UMB Financial Corp (UMBF) 2020 Q2 法說會逐字稿

Good day, and welcome to UMB Financial Corp.

Second Quarter 2020 Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Kay Gregory.

Please go ahead.

Good morning, and welcome to our second 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 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 to everyone for joining us today.

I hope you and your families are safe and healthy.

As we all navigate our way through not only a global pandemic but an increasingly polarized and highly politicized environment, we have been engaging our associates, customers and communities through proactive outreach and dialogue.

Inclusion and diversity have always been core principles for UMB.

However, like many others, we've taken more action in this time of heightened sensitivity.

We offer a variety of resource groups for our associates, and they are hosting ongoing conversations to educate and dispel stereotypes as well as foster inclusion.

On Page 5 of the slides, we've included a few comments on our inclusion and diversity efforts, along with some key topics.

I encourage you to read our recent corporate citizenship update by using the link shown there.

During the quarter, we have continued to serve our customers fully, while most of our workforce remains off-site.

We've begun seeing customers in our branches by appointment only and continue our drive-through operations at most locations.

Our sales teams have had success with virtual calling efforts, meetings with clients via video in some instances, and I'm extremely proud and impressed with how our associates continue to adapt and perform.

We're taking a measured approach in our return to the workplace, bringing back a small percentage of our employees on a phased-in basis and including enhanced safety protocols.

While I'd like to see more of our team back in the office, health and safety will take a priority.

Last quarter, I shared my thoughts on the economic crisis, paired with the unfortunate timing of the implementation of CECL and its likely impact on our industry.

As we continue to see, there is a great deal of subjectivity on how banks apply the methodology, making comparisons of actual risks difficult at best.

So we focus on what we know, and our priorities continue to be: maintaining the high-quality underwriting standards that have served us well over the long term, maintaining solid capital and liquidity levels to carry us through this crisis and doing what's right to support our workforce, customers and communities.

We entered the second half of the year in a position to manage what lies ahead.

We have solid capital levels and a very strong liquidity position with a loan-to-deposit ratio that provides us flexibility.

And most importantly, we have an experienced credit team with a superior track record, particularly in times of crisis.

As it relates to the U.S. economy, we are navigating through the murky waters muddled by global pandemic and deep-rooted social issues, where every issue is further politicized, particularly in an election year.

For these reasons, the overall economy continues to be fragile, and these uncertainties will likely persist into the next year.

However, within our markets and among our borrowers, we haven't seen any significant signs of deterioration to date.

Now I'll turn to our second quarter results, which highlighted the balance sheet strength I mentioned, along with the quality of our underwriting practices, as evidenced by our 15 basis points of net charge-offs.

30 days into the quarter, we continue to hear that our customers generally remain prepared to weather the current economic headwinds.

We posted net income of $60.5 million or $1.26 per share on a GAAP basis and $63.8 million or $1.33 per share on an operating basis.

Pretax, pre-provision income of $90.2 million represents a 7.6% increase over the linked quarter and a 15% increase compared to the second quarter of 2019.

Total fee income was strong at $120.5 million.

While this included some market-related adjustments, including COLI valuations, we saw positive results in investment banking, as higher trading volumes, particularly in municipals and MBS, drove the linked-quarter increase of $6.2 million, which you can find in our trading and investment banking line.

Similar to trends across the industry, we've seen reductions in 12b-1 fees in our brokerage business as well as reduced credit and debit card spend across most categories.

Net interest income increased 2.5% from first quarter, driven by lower deposit and borrowing costs, along with strong loan volume, which included $1.5 billion in PPP loans.

New loan production outside of PPP remained strong at $706 million.

And payoffs and paydowns were slightly lower than historical averages at 3.2% of balances, excluding PPP.

Organic growth was partly negated by the normalization of commercial line utilization, which was 31% at June 30, following a spike to 39% in the first quarter from the initial impact of COVID.

