understand the actual risk that exists in a bank's portfolio. However, the unintended consequence of this should be that we're all more prepared for the unknown risks ahead. What I do know is that it's better to be prepared for the worst, rather than only preparing for outcomes that would be better. With all that as a backdrop, I'll share with you the 3 most important things to focus on as we look at what lies ahead. First, capital liquidity are king. None of us has any idea how bad this crisis will be, no matter what any self-proclaimed genius will tell you, and you can't have enough capital or liquidity right now. Second, doing what's right actually matters, not only because it feels good, but it builds franchise value by bonding both employees and our customers of UMB. We're laser focused on helping our associates and customers manage through these very difficult times. More on that in my prepared comments. And lastly, and importantly to you our investors, our primary mission is to make sure that our current investors can count on us to be standing strong at the end of this crisis and benefit alongside us when we take advantage of the opportunities that will sure present themselves in recovery and only to those of us who are not too badly wounded to capitalize on it. Here is where our track record as lenders comes into play. I can't make any promises about how we'll perform during this situation. But what I can tell you is that I will treat the money that we lend out as my own. It happens to be the only investment I have. I, along with most of our loan committee, have been overseeing our lending activities together for 25 years. It's easy to look good when things are good. The real test of credit quality is how it performs when conditions are negative. We have a track record on that issue. We outperformed nearly every bank in the '08 crisis. In conclusion, UMB is always preparing for the worst. We have strong capital levels and a very strong liquidity position, along with a loan deposit ratio that allows us to be there for our customers. We've demonstrated to our customers and employees that we put them first. And lastly, most importantly, we have a credit team that is battle tested with superior results when it matters in times of crisis. Now, I'll return to the comments that we prepared. This quarter's release and investor call are certainly not routine. Our focus today is less on quarterly results and more on how we're responding to protect and support our associates, customers and communities, along with details on our portfolio and how we're positioned to operate through this crisis. We came into this crisis in good position, with healthy capital levels and a balance sheet that gives us flexibility. While we don't know how long this current environment will last, we are prepared and in true to our style we have taken a conservative stance with our positioning. First, I'd like to share some of the actions we've taken in light of the rapidly changing environment. Operationally, we activated our business continuity plans on March 16th and took steps to protect our associates and customers. UMB was one of the first in our region to move to drive-through only service in our branches, and we were able to quickly transition much of our team to remote work model. We've put additional safety practices in place as well as adding supplemental compensation and additional PTO days for roles that can't be performed offsite. Our technology, digital and online banking platforms, have performed well and we've been able to continue to serve and support our customers on an uninterrupted basis. Now, I'll turn up to our first quarter results announced yesterday afternoon. You'll see that on a GAAP basis we recorded a net loss of $3.4 million, driven by the impact and adoption of CECL which resulted in significantly higher provision expense based on how the economic models calculate the possibility of future credit losses under the extreme conditions created by the COVID-19 crisis. Excluding this impact, business and financial results remained strong and demonstrated by a 5.6% increase in pre-tax, pre-provision income to $83.7 million from a linked quarter. Today, we've seen our peer group report a median increase of 3% in PTPP income. Unfortunately, the ill-timed adoption of CECL methodology during this unprecedented macro environment has resulted in additional volatility at a critical time. This has made comparing financial institutions across the banking industry extremely difficult, if not impossible. Given all the subjectivity that has gone into these calculations, including the source and date of economic forecasts, the industry has spent months creating and testing CECL models. But they weren't meant to operate with such significant movements in unemployment rates, GDP expectations, interest rates and economic forecasts, especially in such a compressed timeframe. Arguably, not all unemployment rates are created equal. While today's rate has now exceeded peak levels seen during the 2007-2009 recession, different industries are being impacted this time at varying degrees. Each bank's loan portfolio is inherently different and national unemployment rates aren't always relevant. Additionally, banks such as UMB who have less reliance on consumer lending, including credit card and mortgage, will likely see their portfolios react differently. Another consideration is the extraordinary amount of fiscal stimulus that has been injected into addressing this crisis. For context. During the prior financial crisis when employment rates jumped from 4% to 10% over a 12 quarter period, our cumulative losses were only 1% of our balances with over half of that in the card portfolio. Our performance was the second best in our mid-sized peer group. For comparison credit card balances were 7% of our loans in the 2009 crisis compared to just under 3% during this crisis. UMB has always had a reputation for being responsive, consistent and conservative as it relates to credit. We are quick to get in front of problems, quick to move credit to the watch list. But most importantly, we have a good track record of keeping rank credits from moving to loss, based on our relationships with our clients. The CECL methodology makes it more difficult to provision in a way that we feel is appropriate for what we know about the quality of our portfolio. We've provided some additional information beginning on Slide 9 of our materials and Ram will discuss those in more detail shortly. Aside from the % impact, our asset quality was strong with net charge-offs of 0.23% of average loans. Our provision of $88 million under CECL equates to 11.5x net charge-offs of $7.7 million for the first quarter. And nearly 11x the last 4 quarters average provision. And another compelling statistic, our reserves to non-performing assets, which has historically been above peer averages, stands at 1.9x compared to peer median of 1.6x. Average loans increased 11.6% on a linked quarter annualized basis. On an end-of-period basis, growth was 3.9% compared to a year end of 2019. Our top line loan production of $816 million and a net increase in revolving balances of $321 million was partially offset by $611 million of payoffs and paydowns. The growth in commercial loans in the first quarter included approximately $388 million in net line draw activity. Line utilization at March 31st was 41% compared to 39% at year end. Similar to what we've heard from other banks, draw activity has slowed in April, as shown on Slide 13. In early March, we began proactively reaching out to our clients we knew could be more severely impacted by the impending economic crisis. Our entire business banking customer base, largely our practice finance portfolio of dentists, doctors and professionals, was offered a 6-month deferral to help them weather the storm. Through our usual relationship management process, we've been working towards customized solutions for other borrowers. And including the business banking deferrals I mentioned before, we have received requests for modifications on approximately $1.7 billion of our loan portfolio or about 12% of the book. The breakdown of those requests by client type can be found on Slide 13. This is similar to the levels reported in industry service. When the SBA's Paycheck Protection Plan program opened up we were ready and moved quickly. We were able to process and get approved 3,000 applications for more than $1.4 billion in funded loans. These loans have ranged in size from $2,000 to $10 million with the median of $122,000. I'm extremely proud of how our team stepped up to provide this critical support to our clients and we were ready to step back in with a backlog of another 1,700 applications when the second phase of the program began on Monday. Now, I'll turn it over to Ram to discuss some of the drivers of our results and I'll come back and provide a little more detail on the composition of our loan portfolio. Ram?

