使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Greetings ladies and gentlemen, and welcome to the UMB first quarter earnings conference call.
[OPERATOR INSTRUCTIONS]
It is now my pleasure to introduce your host, Miss [Begonia Klum]. Thank you, Miss Klum, you may now begin.
Begonia Klum
Thank you. Good afternoon everyone and thank you for joining us today for our conference call and webcast regarding our 2006 first quarter financial results.
Before we begin, let me remind you that our comments in this conference call contain forward-looking statements within the meaning of section 27A of the Securities Act of 1933, section 21E of the Securities and Exchange Act of 1934, and within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements rely on a number of assumptions concerning future events and are subject to risks and uncertainties which could cause actual results to differ materially from those indicated in our statements made during this call. While management of UMB believes their assumptions are reasonable, UMB cautions that material changes in interest rates, the equity markets, general economic conditions as they relate to the Company's loan and fee-based customers, competition in the financial services industry, and other risks and uncertainties which are detailed in our filings with the Securities and Exchange Commission may cause actual results to differ materially from those discussed in this call. UMB has no duty to update such statements and undertakes no obligation to update or supplement forward-looking statements that become untrue because of new information, future events, or otherwise.
By now we hope most of you on the call or listening to the webcast have had a chance to our review earnings release dated April 25. If not, you will find it in our website at UMB.com. On the call today are Mariner Kemper, Chairman and Chief Executive Officer, Peter deSilva, President and Chief Operating Officer, and Michael Hagedorn, our Chief Financial Officer.
The agenda for today's call is as follows. First, Mariner will highlight our results and strategies. Then Mike will review the details of our first quarter results. Peter will follow with a more detailed review of operating performance against our strategies. Following that, we will be happy to answer your questions. Now, I will turn the call over to Mariner Kemper.
Mariner Kemper - Chairman and CEO
Thank you, Begonia. It's great to be with you again. Thanks for joining us today. As Begonia mentioned, I will be providing a high-level overview of our first quarter results, briefly comment on our execution of key growth strategies, and then turn the call over to Mike and Peter for more color on the quarter. Following a strong performance in 2005, we are continuing to deliver solid growth in 2006.
Reported earnings per share in the first quarter increased 17% to $0.62 per diluted share from $0.53 in the prior year. While we are pleased with these results, we had expected greater margin expansion by this time. Margin improvement was held back primarily by a challenging rate environment that led to a higher increase in the cost of funds then we anticipated.
Our operating performance was driven by continued loan growth and improvement in our fee business. Also, the restructuring of our variable incentive compensation program has further driven greater accountability and improved results across the organization. As always, we continue to maintain our high credit quality underwriting standards while achieving significant growth.
In 2006, we continue to focus on our five key strategies. As a reminder, they are first a focus on yield enhancement in our investment portfolio and growth in our loan portfolio. Second, continued growth in our strong and diverse fee-based businesses. Third, optimizing our branch distribution network, including investing in our retail business. Fourth, strengthening our asset management business, and fifth, a focus on capital management. Let me review how we are performing against each of them.
The first strategy is a focus on yield enhancement. We made progress again in the first quarter by increasing our earning assets. Average loans grew nearly 19% from the same quarter last year as result of several factors, including more aggressive outreach efforts by our sales force, increased share of wallet from existing customers, and gaining share from our competitors. This was the sixth consecutive quarter of loan growth while maintaining our commitment to high quality lending. We also continue to maintain a significant low-cost non-interest-bearing deposit base, which for the quarter represented 34% of average total deposits.
We are well-positioned with our deposit composition as the value of our non-interest-bearing deposits carry a higher contribution in a rising rate environment. We are also improving yield by moderately extending the average life of our investment portfolio over time by maintaining our traditionally strong liquidity position. Our core portfolio's average life went from 21.6 months at the end of the first quarter 2005 to over 31 months at the end of the first quarter of 2006. Given the flat yield curve, our current interest rate risk tolerance, the average life of our core portfolio is not expected to change in a material way going forward.
