UMB Financial Corp (UMBF) 2007 Q2 法說會逐字稿

Welcome to UMB Second Quarter Conference Call (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Heather Miller, Executive Vice President of Marketing. Thank you, Ms. Miller. You may begin.

Thank you, Joshua. Good morning, everyone, and thank you for joining us today for our conference call and webcast regarding our 2007 second 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 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 believe 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, the ability to integrate acquisitions, 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 phone or listening to the webcast have had a chance to review our second quarter earnings release, dated July 24th. If not, you will find it on our website at www.umb.com.

On the call today are Mariner Kemper, Chairman and Chief Executive Officer, Peter deSilva, President and Chief Operating Officer, and Mike 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 second quarter and first half results, Peter will follow with a more detailed review of the operating performance against the strategies. Following that, we'll be happy to answer your questions. Now, I'll turn the call over to Mariner Kemper.

Thank you, Heather. Welcome, everyone, and thanks for joining us today. As you've seen in our press release, UMB delivered record net income, strong growth, and improved financial performance. These strong results are evidence that our growth strategies are working. Also, these results are reflective of our operating leverage we are able to achieve, without changing our risk profile.

Net income in the second quarter totaled a record $20.1 million, or $0.48 per diluted share, a 35% increase from $0.35 in the second quarter of 2006. Additionally, year-to-date earnings increased 34.8% to $0.89 per diluted share. Our strong second quarter financial performance was driven by outstanding fee income and loan growth, and modest net interest income growth, while we continue to focus on controlling expenses. In addition to our record net income, we also achieved record loan balances, as well as record quarterly revenue and non-interest income. These results, again, demonstrate the operating leverage we are able to achieve as our team continues to effectively implement our growth strategies while maintaining cost controls and our high credit quality standards.

We achieved these strong results while carefully positioning our balance sheet in a highly competitive market. I'll briefly touch on our execution against our five key strategies. As a reminder, our first strategy is to focus on yield enhancement, where we continue to make progress in optimizing the mix of our earning assets and liabilities while growing our loan portfolio. During the second quarter of 2007, end of period loans increased 10% over the same period in 2006, and 1.6% on a linked quarter basis. We reduced our indirect loan portfolio by 11% from the prior year as we continue to focus on higher yielding products. As an example, our home equity loans are up more than 70% year over year, and now exceed $225 million in total balances.

In December of 2002, HELOCs represented approximately 1% of our total portfolio. Since then, we've grown our HELOC portfolio to 5.7% of total loans as of the end of the second quarter of 2007. Our HELOC portfolio currently has a yield of 7.16%. We still have a good opportunity to grow our HELOC portfolio, as the penetration of our existing retail customer base is currently less than 3%. Total loans were a record $3.97 billion at the end of the quarter, with continued growth in commercial real estate, credit card, and home equity loans. This is our 16th consecutive quarter of year-over-year loan growth.

Average total deposits were up 2.4%, or more than $134 million during the second quarter of 2007, with the largest increase coming from savings and time deposit categories. Non- interest-bearing deposits remain at a healthy 32.6% of total deposits, well above the industry average. We believe this is a competitive advantage for UMB as the value of non-interest-bearing deposits rise in a higher interest rate environment.

We remain disciplined about profitably growing both sides of our balance sheet, and prudent about when we come to market with deposit gathering campaigns. Our core portfolio's average life increased slightly to 36 months at the end of 2007, up from 35 months at the end of March of 2007. It has expanded modestly since June of 2006, when it was 33.6 months. Given the relatively flat yield curve and our interest rate risk tolerance, the average life of our core portfolio is not expected to change in any material way looking forward. We expect moderate yield enhancement to continue, with more than 363 million expected to roll off our core portfolio, and 54% of our loan portfolio re-pricing during the second have of the year. We are also striving to improve yield through a better earning asset mix. Total average loans comprised 56.2% of the earning asset base for the second quarter of 2007, compared to 53.5% during the same period in 2006.