Thanks, Mariner. I'll begin with comments on CECL and the drivers of our increased allowance for credit losses which began back on Slide 9. At adoption on January 1, our allowance for credit losses increased by 8.8% or $9 million to $110.8 million. Net charge-offs drove a reduction of $7.7 million and portfolio changes, including loan growth and mix and qualitative changes, added $21.2 million. For the economic outlook adjustment of $66.8 million under the CECL model, we used the March 27th Moody's Baseline economic forecast. This brings our total allowance to $191.1 million at March 31st. The Reserve Build added 59 basis points to our allowance to loan coverage, which was 1.4% at quarter end. Our econometric models are built on regressions and correlations during the prior financial crisis to changes in some of the key economic variables applied to our loan portfolio. As we disclosed last quarter, some of these key variables considered in our model today include the unemployment rate and treasury rates. We have taken a conservative approach to our CECL modeling in light of the volatility and frequent changes in economic expectations, especially when you consider the modest, at-risk portfolio disclosures that Mariner will address shortly. Approximately, 2/3 of the increase in our allowance can be attributed to our C&I portfolio. Since the end of the first quarter and subsequent to finalizing our CECL estimate, the economic forecasts have deteriorated further than our model inputs, including conditions that are materially worse than prior recessionary periods and what most models were built off. But we've also seen an unprecedented amount of fiscal stimulus being injected to address the crisis with likely more to come. Additionally, unlike prior recessions, this crisis has a potential to correct meaningfully in a very shortened timeframe. The direction of our future reserves will depend on more observable trends within our portfolio and loan growth, coupled with macroeconomic forecast that will be available at the measurement date of the end of the quarter. Other factors such as the shape, timing and magnitude of the recovery will also play a part in assessing future allowance levels. It is important to note that our first quarter provision isn't an indicator of a run rate for the remainder of the year. Now, looking at the quarterly results, net interest income of $173.9 million, represents an increase of $1.6 million from the fourth quarter driven by 11.6% annualized growth in average loans and excess liquidity and along with decreased deposit cost. Total earning asset yields fell 18 basis points to 3.58% from the linked quarter, driven largely by a 23 basis point decline in loan yields. Interest bearing deposit costs also declined 18 basis points for a beta of 44%. As the rate cuts were in March, we'll see this impact more clearly in the second quarter. Net interest spread increased 1 basis point despite 150 basis point reduction in short-term interest rates. Net interest margin compressed by 5 basis points from the fourth quarter, driven almost entirely by the declining benefit of free funds. The positive impact from lower interest bearing liabilities was offset by loan yields repricing. As stated, fee income was $98.4 million for the quarter and reflected some impacts from the volatile markets, including negative market valuation adjustments to a few line items. The largest reduction was in company-owned life insurance or COLI income, which decreased $16.6 million compared to the fourth quarter. Additionally, derivative income and the valuation of some other investments in our trading inventory were impacted as discussed in our earnings release. Expenses for the quarter decreased 7.3% or $14.8 million compared to the fourth quarter largely related to a $15.7 million reduction in deferred comp expense, the offset to the reduced COLI income I mentioned. Partial offsets include a typical and seasonal increases of $8.1 million in payroll taxes, medical insurance and 401(k) expense in the first quarter. Additional details on non-interest income and expense can be found on Slides 5 through 7 as you analyze our results. We continue to maintain strong regulatory capital ratios with the CET1 ratio of 11.9% based on the adoption of interagency guidance for regulatory capital transition, and average tangible common equity to tangible assets of 9.7%. During the quarter, we purchased just over 1 million shares at an average price of $53.79 through both open market repurchases and an accelerated share repurchase program. We have no additional plans for share repurchases at this time other than the completion and the settlement of the ASR entered into in early March. Our tangible book value per share increased to $51.04 at the end of the quarter, up 16.1% from a year ago. For comparison, our peers that have reported so far have shown an increase of 9.1%. Regulatory capital ratios are shown on Slide 16. Finally, in addition to our lower loan to deposit ratio, we have multiple primary and secondary sources of liquidity to support our customers. Now, I'll hand it back to Mariner to go into the details on our loan book.

