Good morning and welcome to UMB Financial's Third Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. Please note that this event is being recorded. Now I'd like to turn the call over to Ms. Kay Gregory, Investor Relations. Please go ahead.

Good morning and welcome to our third quarter 2021 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. These risks are included in our SEC filings and are summarized on Slide 43 of our presentation. Actual results and circumstances 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 unless required by securities laws. 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. We continue to see the benefits of our diverse business model, which helps us drive key points of our investment thesis: above-peer loan growth, solid net interest income, and strong fee income contributions. For the third quarter, we posted 15.3% average loan growth on a linked-quarter annualized basis, excluding PPP balances. Asset quality remains strong, with net charge-offs of just seven basis points, and a $5 million negative provision for credit losses. Sentiment in our markets continues to move towards more normalized levels, while supply chain dynamics and rising material costs weigh on businesses across our footprint. Pricing and customer demand led to strong loan growth. Turning to our third quarter results, net income was $94.5 million or $1.94 per share, and pretax pre-provision income on an FTE basis was $115.3 million or $2.37 per share. Slide 18 shows primary drivers behind our results. Net interest income increased 4.3% from the second quarter driven by strong earning asset growth and controlled liability costs. Net interest margin was 2.52% versus 2.56% last quarter, impacted by continued elevated liquidity levels, reinvestment rates, core loan mix, and re-pricing. We are working to deploy the excess liquidity as prudently as possible as the rate environment changes. While reported non-interest income declined for the linked-quarter, it was largely driven by unrealized mark-to-market adjustments in the equity holdings, including a $10.7 million swing to our Tattooed Chef position in the second quarter. We saw positive momentum in fund services income and bank card fees with increases of 8.5% and 7.1% respectively. Trading and investment banking income fell during the quarter on lower trading volumes after an extremely strong second quarter. Moving to the balance sheet, Slide 24 shows a snapshot of our loan portfolio, showing the drivers behind our loan growth. C&I led the growth in average balances this quarter as we continue to gain share across our footprint. Prospects are recognizing us as a consistent, stable player in our markets. More than half of our commercial loan growth came from new customers this quarter. During the quarter we saw some return of CapEx spending, and while a growing number of middle-market companies selling to private equity firms contributes to pay off, we've had success in building relationships with PE firms and are often able to participate in those purchases. Average mortgage balances increased 7.4% from the second quarter to $1.8 billion. Funded mortgage loans for the quarter were $236 million including $30 million in the secondary market. Year-to-date we've seen 53% in secondary market mortgages compared to the same period in 2020. Topline loan production, as shown on Slide 25, was $905 million for the quarter. Outside of PPP balance changes, payoffs, and pay downs were 5.9% of loans above recent levels. We do expect acquisition activity among middle-market companies to continue, which makes estimating payoffs unpredictable. However, we see a robust pipeline for the fourth quarter with opportunities across all verticals. On Slide 26, we've updated our exposure to sensitive industries. We continue to monitor our hotel and senior living portfolios, which stood at a combined $885 million at quarter-end representing 5.5% of loans excluding PPP. After analysis of mitigating factors, including strong sponsors and guarantors, we feel approximately $419 million, or 2.6% of loans, warrant closer monitoring. We've included this analysis again this quarter. However, as the economy continues to improve, this will be less of a focus going forward. Slide 27 and 28 show asset quality trends. I'm pleased with the reported seven basis points of net charge-offs for the quarter. As I mentioned last quarter, given what we know today and the quality we see across our portfolio, we expect charge-offs to come in here at historical levels of 25 to 30 basis points for the full year of 2021. You will see that non-performing loans ticked up this quarter to 0.59% of loans in line with the third quarter of 2020. This increase was largely driven by one credit relationship. As we discussed often, we'll see peaks and valleys as we manage credit, moving them to watch list or MPAs, but our historical track record has shown limited migration to loss. Moving to capital, we saw improvement in our already strong ratios, with total capital of 14.17% compared to 13.84% in the second quarter. While we returned additional capital to shareholders through the increased dividend payment announced in July, our top priority for the use of capital remains supporting strong organic growth. And as market conditions allow, we'll continue to look for opportunities to augment that growth with strategic acquisitions. Along these lines, we recently announced a single-branch acquisition with approximately $250 million in deposits in the Kansas City Market. Finally, we recently announced the formal launch of our Family Wealth offering. This is a registered investment advisor which focuses on providing entrepreneurial investment strategies, sophisticated tax planning, and generational wealth guidance to families with significant wealth. We were already providing many of these services within private wealth management, and we decided it was time to formalize the offering, including hiring and developing a dedicated team of investment professionals. Additionally, UMB Capital Corporation, which holds our SBIC, will be part of our Family Wealth offering, and will focus on investment opportunities, private equity, direct investments, and other alternatives for our clients. To wrap it up, we continue to see positive momentum across the company, and I'm pleased with our third quarter performance. I'm excited about the opportunities we see as we head into the fourth quarter and beyond into 2022. Now I'll turn it over to Ram for a few comments.