The rising rate environment, together with our competitor's need for liquidity continues to increase the cost of gathering deposits. Due to rising deposit costs, we have also experienced a significant increase in interest expense. In our case, during the second quarter of 2007, our cost of funds was 3.53%, compared to 3.01% in the second quarter of 2006. As a result, interest expense related to interest bearing liabilities increased 31% compared to the same period last year.

Our second strategy is to continue to grow our strong fee-based businesses, which in the second quarter represented approximately 56% of total revenue. Non-interest income grew 10% in the second quarter, compared to the same period of 2006. During the second quarter, trust income and deposit service charges were key fee income growth drivers. Deposit service charges are up year over year and sequentially. Peter will cover the results of our fee-based businesses in more detail during his comments.

Our third strategy is to optimize our distribution network, including the continued investment in our retail business. This strategy includes gaining share in high growth markets, where we have established proven leadership. We were able to grow our primary retail customers by 2.9%, compared to the same period of last year. We also continue to focus on having multiple service relationships and improving the customer cross-sell ratio. An additional part of our strategy is to optimize our distribution channels, which should lead to greater financial contribution at the branch level.

At the end of the second quarter of 2007, our branch networks stood at 134, down from 138 at the end of the first quarter of the year. This is a result of closing four branches in the second quarter. We continue to evaluate branch performance to ensure long-term returns are in line with the market opportunities. This strategy has contributed to improve profitability. We currently have five branch projects under development. Also, we will continue to invest in markets where the demographics make sense for our business model.

Our fourth strategy is to continue to strengthen our asset management business. With strong equity markets and performance, our Scout Funds continue to grow with net fund flows of 13 million in the second quarter. As of the end of the second quarter, our total assets under management were more than 10.5 billion, up from 9.1 billion in 2006. Trust and securities processing income increased nearly 16%, to 29 million, from 25 million in the prior year, mostly related to both improved market conditions and new business. Peter will cover in more detail later on the asset management business as it continues to be a key growth area for us.

Finally, our fifth strategy is to focus on capital management. Our priority in this regard have not changed. They are first, to invest in growth, either through reinvestment in the business or through acquisitions that are good strategic financial, operational, and cultural fit, second, to consider increasing our dividend over time, and third, to repurchase stock when it makes sense to do so. To this end, we repurchased 886,585 shares at an average price of $37.47 per share during the first half of the year for a total cost of $10.7 million. Also, the Board declared a regular quarterly dividend of $0.14 per share on July 24th, for a total outlay of $5.9 million, which equates to a 29% dividend payout ratio.

We continue to focus on attracting, retaining, and developing the very best professionals in the banking business. As evidence of this, we recently hired Tom Chulick and David Naunheim, each of whom will play key roles in our St. Louis region. We also hired Steve Kitts to lead our investment banking division.

All told, we had a very strong quarter, with our results being driven by sound execution, as well as investments that we've made in technology and our people. Our team has successfully converted these investments into higher revenue and earnings, as well as deepening our product offering. I'll come back with a few concluding remarks, but I'd like to turn it over to Mike Hagedorn for a detailed review of our second quarter financial results. Mike?

Thanks, Mariner. And let me add my welcome to everyone on the call today. As Mariner indicated, we reported another very strong quarter, with record earnings and many key performance metrics showing significant improvement. Net income was $20.1 million or $0.48 per share for the second quarter, up 35% from $14.9 million, or $0.35 per share in the prior year's second quarter. Simply stated, non-interest income and net interest income grew faster than non-interest expense, leading to our solid growth in net income. Net income for the quarter increased $3.3 million -- net interest income for the quarter increased $3.3 million, or 6.3% over the same period in 2006, mainly due to higher average earning assets.

Net interest margin remained flat at 3.43% for the second quarter, compared with the second quarter of 2006. Higher earning asset yields in increased free funds contribution were offset by higher yields on earning -- interest-bearing liabilities. The year over year yield improvement in our investment portfolio was 52 basis points, finishing the period at 4.8%. The yield on our loan portfolio increased 42 basis points, to finish at 7% for the period. The free funds contribution to our margin increased (break in audio) basis points during the second quarter of 2007, compared to 88 basis points in the same period last year.