Thanks, Ram. A snapshot of our loan composition at the end of the first quarter is shown on Slide 21 and we have a breakdown of our commercial portfolios by asset class on the following pages. Our C&I book shown on Slide 23 stood at $6.2 billion at the end of the quarter, representing 44.2% of our total book. The portfolio was well diversified by industry. Our commercial real estate portfolio detail begins on Page 24. Our total CRE portfolio stood at $5.3 billion at the end of the quarter and approximately 40% is comprised of owner occupied real estate, farmland and residential construction. The remaining 60% is investment CRE where our largest exposures are multifamily, industrial properties and office buildings. While loan-to-value ratios vary by property type, the average is 63%. You'll see the full mix and other detail on Slide 25. We have many long term relationships with sponsors who have managed through prior economic cycles, and we're primarily a recourse lender. Our investment CRE portfolio overall is 90% recourse. Next, on Slide 26, we've called out our exposure to industries that are viewed as having more exposure to the pandemic with additional detail on how we're viewing those. We identified the 5 categories shown, then looked at each for specific characteristics or specific credits that we feel comfortable with, as well as those which we may think carry more risk, if the current environment is prolonged. The balance is shown in the column labeled, "Potentially More Impacted Subset," are those we're monitoring more closely. And you'll see that amounts to just under 9% of our total loan book. I don't think it's appropriate to make a blanket statement about a particular industry or category as that's not how we look at our book. We know our customers well and have an active dialogue with them in all environments. We generally have strong sponsors, and as I mentioned, our CRE book is largely recourse. I'll begin with our oil and gas portfolio and the breakdown by segment is shown on that same slide. We had $457 million outstanding at the end of the quarter, representing 3.3% of total loans, which has remained steady since the last time oil prices were in focus in 2014 and 2015. Many of our energy clients have been with us for years and we've worked with them through the last cycle. We have strong equity sponsors in place for much of the book and many customers are well hedged against oil price volatility. As shown in the table, $215 million of the oil and gas portfolio is currently receiving more scrutiny and is comprised of credits in the service sector and those customers are most impacted in this environment, and a few of our upstream credits that are more heavily dependent on oil prices and possibly have less protection in place. This brings us to a total in the more impacted column for our oil and gas loans down to 1.5% of total loans. In CRE, our multifamily and student portfolios -- student housing portfolios had a combined $664 million outstanding at quarter end, 14% of which is for projects under construction that are not expected to come to market within the next 6 months. A largest portion of our multifamily loans are for Class A developments. We have not yet heard of significant stress, but a longer shutdown or deeper recession could obviously impact the professional workforce as well and we are in close communication with our clients. This book is 87% recourse and weighted average LTVs are 59% for multifamily and 67% for student housing. This brings the total in the more impacted column for multifamily down to 2.6% of total loans. Retail CRE of $445 million is broadly diversified and a substantial portion carries guarantees from top sponsors. 38% is grocery-anchored retail centers and less than 5% is for properties that are majority occupied by restaurants. This book is 90% recourse and has a weighted average LTV of 61%. This brings the total in the more impacted column for retail CRE down to 1.7% of total loans. Our total hotel portfolio is $328 million, representing 2.4% of total loans and you'll see that the portion we currently have under closer scrutiny is $201 million or 1.4% of loans. 16% of our outstanding hotel balances are under construction, and again, that excludes any that may come to market within 6 months. Our entire hotel portfolio is recourse. All properties are flagged with major brand families and the majority are limited service hotels versus full service. The weighted average loan to value is 62% and the average debt to service coverage ratio on our stabilized hotel portfolio in 2019 was 1.90x. In our transportation service category, the largest portion of the $293 million in balances, are truck transportation and warehouse clients. And much of that group are leaders in the industry with strong net worth and liquidity. We have minimal exposure to passenger travel or tour companies, which are less than 1% of total loans. After review, the more impacted portion of that book is just about 1.5% of total loans. After an in depth analysis, the portion of balances in these 5 categories that we view as being highly impacted, represents about 9% of total loan balances. Of course, this isn't any indication that we think those will all be losses, but we will continue to keep a close watch as conditions evolve throughout this crisis. Finally, we have a strong capital and liquidity position and a history of prudent risk management and believe our diverse revenue sources help provide a buffer in this interest rate environment. We've been through many crises in our 107-year history and we're proud to work alongside our peer banks to help navigate through this one. To wrap up, after digesting other bank's earnings this season, it's abundantly clear that there is a great deal of subjectivity that goes into the allowance process more so than ever. As you've heard us say, our credit management team has been together for a long time with an average tenure of 21 years at UMB. We take a conservative approach and proactive approach to credit management and remain confident that our credit quality will remain one of our key differentiators, especially during periods of stress. I want to recognize and thank our team members who continue to go above and beyond every day as we serve our clients. It has brought everyone together during a difficult time and it has reinforced what we've always known, relationships matter. That concludes my prepared remarks and I'll turn it over to the conference call operator from the Q&A portion of the call. Thanks a lot.

