UMB Financial Corp (UMBF) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the UMB third quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session for analysts will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Begonya Klumb, Director of Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us today for our conference call and webcast regarding our 2007 third 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 believes our 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 C-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 (inaudible - heavy accent) 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 third quarter earnings release dated October 23rd. If not, you will find it on 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, 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 third quarter and year-to-date results. Peter will follow with a more detailed review of operating performance against our strategies. Following that, we'll be happy to answer your questions. Now, I'll turn the call over to Mariner Kemper.

Thank you and welcome everyone and thank you for joining us today. As you have seen in our press release, UMB delivered continued growth and improved financial performance in the third quarter. These results are evidence that our growth strategies are working. Also these results reflect the growth we continue to achieve without changing our risk profile during a period of significant stress in the credit markets. Net income in the third quarter totaled $21.5 million or $0.51 per diluted share, up 36% from $0.37 in the third quarter of 2006. Our year-to-date earnings increased 36%, to $1.40 per diluted share. Our third quarter financial performance was driven by double-digit non-interest income growth as well as improvement in our net interest income, primarily achieved through loan growth and margin expansion. These results also reflect the sale of our securities transfer product in July which resulted in an after tax gain of $4.5 million or $0.11 per share.

Our third quarter results again demonstrate the operating leverage we have been able to achieve as our team continues to effectively implement our growth strategies while maintaining our high credit quality standards. We achieved these results without compromising our tradition of strong liquidity and asset quality. Now I would like to discuss our progress against the Company's five key strategies. s 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 the loan portfolio. During the third quarter of 2007, end of period loans increased 4% over the same period in 2006. The improvement reflects solid growth in commercial, HELOC, and credit card portfolios, offset by an 18.1% decline in our indirect balances. Commercial loans grew 8.5% year-over-year. We are pleased with this growth as it's been achieved within our traditional credit quality underwriting standards. Credit card loans grew 9.2% year-over-year, and remain an area of focus for future growth and earning asset yield improvement.

Home equity loans are up over 55% year-over-year and now exceed $250 million in total balances with a yield of 7% for the third quarter. Home equity loans now constitute 6.3% of our total loan portfolio. In addition to our branches, originations have come from our existing customer base, particularly in the private banking and commercial portfolio. We've again been able to grow this business without compromising our credit standards. Given the relatively small base of the portfolio, as well as the low penetration in our existing retail customer base, we are optimistic about our opportunity for the future. As I mentioned previously, our indirect loan balances declined 18.1%. We decided to allow the indirect loan portfolio to run off as part of our strategy to improve earning asset yields. As we continue to manage our existing indirect loan portfolio, we will not purchase any new contracts through our dealer network. The yield in the indirect portfolio with 5.07% during the third quarter, versus a yield of 6.07% on our total earning asset base. At the end of the third quarter, our indirect portfolio had an average life of 3.4 years and a balance of over $606 million, compared with a peak of over $741 million two years ago.

End of period deposits were up 7% or more than $385 million growth over the third quarter in 2006, with the largest increase coming from our public funds, mutual fund processing and treasury management business. Growing deposits is a challenge for the entire industry. Still, with the continued success we've had with our non-interest bearing demand deposits, sitting at 29.6% compared to industry average of approximately 15%. Our core investment portfolio average life increased slightly to 36.6 months at the end of September 2007, up from 34.6 months a year ago. Given our current interest rate risk tolerance, we do not foresee a significant change to the average life of our core portfolio going forward. We are also striving to improve yield through a better earning asset mix. Total average loans comprised 55.9% of earning asset base for the third quarter of 2007 compared to 54.4% for the same period in 2006.

Our second strategy is to continue to grow our fee based businesses. Non-interest income grew 19.4% and represented 57% of total revenue in the third quarter. This increase reflects continued solid growth in trusts and securities processing income and deposit services charges as well as the gain from security transfer. Peter will cover the results of our fee based businesses in his comments. The third strategy is to optimize our distribution network including continued investment in our retail business. We grew our primary retail customers by 2.1% compared to the same period last year. We also continue to focus on having multiple product relationships and improving customer cross sell ratio. To this effect, in the third quarter we began a new marketing partnership to redefine our customer acquisition and retention strategy.

