UMB Financial Corp (UMBF) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the UMB fourth-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 today. It is now my pleasure to introduce your host, Ms. Begonya Klumb, Director of Investor Relations. Thank you. Ms. Klumb, you may begin.

Good morning, everyone, and thank you for joining us today for our conference call and webcast regarding our 2007 fourth-quarter and full-year 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 1944, Section 21E of the Securities Exchange Act of 1944 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 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 undertake 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 fourth-quarter and full-year earnings release dated January 22nd. If not, you will find it on our website at UMB.com. Our earnings release includes both our GAAP-based income statement and our reconciliation to the non-GAAP measures discussed in the release and during this call, which includes certain pretax adjustments to non-interest income and non-interest expense, the tax effect of those adjustments and adjusted net income. These adjustments comprise net gains associated to the sale of the securities transferred product and a liability accrual related to Visa's corporate litigation provision. The reconciliation for these items can also be found on our website at UMB.com.

The non-GAAP results are a supplement to the financial statements based upon Generally Accepted Accounting Principles. UMB believes this non-GAAP presentation and the elimination of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance. 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 fourth-quarter and full-year 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.

Thank you, Begonya. Welcome, everyone, and thank you for joining us today. Happy New Year to you all.

As you've seen in our press release, UMB delivered solid financial performance throughout 2007. These results reflect a disciplined execution against our growth strategies, which we believe without changing our risk profile, even as the credit markets continue to suffer significant stress, UMB achieved record net income in 2007 of $74.2 million or $1.87 per diluted share, up 26% from $1.40 reported in 2006. Our fourth-quarter diluted EPS was $0.37, flat from the same period in 2006.

The fourth-quarter results reflect the impact of a $4.6 million pretax recorded liability related to Visa's covered litigation provision. Without this expense related to Visa, UMB would have reported net income of $17.8 million, resulting in diluted EPS of $0.43 or a growth of 16.3% over 2006. Our 2007 financial performance was driven by double-digit non-interest income growth, which at nearly $289 million, was also a record for UMB.

Net interest income improved as well mostly due to a higher average earning assets and higher margin. Our 2007 results demonstrate the operating leverage we've 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. In 2008, we will continue to monitor the economy and manage our business the way we always have, for the long term and not just for the quarter.

Now, I would like to discuss our progress against our Company strategies. Our first strategy is to focus on yield enhancement. We continue to make progress in optimizing the mix of our earning assets and liabilities while growing the loan portfolio. In 2007, end of period loans increased 4% over 2006. The improvement reflects solid improvement in our commercial, HELOC, and credit card portfolios, offset by a 26.4% or 190.8 million decline in our indirect balances. Commercial loans grew 13.1% year-over-year as we continue to demonstrate our ability to leverage one of the strongest parts of our franchise. We are also very pleased that we achieved these results while maintaining our credit quality standards.

Credit card balances increased 17.2% year over year and 5.2% on a linked quarter basis. Credit cards remain an area of focus for future growth and earning asset yield improvement. Peter will cover our credit card business in more detail during his remarks.

Home equity loans are up 47.8% year over year and now exceed $270 million in total balances. Home equity loans now constitute 6.9% of our total loan portfolio. In addition to our branches, originations have come from our existing customer base, particularly in private banking, and our commercial portfolio. Again, this business has grown without compromising our credit card quality standards.

Given the relatively small base of our portfolio as well as the low penetration within our retail customer base, we are optimistic about the potential for this portfolio. As I mentioned previously, our indirect loan balances declined 26.4% in 2007. You may remember last quarter we made a decision to allow the indirect loan portfolio to run off as a part of an overarching strategy to improve earning asset yields. As we continue to manage our existing indirect loan portfolio, we have not purchased any new contracts through our dealer network since August the 1st. And at the end of 2007, our indirect portfolio had a balance of $531 million compared with $721 million at the end of 2006.