[Operator Instructions]. At this time our first question comes from Ebrahim Poonawala of BofA, Bank of America.

So, I guess, just first on credit, so appreciate all the commentary and it's 2-part question. One, just from a quantitative perspective, Ram, on the Slide 10 you mention reserve levels at a 150 basis points of projected loss under stress scenario. And we've seen all sorts all ranges there in terms of banks have been at 40%, 50%, 60%, 70% up to that. Just talk to us in terms of the depth of downturn or economic being assumed in that loss scenario. And is it safe to conclude that unless we see the macro outlook deteriorate you're -- you should be done with the reserve building part of this?

Yes, Ram, why don't you take that? It sounds like a modeling -- mostly a modeling question.

So, we've seen some of the peer data on that same metric and I can't speak for others in terms of our coverage of DFAST losses. First thing, DFAST and CECL are 2 different tracks. They're completely for 2 different purposes, right? obviously, DFAST is a 9 quarter outlook versus the life of the loan contract. But I'll go back to what I said in the script, I mean, Mariner mentioned this too. We have taken a pretty conservative approach based on the volatility that we saw at measurement date of March 27th in the Moody's economic forecast looking ahead. So those are considered in. We didn't lay any negative overlays on what the model output was in terms of some of these stimulus programs that are out there and how shallow this recession could potentially be. So this is pretty much a straight up model exercise in terms of how we approach CECL with it and then DFAST, which is, as I said, completely different ballgame.

And I guess -- so I understood, so you didn't assume any loan losses relative to what the model split out to account for the stimulus actions if I heard you correctly?

And the stimulus actions that all the things that Mariner just walked us through in terms of the at-risk portfolios. Right? Within the at-risk portfolios that people have generally labeled, there's only half of that we think we need to monitor a little bit more closely, because we have recourse and we have a lot of different things that can protect us. So that's not truly taken into account either.

I think also, Ebrahim, it sounds a little bit like your question is what about the second quarter, and I think it's early to try to give you too much color about what will happen in the second quarter. But what has come clear to us as it to relates to how CECL was applied by all the different banks. Is it -- there were many, many qualitative overlays put on by a lot of the banks. And as we stare into the second quarter, we being as conservative as we were, we do believe if data were to get worse -- unemployment were to get worse, that we sort of bought our way into the second quarter at some level by being conservative in the first quarter. We do plan on doing deep analysis on the second quarter against what the unemployment rate will be, what the stimulus is, how to apply unemployment against different parts of our book? So, we will continue to apply qualitative analysis as we roll into the second and third quarter.

And I guess, just a remainder following up. So you mentioned the difference in the portfolio. Credit loans much smaller. They were the big driver of losses last cycle. I guess the other side of this is you've grown the bank a lot in terms of commercial lending, a lot of that has been CRE and C&I out of market. Just to talk to us in terms of your level of confidence going into this cycle relatively to your CEO going into the cycle. And just in terms of your borrower base, your confidence in the customer credit quality?

First of all, you made one statement about out of market. We have very little in the way of out a market, so that's not -- you got that -- misunderstood that a bit about our portfolio. So most of our loans are--

I guess, I meant all of the legacy markets, so expansionary markets, be Texas, Denver et cetera?

Okay. Well, I mean, again -- I mean, we've been in Denver since '95. So, I don't know the way I would call any of our markets particularly expansion markets other than -- I suppose, Texas is under 10 years. But we were lending in Texas before we opened the offices there. So, anyway, I think really -- well, we've talked about before about our loan growth. As you will recall, about 10 years ago, we went through an exercise, right, to penetrate the markets that we're in by doing a few things that are independent of taking more risk i.e. creating the verticals, right? So, we were generalists 10 years ago and we hired marketing people, and went to conferences and created marketing material and special pricing that helped us compete in particular segments and verticals. And then we invested in staff, in the markets that we were -- didn't have as much exposure in. And we also changed our compensation practices 15, 20 years ago to pursue -- help our teams pursue. So, I think, the biggest thing I would say, as we've been saying for some time is, we were underpenetrated. And a big part of our outsized growth was and continues to be being underpenetrated in the markets that we're in and just getting our piece of the market share. So we are not weak. In order to go from the growth rates we had 20, 15 years ago to the ones we're having now, the only difference really is the things I've mentioned haven't changed our credit underwriting. It's the same team as I said before. So we're underwriting the same way. We've just -- well, we've awakened our marketing capabilities and our sales capabilities over the last decade to pursue what's rightfully ours from a market share perspective. We have really low market share in all the markets that we're in. So we call that a runway for some time on these calls. We have a really long runway to penetrate without taking any additional risk. And on the CRE side, as we've talked at great depths about how we do that, we're a recourse lender. We pay attention to sponsors and global liquidity and things like that. So I feel very comfortable. And I would say -- the biggest thing I would say is there really isn't anything different that we've been doing. I'm the same CEO I was 16 years ago when I took the job. And I've been overseeing credit over that entire 16 years. Tom Terry, who is our Chief Credit Officer is 33 -- 34 years on the job, and Jim Rine is 26 years on the job, so -- and that's just 3 of us. But -- so that's what I say about it. Like I said in my prepared comments, I can't promise anything, but what I can tell you is that we're very consistent.