Commercial loans continue to grow, and we're up 6.9% over June 30, 2006. Some of our commercial loan growth was due to strong grain markets. Another large driver of loan growth was commercial, commercial real estate, which increased 19.2% year over year, mostly due to the acquisition of Mountain States Bank. Our credit card balances increased 7.7% over the second quarter of last year and 4.3% over the linked first quarter of 2007. Our credit card business represents an area of focus and we expect this business to continue to future growth. In the second quarter, $177 million securities rolled off at an average yield of 4.20%. In keeping with our yield improvement strategy, in the second quarter, we purchased $154 million of securities, at an average of 5.37%. Our margin should continue to benefit from the planned reinvestment of $363 million of core investments, with an average roll-off yield of 4.25% for the remainder of 2007, as well as from the 54% of our loan portfolio expected to re-price during the remainder of 2007. As rates stabilize, we expect continued margin improvement, but at a decelerating pace.

Non-interest income increased 10.1% to $72.3 million in the second quarter. This year over year gain was driven primarily by increases in trust and securities processing income and deposit service charges. The 2007 second quarter results included a $3.9 million, or a 15.9% increase in trust and securities processing income, primarily due to a $1.07 billion dollar increase year over year in net assets in the UMB Scout Funds. Deposit service charges increased 8.9%, primarily due to consumer pricing changes implemented earlier this year.

Non-interest expense increased 3.1%, or $2.9 million, compared with the same quarter in 2006. This increase was driven primarily by higher salaries, occupancy expense, equipment cost, and other expenses detailed in our press release. The higher equipment costs are primarily related to increased software expense during the second quarter. Additionally, the acquisition of Mountain States Bank in the third quarter of 2006 increased the amortization of other intangibles by almost $448,000 during the second quarter of 2007, compared to the same period last year.

Credit quality ratios in the second quarter of 2007 reflected UMB's continued strong commitment to high quality lending. Non-performing loans at June 30, 2007 totaled $9.7 million, or 0.25% of loans, compared to $13.4 million, or 0.37% in the same period last year. Net loan charge offs for the quarter totaled $1.5 million, or 0.16% of average total loans, compared with $1.6 million, or 0.19% of average total loans for the prior year's second quarter. Credit quality metrics remain strong.

Turning to the year to date, diluted EPS of $0.89 increased 34.8%, compared with $0.66 for the first six months of 2006. This is based on net income of $37.4 million, compared with $28.1 million for same period last year. Our 2007 first half earnings improvement was driven by higher trust and securities processing income, deposit service charges, advisory fees, investment income, and continued strong loan growth. Net interest margin was 3.37% for 2007 year to date, compared with 3.33% for the same period in 2006.

The effective income tax rate for the first half of 2007 was 30.4%, up from 28.4% for the first half of 2006. The increase is primarily attributable to a smaller percentage of tax exempt income in 2007, compared with 2006.

Turning to the balance sheet, our solid earning asset growth for the second quarter was driven primarily by loan growth. Average loan balances totaled $3.9 billion, compared with $3.5 billion a year ago. Total average loans grew by 11.6% again, primarily driven by commercial, commercial real estate, credit card, and home equity loans. Compared to the second quarter of 2006, average total deposits grew 2.4%, or $133.6 million. On a linked quarter basis, average total deposits were up 2.9%. The majority of the deposit increase is attributable to savings and time deposits, which also play to our retail customer acquisition strategy. The second quarter average loan to deposit ratio was 69.8%, compared to 64.1% last year. Our ratio of average loans as a percent of earning assets also continued to increase to 56.2% for the second quarter, from 53.5% in the same period last year.