End of period deposits were up 3.18%, an improvement of nearly $242 million over the end of 2006 with the largest increase coming from time deposits. Growing core deposits remains a challenge for the entire industry. Still, a strong 32% of our deposits are non-interest-bearing compared with the industry average of approximately 14%.

Despite the declining rate environment, we're still seeing very aggressive pricing on our deposits within the industry. We will continue to monitor our funding needs as our indirect loan portfolio runs off. We expect this run-off to provide more liquidity. We believe we are in an advantageous position based on our balance sheet and funding structure. We have managed our funding costs as rates have declined, which has contributed to our margin improvement during the year. Our core investment portfolio's average life increased to 37 months at the end of 2007, up from 35.3 months a year ago. If rates continue to decline, some shortening of the core portfolio's average life could occur over the next year as we plan to avoid locking in lower rates for longer periods of time.

We are also improving yield through a better earning asset mix. While our indirect loan portfolio runs off, it is our intent to replace it with higher yielding loans, such as commercial, credit card, and HELOCs. Moreover, the total average loans comprise 54.9% of earning asset base for 2007 compared to 53% for 2006.

Our second strategy is to continue growing our fee-based businesses. Non-interest income increased 13.3% and represented 55.4% of total revenue in the fourth quarter. This improvement reflects continued growth in trust and securities processing income and deposit service charges. Peter will cover more detailed 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 closed two branches and opened one in the fourth quarter, leaving us at a total of 135 branches as of 12/31/2007. Repositioning and increasing utilization of our regional distribution network remains a priority.

In both St. Louis and Denver, we hired new leadership and sales support to focus on asset management and corporate trust. These actions also play to our strategy to strengthen our asset management businesses. We continue to strive for a larger presence throughout our footprint and especially in these key markets. Our focus is to provide a broad offering of services to our existing branch network.

Our fourth strategy is to continue to strengthen our asset management business. Trust and securities processing income increased more than 17.6% in 2007 to $115.6 million from $98.3 million in the prior year, primarily due to the success of our asset management business, which continues to be a key driver for UMB. The improvement in asset management was largely due to the $873 million or 8.6% increase in total assets under management.

Finally, our fifth strategy is to focus on capital management. Our priorities for this remain the same. They are first, to invest in growth either through reinvestment in businesses or through acquisitions 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 448,000 shares at an average price of $40.31 in per share during the fourth quarter for a total cost of $18.1 million. For the year, we repurchased 1.1 million shares at an average price of $39.37 and a total cost of $43.3 million. Yesterday, the Board declared the regular quarterly dividend of $0.15 per share for a total outlay of $6.2 million. For 2007, the total dividends paid were $23.2 million, a 6.1% increase over 2006 and a payout ratio of 32%.

We continue to look at several types of acquisitions from traditional banking acquisitions within our footprint to opportunities that would complement our payments, technology, asset management, corporate trust, and health-care service businesses. As always, we will be disciplined and prudent in this approach. All told, we had a good quarter and a record year. Our results were driven by sound execution as well as the investments we've made in our core businesses. And our associates have leveraged these investments into higher revenue and (technical difficulty).

I will come back to you with a few concluding remarks, but I would like to turn it over to Mike Hagedorn for a detailed review of our fourth-quarter and full-year results. Mike?

Thanks, Mariner, and let me add my welcome to everyone on the call this morning. First, I will provide a review of the fourth quarter and then turn to a few brief remarks regarding the full year. As Mariner indicated, we reported diluted EPS of $0.37 for the fourth quarter, which is flat from the same period in 2006. Higher revenue in the fourth quarter was offset by higher expenses, which were primarily driven by a pretax accrued liability of $4.6 million related to Visa's covered litigation provision. As Mariner mentioned, without this expense, our EPS would have been $0.43, a 16.3% increase.