Thank you, Mariner. Net interest income of $209.8 million represented an increase of 4.3% from the second quarter. We amortized $8.8 million of PPP origination fees into income, and the overall PPP contribution to the third quarter net interest income was $10.1 million compared to $12.4 million last quarter. At quarter end, our PPP balances stood at $318 million, down from $766 million at June 30. Approximately $9.3 million in unamortized fees remain at the end of the third quarter. Average earning asset yields decreased five basis points to 2.65% due to a three basis point decline in security yields and asset mix changes, including increased liquidity and a $659 million decline in average PPP balances. Our Fed account, reverse repo, and cash balances now comprise 16% of average earning assets compared to 14% last quarter with a yield of 30 basis points. This increased liquidity, along with core loan re-pricing pressure and mix changes, drove the decline in net interest margin. We continue to deploy a portion of excess liquidity as well as cash flows from our securities book back into our AFS portfolio, driving an increase of $643 million in average balances from the prior quarter and nearly $2 billion compared to the third quarter of 2020. Looking ahead, our internal outlook for any Fed actions is in line with the current consensus for a nearly 2023 increase. We remain modestly asset sensitive with more than 50% of our loan portfolio tied to short-term interest rates and over a third of our deposits in interest-free demand deposits. Actual experience when rates do rise will depend on a number of factors, including the pace and source of liquidity reductions, overall size of our investment portfolio, mix shift within the deposit book, steepness of the yield curve to include the 10-year treasury yields, and the number of rate increases, as pertinent to our $1 billion in pay fixed, receive float swap portfolio. As we've noted in our investment thesis, we believe that our ability to grow our loan portfolio through market share gains, potential to redeploy our over $4 billion in excess liquidity, coupled with opportunities to rotate within our earning asset base will also add to net interest income outperformance relative to our peers. Additionally, a few of our fee income businesses benefit from higher interest rates, such as 12b-1 money market fees in our corporate trust business. The portfolio composition and activity trends are shown on Slide 29, and during the quarter, we had cash flows of $375 million at a yield of 1.98%. We purchased $1.1 billion of securities that yielded 1.28%. Non-interest income for the third quarter was $107.9 million, down $23.7 million from the last quarter, driven largely by market-related adjustments. The market value of our investment in Tattooed Chef, TTCF, resulted in a $3.5 million unrealized loss in the third quarter compared to a $7.2 million write-up in the second quarter. Additionally, as noted last quarter, our second-quarter fees had included over $5 million in investment gains from liquidity events on portfolio companies held at UMB Capital Corporation. Other drivers of fee income for the quarter are shown on Slide 22. Non-interest expense trends are shown on Slide 23. Expenses increased $7.5 million or 3.7% from the second quarter to $208.9 million driven by larger performance-related incentive expenses and $2.7 million in operational losses. Our effective tax rate for both the third quarter and year-to-date was 17%. For the full year 2021, we anticipate it will be approximately 16% to 18%. Our tangible book value per share has increased nearly 10% during the past 12 months to $60.44 at September 30. That concludes our prepared remarks and I'll now turn it back over to the operator to begin the Q&A portion of the call.