An additional part of our strategy is to optimize our distribution channels. We continue to reposition our branch network with an emphasis in markets where we have proven leadership. At the end of the third quarter 2007, our branch network stood at 136, reflecting the opening of two branches during the quarter in the Stapleton area in Denver, Colorado and Scottsdale area in Arizona, both high growth markets. Are Stapleton branch in Denver is part of our green initiative, demonstrating our support for a cleaner, more sustainable environment. The branch features a green roof, the second in all of Denver and incorporates an environmentally friendly design, which reduces waste and conserves energy. UMB intends to become a leader in business practices for a sustainable environment within our industry.

Our fourth strategy is to continue to strengthen our asset management business. Trusts and securities processing income increased more than 15% to $28.9 million from $25 million in the prior year, primarily due to both improved marketing conditions and new business. The asset management business continues to be an area of growth and success for UMB. Finally, our fifth strategy is to focus on capital management. Our priorities in this regard have not changed. They are, first, to invest in growth either through reinvestment in the businesses or through acquisition that are a 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 more than 364,706,000 shares at an average price of $0.3971per share during the quarter for a total cost of $14.5 million.

Also on October 23rd, the board increased the regular quarterly dividend by 7.1% to $0.15 per share, which equates to a 28.8% dividend payout ratio. This is the sixth increase in our quarterly dividend since October of 2003, with a total increase over this period of 50%. We continue to look at traditional banking acquisitions within our footprint and other opportunities to add to our payment and technology, asset management, corporate trust and healthcare service businesses. As always, we'll be disciplined in our approach. All told, we had a good quarter. Our results were driven by sound execution, as well as investments that we've made in our core businesses. Our team has successfully converted these investments into higher revenue and earnings as well an enhanced product offering. I'll come back with a few concluding remarks but I would like to turn it over to Mike Hagedorn for a few detailed comments and our third quarter financials.

Let me add my welcome to everyone on the call this morning. We reported continued healthy earnings growth as well as improvement in many key performance metrics. Net income was $21.5 million or $0.51 per diluted share for the third quarter, up 36% from $15.9 million or $0.37 per diluted share in the prior third quarter. Simply stated, our revenue growth outpaced our expense growth leading to solid net income growth. As Mariner commented, our non-interest income benefited from the sale of our securities transfer product resulting in an after tax net gain of $4.5 million or $0.11 per share. Still, our fee based businesses delivered another impressive quarter of organic growth with strong performances from asset management and corporate trust. Net interest income for the quarter increased $3.2 million or 5.8% over the same period in 2006, mainly due to higher average earning assets. Net interest margin increased five basis points to 3.48% for the third quarter, compared with the third quarter of 2006.

Loan growth and higher earning asset yields were partially offset by the modestly higher cost of interest bearing liabilities. Our margin continues to benefit from the lag between interest rate changes and the repricing of our loan and investment portfolios. As a result, the year-over-year yield improvement in our investment portfolio was 38 basis points, finishing the period at 4.86%. The yield on our loan portfolio increased 20 basis points to finish at 7.01% for the period. Our margin also benefited this quarter from the recent Fed cut, as the Fed fund and repo yield declined 22 basis points. This decline softened the impact of the 32 basis point increase in the yield on interest bearing deposits. With lower rates as well as the declining reliance on demand deposit balances, the free funds contribution to our margin decreased slightly to 92 basis points during the third quarter of 2007, compared to 95 basis points in the same period last year. In the third quarter, $167 million in securities rolled off at an average yield of 4.01%. In support of our yield improvement strategy, we purchased $167 million of securities at an average yield of 5.27% during the third quarter.