Net interest income for the quarter increased $2.2 million in 2007 over 2006, due primarily to higher average earning assets and improved net interest margin. Net interest margin increased 14 basis points to 3.55% for the quarter from 3.41% in the same period of 2006. This improvement came primarily from a 4 basis point increase in our earning asset yield and a 16 basis point decrease in the cost of interest-bearing liabilities. Net interest income benefited modestly as we had $174.7 million roll-off of our core investment portfolio at an average yield of 4.58% and we purchased $235.7 million of securities at an average yield of 4.98%. The fourth-quarter purchases are larger than the roll-off due to the pre-buying of maturities as well as the repositioning of our portfolio mix as we swapped approximately $30 million in treasuries for agency CMOs.

As of December 31st, our public fund balances, including the seasonal inflows, amounted to approximately $1.7 billion, in line with our expectations. These funds are primarily held in higher yielding transaction accounts and repurchase agreements and are largely indexed. Typically we see a greater impact on our margin in January through March as a result of the seasonal public fund balances and we expect this trend to hold true again. We expect public funds to start declining in late January with the majority of the seasonal balances gone by the end of March. In 2008, $615 million in core portfolio securities should roll off at an average yield of 4.58%, of which $182 million will roll off in the first quarter at a rate of 4.56%.

In addition, approximately 63% of our loan portfolio is expected to reprice during 2008. If rates stay current levels or continue to decline, we anticipate a negative impact to interest income as a result of this repricing. The magnitude of this impact will be largely dependent upon the Fed policy decisions and market movements.

Non-interest income increased $7.9 million or 12.1% for the fourth quarter compared with the same period in 2006 due primarily to higher trust and securities processing income and deposit service charges. Trust and securities processing fees were up 19.2%. In addition, service charges on deposits were up 8.3% primarily due to fee increases or fee changes implemented by our consumer services division.

Non-interest expense increased $11.3 million or 11.4% for the fourth quarter of 2007 compared with 2006 with the most significant increases in salaries, employee benefits, equipment, occupancy and processing. Without the charge related to the Visa covered litigation provision, non-interest expense would have risen 6.7% for the quarter as Visa accounted for slightly more than 40% of this increase. Another driver of the increase were higher salaries and benefit costs, which were up $4.3 million in the fourth quarter over the same period in 2006. Much of this increase was due to higher base salaries and increased commissions and bonuses related to our improved financial performance for the year. A portion of the increase in the fourth quarter was $700,000 related to the increase we announced in profit-sharing.

Given the current market conditions, our credit quality metrics remain strong compared to the industry and historical trends. Non-performing loans including non-accrual, restructured, and 90-day past due loans as of December 31st, 2007 were $9.5 million or 0.24% of loans compared to $9.3 million or 0.25% last year.

Net loan charge-offs for the year continue to be stable, totaling $8.3 million for 2007 or 0.21% of average loans compared with 7 million or 0.20% of average loans last year.

Net charge-offs for the quarter increased to $3.2 million from $400,000 in recoveries in the same period last year. The higher net charge-offs in the fourth quarter were primarily due to one C&I loan charge-off.

Our allowance for loan losses to total loan ratio stood at 1.17% as of December 31st compared to 1.20% last year. We determine our provision by using a model that estimates a range of inherent risk in our loan portfolio. Given the current market liquidity and credit conditions, we deemed it prudent to be on the high side of this range.

Turning to the full year, we reported earnings for 2007 of $74.2 million or $1.77 per diluted share, an increase of 26.4% compared to 2006 earnings of 59.8 million or $1.40 per share. During the year, two significant events occurred that impacted earnings, the sale of our securities transfer product and the Visa covered litigation provision. Without these two events, our EPS would have been $1.74, up 24.3% over 2006.

Net interest income for 2007 increased $14.9 million or 7.1% compared to 2006. This was due primarily to higher average earning assets and an increase in net interest margin. Net interest margin was 3.44% in 2007 compared to 3.38% in 2006.

Non-interest income increased $33.8 million or 13.3% over 2006, due primarily to higher assets under management, corporate trust fees, and deposit service charges. Non-interest expense increased $25.7 million or 6.8% due primarily to an increase of salary and benefits as well as the $4.6 million related to the Visa covered litigation provision.