In addition, some active deals we had in the pipeline at the end of the first quarter were pushed out a bit as customers paused to understand the implications of the crisis.

Looking ahead into the third quarter, we continue to see robust activity.

Average loan balances, excluding PPP, increased 8.2% on a linked-quarter basis annualized, driven by commercial and consumer real estate as C&I balances were impacted by the normalization of line utilization.

Mortgage prequalification applications hit record highs during the quarter, helping to drive an 8.1% quarterly increase in consumer real estate.

The composition of our loan portfolio, which remains diverse and well-balanced across several product lines, geographies and industries is shown on Slide 18 in the balance sheet section of the presentation, followed by loan activity during the quarter and breakdowns of our commercial portfolios by asset class.

On Slide 22, we've updated our exposure to sensitive industries that we shared in April.

We removed transportation after reviewing its performance.

That group is largely comprised of freight and warehouse relationships with top industry companies.

And we've had little exposure to travel-related businesses.

We've added senior living CRE to the list based on the potential strain on occupancy levels and operating expenses related to the COVID restrictions and increased pandemic-related costs.

This category represents 2.1% of our loan portfolio or just 1.6% when risk adjusted.

As we did last quarter, we again looked at each category for specific characteristics or specific credits that we feel comfortable with as well as those which may carry more risk if the crisis is prolonged.

After an in-depth analysis, the portion we view as potentially being more impacted represents about 10% of total loans, excluding PPP balances.

Of course, this isn't an indication that we expect losses in this portfolio.

But we continue to keep a close eye on the conditions as they evolve.

We've included some details and considerations in each category on the slide.

Details on the $1.5 billion in PPP loans we booked during the quarter are shown on Slide 23.

The median size was $56,000.

And as you can see, they're broadly diversified among industries.

Now looking at asset quality and provision.

You'll see on Slide 27, the second quarter provision under CECL was $21.5 million, which represents 3.9x net charge-offs of $5.5 million.

As we noted previously, our substantial provision and reserve build in the first quarter was prudent and conservative.

The additional reserve build in the second quarter brings our total allowance for loan losses to $200.3 million as of June 30, with an allowance to loan coverage of 1.3%.

Excluding PPP loans, that coverage is 1.45% or nearly 2x what it was at year-end 2019, prior to the adoption of CECL.

Total reserves to nonperforming assets is now 2.3x compared to the peer median of 1.6x based on those who have reported to date.

Net charge-offs to average loans for the quarter of just 15 basis points is better than our long-term historical performance, and NPLs improved from the first quarter to 0.54% of loans.

UMB has always had a reputation for being responsive, consistent and prudent as it relates to credit, and we have a good long-term track record for keeping rank credits from moving to loss based on our relationships with our clients.

While this unpredictable environment is a new territory for all of us, we'll keep our focus on risk management and believe that our credit quality will remain one of the key differentiators, especially during periods of stress.

This quarter, we've added a more granular look at loans by type in the loan risk table on Slide 29.

This data shows the quality inherent in our portfolio.

We're continuing to provide flexibility for our clients through modifications, and you'll see those totals in the table as well.

Based on initial requests, we approved approximately $2.1 billion in modifications.

However, many of those were ultimately not accepted as customers determined they weren't fully necessary.

This speaks to the general strength of our customer base.

At June 30, we had loan modifications of $1.3 billion on our books, representing 9.6% of the portfolio, excluding PPP balances.

This includes our proactive offer of 6-month deferrals to our practice solutions clients, largely dental offices in our business banking group.

Our teams are in regular contact with our clients and have ongoing dialogue.

Anecdotally, conversations with our CRE customers indicate that a good portion will begin making payments at the end of the deferral period.

As we indicated last quarter, a significant number of our borrowers within the sensitive industries have strong balance sheets and sponsors.

Well ahead of the pandemic, we have begun the reinvigoration of our retail business, including online banking upgrades, online account openings and our new teller platform.

We onboarded the second wave of our existing online banking users just days after we moved our branch operations to drive-through only in mid-March.