Our margin should continue to benefit, although at a slower rate, from the planned reinvestment of $175 million of core investments with an average roll-off yield of 4.58% during the fourth quarter. During 2008 we expect $529 million of core investments to roll off at an average yield of 4.47%. We also expect 69% of our loan portfolio to reprice through the end of 2008. If rates remain stable, we expect a continued positive impact on margin but at a decelerating pace. Non-interest income increased 19.4% to $76.9 million in the third quarter. This year-over-year improvement was driven by increases in trust and securities processing, deposit service charges and bank card income, as well as $6.5 million pretax gain on the sale of securities transfer.

As we mentioned last quarter, a price of $7 million was paid up front which is reflected net of severance costs in our third quarter results. Residual payments may amount to an additional $1.9 million will be contingent upon various revenue targets over the 12 month period after the sale date. We made a strategic decision to sell this product because of a consolidation in the industry and the large technology investments we would have incurred to stay competitive. This decision is consistent with our strategy to better utilize our capital and focus on those businesses where we can achieve a higher return on investment. The 2007 third quarter results included a $3.9 million or 15.4% increase in trust and securities processing income, primarily due to a $1 billion year-over-year increase in net assets in the UMB Scout Funds. Deposit service charges increased 9.6%, primarily due to higher or greater individual overdraft and return item charges, as well as consumer pricing changes implemented earlier this year.

Non-interest expense increased 5.3% or $5.1 million compared with the same quarter in 2006. This increase was driven primarily by higher salaries, occupancy and equipment expenses. The salary growth was primarily due to increases in employee base salaries, as well as higher commissions linked to performance and revenue growth. In our business model, we believe people are critical to achieve our goals and vision. While we focused on efficiencies through FTE reduction, we have also hired additional talent in some areas of our Company. Credit quality ratios in the third quarter of 2007 reflected UMB's continued commitment to high quality lending. Non-performing loans at September 30th, 2007 totaled $5.7 million or 0.14% of loans, compared to $8.1 million or 0.21% at the end of period last year. Net loan charge-offs for the quarter totaled $1.9 million or an annualized 0.19% of average total loans compared with $2.4 million or 0.27% of average total loans for the prior third quarter.

Credit quality metrics remain strong and UMB's exposure to higher risk assets such as construction and development loans is very low. However, given the current market volatility and credit conditions, we deemed it prudent to increase our provision by $2.8 million to the higher range of our modeled estimates. Our resulting allowance for loan loss is 1.17%. Turning to the year-to-date, diluted EPS of $1.40 increased 34% compared with $1.03 for the first nine months of 2006. Our year-to-date net income was $58.9 million, compared with $44 million for the same period last year. Our 2007 year-to-date earnings improvement was driven by higher trust and securities processing income, deposit service charges, brokerage fees, the net gain on the sale of the securities transfer product, and continued loan growth. Net interest margin increased to 3.41%, for 2007 year-to-date, compared with 3.36% for the same period in 2006. The effective income tax rate for the first nine months of 2007 was 30.1%, up from 26.8% for the first nine months 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 third quarter was driven primarily by loan growth. Average loan balances totaled $3.9 billion, compared with $3.6 billion a year ago. Total average loans grew 7.8%, again primarily driven by commercial, credit card and home equity loans. Compared to the third quarter of 2006, average total deposits grew 5% or $269.3 million. The majority of the deposit increase is attributable to time deposits and money market accounts. The third quarter average loan to deposit ratio was 68.8%, compared to 67% last year. Our ratio of average loans as a percent of earning assets also continued to increase to 55.9% for the third quarter, from 54.4% in the same period last year.

Return on average equity and return on average assets increased significantly during the third quarter, to 9.7% and 1.09% compared to 7.44% and 0.84% respectively for the third quarter of 2006. We continue to focus on these key industry metrics as we grow our business. Capital ratios remain strong with Tier 1, total capital and leverage ratios at 14.27%, 15.14% and 10.01% respectively. In summary, UMB delivered another good quarter with solid growth in non-interest income and loans while maintaining strong liquidity and asset quality. With that, I'll turn it over to Peter for some remarks.