And just separately, if I could, Ram. In terms of the margin, understand there is a lot of volatility, but if the rate environment stays were it is, what's your sense in terms of the cadence of margin compression from this point on? And do we see stabilization at a higher level relative to where we were when rates were 0 back in 2015?

Yes, as you said Ebrahim, lot of moving parts with the margin looking ahead. One of the disclosures that we have is the amount of PPP loans, for instance, we did. So we've done up to this point $1.4 billion. And as you know, those fees will get amortized over a 24-month period until a large portion of these loans will pay off or be forgiven or just mature, right, at which point all these fields will be amortized. So that can be a big impact over third and fourth quarter result in terms of how the margin progresses. But if you exclude PPP, one of the things we've been really successful, both on the asset side and the liability side of the equation is, instituting loan floors in a majority of our new production. And then as the back book comes up for renewals, we've been able to be very successful in that as well. And you saw this quarter, we're also very prudent with our deposit pricing. Our cost of deposits in March alone was 20 basis points, lower than where 1Q deposits were. So we're taking a pretty good look at where deposit costs need to be. So a good use of our excess liquidity that should be favorable to margin as well. And then, the other side is, what's happening with LIBOR. One-month LIBOR was at 99 basis points or so at March 31, and it's now retreated down to about 40 basis points. And as you know, some of these are -- some of our loans are indexed to 1 month LIBOR. But as I said earlier, as these loans come up for renewals, we are pretty successful at pulling some of these rates. And then the last point I'll make is just to buy yields on our portfolio. Given where the 10 year is at less than 60 basis points, that's flipped a little bit. You see the roll off yield on one of the pages, it's about 2.25%. We're getting slightly lower than that between a mix of mortgage backed securities and muni bonds. So the final point I'll make is, net interest spread as you saw this quarter, is going to be pretty stable. The benefit of free funds and what happens to the value of our DDA balances which are about 30-plus percent of our debt, it -- that's where we see the lower benefit going forward. Another long answer to say nothing, but I'm not -- you know, we don't give typical margin guidance.

Yes, I think -- and I think Ram mentioned there -- in there that, obviously, a big part of our deposit repricing happened in late March. So a lot of that positive impact you will see in the second quarter.

Our next question comes from John Rodis with FIG Partners.

I appreciate all the detail, maybe, Ram -- maybe just a, I guess, a modelling question. As far as the share count goes you said in the press release that you still have -- I guess, you'll complete the ASR in the second quarter. So, how does the share count change from the end of the -- end of March to June, I guess?

So the way the ASR works is 85% of the 30 million through the ASR has already been retired or put in treasury stock. So the 15% the broker-dealer just holds back for any volatility in the stock price, the other 15%, could be another 100,000 and 150,000 shares from where March 31 ended.

Okay, so not a big difference. But -- and then aside from that, the buyback is on hold, is that correct?

Yes.

Correct.

You mentioned the PPP loan program. What is sort of the average fee that we should expect? I assume, it's probably in the 2% to 3% range, but can you narrow it down?

Yes, I'll get that. So based on the profile we've seen and what we disclosed, the average loan size is about 122,000 and right now we're trending closer to 2.50 on the loan origination fee and that's gross. Obviously, the other things that will factor in is the funding cost. We could allow the PPP lending facility, which funds these loans at 35 basis points. And then there is any costs -- incremental and marginal cost that are associated with the program, whether it's legal, regulatory, new system that we purchased to enabled this to be able to serve our customers really well. So those are kind of the moving parts on the economics of the PPP program.

Yes, John, just as a reminder too. This is really a service we're providing. We don't really see this as something we're making any money on at all. This is a government program. We're an agent. And if we cover our costs at the end of this thing, I'll be surprised.

No, listen, I understand, it's obviously extraordinary times. So you -- I mean, the banks are part of the solution this time around.

Yes.

Two other questions from me guys. Just -- I guess, just one, your comment -- your thoughts as far as the loan pipeline going forward. Obviously, the first quarter was very strong, but I would think things have slowed pretty dramatically. And then just one other question, or just if you could address -- the other question was on service charges. You saw a bump up related to health care and just your thoughts as far as that going forward or is that more sort of onetime?

I'll take the -- this is Mariner. I'll take the first question, and then I'm going to turn the second over to Jim Rine. The first question about the pipeline, we have a pretty long history of giving you, or our investors on these calls a look into the upcoming quarter and then that's about as much forward looking as we are able and willing to give. And so, the second quarter looks -- based on the pipeline to be as strong as the first quarter or thereabouts. And so it looks to be a solid second quarter. I have no idea what third and fourth quarter will be given kind of the conditions and the inability to kind of get out and play golf and have a lunch or a cup of coffee with a prospective borrower. So those -- that -- I imagine in third and fourth quarter, if things don't open up, significantly with slow some. But the second quarter looks pretty good.

Mariner, so -- I'm sorry. So you -- so, the pipeline is strong. Would you sort of assume though that the pull-through rate would be lower, just given everything that's going on or...?

No, the way we do our pipeline for you guys is it's -- that's a pretty strong indication of things that are going to be accepted and booked. So we expect the second quarter to be pretty strong like the first quarter. No guarantees, of course, right.