Usage has increased, although the timing makes it difficult to fully gauge the drivers of the uptake among our customers.

The average number of daily online banking users increased by 12% during the second quarter, and the number of users enrolled in our personal finance tool in the new platform increased 42% from March to June.

Mobile deposit capture has increased 44% since customer access to branches was limited.

And finally, since our online account opening capabilities fully launched in May, about 17% of our new DDA accounts have been opened through the digital channel.

Ultimately, it's clear that a mix of options is important to our customer base, and we'll continue to make sure our network has the appropriate capabilities.

We continually look at staffing and the use of technology as we transform our digital offering, especially in light of the headwinds we're living through.

In closing, I reiterate what I said at the beginning.

We're in a sound position to navigate what lies ahead.

We continue to manage for the long term with a strong capital and liquidity position, a history of prudent risk management and diverse revenue sources to help provide buffers in the interest rate environment we're living in.

Now I'll turn it over to Ram to discuss some of the drivers of our results.

Ram?

Thank you, Mariner.

I'll begin with comments on CECL and the drivers of our allowance for credit losses, which begin on Slide 25.

As we previously discussed, we took a conservative approach to our first quarter modeling considering the volatility and frequent changes in economic expectations we saw at that time.

As Mariner noted, our second quarter provision for credit losses totaled $21.5 million, down from $88 million in the linked quarter.

Approximately half of the provisioning in the second quarter reflected changes in key macroeconomic variables as prescribed in the Moody's baseline economic forecast issued in June as well as consideration for modified loans.

Future provisioning levels will continue to be predicated on loan growth, any changes in our portfolio mix, net charge-offs and forward-looking macroeconomic assumptions that drive our econometric models.

At June 30, nearly 85% of our allowance for credit losses was attributed to our commercial and commercial real estate portfolios.

Now looking at the quarterly results.

Net interest income of $178.2 million represents an increase of $4.3 million from the first quarter, benefiting from a 58 basis points reduction in the cost of interest-bearing liabilities and loan volumes, including PPP loans.

These were offset by the adverse impact of 105 basis point quarter-over-quarter decrease in the 1-month LIBOR rate.

Total earning asset yields fell 57 basis points to 3.01% from the linked quarter, driven by a 73 basis point decline in loan yields.

Net interest spread increased 1 basis point over the first quarter and was down only 5 basis points from the year ago period.

Net interest margin compressed by 18 basis points from the first quarter.

Drivers of the change included a 34 basis point reduction from loan yields, which included a negative 3 basis points to margin from PPP loans and positive 2 basis points from the synthetic floor we have in place, a 19 basis point reduction from excess liquidity and the reduced benefit of free funds, negative 2 basis points from lower reinvestment rates and market changes in the AFS portfolio, partially offset by a positive 38 basis points impact from lower interest-bearing liability costs, including a 53 basis points reduction in the cost of interest-bearing deposits to 0.3%.

As stated, fee income was $120.5 million for the quarter and reflected continued impacts from the volatile markets, including a valuation adjustment in company-owned life insurance income, which resulted in a $24.8 million swing from the last quarter, which is included in the other income line.

This increase is offset by a similar increase in deferred compensation expense.

As Mariner mentioned, increased muni and MBS volumes drove solid increases in our investment banking income, supplemented by market valuation benefits from our trading portfolio.

Offsets included a $4.1 million reduction of brokerage fees and a $3.6 million reduction in bank card income.

We've been watching as peers have reported results, and it's clear that the pandemic has dramatically impacted credit and debit card spending patterns.

Our card purchase volume stats are on Slide 9.

On a year-over-year basis, we saw a 17% decline in total card volumes, driven largely by reduced health care spending as people have delayed some routine medical and dental care as well as decreases in travel, gasoline, restaurants and entertainment spending.

On the commercial front, corporate travel and entertainment have been curtailed and municipalities, which make up a good portion of our card business, have seen declines related to school closings and reduction in other usual activities.