Thanks, Mike. I'd like to add my welcome to everyone this morning. I'll spend a few minutes providing some additional details on our growth and operational strategies, starting with our strategy first to grow our fee businesses. First I would like to comment on our strategy to grow our asset management business. Total assets under management increased 13.5% to $10.9 billion from $9.6 billion in the third quarter of 2006. Leading this growth is our proprietary family of mutual funds which continues to play a key role in our overall growth strategy. Total assets in our UMB Scout Funds grew 22% from $4.7 billion at the end of the third quarter of 2006 to $5.7 billion at the end of the third quarter of 2007.

And our mutual fund leadership continues to be recognized by the industry. Jim Moffett, Manager of the UMB Scout International Fund, was nominated as a contender for Morningstar's 2007 International Manager of the Year for the second time in three years. Leveraging our talent by expanded the UMB scout fund family including plans to launch a new small mid-international fund by the end of 2007. During the third quarter we also launched a tariff-free international investment option for the Missouri 529 college savings plan. Another important area within our asset management group is corporate trust. Assets under administration grew 34% year-over-year to $13.7 billion. In the third quarter's corporate trust rankings just released by Thomson Financial, UMB ranked fourth by number of transactions of overall municipal trusteeships and paying agencies combined. Our third quarter performance against much larger competition is a reflection of our strong reputation and superior customer service. As momentum continues, we remain encouraged for the opportunity for growth in this area, both organically and through potential acquisitions within our footprint and contiguous market areas.

Another integral part of our asset management strategy is the implementation of an integrated wealth management business model. We continue to be encouraged by the results we're seeing from the integration of our wealth management offerings which we initiated of a year ago. Our private banking group continues the growth momentum. During the first nine months of 2007, this group generated $33.4 million in new loans and over $55.9 million in new deposits for UMB. UMB Financial services, our full-service brokerage subsidiary, has been another strong performer, contributing $1.4 million to year-over-year fee income growth. Our card businesses continue to perform well. A key driver has been our commercial card program. Card holder volume increased 23.2% over the same period last year. The opportunity for growth continues to be encouraging, as our commercial card holder volume posted a monthly record in July with more than $51 million in sales. This represented a 35.2% increase over the same period last year.

UMB continued to gain momentum in healthcare services where accounts grew 122.5%, and deposits and assets increased 53.6%, compared with the same period last year. At the end of the quarter, we had more than $96 million in deposits and assets and more than 531,000 health savings accounts and flexible spending accounts. For the first nine months of 2007, HSA and FSA purchase volume was more than $91 million which helped drive strong interchange fee income. During the quarter we rebranded UMB investment services group to UMB Fund Services to better reflect our product and service offerings to the marketplace. We continue to believe this business represents a great opportunity for growth at UMB. As a result of the ongoing consolidation in the business, we believe we are uniquely positioned to take market share from our larger competitors. Our fee income from this business increased 14.9% in the first nine months of 2007 when compared with the same period last year.

In addition to growing our fee businesses, we continue to focus on improving operating efficiencies and driving cost savings. During the third quarter, average loans per FTE increased 10.2% to $1.15 million, average deposits per FTE increased 7.2% to $1.67 million, and non-interest income per FTE increased 22% to over $22,000. At the end of the third quarter, we had 3,376 FTEs or 80 fewer FTEs than in the same period last year. This is despite adding 57 positions related to the acquisition of Mountain States Bank in September of 2006. Our efficiency ratio in the third quarter improved to 73.4% from 78.9% during the same period last year. Clearly, our focus on accountability is translating into strong operating leverage across our businesses. With that, let me turn it back to Mariner for some concluding remarks.

Thanks, Peter. I'll conclude today's call by simply stating that these are challenging times and once again our time tested model of tradition and quality, liquidity and safety and soundness continue to serve us well. Having a strong and diversified mix of earning assets has greatly benefited us. Indeed, a recent Wall Street journal headline read liquidity is priceless. All of us here share that belief and remain committed to growing our intrinsic value for UMB over the long-term. With that, I'll turn it back over to the conference call operator to open up the session for your questions. Thank you.