We've also moderately changed the mix of our investment portfolio from the same period last year, increasing the emphasis on municipal securities, and reducing the weight of treasuries and agencies in the portfolio. At the end of the first quarter 2006 our core portfolio mix was 39% in treasuries and agencies, 25% in municipal securities, 21% in collateralized mortgage obligations and 15% in balloon and other pools.
We were also striving to improve yield through a better earning asset mix. Compared to the same period last year, the average balance of our investment portfolio decreased 234 million or 7.3%, while total average earning assets increased 551 million or 8.7%. The opportunity for yield enhancement will continue with more than 650 million expected to roll off our core portfolio and with 57% of our loan portfolio repricing during the next three quarters.
As you may know, a flat yield curve makes it challenging to increase yield through reinvestment opportunities. The entire industry is facing a significant increase in the cost of funds. In our case, during 2005, interest expense related to interest-bearing liabilities grew 107%. In the first quarter of 2006 we continue to experience a significant increase in interest expense related to interest-bearing liabilities, which grew 26% versus the fourth quarter of 2005 and 110% when compared to the same period last year. This is a reflection of continue upward pressure on interest rates.
Despite these challenges, net interest margin increased 26 basis points compared to the same period last year, primarily due to healthy loan growth and yield enhancement. The reinvestment opportunities from our investment portfolio and margin improvement due to contribution of free funds.
Our second strategy is to continue to grow our strong fee-based businesses, which in the first quarter represented abruptly 53% of our total revenue. Our strong fee-based businesses helped to offset even these lower than an industry average loan and deposit ratios. Excluding one-time gains that contributed to fee income in the first quarter 2005, our fee-based businesses continue to show improvement, primarily from higher trust, securities processing and bank card income. Peter will cover the results for our fee-based businesses.
Our third strategy is to optimize our distribution network including continued investment in our retail business. Growing and rationalizing our distribution is critical to our long-term growth and profitability. Part of this strategy includes reinvigorating our retail franchise by adding customer and core deposits. In the first quarter of 2006 all of our regions experienced growth with a net increase of a proximally 6000 new retail customers. This increase was partly due to our successful Grab a Great Rate deposit campaign during the first quarter in the opening of three branches.
Another part of this strategy is a comprehensive approach to wealth management. In support of that, our brokerage and private banking services were reintroduced in the second half of 2005. After reevaluating our existing customer base we are very encouraged by the size of the opportunity for comprehensive wealth management services.
An additional part of our strategy is to rationalize our distribution, which should lead to a greater financial contribution at the branch level. We continue to review our branch network to ensure that we have the right number of branches to serve the communities in which we operate. During the first quarter of 2006 we opened three branches and closed two, with a total number of branches now standing at 141.
Our fourth strategy is to continue to strengthen our asset management business. Our scale of funds continue to bring in record net flows in the first quarter and we are seeing positive results from the integration of our wealth management and brokerage businesses. Peter will cover in more detail later, but this strategy continues to be an area of strength and success for UMB.
Our fifth strategy is a proactive approach to capital management. We believe the best way to drive this strategy is to use a combination of different approaches, including share repurchases, dividend payments, and acquisitions. To that and, we repurchased more than 100,000 shares at an average price of $67.66 per share during the first quarter. Also, the Board increased the quarterly dividend by 4%, to $0.13 per share on a post-split basis. And as always we continue to evaluate strategic and accretive acquisitions that can improve our competitive advantage in targeted markets.
Finally, shareholders approved an increase in authorized shares from 33 million of common shares to 80 million of common shares. Subsequently, the Board approved a 2-for-1 stock split and approved a 2 million share repurchase authorization post split that will extend into April of next year.
So these five operational strategies continue to serve as our roadmap to drive financial performance and results. With safety and soundness at our core, as always, we are pleased with our revenue growth and expense control stewardship. I will come back with a few concluding remarks, but let's go ahead with a detailed review of our first quarter financial results with Mike Hagedorn. Mike?
