Good morning, and welcome to the UMB Financial Third Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kay Gregory, Investor Relations. Please go ahead.

Good morning, and welcome to our third 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 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, 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 statements. Forward-looking statements speak only as of today and we undertake no obligation to update them except to the extent required by securities laws. All earnings per share metrics discussed on this call today are on a diluted share basis. Our presentation materials and press release are available online@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 your families are safe and well. As we approach the ninth month of this adjusted way of doing business and serving our customers, our systems are performing well and we're continuing our measured approach to the return to the workplace. We have a multi-phased plan and currently have about 18% of our non-branch associates in our corporate facilities. The majority of our associate base still remains remote. We continue to meet with our customers and our branches by appointment or through our drive-up operations at most locations. Our teams are very adept at virtual meetings and have had success with calling efforts, but I know we'll all be ready for an eventual return to in-person interactions and a handshake. These times have reinforced what we've always known; relationships matter. I'm extremely proud and impressed with how our associates continue to adapt, while maintaining those relationships with our customers and each other. Doing what's right to support our workforce, customers and communities is one of our priorities, along with maintaining our high-quality underwriting standards and solid capital and liquidity levels. Our third quarter results reflect those priorities with net charge-offs of just 0.13% of total loans, improving past due trends and double-digit year-over-year growth on both sides of the balance sheet. On the credit front, provision for the quarter was $16 million, reflecting the quality of our loan book and the reduction in modified loan balances. Third quarter provision represents 3.1x net charge-offs of $5.1 million. The reserve build in the third quarter brings our total allowance for credit losses on loans to $211.7 million at September 30 with an allowance to loan coverage of 1.33%. Excluding PPP loans that coverage is 1.46% or nearly 2x what…

Thank you Mariner. Looking at the quarterly results. Net interest income of $184.4 million represents an increase of $6.2 million from the second quarter, driven by strong growth in C&I and CRE loans and a larger AFS portfolio. Total earning asset yields fell 10 basis points to 2.91% from the linked-quarter, driven by yield declines of 13 basis points in both loans and total securities. Net interest spread decreased four basis points from the second quarter and was down only one basis point from a year ago. Net interest margin compressed by six basis points on a linked-quarter basis. Drivers of this change included, negative four basis points from lower reinvestment rates and market changes in the AFS portfolio, a three basis point reduction from the reduced benefit of free funds and negative two basis points related to earning asset mix shift partially offset by a three basis point impact from deposit mix along with CD and money market rate changes. Liquidity levels remain elevated and consistent with the second quarter levels, but at over 2.3 times level seen a year ago. As we noted in the release, we terminated our $750 million interest rate floor hedge for $34.1 million during the third quarter. The unrealized gain remaining in AOCI was $18.4 million, which will be amortized into net interest income through September of 2024. Non-interest income, as shown on slide 9, was $113 million for the quarter, a reduction of $7.5 million. Valuation adjustments in company-owned life insurance income accounted for $6.2 million of the sequential decline. This decrease is offset by a similar decrease in deferred compensation expense. Gains on sale of securities accounted for an additional $3.7 million decline from the linked-quarter. We saw improved trends in asset servicing with our alternative investment, registered funds administration, and…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Chris McGratty with KBW.

Good morning, Chris.

Hey, good morning, Ram. Good morning, Mariner. Nice quarter, overall. I'm hoping to talk a little bit about expenses to start. You guys had them pretty well controlled this quarter, but rereading the transcript from last quarter, you talked about just a really big focus on expenses, given the revenue environment. Interested in your thoughts about expenses, investments you may need to make and potential sources of rationalizations in 2021? Thanks.

Yes. This is Mariner. Thanks for the question. As we've been talking the last few quarters, we remain very focused on being an efficient company and we've undertaken over time any number of exercises. But really, it's more of the way we're operating and we are able to -- with digitization and acceptance of digitization from the customer base, we've been able to continue to find efficiencies through the use of technology. We continue to manage staffing levels based on performance and continue to look at our physical plan. And you should expect us to continue to focus on expenses, without giving you any particular guidance.

Maybe, just on one line item and then expenses. The personnel number, Ram, was somewhat high in the last couple of quarters. I'm interested how much of that was kind of a catch-up from really low first quarter and bonus accruals and maybe that line item, is that in this mid-120's is that a bit decent jumping off point to kind of forecast growth?