Expenses for the quarter increased 10.6% or $19.9 million compared to the first quarter, driven by a $24.6 million increase in deferred compensation expense, the offset to the increased COLI income I mentioned.

In the salaries and benefits line, this increase was partially offset by lower payroll taxes and profit sharing and 401(k) expense.

Marketing expense decreased $1.4 million compared to the first quarter from the decline in travel and business development activities due to the pandemic.

Additionally, we recorded $4 million in nonrecurring costs tied to our COVID-19 response.

For the full year 2020, we anticipate the tax rate will be approximately 12% to 14%.

Moving back to the balance sheet.

Average deposits increased 9.4% on a linked-quarter basis and free funds now comprise nearly 34% of total deposits.

We estimate that about $560 million of demand deposit balances at June 30 were related to PPP funds disbursed to our customers.

We continue to maintain strong regulatory capital ratios with a CET1 ratio of 11.92% based on the adoption of interagency guidance for regulatory capital transition, and tangible common equity to assets of 8.7%.

Our tangible book value per share increased to $53.57 at the end of the quarter, up 15% from a year ago.

For comparison, our peers that have reported so far have shown an increase of 6.6%.

Regulatory capital ratios are shown on Slide 13.

That concludes our prepared remarks, and I'll turn it now back over to the operator to begin the Q&A portion of the call.

(Operator Instructions) Our first question comes from Gordon McGuire from Stephens.

I wanted to start on the balance sheet size.

Even excluding the PPP deposits, deposits grew $2.7 billion quarter-over-quarter.

I'm curious what trends you're seeing so far in July in terms of deposit balances.

And how much is that -- of that you'd expect to be fairly sticky or whether you're seeing any kind of outflows?

This is Mariner.

We don't obviously give guidance, but I would say that the environment that we're in doesn't look to be over anytime soon, and liquidity build seems to be a part of the environment we're living in.

So we don't expect liquidity drawdowns anytime soon.

We have a very, very diverse book of deposits.

And I would say during the last crisis, when we had a safety and soundness liquidity build, it stuck around largely, and we continue to build our balance sheet.

It's too early, I would say, to determine what's going to happen.

But if history is an indicator, we've largely picked up market share rather than just temporary liquidity.

There'll be a combination, but I think it's too early really to tell.

But the first part of your question is, what are we seeing, and I would just say that we're still in the environment and people are still building liquidity.

Okay.

And I think the last quarter, you had suggested that you would try to put more of the cash on hand into the securities portfolio.

Is that still consistent looking forward from here?

Well, I mean, obviously, we want to rotate -- strategically, we'd like to rotate more of that into loans.

And so it's just a matter of what we're seeing with demand.

In the absence of loan demand, we'll be rotating that liquidity into securities.

And just on deposit costs, repricing was pretty strong this quarter, Ram, I'm curious if you had an estimate to what kind of floor you could expect for costs or how much more room you have to go on that front.

Go ahead, Ram.

Yes.

So I mean, we're at 30 basis points for the second quarter.

In the month of June, we're about 28, right?

So if you look at the last time, we were at 0 to 25 basis points on the short end of the curve, our deposit cost bottomed out at around 18 basis points or so.

Of course, that's 3, 4 years ago, and there's been some slight shifts in our deposit mix.

So there's still some room probably on the downside for deposit pricing based on some of the aggressive actions we're taking, but it's going to be marginal relative to the 53 basis points drop you saw in deposit cost this past quarter.

Got it.

And then last thing for me, if I look at the sensitive industry update and compare each portfolio to what was listed last quarter, it looks like the potentially more impacted subset increased on a dollar basis and percent basis, I think, particularly in multifamily, but also some of the other categories.

I'm curious what drove that?

Whether it's migration from less concern 3 months ago to more concern now?

And if so, what trends or characteristics would have warranted more concern?

I'll take the high level, and then Ram can see if I don't pick up the whole answer for you.