Return on average equity and return on average assets increased significantly during the second quarter to 9.32% and 1.02%, compared to 7.15% and 0.80% respectively for the second quarter of 2006. Return on average equity is the highest level since the first quarter of 2002, and return on average assets is the highest since the first quarter of 1997. We continue to focus on these key industry metrics as we grow our business. Capital ratio has remained strong, with tier one, total capital, and leverage ratios at 14.05%, 14.89%, and 9.86%, respectively.

In summary, UMB delivered another very good quarter with solid growth in non-interest income and loans, as well as a disciplined expense control. In addition, we demonstrated a strong operating leverage that Peter will cover in his remarks. With that, I'll turn it over to Peter.

Well thanks, Mike, and good morning, everyone. I'd like to spend a few minutes providing some additional details on our growth and operational strategies, starting first with our strategy to grow our fee business. First, let me comment on our strategy to grow our asset management business. Total assets under management increased 16.6%, to $10.5 billion, from $9.1 billion in the second quarter of 2006. Leading this growth is our proprietary family of mutual funds, which continues to play a key role in our strategy.

Total assets in the UMB Scout Funds grew from $4.38 billion last year to $5.45 billion in the second quarter of 2007. Last October, we launched the UMB Scout Midcap Fund, which, as of June 30th, the fund had total assets of $30 million and has year-to-date flows of $12.4 million. As of June 30th, the fund is outperforming 96% of its Lipper peer group.

A very important area within our Asset Management Division is Corporate Trust. This division delivered solid performance during the second quarter of 2007. For the year, Corporate Trust has contributed over $1.2 million to fee income growth. We are building strong momentum with a reinvigorated approach to the marketplace and remain encouraged with the opportunities for growth.

Our Private Banking Group continues to be a focus as well. During the first half of 2007 alone, this division generated $25.5 million in new loans, and over $33 million in new deposits. Private Banking now holds over $83 million in total deposits. With nine client managers and $83 million in deposits, each client manager is responsible for more than $9.2 million in deposits.

Our credit card business is also showing continued growth. Our commercial and private label credit card programs are the key drivers. Cardholder purchase volume increased 20% and 9.5% respectively over the same period a year ago. The opportunity for growth continues to be encouraging as our commercial cardholder volume posted a monthly record in May with more than $46.5 million in sales. This represents a 23% increase over the same period a year ago.

The consumer credit card segment is also performing well, with an activation rate of more than 62%. Strong leadership, as well as innovative products, strong marketing and distribution focus, we believe we have the opportunity to grow this business in our existing retail customer base from our current 63% penetration rate.

UMB continued to gain momentum in healthcare services, where accounts grew 177% in the second quarter over the prior period, with deposits and assets increasing 44.7%, compared with the same period last year. At the end of the quarter, we had more than $88 million in deposits and assets, and more than 517,000 Health Savings Accounts and Flexible Spending Accounts. During the first half of 2007, we experienced more than $230 million of purchase volume for the HSA and FSA accounts, resulting in strong interchange fee income.

Another area of emphasis to grow our fee business is payments and treasury management. During the second quarter, we deployed our latest remote deposit system, an Internet-based software program that provides an enhanced offering to our clients. We also launched an upgraded a version Web Exchange, our online banking tool that provides a secure efficient method for businesses to manage online banking services. These enhancements provide our customers with cutting edge functionality and solutions to save them time and money, and UMB with a competitive advantage.

One area of our business that is experiencing rapid consolidation is our Mutual Funds Servicing business. In the past 12 months, five of our competitors have either been sold or merged. We believe that is creating a great opportunity for UMB Fund Services to emerge as a preeminent player in the industry. With new leadership and changing market conditions, we are optimistic about the future of this business.

We have experienced a 20.5% increase in net income before taxes when comparing the first half of 2007 to the first half of 2006. We remain excited about the future prospects for this business. We continue to focus on improved operating efficiencies and cost savings. We evaluate productivity measures on an FTE and branch basis for our lines of business and regions. We continue to see nice improvement. As an example, during the second quarter, average loans per FTE increased 14.0%, to $1.16 million. Average deposits per FTE increased 4.8%, to $1.65 million. And non-interest income per FTE increased 12.3%, to just over $21,000. Our efficiency ratio in the second quarter of 2007 improved to 74.5%, down from 78.3% during the same period last year. Currently, the focus on accountability that we've put in place is translating into strong operating leverage across the business.