I fully understand.

Yes. And then other relates about fees, I've got Jim Rine, our CEO of the bank who has prepared. Those businesses roll to him. He can give you a little color on the fees.

So on healthcare, you saw a spike in the service charges and that was related to one relationship that we still have the deposits and the business that was transferring the actual custodial relationship on the accounts. The deposits still are growing in our health care space. The pandemic is still remains to be seen as far as how it will impact the industry in general. But the high deductible plan should become much more in favor as employers look to continue to reduce costs going forward. So we're -– while right now, we don't see full impact of how things will play out through the course of the year, we did see some of the card activity reduce also in March. But we will know more in the next few months how the rest of the year plays out there.

Okay. So the move over, though, from that one relationship is sort of a one-time item, I guess?

It was one-time and we continue to maintain those deposits.

The next question comes from David Long of Raymond James.

The first question I have relates to these large commercial customers you talked about that caused an increase in your non-accruals. Can you talk about maybe what industry that was or what changed with that relationship or if there's anything else you can disclose that caused that move?

It's actually two relationships that caused that move. And, I think, I'll just point you back for a moment just kind of the way non-performing and criticized credits work at UMB. We have a long history of sort of seeing some volatility on that. And then the reason for that is the way we operate, which is we are very quick to take action and recognize problems and work them. We have a pretty long, great track record of doing so. And what is -- if you take a look at our long -- the chart from criticized to doubtful or loss, you'll see that the migration from non-performing or criticize to loss is de minimis. And so again, I guess, what I would just point you to is, from time-to-time you'll see 2 or 3 credits that end up in that non-performing category that caused a spike to those numbers. But typically, that's just because we're working -- we're identifying them early and working them early for a solution. And in this particular case, there's 2 credits, one in the energy space and one in the ag space. The one in the ag space, we feel like we have adequate collateral coverage to bring us home. The one in the energy space, we have already reserved for what we believe to be -- today, believed to be the exposure on that one. And so, I think you'll overtime see our number come back down into its averages. So that's a high level of what has impacted that and how we're thinking about those 2 credits.

And then my second question relates to your trust and securities processing line. Is that more driven by market values, transaction volumes or a mix there? And then what type of trends have you seen in that business?

Hey, Jim, why don't you take that? We've got some good news there to share. And then, of course, market impact is definitely part of it.

Yeah. So the fees in that business is -- it's twofold some its market action. But we've had nice backlog in that business. In our wealth management business, the new business from new customers has been up 50% over Q1 to Q1 '19 and the growth in AUM from new customers is up 79%. And the fund services business, we've had continue to convert new customers and we've seen strong growth on that. And so we feel very good about where we're positioned. But as far as the decline in the market, we were off. The market and equities were off roughly 35%. We were only off roughly 10% in portfolio values. So we weren't seeing the declines like the -- our declines didn't mirror the actual market and some of the fees are tied to the actual market returns. But some, obviously, are more flat fee as well, so there's a mix there. But the business continued to grow. We've invested in it. We have new platform being brought on for the private wealth management space this year that will allow us to hold additional alternative investments on that platform and be a better experience for our clients. So there is a lot going on in that space, so we'd continue to invest and we haven't cut back on the projects related to growing the business regarding that space.

And our next question comes from Chris McGratty, KBW.

Ram, maybe a just a modeling question for you on the expenses. Understanding the offsets on the COLI that ran through both fees and expenses. But if I adjust for that $16 million, and then also the seasonal -- I think you'd called out the $8 million as seasonal expenses. Is that the right way to kind of think about were expenses could be near term. understanding you may pull back on some costs given restrictions on travel and marketing?

You got this, Ram, go ahead.

Yes. Generally, yes, that's -- the $8 million is seasonal expenses. And you just heard Jim Rine talk about in this environment we haven't really scaled back any of the investments from that standpoint, right? We're continuing on our path on that one. So you should see some inflation related to that. But at the same time, as we've always said, we'll be really watchful on some of those discretionary items. The lockdown is creating some of those synergy opportunities just from a travel and entertainment and marketing perspective. So we'll watch our expenses from that standpoint.

Yeah, we should definitely continue to outperform there as both the lockdown conditions persist. As well as we've continued to, through this environment, learn that we can continue to be more efficient in the way we're operating.

And then, of course, in the disclosures we also have some of the expenses that we track related to the COVID crisis and in the first quarter we had 250,000 or so or less of that. Some of the programs that Mariner talked about, whether it's the supplemental pay or just in terms of our readiness and preparedness for COVID, you'll see some of that impact our expense line. But, again, it depends on how long this lasts. So those will impact our expense trajectory as well.

Okay, and just a couple small ones. The disclosures were great in the deck. The reserve ratios, we're getting some questions just for banks on specific of those portfolios that you deemed somewhat higher risk. Do you have the reserve that you have set aside on both the hotel and the energy portfolio?

The energy book we have a qualitative reserve of about $13 million, which is 3.5% of that book. The hotel, I don't know if I know the answer, Chris, specifically on hotel book. But, again, going back to the disclosures -- yes, what Mariner talked about even the hotel book, we whittle it down. When you take out recourse, it's a very small part of our exposure there.