I'll begin the question-and-answer session. First question comes from Jared Shaw, Wells Fargo Securities. Please go ahead.

Hey, good morning, everybody.

Good morning, Jared.

I guess maybe first with the loan growth and outlook, good growth on an average basis, quarter over quarter. I see the slide with the pay down payoff activity. How should we be thinking about loan growth going into the end of the year? Should we - can we expect to see average growth from the third quarter with the impact of PPP rolling off? Or how should we think about those strong pipelines versus some structural headwinds there?

Well, I think the news - this is Mariner. Good morning, Jared. I think the news is similar to what we've already talked about, which is our top line growth. We expect to continue to be strong. Payoff and pay down activity against that is unknown. This last quarter was, I think, representative of a build-up from the Coronavirus from last year where we got low cap rates and low interest rates. There’s some sales activity taking place within our - largely our CRE book. But otherwise, top line growth continues to look strong. Obviously, ex-PPP, we continued the same trends, as we always do with our loan growth.

Okay, and then you'd mentioned some strength with PE firm customers. Are you doing capital call lending with them? Or what's the type of lending relationship that's driving?

Well, we do some lending into our fund services clients, but that's not really what we're referencing; we're really talking more about M&A-driven PE lending. As companies in our portfolio or through relationships with PE firms get bought or sold, we're participating in that acquisition debt.

Okay, great. And then looking at loan yields, do you think that overall, we've sort of hit a bottom here, assuming a stable, similar rate environment? Or could there be maybe a little more incremental squeeze on loan yields?

Things remain very competitive, as they always do. I don't know, Tom, if you want to add? We're near the bottom, I suppose.

Yeah. No, I would agree with that. It's still a very aggressive environment. I don't expect that part of it to change. If rates stabilize, we may be near the bottom, but it's still always a competitive environment.

Probably not a lot of downward pressure, but certainly remains competitive.

Okay, thanks. And then just final for me, any color you can give on that increase in CNA appeal whether it's detail on the sector, and then I guess what gives you confidence that the last content could be lower than that?

So it is, as we mentioned in the call, it is one credit. What I will tell you is, which has been true for some time. I've been in credit leadership at UMB for 25 years, as have the two other gentlemen on the call with me today, Jim Rine and Tom Terry. What has always been true about the way we manage credits is we're quick to take action, quick to recognize trouble, and quick to manage credits. Our history is very strong in not seeing material migration from troubled credits to loss, and we don't expect that to be any different on a go-forward basis as there are peaks and valleys from time to time. Typically, very few credits, so they're not really trends in any one—it’s never a trend in an industry; it's usually a particular credit or two.

Okay, is that in this quarter?

We would expect full-year charge-offs to remain within our typical averages of 25 to 30 basis points.

Okay, and was that growth in the factoring unit?

No, it is not from factoring.

Okay, great. Thank you.

It'll be in our core portfolio.

Thank you. Next question comes from Nathan Race, Piper Sandler. Please go ahead.

Yeah. Hi everyone, good morning.

Good morning, Nathan.

So a few questions on the income growth outlook. It looks like the funds services unit is continuing to post pretty impressive growth over the last several quarters here, and I appreciate the additional breakouts on Slide 22 along those lines. Just curious, as you guys maybe look out over the next several quarters, total fee income growth has been kind of low to mid-single digit range over the last couple of years. Is that still a reasonable expectation to think about for 2022? Where do you see a lot of that growth coming from across the overall composition of the year?

Hey, this is Jim Rine. We have had great growth in the fund services area, and half of that is coming from new clients. We won't really provide forward guidance on what we see for fee income. I can tell you though, through our institutional business, our public finance area is up, and we anticipate additional strong growth there through the rest of the year; they're already having a record year. Corporate trust is up 61% over 2020. We've continued to expand and add additional associates in that area. We've made additional investments in our healthcare services area to expand our direct employer network to where we're expecting additional growth in the future there. Keep in mind, and through our fund services, as well as some of the other businesses, we are absent 12b-1 fees due to the rate environment. If you go back to pre-2020, we had roughly $30 million in 12b-1 fees on a run rate. So again, not providing guidance. But as rates do tick up, we would see additional fee income from that category as well.