Another area of continued operational focus is Enterprise Risk Management. The refinement of our ERM system and processees continues and we expect that they will help us manage our business better by focusing management resources on the areas that represent the greatest risks.

Yesterday, we announced the sale of Securities Transfer business to Computer Share for $8.86 million. A couple of trends drove this decision. First, there has been continued consolidation in the market with the top five securities agents controlling over 95% of the industry. Second, our platforms (inaudible), where significant capital investment would've been required. Computer Share has the size, scope, and the technology to effectively service our shareholders.

With that, let me turn it back to Mariner for some concluding remarks. Mariner.

Thanks, Peter. Let me start by making a quick correction from my previous comments. I shared with you what we had done in the first half of the year with share repurchases, and somehow I said we had purchased over 800,000 shares, I believe, and the actual number was 286,585 shares in the first half of the year.

So, with that, I'll conclude today's call by simply stating that I am pleased with our team's execution of our five key growth strategies this quarter and the progress that we've made since we started implementing these strategies. We remain focused on several top priorities, including maintaining high asset quality, deeper client relationships, and market penetration, building out the team, continuing to improve efficiencies that will benefit operating leverage, and profitably growing both sides of our balance sheet.

Our success would not be possible without the investments we've been making in people and technology, which drive performance throughout the organization and enable us to deliver the unparalleled customer experience to our customers. With that, I'll turn it back to the conference call Operator to open the session for questions. And thanks again for listening.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. (OPERATOR INSTRUCTIONS). Our first question is from the line of Mr. Peyton Green with FTN Midwest Securities. Please go ahead.

Good morning. I was wondering if you could discuss your intentions with the indirect auto portfolio. You indicated that you all are in the process of running it off. Is that something you intend to do across the entire indirect auto portfolio, or is it just a portion of it?

Peyton, good morning. This is Mariner. I think actually the comment wasn't that we were running it off, but rather, we were continuing to shift our earning asset mix to better improve our yields, which includes trying to become less reliant on our indirect loan portfolio. So it is not a complete runoff strategy. It is a reduction in reliance.

Okay. And, just by way of comparison, you mentioned the HELOC growth, but how much did indirect auto shrink year over year?

Did we give that number? It's approximately --

It was down 11%, Peyton, on a year over year basis.

Yeah.

Okay. And, I guess, based on current production, and with the runoff that you've had, is it the yield up to a point where you will continue to, I guess, grow balances going forward, or is there still going to be more attrition going forward?

It's unclear at this point. We're continuing to evaluate yields in general across our entire earning asset base, and continuing to look for ways to drive up yield. And as interest rates change, we'll continue to reevaluate that.

It's a -- as you know, Peyton, it's a very competitive business. The manufacturers have gotten back into the business in a pretty big way. There are lots of specials out there, and it's a challenging environment for indirect at the moment.

Okay. And then in terms of the overall competition for loan paper, I mean it's -- the intensity has probably increased over the year and certainly over the past two years. How do you gauge your appetite to participate in the pricing game going forward?

Are you talking about in general, or is --

Yeah.

-- indirect?

No. No. Just in general, be it commercial or other consumer.

Well, first I would echo your comments. I think there's a definite marginalizing going on of risk-based pricing in the industry. We definitely recognize that. We, fortunately, just through quality sales efforts, have been able to grow our loans -- picking the right loans, doing the right deals, and certainly, there's been pricing pressure. And the only way, really, to outpace the pricing pressure is with volume. So we plan on continuing to grow our loan base and deal with them deal-by-deal. But there's definitely a lot of pressure on pricing.

Okay.