Michael Hagedorn - EVP and CFO
Thanks, Mariner, and good afternoon everyone joining us today. As Mariner indicated, we reported diluted EPS of $0.62 for the first quarter, up 17% from $0.53 per share in the prior year's first quarter, primarily due to higher net interest income and lower non-interest expense. Net income increased to 13.2 million or an increase of 14.3% from 11.6 million in the first quarter of 2005.
As we have reported in prior earnings releases, non-interest income in the first quarter of 2005 included net gains of 2.6 million on the sale of branch facilities and other assets and 3.6 million from the sale of employee benefit accounts. Also, non-interest expense in the first quarter of 2005 included a $4.3 million charge due to the implementation of a voluntary separation plan. Excluding adjustments in both years, net gains from sales and closures of banking facilities, gains on the sale of employee benefit accounts, and charges related to the voluntary separation plan, our 2006 first quarter net income would have increased 27.6%. A table reconciling GAAP net income for these items for both quarters can be found in our news release, which is available on our website at UMB.com.
Our effective tax rate was 25.9% in the first quarter of 2006, compared with 27.2% in 2005. The decrease in the tax rate is the result of tax exempt income comprising a higher percentage of net income in 2006 than in 2005. Excluding significant items in both quarters, our 2006 first quarter earnings improvement was driven by several factors, including an 18% increase in net interest income to 52.2 million primarily due to an 18.8% increase in average loan balances and improved yields.
Although net interest spread decreased by 9 basis points as compared to the same period in 2005, net interest margin increased by 26 basis points due to the contribution of non-interest-bearing demand deposits which become more valuable in a rising rate environment. Compared to the same quarter a year ago, loan interest income increased 41.1% to 53.2 million, but a 30.4% increase in securities interest income also contributed to the improvement. The investment portfolio yield increased 116 basis points over the prior year, finishing the period at 4.09%.
Despite the growth in interest expense that Mariner earlier mentioned as our loans and investment portfolio reprice we are seeing a positive impact on our net interest margin.
During the remaining three quarters of 2006, 658 million in core portfolio securities will roll off at an average yield of 3.33%. The scale of yield improvement through reinvestment of this cash flow will depend on the yield curve as well as our investment purchase decisions over the coming months.
Non-interest income decreased 61% to 59.8 million in the first quarter of 2006. This quarter-over-quarter decrease reflects a total of 6.2 million in one-time gains, including the $3.6 million gain from the sale of employee benefit accounts and a $2.6 million gain on the sale of branch facilities and other assets recognized in the prior year first quarter.
The 2006 first quarter results included a 2.2 million or 10.6% increase in trust and securities processing income, and a 1.3 million or 17.4% increase in Bankcard income. These results reflect the continued strong net flows into our Scout mutual funds, increased fee income associated with the servicing of alternative investment customers, and new mutual fund customers converted during the quarter.
Non-interest expense remained relatively flat compared with the same period in 2005. This was primarily due to lower salaries and employee benefit expenses, offset by increases in other expense categories. The average number of full-time equivalent employees was 3436 during the first quarter, a reduction of 143 or 4% compared with the same period last year. The decrease in compensation related expenses was offset by increases in other categories, including occupancy, marketing and business development, processing fees, and Bankcard expenses.
Credit quality ratios in the first quarter of 2006 reflected UMB's strong commitment to high quality lending. Non-performing assets at March 31, 2006 totaled 10.2 million or 0.3% of loans, down from 12.5 million or 0.43% in the same period last year. Net loan charge-offs for the quarter totaled 3.3 million or less than 0.1% of average total loans compared with 2.6 million or 0.09% of average total loans for the prior year's first quarter. The higher rate of net charge-offs in the first quarter reflected one significant commercial charge-off.