Yes. The one thing that flows through that line item is also our deferred comp expense, right? So quarter-over-quarter, we saw some movement over there, depending on what happens with the market. But usually there’s an equal offset on the COLI side. So if you look at just what happened this particular quarter, we had deferred comp expenses of just under $4 million, which was down about $8 million from the prior quarter. But if you exclude that noise, there's always usual seasonal resets and FICA. But the overall incentives were just impacted by some of the trading volumes that you see, the bond trading has been a pretty strong headline for us. Other fee income opportunities have also been a strong headline. So anything volume-related will always increase salaries from one period to another period, but the salaries, just when you look at salaries and wages what you see in the fourth quarter is probably a good starting point enter 2021.

Great. And if I could, just on a couple of modeling questions; the PPP. Can you let us know what was in the quarter for the fees, what remains? And then, I guess, into 2021, like, the cadence of the fees?

Ram, do you want to take that?

Yes, I'll take that. So what's in our fees right now is just the plain vanilla finance charge of 1% and the amortization of the origination fee. As you know, as Mariner said, we're gearing up to take forgiveness applications. And so, none of that is really in our fee income -- or net interest income base for the third quarter. Chances are, with the way the process is playing out, there will be a very little impact, if any, in the fourth quarter and most of it will be probably in 2021.

Okay. And then, on the taxes, if I could. It sounds like the fourth quarter, a little bit of a higher tax rate, Ram. And then, how do we think about the sensitivity if we do get a change in administration to some of the proposals that are being floated in Washington with the tax hikes? Is it a -- yes.

On the first part, so we said 14% to 15%, yes, a higher tax rate for the fourth quarter, a lot of it will depend on our pretax income, as I said in my script, we might have as much as a $70 million, $75 million gain from our investment in Tattooed Chef. So when -- if pretax income goes up, your tax rate -- effective tax rate will also go up. On the second part about, if corporate tax rate went from 21% to 28%, we'll see probably about a 400 basis point increase in our ETR when that goes into effect.

Awesome. Thank you very much.

Thanks, Chris.

Our next question comes from Nathan Rice with Piper Sandler.

Yes. Hi, guys. Good morning.

Hey.

I was hoping to start on credit. It looks like this quarter's reserve build was largely a function of criticized classified trends in the quarter. So just curious to get a sense of how that trended during 3Q and if a lot of that criticized classified inflow was just concentrated in that at risk portfolios that have been outlined in the slide deck, or if there's some other areas that also saw some inflows?

On the provision expense, largely, it is definitely based on mostly credit performance, don't have much macro modeling related provision expense in the third quarter to speak of, not much. So it's mostly just credit performance. And it was a good quarter from that perspective, with 13 basis points in charge-offs and the typical growth level we've been seeing. So its nice growth in the quarter too. So performance was strong and growth was strong and that's basically what you saw on the provision expense for the most part, if that answers the question?

Yes. That's helpful. Thanks Mariner. I guess, I was also just hoping to get some color, just in terms of broader criticized classified trends in the quarter. I don't think those slides --

Sure. You noticed. So there -- you'll see this in the Q our criticized are down. So overall criticized are slightly down, nothing to note as it relates to overall – the way we think about it so NPA's ticked up slightly but credit size in total are down. Nothing to note. Really, we don't expect anything different when it comes to charge-offs in the coming periods that we don't see or expect today as we look at the data. It's the same kind of comment, I've made before, which is we'll see some spikes along the top as it relates to putting credits on the watch list or a credit loan to NPA as we are very quick to manage credits at UMB. We're quick to identify problems, we're quick to manage them. So you'll see peaks and valleys along the top. But what's really important the way we look at it and the way we think about it, is there's very little migration to doubtful and loss. And that's what we care about and that's what we think about. And we don't expect anything different as far as we can see out right now as it relates to migration to doubtful and loss.

Okay. Great. Yeah, that's super helpful. And then just thinking about the margin trajectory going forward PPP fees. Ram, any thoughts obviously securities – reinvestment rates are a challenge these days. But it seems like the loan growth outlook remains pretty solid. So hopefully that that should change earned assets should help going forward but just kind of any thoughts on, how you see that core margin trajecting through the fourth quarter and early 2021?