I mean, first of all, the portfolio is slightly smaller, right?

So you have a percentage change related to the size of the balance sheet.

So that's a part of it.

And then the other one was really just a shift.

As we spoke, we took transportation out and put in senior housing.

So that's the overall change really there.

I would say, if you -- in my estimation, if you take the balance sheet size component of that, it's really a margin of error kind of concept.

It's pretty much the same size.

I would describe it as unmoved.

Ram, I don't know if you want to…

No, that's exactly it.

No, that's exactly it.

As you see in our footnote on Slide 22, right, so we took away transportation as an at-risk category and then instead this time around, because of occupancy trends and what's about -- what you see in the headlines about senior living, we added that.

And that differential is just about 100 basis points.

So that's why you see it marginally tick up.

Yes.

I just want to -- I also want to echo that sort of our view of this concept is a little bit different than it's being interpreted.

We don't think that this group as identified means we see loss in it.

It's just -- it's a group of categories that we're watching more closely.

It doesn't indicate loss.

So that's also something I'd add to the description.

Okay.

And I appreciate the switch from transportation to senior living, but I guess I was looking at multifamily went from $361 million, potentially more impacted in dollar balances to $463 million.

I was curious if there was any increased concern out of some of these portfolios.

Tom, do you want to take that?

It's really a minor shift.

Yes.

This is Tom Terry.

Some of that is just the growth in construction loans.

We still have construction loans that are advancing.

So you are seeing an increase in balances.

There is not -- there has not been a shift in identification of, "Oh, we have more that we're worried about." I think it's just the natural growth that we're seeing mainly in our construction loans.

Our next question comes from Chris McGratty of KBW.

Great.

Mariner, in your prepared remarks, I think you characterized that the outlook for loan growth or loan demand as robust, which is a little bit more optimistic than some of your peers.

I'm interested in what you're seeing in your markets that leads you to that statement?

And any color you could have on loan repricing would be great.

Yes, sure.

So on loan growth, first of all, even in second quarter, where you see a small decrease that, that obviously was mostly due to line utilization coming down.

If you look at gross production, it was actually up.

So even in the second quarter, we saw that the growth side of it come in the way we expected it to.

It was just negated by utilization rates, which, by the way, we see as an indication of quality that that's a positive sign of quality in the portfolio.

As it relates to growth and looking into the next quarter, as we always do, we give a little bit of a look into the coming quarter.

And part of why we weren't any higher in the second quarter is because of coronavirus.

So there's was a little bit of, I call it, hesitation or slowdown in the ability to close and bring parties together and such.

So some of the second quarter has pushed into the third quarter.

Some of the growth we expected and some of the loans we identified have pushed into the third quarter.

So that would be part of what we see in the third quarter and forward, is that.

And as far as the loan growth itself, what we've always said about our loan growth is it's more about market share gains in underpenetrated markets than it is economic activity.

So when we say we see robust loan growth, it's not an indication of economic activity.

It's more us blocking and tackling and continuing to take market share where we have low market share in large markets.

So that's -- it's more about share gains than it is economic activity.

I appreciate that.

Maybe a follow-up.

The ability to fine-tune at branches has been an emerging theme, I think, with COVID.

You guys have in the past been pretty proactive in terms of managing your branches.

Interested kind of how you're thinking about expenses and expense management in this environment and maybe what you've learned over the last 90 days that could lead to some synergies over time.

Yes.

Well, I mean, I'd start by saying we're in the middle of that.

So what I would say is there is absolutely change coming, right?

And we mentioned in our prepared comments some of the changes related to pickup in activity in all of our different mobile platforms and products.

So we're seeing it.

I would say what once was going to be a 10-year process is now a 2-year process.

I think over the next 2 years will be pretty dramatic on the uptake in digital acceptance of products and interface with the industry, with our customer base.

It's too early to tell exactly what we're going to do with that.

I mean we're deep into it.