Turning to the balance sheet, our solid financial performance for the quarter was driven primarily by loan growth. At the end of March, loan balances were 3.4 billion compared with 2.9 billion a year ago. Average total loans grew 18.8%, driven by 21% increase in commercial and industrial loans. This growth is attributed to a renewed focus on sales throughout the organization, the incentive compensation plans implemented for commercial loan officers last year, increased loan demand, and market share gains.
Compared to the first quarter of 2005, average total deposits grew 7.8% or $399 million.
The first quarter average loan to deposit ratio continued to increase to 61.8% for the current period, from 56.1% last year. Our ratio of average loans as a percent of earning assets also continued to increase. 49.3% for the first quarter, from 45.1% in the same period last year.
Return on average equity and return on average assets increased during the first quarter to 6.42% and 0.7% compared to 5.7% and 0.66% respectively for the first quarter of 2005.
Finally, capital ratios remained strong, with Tier 1 total capital and leverage ratios at 16.19%, 17.04%, and 10.31% respectively.
With that, I'll turn it to Peter for some additional comments on our operating performance.
Peter deSilva - President and COO
Good afternoon, thanks Mike, and let me add my welcome to all of you. I'd like to start by spending a few moments commenting on our strategy to strengthen our asset management business. Our proprietary family of mutual funds continues to play a key role in this strategy. Once again, our UMB Scout funds benefited from record net flows of 460 million during the first quarter of 2006, more than half the total flows registered for all of 2005 and higher than the total flows in all of 2004. The other integral part of this strategy is the implementation of an integrated wealth management business model. We are encouraged by the results we are achieving from the integration of our wealth management offerings and the synergies with private banking. Consistent with this strategy, we've renamed our Scout brokerage services business to UMB Financial Services Inc.
Next I'd like to comment on our strategy to grow our diverse fee-based businesses. ... We're advancing health care services by leveraging our early entrance in the Health Savings Account space. Our strategy continues to be focused on health care providers, large corporations and third party administrators. As evidence of our national leadership in this area, Dennis Triplett, the President of UMB Healthcare Services was appointed to the ABA/HSA Council.
Also during the first quarter we established new, important client relationships with [Shifs], the second largest TPA in the country and Connect Your Care, a Baltimore subsidiary of Revolution Health. Finally, during the first quarter, we continued to grow the HSA Accounts with more than $42 million now in bank deposits and more than $9 million in mutual fund assets.
Additionally, we've issued more than $200,000 HSA and FSA debit cards by the end of the first quarter. Furthermore, we've continue to strengthen our position in the payments industry, where we continue to be committed to helping our customers seamlessly migrate from paper payment methods to electronic solutions.
To support our customers, we are investing in an upgraded treasury management platform called Web Exchange, which will enable enhanced information reporting and transaction initiation via the web, improve control of service through online self administration and strengthen system security through innovative features including a two factor customer authentication.
This state of the art technology is on schedule to be fully implemented in the third quarter of this year. We also began the roll out of remote deposit check capture capabilities during the quarter. Also related to improving technology, we began pilot testing our new customer relationship management system. Client Link will combine information from multiple legacy systems and provide UMB Associates a 360 degree view of a single client relationship.
The first wave of training will run through June and continue through the next two quarters, with a company-wide roll out occurring throughout 2006. This technology will enable us to deepen customer relationships by identifying and exploiting cross sell opportunities.
In addition to our payment business, our Milwaukee based mutual fund services business continues to see revenue growth through the addition and conversion of new customers. In addition to growing our fee businesses, we continue to focus on improved operating efficiencies and achieving cost savings.
Across our network, we're placing stronger emphasis on productivity. Simply stated, we're utilizing our resources more efficiently. For example, during the first quarter of 2006, we increased revenue 3.8% with 143 fewer average full time equivalent positions. This has helped us improve our efficiency ratio to 79.31% from 82.83% in the prior year same period.