Yeah. Sure. I can take that. If you think about the two main reasons for margin compression today, right? As you mentioned, it's the reinvestment rates on our AFS book are lower than what's rolling off and we have some data in our slide deck that shows, we have close to $1.7 billion of maturities coming over the next 12 months at a 1.93 rate. And for instance, what we reinvested in September had a 160 handle on it right? So there's some compression. And then the other thing that's happening is also the earning asset mix shift not only within the loan book, but between loans and earning assets, a lot of it is because of the liquidity bill. So the big wildcards as you rightly pointed will be the pace of PPP runoffs, right? And for instance, if you assumed all our PPP balances ran off in the third quarter and were replaced by non PPP loans, our margin would have been 7 basis points higher this quarter. But that's not how it's going to play out in the short run. So as PPP loans exit, we would expect our loan-to-deposit ratio probably come down a point or two and that's going to probably drive a little bit more of the unfavorable earnings mix shift that I talked about. And then the other wild card is also the excess liquidity part. So while it was stable, as I said on a linked-quarter basis it's still about 2.5 times, where it was pre-pandemic levels. And for us in our businesses as you all know, we'll see more liquidity in the fourth and first quarters from public funds business. So all said I would say, I probably expect margin to trough in the next couple of quarters because of excess liquidity and this other PPP dynamic, I'm talking about. But what did we do? We always said this in these low environments low interest rate environments we tend to focus on net interest income growth. So that always will be a differentiator for us. We'll keep the dry powder in terms of deposits to deploy later.

Got it. That's great color. I appreciate taking the questions. Thank you.

Thanks, Nate.

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

Hey, good morning, guys.

Hey, Ebrahim.

Hey. Very quickly to follow-up on the NII focus. Is it safe to assume just given the kind of growth that you guys are seeing ex-PPP we should expect NII growth to continue, or do you see any reason why NII could actually decline over the coming quarters?

I mean, just based on what Ram just said, it's likely that it will continue to increase.

Got it. Got it. And I guess just on credit manner, if you take a step back, I know you feel very good about your loan book for a bank that is actually growing the loan portfolio. Just talk to us as you think about the puts and takes in terms of the macro outlook looking into the next year, do you see -- are you more worried about credit or are you more optimistic about growth when you think about 2021?

So, Ebrahim, you know me pretty well. You've watched us for a while. I'm a career pessimist. So we -- the thing about the way we underwrite is, we're always underwriting for the next crisis. So as it relates to how we underwrite in general, we're always prepared for the worst. We always underwrite to the worst case scenario. So, we're really not doing anything different in the way that we underwrite. We're -- we want to bank customers that know that things can get bad and have build equity and have global cash flow and sponsor strength and all those kinds of things. People that -- we bank people who believe what we believe is that we believe in gravity, we believe that what goes up, must come down. And so we're always underwriting that way. So we don't wait for a crisis to operate like there's a crisis. And so as we think of the first quarter, a couple of comments first quarter and second quarter, a couple of comments I would make about our outlook for that. I don't we don't believe that the economy cares who the President is. We also don't believe that we're going to go into the New Year without another stimulus package. And so we believe that there'll be stimulus, and we don't believe that the market's care who's President. What we worry about is if the coronavirus pandemic were to get worse that would likely apply some pressure to our more sensitive impacted credit list that we've provided for you the investor community. So that's what we worry about. We -- I think that as it relates to the rest of our book, I think, we'll go on into the next year uninterrupted with the rest of the -- with the book. But as it relates to some of those industries that we've identified that are sensitive to the pandemic, we would likely see some stress there. However, I would revert back to my original comment, which is that when we originated those credits, we originated them knowing that things could get worse. And so we assess global cash flows, sponsor strength, loan to values, location, cap rates. We're very conservative about the way we look at those things. And so we know that there -- while there will be stress, we don't worry particularly about higher than normal loss levels.

Got it. That is helpful. Thanks.

Thanks, Ebrahim.

[Operator Instructions.] Seeing no further questions, I'd like to hand the call back over to Kay Gregory for any closing remarks.

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

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