Yes, it's been my perception as I sort of look at all of the other announcements coming out that they've been sort of standard -- it's been kind of a standard accounting exercise. It's a bit of a lazy exercise, if you will, to me, just sort of taking the whole book, saying, okay, everybody's interested in hotel. So here's our hotel book, boom, done. So we took some extra effort to actually show you what we actually are worried about, because it isn't -- I don't think the right approach is to take the whole book and say it's at risk, because that's just not true. So that was really what we did was instead of just kind of doing a blanket, simple accounting exercise and just showing you what we had in each category, we broke it down to tell you what we worry about and then how we think about where the real risk is, and that's in those 2 columns to the right on Page 26, where we talk about reasons for excluding. And then in the farther column to the right, are just additional comments as to why, well, may or may not worry about something that is even still on that list. So, just because it's on that list doesn't mean we think we're going to take a loss because, hey, it's also got liquid sponsors on there or, for example, doesn't come to market within the next 6 months, so it's something we can re address later 6 months from now depending on where we are.

No, no, that level of disclosure was helpful. I appreciate it. Maybe the last one, Ram. Could you help us on the effective tax rate going forward?

It's tough because of all the volatility in earnings and the percentage of tax free income as it related to pre-tax. So my best guess, Chris, at this point would be closer to 14%.

Is that FTE or is that non-FTE, sorry?

Yes, ETR.

And Chris, I might add too. I think it might be interesting for everybody to know on oil and gas, because I -- everyone is concerned about that as we are. That remains about the same percent of the book as it was during the '14 energy pricing crisis. And, generally the same clients that are in that book for us. 30% of it is service, which is really where most of the concern would be. The great majority, the rest of it has hedges on it. And on the service side, the customers that we ranked and worried about during the last cycle are the same customers this cycle, and the sponsors in those credits stepped up during the last cycle. So, we have great confidence really in the ones that remain in that book, because they're the same people who stepped up behind the credits during the last crisis.

[Operator Instructions]. Our next question comes from Ebrahim Poonawala, Bank of America.

Just a follow-up, Mariner or Jim, and it might be a tough one to answer. But I was wondering if you've seen any improvement in customer sentiment activity through the course of the last month? Means, everything, obviously, shut down in a big way in the middle of March. I'm just wondering, as things have kind of steadied in the last few weeks, is there any kind of green shoots or any pickup in activity that you've noticed that might be worth calling out?

The one thing I would point you to is just a line utilization. So, as the crisis started to unfold, we went from 39 to 41 in utilization. And if this is any indication of sentiment that has dropped back down to 39, as we sit here today. So that is some indication maybe of how the customers feel. I would say just generally, anecdotally, as we speak to our clients, and I'll let maybe Tom pipe in here for a second, I think everyone's still nervous and cautious. So, I don't see anybody really reacting as if they see light at the end of the tunnel right now. It would be my take. And I'll let Tom add to that. I think, just it's -- in general, there's -- in my opinion -- and I think our customers would share that with us, there's a long road to hoe here and I don't think there's as much of a sentiment change. You want to add to that, Tom?

No, I think you said it just right. I think there's a wait and see attitude. And I think we have a very patient client base and I think people are going to walk before they run, certainly before they start borrowing and expanding too quickly.

I would just add. As I think you already know just about how we lend, our borrowers are in general are on the stronger end of things. They've got better balance sheets and liquidity and you know that's sort of how -- what kind of lender that we are. So, we have borrowers, just generally speaking that always operate as things can get worse and that's the right way to think about things.

And Ebrahim, this is Jim Rine. We also have a lot of borrowers that are also essential businesses that are still active, that are quite busy, that are also going through the motions of employing safe workspaces, while going about construction contracts and things like that. While they're busy, they're certainly experiencing the new normal they haven't experienced. They've experienced some delays in projects, but not outright cancellations yet. So it really is a mixed bag, which isn't the exact answer you would be looking for, but I'm sure that's a consistent answer that you're hearing from others.

And I also think you -- you didn't really ask it this way, but I'll offer it as it relates to just how this thing is unfolding. I don't believe -- so when we -- there's a lot of conversation about when we go back and what that looks like. To me going back is going to be a very, very slow ride. You think here what Texas is doing is they're calling in a complete open, but at 25% capacity. So I think until we have a vaccine, things are going to -- when they do open and we call things open, broadly, it's going to look a lot more like Texas then it's going to look like what we left behind in February. So I think the road is long and hard even when we come out, because coming out doesn't mean 80% capacity. It means 25%, 30% capacity. That's my personal opinion until we have a vaccine.

Our next question comes from Jared Shaw, Wells Fargo.

This is actually Timur Braziler filling in for Jared. Just a couple of questions remain here. Looking at Slides 13, the in process modifications. The composition of that $448 million, is that any different from the existing modifications or is it pretty similar?

You want to ask that again, I'm sorry.

So for the $448 million of in process modifications on Slide 13, I'm just saying if the industries those are in are similar to the existing modification or if that's that skewed to any particular industry?

No, that would -- there's nothing. There's no skewing going on there. I also just might add that in my opinion on modifications and forbearance in general, I don't know exactly how the investor population is thinking about it. But it feels like it's something you all are looking forward to see if what existing problems might exist. And the color I would give you is that, really at least for UMB, modifications and forbearance really is forward looking and relief based to help people avoid problems, rather than a recognition of existing problems.