The drivers—the backdrop for all of our businesses continue to be strong. There's a lot of disruption among our competitors in the fund services business. We've been benefiting handsomely from that disruption. We're a strong player in the PE space, so alternatives have been very strong. In this low-interest-rate environment, alternatives have been a very strong asset class. There's a lot of growth there in both formation and asset growth within our customer base. And then infrastructure and rates are headed up. The anticipation of an infrastructure bill is speeding up activity in the public and corporate trust space. Our aviation business is also starting to see some positive outlook as travel has recovered. So a lot of good drivers as we look forward. Also, our mortgage business is, as we've talked about in the past, we have a lot of runway across all of our business lines, and that's true for mortgage for us too, even if the re-fi business slows down. Our business is so nascent that we have substantial opportunity just within our customer base to participate in the purchase volume. We see some legs for our mortgage business on a relative basis, even if rates rise and the re-fi business slows down along with our card business, which is significant for a company our size. We're starting to see nice momentum and card spend driving interchange revenue for us.

Got it, that's very helpful color. Maybe just changing gears and thinking about the trajectory of the reserve over the next several quarters. You guys are back below pre-pandemic relative reserve levels as we sit here today ex PPP. How are you kind of thinking about the need to provide for additional growth going forward within the context of the charge-off outlook remaining in that 25 to 35 basis point range going forward?

Ram, you want to take that?

Yeah, I mean, we're still not at pre-pandemic levels. On day one, our CECL number was 85 basis points coverage. If you look at where we are today, we're close to 120, right? So there's still some macro environment. As the Moody's forecast gets better, there's going to be pressure on the allowance coverage ratio to go down further from where we are. But a lot of our provision typically happens because of the outsized loan growth that we have. Our relative recapture of the reserve might be slower than peers because we continue to grow our balance sheet on the loan side, and that will be a good differentiating factor, if you will.

Got it, makes sense. One last one for me, any additional color on the operational loss and the other expense line item here in the third quarter? I assume that doesn't recur going forward, but I would appreciate any additional color on the driver there.

Yeah, that's something that—I think you see this on other income statements that bounces around a little bit. It's not regulatory or anything like that; it's just typical business operating-type losses that we will bump into from one quarter to the next based on our business activities and breadth and depth.

Got it, I appreciate the color. I will step back. Thank you, guys.

Thank you. Next question comes from Chris McGratty, KBW. Please go ahead.

Hey, good morning.

Hey, Chris. Good morning.

Ram or Mariner, the deposit growth has been just off the charts. I'm interested in kind of an outlook for deposit flows, particularly non-interest bearing. How much do you think is sustainable versus a little bit transitory? Those numbers are pretty strong.

It's a great question. When you get the answer, will you give us a call? No, we've benefited—one of the reasons ours is outsized is a mix of business, right? We have a large commercial and institutional business. The growth of our asset servicing business, the growth of our new aviation trust business, the coming back of our regular corporate trust business—these kind of comments around corporate trust and public finance, business picking up in a rising rate environment—all contribute to the growth in our business lines, and those would be the non-transitory part of the increased levels of liquidity on our balance sheet. The question, the million-dollar question for everybody is, is it $4.5 million in excess transitory liquidity or something less? We believe that it's less than that because of the growth in our business lines and the complexity of our balance sheet and income statement. Certainly, there's some experts clearly on the balance sheet. But we have internal debate ourselves really about how much there is.

Okay. Yeah, it's a guess, but I appreciate the color. My follow up would be on expenses. I've heard from many of your peers this quarter, just inflationary wage pressures to run the business. I'm interested in how you're thinking about retention in the cost to retain and also recruit. Thanks.