We're neck deep in analyzing what it means and how we're going to react and whether it's the size of a branch, what's going to take place in a branch, will we do appointment-only in the branch side and do transactions in the drive up.

All these questions that are in process, but be assured it will change.

It will become more efficient, absolutely.

Great.

That's great.

And maybe the last one for Ram.

Can you help us with the PPP outlook, the amount of fees that are to come in and maybe the timing of how you're modeling it?

Yes, that remains to be seen, right, Chris.

So what we are modeling is very consistent with what others have said, somewhere between 60% and 80% paying off in the fourth and first quarters.

That's probably the earliest that we expect a big drudge of these forgiveness things to happen.

So probably I would say, it's distributed evenly between the fourth and the first quarters.

I would start with 60% to 80% range.

And then the amount of the fees that were -- that are yet to be realized, do you have that number?

Yes, it's -- yes, it's about 2 40-ish based on the median that we disclosed.

Our median size on the PPP is about $56,000.

For modeling purposes, we are using about 2.4% on these balances.

Our next question comes from Nathan Race of Piper Jaffray.

I want to just touch on the loan modifications, as disclosed in the slide deck.

Just curious, as you guys are talking to clients at this point, how much of those 10% of loans that are deferred currently are expected to need a second deferral going forward?

Tom, you want to take that?

Yes.

At this point, we feel like the volume of requests for a second deferral so far has been very low.

In our commercial real estate book, it's been roughly 35% of those on deferral who have requested a second deferral.

In the C&I portfolio, it's been less than that.

Certainly, all of that is subject to the pausing of the economy and kind of what lays ahead over the next several weeks and months.

So that could change.

But right now, we're hearing very positive commentary from our customers, and the level of request has really slowed.

And also while we have that, because I just want to make sure that you know the note, so from first quarter when we talked about percentage of deferrals, those were approved, and what was accepted at this point is substantially less.

Is that $1.3 billion, Tom, versus $2.5 billion?

$2.1 billion was approved, and ultimately, $1.3 billion is what got booked.

So we had a lot of clients that were approved for a modification that ultimately said, "I don't need it," and kept on paying for the contract.

Yes.

So the second number that we're announcing today is more important than the first number because the first number is just what we approved at the end of the last quarter.

Understood.

Got it.

And then just thinking about the provision in the quarter, I appreciate the details on the slide deck along those lines.

I guess, the qualitative effect on the provision score is a little below what we saw from some others so far in the quarter.

And it looks like you guys used a third-party input from early June.

So just -- and I think that input includes no second wave of COVID going forward, which I think varies by state at this point.

So I'm just curious if we had a more kind of current economic input into the provision and CECL model, how that would have impacted your provision in the quarter and kind of how you guys are thinking about provisioning at least into the third quarter as well at this point?

I'll take the high level there.

And Ram, you can get into any modeling questions that we want to get into there.

But I first -- I'm going to get on my soapbox here for just a quick second.

CECL, if you all are trying to look for actual performance or relative try to look through the fog to figure out what credit risks actually exist in the banks, I'm not a believer in CECL as it relates to what it actually tells us.

We're complying with CECL because it's an accounting convention we need to comply with.

But it means nothing to me as it relates to how I feel about the quality of my loan.

And what you -- what we pay attention to is what is happening to our NPLs, what's happening to our charge-offs, what's happening to our past dues, what's happening to utilization rates.

And those are the things that you can actually look at across all banks to level the information.

CECL is a joke because the way every bank does it is different.

So it's a stupid way to analyze what the problems are in a bank's portfolio.

So that's how I feel about that.

So for me, what you should look at is what is our NPL coverage to allowance.

For us, it's 2.3x against our peer group at 1.6x, which helps to understand why we're at 1.45 on coverage, with the provision versus the peer group being a median at 1 65.

They're all -- they're covering their NPLs at 1.6.

We're covering our NPLs at 2.3x.

So that -- those are the kinds of things I think are more important to focus on.