And just in terms of clients seeking modifications. Has that also slowed similar to the utilization rates or is that pace still fairly similar to quarter end?

Tom, do you have any color on that?

Yes, it has slowed. We had quite a few right out of the gate. I think PPP may be caught some people's attention. You talked to some of the other chief credit officers in various meetings, there are some feeling that certainly the longer this goes -- if it goes past May or past June in terms of how long it takes for the economy to come back, there may be another wave. We haven't seen that yet.

Yes, and by the way, my comments a moment ago, just to clear them up about the 25% or 30% comeback. That would be, I was thinking more along the lines of service, not GDP, like the utilization of what restaurant activity and concerts and such and things like that, not so much GDP. So just clarification.

And then just one last one from me, may be a big picture question as it relates to CECL methodology. Do you actually need to see an improvement in the GDP and unemployment rates or is there enough qualitative overlay where you can preemptively begin to lower reserve levels in advance of those metrics actually coming down?

So this Ram. And its little bit early to talk about it. But if you look at the Moody's forecast and we have a little synopsis of what the forecast entails, right? So it has unemployment rate peaking to an average of 8.7%, at least as of the March 27th forecast, and then coming down back to 6% level. So that kind of recovery is already built into how we've modeled it. And we call it may be a bathtub U recovery as opposed to any kind of V recovery. That's not what we're assuming in terms of unemployment getting back to normal. Whatever the new normal will be.

So to echo or one extra layer there on Ram's comments, if that were the case, that's the answer to your question. But then the flipside is, obviously, if Moody's change is -- its forecast in the second quarter to match something more like what JP Morgan is talking about with the 20% unemployment and a 40% reduction, if that type of thing were to take -- to take hold into the Moody's forecast, that -- we'd have -- we would have to react to that. And that's where then you start assessing what you think the $9 trillion in stimulus, what kind of impact that has from a qualitative perspective. We start doing qualitative overlays related to how unemployment specifically impacts different categories within our book and how we feel about how national data plays into our book in the middle part of the country and those types of things that we'd overlay.

[Operator Instructions]. The next question will come from Nathan Race of Piper Sandler.

Mariner has answered my first question just on the oil and gas book in terms of how that portfolio has changed in both size and client compositions since the 2015 2016 downturn. But, I guess, I'm just curious if you guys have a sense or when you look back at that period what Optum loss content looked like across that portfolio?

We had very little losses in it. It actually, you know, we ranked credits and worried about them, but ultimately had very little in the way of losses.

And then just going back to the PPP loans that you guys have funded. Any sense for that $1.4 billion-$1.5 billion that you've funded. How much of that has actually been kind of geared towards those clients that you guys outlined on that slide that have been more so impacted?

I don't think we have an overlay that get into that -- to match those 2 up. So I don't think we have that level of detail, Tom.

We don't.

Yes.

And then just a couple of housekeeping questions, Tom. The securities book came up a little bit in the quarter. Obviously, you guys had good seasonal deposit growth as well. Any sense of how that securities portfolio is going to trend over the next few quarters, obviously, with the PPP loans coming on balance sheet and so forth and just how those -- how you expect those to be funded?

I would say consistent with current levels. Obviously, every month we're evaluating whether we want to reinvest in this market. As I've said earlier, the roll on, roll off yields on the securities -- especially the mortgage backed securities will kind of split. So we're going to be very cautious about reinvesting. And at the end of the day, we might have excess liquidity because at some point we do anticipate and we're seeing the halo effect of excess liquidity that we did see through the last crisis from a deposit standpoint. So at some point we'll have excess liquidity that we might have to deploy between munis and mortgage backed securities. That as I look for the next quarter or two, I would keep it consistent with where it's been.

We have definitely, as we did in the last crisis, seen some flight to safety deposit gathering activity for sure and expect to continue to feel that. And in particular, without naming any banks, but some of the missteps that have taken place in the industry as it relates to how PPP rolled out, we have -- we're seeing some benefit from that as we were early and took action and started adding non-customers to that pipeline as they were not being served in other places. So I think we're going to continue to see some of that flight to safety, flight to quality, deposit building and deposit gathering activity.

And if I could just add one more, just with an expense line. I know you guys don't give guidance. But marketing was down pretty substantially sequentially and then during 2019 you guys obviously had a ramp in legal and consulting fees. So just a sense for how those line items could trend this year? It sounds like you guys have some delays in the timing of some projects and so forth. So just trying to put them in context in terms of the run rate of those items.

Go ahead Ram.

Yes. So you can see that it's consistent with what the last first quarter was. So there is always a seasonal drop off in the first quarter. We did accelerate some of the spending for concepts in the fourth quarter, so that's why it's a little bit higher than usual as well. But as we said earlier, that's one of the discretionary items that we will consider as we look at our expenses. Obviously, in a lockdown, some of the things that roll up into that line item more travel and entertainment and sponsorships and things like that. So to the extent those don't happen you might see those trending lower. But once we come out of the crisis it's our every intent to go back on the customer acquisition side and start to market for both the consumer and card portfolio specifically.

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

Thanks, everybody, for joining us today. As always, you can reach us at 816-860-7106 if you have any follow ups. And thanks for your interest and have a great day.

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