Thank you, sir. (OPERATOR INSTRUCTIONS) One moment, please for our first question. Our first question comes from Peyton Green with FTN Midwest Securities. Please go ahead with your question.

Good morning. I just had a follow-up on the indirect runoff and I was basically wondering what your expected cash flow from that portfolio is over the next five quarters or so.

Good morning, Peyton. How are you?

I'm doing fine. Doing fine.

We are anticipating this to run off basically over the next three years, starting with the most recent decision and what's happened so far to have it run pretty much off by the end of 2009. And so next year, probably being the biggest runoff, through December 8.

Peyton, this is Peter. Good morning. We were sitting with about $606 million of indirect paper at the end of September of '07, just a few weeks ago, and as Mariner said, it will take us about three years to run it off with pretty much a straight line amortization. It depends a little bit, if the economy softens and people don't go out and buy new cars, they could hold on to these loans a little longer. So it is a little difficult for us to predict with any precision. But I think three years is a good estimate.

And then also, how confident are you in running this off and also being able to replace it with loan volume from other segments that you're trying to emphasize like commercial and HELOC?

Well, it's certainly the goal, the economy is going to be a big indicator of our ability to do that over the coming couple of years. You watch the news as closely as we do. And things seem to be less certain today than they have in -- the pipeline looks good but things are more uncertain these days than they have been.

Okay. And then more of an anecdotal question, but how much better do you feel about the sales calls that your bankers are making on their existing clients, getting more business out of their pocket, versus bringing new clients into UMB?

I've got some thoughts on that. One area that we're doing particularly well at for example is at our commercial credit cards. A lot of that is coming from our existing clients and penetrating deeper with new product into that client base. Again a good example of that would be our commercial card products. Personally, I think our pipeline is still solid, as Mariner described it, for both new customers as well as additional business from existing customers. We've got some exposure to the grain markets and to the farm belt and that's been very, very strong over the last year or so. And I think that's been helping us as well.

As far as sales go, though, we've been implementing new systems to track sales and to encourage sales. We are doing sales training at a new level than we have in the past and we also, a couple years ago, as you well remember, implemented compensation -- incentive compensation for our sales force in the commercial area, which we never had before. So I think the combination of those three things will continue to make the number of calls, both externally and internally to our current customer base, the calling will be great. I think you'll see tremendous improvement in our calling efforts. The economy is the wild card.

And then on the sale of the securities business, or the transfer agent business, is that $6.5 million, is that net of the severance or was the severance included in personnel.

That was net of the severance.

Okay. All right. And then also, Mike, you mentioned the securities repricing in '08. I think you mentioned -- what was the overall volume for that number?

I think it's a hundred. I think it was 175 and 458 in the fourth quarter but -- during all of 2008, it's 529.

Okay. And is there any particular lumpiness in '08?

Can you elaborate on -- I mean, as far as certain asset classes?

Or quarters. Like is it more back half loaded or front end?

No.

Okay.

We've been working on evening out that cash flow, so --

Okay. Good enough. Thank you very much. That's all I have.

Thank you, Peyton.

Thank you, sir. (OPERATOR INSTRUCTIONS) One moment, please for any additional questions. Sir, there appear to be no questions at this time.

Okay. Well, we appreciate all of your interest and I'll let Begonya close it out and again, thank you for your continued interest.

Thank you very much for your interest again. The call can be accessed via replay at our website beginning in about two hours and it will run through November 7th. And as always, you can contact me at UMB Investor Relations with any follow-up questions by calling 816-860-7906. Again, thank you very much for your interest and time.

Thank you, ma'am. This concludes today's conference. Thank you for your participation. If you would like to listen to a replay of today's conference call in its entirety, you can also do by dialing 303-590-3000 or 1-800-405-2236, using access code 11098473. Thank you again for using ACT conferencing. You may now disconnect. Have a pleasant day.