Although we continue to do targeted human and technology investments to achieve long-term growth and returns, we remain committed to improving our efficiency ratio over time. Another area of focus is risk management. We are implementing a new enterprise wide risk management process that is on track for delivery during the second quarter.
This new ERM system will provide us with a holistic solution to assess, quantify and prioritize and track accountability and resolution of risk. And finally, we continue to invest in other technologies to help satisfy our customers' needs. Our new umb.com website is a good example of this strategy. With that, let me turn it back to Mariner for some concluding remarks.
Mariner Kemper - Chairman and CEO
Thanks Peter. I want to conclude our formal remarks by commenting on our 2006 outlook. Our five core strategies drive our company. We expect this to result in organic growth supplemented by strategic acquisitions if the right opportunity becomes available.
Investing in our retail business will drive growth in this key segment, as we continually push to optimize our distribution in order to achieve better operating performance. We'll continue to make investments in key technology, people and improvements in our distribution to build the foundation for long term sustainable growth.
For 93 years we've been known for our tradition of high quality credit, liquidity and deep relationships with our customers. Our vision is to be recognized for the unparalleled customer experience. Every day each of us is focused on delivering the count on more experience to our customers.
Our associates believe in our mission and deliver it with passion. This alone sets us apart from our competition. Thanks for being on the call today and with that, I'll turn it back to the conference call operator and open up the session for questions.
Operator
[Operator Instructions]
With that, our first question is coming from Mr. Peyton Green of FTN Midwest Securities. Your line is live for questions, sir.
Peyton Green - Analyst
Good afternoon, I was wondering if you all could comment a little bit on what you're seeing from your commercial customers and their appetite to borrow and use up their excess liquidity and what implications that might have on your deposit franchise over the course of '06?
And then secondly, in terms of the branch business and the retail push that you all have been making, have the teaser rates and the grab a great rate program over the course of last year, have they reset yet and if so was the full impact realized in the first quarter, thanks.
Mariner Kemper - Chairman and CEO
Hey Peyton, this is Mariner, how are you this afternoon?
Peyton Green - Analyst
Doing great, thank you.
Mariner Kemper - Chairman and CEO
It's good to be with you again. To answer the first part of your question, loan demand has been strong across our footprint. We continue to see loan demand be strong. The sense we get from our sales force is that continues to be the case for the remainder of the year.
And as that relates to our deposit franchise, obviously we have a two-pronged strategy. One is to obviously continue to grow our loans at a significant clip if we can. But we also believe that a healthy franchise is growing its deposit franchise at the same rate. And that's why you actually see all the things we talked about as it relates to our retail business, largely it's driven by our desire to increase core deposits.
And so we've been very focused on that and we are very proud to present numbers that show 7.8% growth in our deposits. We think in the interest rate environment that we're operating in that anybody would be pleased with those numbers. And quite frankly, we're real pleased to tell you that not too much of that was from CDs. We really perceive that to be from core deposits.
Peter deSilva - President and COO
I want to add just a little bit of color to that, Mariner. Peyton, you know, we had an eight month CD program that was yielding 4% that did come to conclusion, if you will. We were able to retain greater than 60% of those dollars and roll those dollars into other CD products at the company.
So we feel good about our retention rates on those CDs and as Mariner mentioned, our funding mix didn't change perceptibly year-over-year after those CD campaigns. And our CD source of funding only went up a few percentage points and is still in the mid to high teens.
Mariner Kemper - Chairman and CEO
Thanks Peyton.
Operator
Thank you, and again ladies and gentlemen, if you'd like to ask a question at this time, please press star one on your telephone keypad.
Peter deSilva - President and COO
Any more questions?
Operator
I'm showing no further questions at this time.
Mariner Kemper - Chairman and CEO
OK, I take that as a good sign and I thank everybody for listening. Thank you.
Peter deSilva - President and COO
Thanks.
Operator
Thank you ladies and gentlemen for your participation in this afternoon's teleconference. You may disconnect your lines at this time.