And, Peyton, I'd say kind of three things we're focused on right now. One is pricing for sure. I mean it's challenging out there, but we want to get as many good deals as we can get. Secondly, though, is terms and conditions. Terms and conditions, I mean I think we're seeing a general loosening of terms and conditions to a concerning level in some cases, and we're not going to play that game entirely. We don't play that game and we're not going to play that game entirely.

We're going to underwrite our credits the way we have historically. We'll continue to have strong underwriting, even though we're seeing some deals that we think are being underwritten probably improperly and may create problems down the road. And then, of course, third is just the general economic conditions going on around us. And, while our region continues to be stable to improving, that bears watching as well, and we'll have some bearing on loan demand going forward.

Okay. And then geographically speaking, where did you all see particularly strong loan growth or particularly weak loan growth?

You know that's the beauty of our results this quarter. We've seen our revenue growth across all lines of business and all regions, really, in general with -- we're real pleased with the results across our entire footprint.

Okay.

Same with new loans. Same with new loans. It's really been across the company.

Peyton Green. Okay. And then, with respect to the sale of the Transfer Agent business, I think you all are getting about $9 million in cash. Do you have any basis in that business? And also, were you making any money with that business?

Hi, Peyton. It's Mike. Our basis in it is completely immaterial. So --

Okay.

-- book value's immaterial in total.

Okay.

And the second question was again?

Were you making any money with it?

It made money. Yes. It was profitable. I think the real issue here, as Peter pointed out, was the large capital investment that was required to remain competitive in the industry.

And is that -- by order of magnitude, is that more than the $9 million you're getting, or about the same, or --

No. It's not more than $9 million.

The capital investment would've been less than that, but capital investment coupled with the secular trends in the business caused us to think that this is a business we should exit.

Good. Well, I think it's a right choice. Thank you.

Thanks, Peyton.

Thank you. Our next question comes from the line of Mr. David Stumpf, with A.G. Edwards.

Good morning, gentlemen.

Good morning, David.

Good morning.

One of my questions, Peyton asked. But I've got sort of a general one. As you guys know, I'm sort of new back to the story again, and you guys are clearly making real progress at sort of unlocking, if you will, the potential of this franchise. Having coming back to the story, I guess, what -- previous leadership team have certainly had some of these ideas, and certainly, I think attempted some of this. And either they were not able to execute I guess, or for some other reason I guess were not able to have some of the same success.

And I know it's a sensitive question, and I don't necessarily want you to criticize previous leadership teams, but what's changed, if you will? I mean you guys seem to be able to pull a lot of the levers that maybe previous leadership teams were not able to do. What's changed?

David, I'm not sure how to answer that. We're looking forward and focused on running the company, and I'm not real sure how to answer that.

Yeah. And I guess it is a sensitive question. You're doing a great job and it looks like there's a lot of potential here I guess.

We agree. We agree.

All right. Thanks.

Yeah. Thanks, David.

Thank you. Our next question comes from the line of Kyle O'Brien with Keefe, Bruyette & Woods. Please go ahead.

Good morning. The salaries and employee benefits line saw a decent linked quarter decline in the second quarter. Were there any reversals or non-recurring items included in this line?

No, there's not. Nothing material.

Okay. Thank you.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star, followed by the 1 on your telephone keypad. (OPERATOR INSTRUCTIONS). One moment for our next question. Pardon me, ladies and gentlemen, we have no further questions. Please continue with your presentation.

Thank you very much for your interest in UMB. The call can be accessed via replay at our website beginning in about two hours, and it will run through August 8th. And, as always, you can contact UMB Investor Relations with any follow-up questions at 816-860-7906. Again, we appreciate your interest and time today. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Again, if you would like to listen to a replay of today's conference call in its entirety, you can also do so by dialing 303-590-3000, or 800-405-2236, using the access code 11092699#. Those numbers again, 303-590-3000, or 800-405-2236, and putting in the access code 11092699#. Thank you for using ACT Conferencing. You may now disconnect. Have a pleasant day.