And what's happening to your charge-off rate, what's happening to your utilization rates, ours are down significantly, which means our -- the performance of our C&I book is actually stronger than it was.

And then your past dues, what's happening in your past dues.

Those are current period forecasting outlook things to look at that are real and tangible versus trying to forecast the impact of COVID on unemployment and the impact, the short-term impact of 10% and 20% unemployment that happens overnight on a short-term basis because of a disease or a virus and what that impact is going to be on the economy 9 quarters from now.

It's an obscene and absurd way to think about credit quality.

So that's how I think about that.

But so stepping back into it, we're using Moody's, and we're using BBB corporate spreads.

And the data that we deployed is right in line with Moody's and right in line with BBB corporate spreads, and that's the information that was spit out, gave you the macro piece of our provision for the quarter, which is, I think, about, what, $9 million for the quarter on the macro side, Ram, from our total provision of $21 million?

$8 million, yes.

$8.1 million.

Yes.

If you look at Page 27 in the slide deck, it's $8.1 million.

And that's all spit out from the model and using our data that we would update it the model -- using our data for our portfolio to update those macro effects to do the qualitative side.

So anyway that's my take.

You didn't ask for all that, but I'm kind of frustrated by having to be compared to other banks, COVID, macroeconomic nonsense that's all over the board.

And it's just silly because it doesn't have anything to do with anything.

So that's my take on it.

Our next question comes from Jared Shaw of Wells Fargo.

This is actually Timur Braziler filling in for Jared.

I appreciate all the color on CECL.

That's certainly helpful.

But maybe switching over to the commercial loan book.

Have those utilization rates stabilized?

And in your commentary for robust loan growth in the third quarter, is any of that coming from the commercial base?

Can you ask that again?

So looking at the utilization rates in the commercial book, have those started to stabilize at the 31%?

And then as you look at the robust loan growth commentary for the third quarter, is any of that being driven by the commercial book?

So the utilization rate is -- it's hard to tell what it will be on a prospective basis because that will be based on things that will have to unfold.

But this would be more in line with our historic utilization rates, where we are now.

So that's -- it's sort of in line with a backward-looking utilization rate.

As far as what it -- how it will play into loan growth in the next quarter, given the fact that it's kind of stabilized at historic levels, it's less likely to be a drag but probably not going to play much in the way of what kind of growth we have.

Okay.

Understood.

And then one more for me.

Looking at the deferrals, can we have the breakout of those deferred for 90 days versus 6 months?

You've got that -- I guess, Tom, we have that.

Is that on the slide there?

Yes.

So on page -- Slide 29, the business banking category, those were all done on 6-month deferrals.

The vast majority of everything else was done on a 90-day interest-only basis.

Okay.

And so I guess for the business banking clients as the deferral period has gone on, how much visibility are you getting into that subsegment?

Is there enough that gives you kind of cautious optimism coming out of this?

Or is this going to be more of a situation that until that deferral period ends, it's going to be really hard to gauge what the outcome is?

Go ahead, Tom.

Yes, the majority of that business banking segment are practice finance loans largely to dentists.

And so you can really track quite clearly with when the dental offices open back up and they're allowed to do more elective-type procedures, which they are today, then we're optimistic that at the end of the deferral period, they should be able to get back to a normal payment structure.

The unknown clearly is if we fall back into a lockdown of some sort, that changes.

But you kind of follow the dentists and for the first 30, and close to 60 days of this, they were shut down entirely, except for emergency-type procedures.

So we're optimistic that as the economy slowly opens back up and the dental practices continue to be able to do the elective-type procedures that they'll be able to come off the deferral at the end of the agreement.

(Operator Instructions) Our next question comes from Chris McGratty of KBW.

Great.

Just wanted to get a little bit more color on the trajectory of service charges.

We've heard from most banks that the elevated cash and liquidity is obviously in lower transactions are just weighing on that.

But interested in kind of that progression over the course of April, May, June.