Another great question, right? As we're all sort of feeling our way through this. The pressures of work from home and the regions from the coasts create a competitive landscape for employment. I think it's early to understand some of the longer-term implications of coming out of COVID and the more permanent implications of the way we've been working over the last couple of years. I would say that we've seen some wage inflation, and we do not believe that is transitory; you can't unring that bell. From a competitive landscape, we have a great culture, and we are not losing people. Our voluntary turnover rate and turnover rates in general are not much different than they were prior to the period we've gone through. So we've been watching that closely. We don't feel like there are any signs on the turnover side where we've been able to maintain and hold the people that we have. Competitively, on the hiring side, that's the biggest challenge because everybody's looking and in need. Again, we feel pretty good about the culture and the strength of consistency of our company as we look to hiring.

Yeah, Chris, Jim Rine. The one thing we've also been dealing with, I think most of our peers are dealing with, is just getting our mix of flexibility correctly. I think that's what associates are really looking for in the workplace right now. That's something that we're addressing and being very thoughtful about, along with the wage inflation. It's just what the new work environment looks like.

Yeah. We want to be a thoughtful leader in that space, so we're not going to dig our heels in. We're going to make some real changes and adapt.

Okay, and then—the last one would be Ram on the Triple P. Can you remind us the fees that were in the quarter, and then what's left?

Yeah, so it was $10 million in the quarter, Chris, that includes both the origination fee of interest income. We still have $9 million of fees left on the PPP program on balances about $320 million at quarter-end.

Great, thanks.

Next question comes from David Long, Raymond James. Please go ahead.

Good morning, everyone.

Hey, good morning, David.

Can you talk about where the utilization rate was here at the quarter-end and how you expect that to change anytime soon?

So it was 32 at the end of the quarter. It ranges from 29 to 35. The average for us is typically low in the 30s. In an environment with a lot of liquidity in the system, my take for the industry is that liquidity gets spent first before we would see something on the higher end of our range.

Got you. Okay. And then looking at the average balances in loans, pretty good growth there in the quarter, but the period end didn't show the same. Was there some accelerated payoffs or pay downs near the end of the quarter?

Yeah, this is Tom Terry. As Mariner mentioned earlier in his comments, we're seeing a greater amount of payoffs in our commercial real estate book, principally due to low cap rates. Low rate environments are either being refinanced in the non-recourse market, or there are a lot of outright sales of commercial real estate properties. We're seeing a greater amount of that this year, and certainly in the third quarter than we've seen historically.

But that point-in-time question, though, that's just a - that's literally just a point in time—the growth—I’d pay more attention to the averages and not the point in time.

And Dave, 20, 25 has the roll-off and roll-on, and you can see those numbers in there. As a percentage of loans, as Mariner and Tom both alluded to, it was a little elevated at 5.9% of total loans.

Got it. Okay. That's all I had. Thanks, guys.

I might add that it wasn't asked, but it's something we're pretty proud of. We're going to have a new tear sheet coming out in a week or so on our community development and our ESG efforts. We spend a lot of time on this and we're excited about the things we're doing. As a matter of fact, I'd say ESG is a new term for some things that we as a company have always really cared about. We're pretty excited about that. So keep an eye out. You can go to our website, see our community development statement, and within a week or so, you'll see our new tear sheet where we're making sure we're getting recognized for a lot of things we're doing by detailing them in the statement. We're rolling out a down payment assistance program in December to reach into LMI neighborhoods and help lift people up and increase homeownership. In our fourth-quarter expenses, we think that if things continue the way they have for us this year into the fourth quarter, we're likely to share some of our profits with our communities, as we have been doing. We're real proud of what our team is doing and where our company is heading to make a difference in the communities we're serving. We'd love for you all as investors to take a look at what we're doing on our website, and keep an eye out for those efforts going forward. Thanks for everybody joining today.

It looks like we have no further questions. Thank you, everybody, for joining us. The replay will be on our website shortly. As always, you can contact UMB Investor Relations at 816-860-7106 with any follow-up questions, and we appreciate your interest and time. Thank you.

Thank you. Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.