You got that, Ram?

Or Jim?

This is Jim Rine.

On the service charges, we saw an uptick in first quarter related to a onetime event, but we're seeing primarily the same thing that most are as far as service charges actually on the decline.

But they're consistent with earnings credit, more cash on balance sheet.

So that particular line item certainly is going to see some pressure, but it's not through loss of business or other market actions that are causing that other than increased offset.

So relatively stable at this point with some sort of industry pressure based on just trends, right?

But there's nothing underneath the hood on it.

And maybe just one quick one on the hotel portfolio.

Could you make a comment on occupancy rates in your portfolio and kind of where those need to be for kind of breakeven for some of your borrowers?

Well, I mean, the first answer is it's just under 50%, and we mostly have limited service within the portfolio.

As far as breakeven, I'm not sure that's something -- Tom, is that something we have for Sydney, from Sydney?

Not off top.

We don't.

Yes.

Don't have that.

That's something maybe we can address later.

But it's about 50%, just under 50% occupied in the portfolio.

We feel relatively good.

I mean it's certainly something that we're watching closely.

But again, it's 100% guaranteed portfolio with large liquid sponsors, and it's the limited service hotels.

So I don't have all the other loaded expenses to deal with, et cetera.

The limited service tend to outperform -- are tending to outperform the other categories.

And again, feeling pretty good about where we are there, and we -- maybe we can address in the future quarters, the breakeven.

I'm sure it's obviously different from hotel to hotel.

I appreciate that.

And then just a quick one on the deferral process for hotels, some banks kind of were requiring more equity to get that deferral.

How did the deferral process work specifically for your hotel borrowers?

Yes, I'll take that.

You have to also start out on the basis that the hotel deals that we have done started out at lower loan to cost, lower loan-to-value, generally with strong sponsors.

So we just -- we didn't require across-the-board additional equity.

In some cases, we did.

But as a rule, we just would go ahead and do the deferral.

But again, we're going into these, I think, in a stronger position than perhaps some of our brethren.

Was that what you're asking?

Yes, exactly.

Our next question comes from David Long of Raymond James.

Just wanted to ask about the asset servicing business.

In this volatile backdrop, my sense is that those revenue numbers from that business can move around quite a bit.

You guys have held pretty consistent there.

So just curious on the puts and takes in that business.

And then also, does the environment today lend itself to pick up any market share in that business as well?

Go ahead, Jim.

Yes.

David, that business has been strong for us, partly because we've continued to acquire market share.

We've made investments.

We have 2 strong teams as far as our Utah and Milwaukee.

And so the alternative investment as well as the 40 Act, we've seen stable growth there.

I don't have anything that I'm going to add.

The only thing I would add is that because we are a strong player in the alternative space, the asset values hold up better in the alternative side than they do in the liquid market side as they don't reprice the same way.

So they hold better, the values hold better.

And we have also seen new business.

So a combination of continued new business along with a heavier reliance on Alts with less volatility in the way the assets are priced has been helpful.

And lastly, you asked about market share gains because of the industry.

We have seen the pipeline grow because of the consolidation.

And what we've learned from talking to our teams is that when a consolidation takes place, the pipeline goes into suspense, basically.

And so anything that has been in the pipeline within other larger consolidations basically becomes more live for us.

And so our pipeline has been growing because of the consolidation.

So that's -- those are kind of the 3 combinations.

Along with our custody business has been -- we've hired some people out of some of the big players.

So we're starting to see some strength on just the pure institutional custody side.

Largely, again, the fallout from the consolidation, we picked up several really key people to help just build the custody -- institutional custody side alone.

(Operator Instructions) There are no questions at this time.

This concludes the question-and-answer session.

I would now like to turn the conference back over to Kay Gregory for any closing remarks.

Thank you, and thanks for joining us today for our call.

If you have further questions, you can reach UMB Investor Relations at (816) 860-7106.

Thank you, and have a great day.

The conference has now concluded.

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