Turning to the balance sheet, our strong financial performance for the year was driven primarily by loan growth. At the end of December, loan balances were $3.9 billion compared with $3.8 billion a year ago. Total average loans for the year grew by 9% to $3.9 billion. At the end of December, total deposits were $6.6 billion compared with $6.3 billion a year ago, a 3.8% increase. The majority of the increase came from time deposits, which increased 9.2% in 2007.

Our average loan to deposit ratio for 2007 was 68.3%, up from 65.2% in 2006. This growth combined with our yield enhancement strategy resulted in healthy net interest income in 2007. For 2008, we expect this ratio to stabilize as a result of the significant runoff in our indirect loan portfolio.

Return on average equity and return average assets during 2007 were 8.49% and 0.93%, respectively, compared to 7.09% and 0.79% for 2006. We are pleased with these results, as they are indicators of the progress that we continue to make.

Capital ratios remain strong during 2007. Tier 1 total capital and leverage ratios at 13.74%, 14.58% and 9.63%, respectively.

With that, I will turn it over to Peter for some additional comments on our operating performance.

Thanks, Mike and good morning, everyone. I'd like to spend a few minutes providing some additional details on our operational strategies.

First, let me comment on our strategy to strengthen our asset management business. Total assets under management increased 8.6% to $11 billion from $10.1 billion at the end of 2006. Leading this growth is our proprietary family of mutual funds, which continue to play a key role in this success. Total assets in the UMB Scout Funds increased 16.4% from 5 billion at the end of 2006 to $5.8 billion at the end of 2007.

And our UMB Scout Funds leadership continue to be recognized by the industry. Jim Moffett, Manager of the UMB Scout International Fund, [minute] finished as the runner-up in Morningstar's 2007 International Manager of the Year contest for the second time in three years. We are very proud of Jim's accomplishments and, in fact, Morningstar's Christine Benz commented in their follow-up article "Moffett was also the runner-up for our International Stock Fund Manager of the Year in 2005, and he's likely to remain a contender or become a winner in the years ahead." I personally want to say congratulations to Jim and our entire international team.

We continue to leverage our talent with the fourth-quarter launch of the UMB Scout International Discovery Fund. This fund invests in small and mid-sized companies in various countries and has a goal of long-term capital appreciation. This fund will be managed by Jim Moffett and Michael Stack, two veterans in managing international funds.

Finally, we launched a new marketing campaign in Kansas City to raise brand awareness of our international and Small Cap funds. In 2007, Corporate Trust was a key driver within our asset management division. Corporate Trust's non-interest income increase was nearly $2.5 million or 20% over 2006. In the fourth quarter's Corporate Trust rankings released by Thomson Financial, UMB ranked fourth for the year by number of transactions of overall municipal trusteeships and paying agencies combined. Our 2007 performance against much larger competition is a reflection of our strong reputation and superior customer service. We remain encouraged with the opportunities for growth in this segment, both organically and through potential acquisitions.

Another important part of our asset management strategy is the implementation of a customer focused wealth management business model. We are encouraged by the results from the integration of our wealth management product and service offerings we initiated more than a year ago. With 12 client managers private banking has more than $47 million in loans and nearly $136 million in deposits. UMB Financial Services, our full-service brokerage subsidiary, had been another strong performer this year, contributing $1.8 million to the year's fee income growth.

Our current businesses continue to perform well. A key driver has been our commercial card program. Commercial cardholder volume increased 22.6% in 2007. The opportunities continue to be encouraging as our commercial current cardholder volume posted a monthly record three different times this year. In an environment of declining credit scores, we continue to write all of our credit card products at a very high level. We closely monitor credit scores of the entire portfolio. Our underwriting standards remain strong and our portfolio continues to score above industry standards.

UMB also continued to gain momentum in health care services. At the end of 2006, we had approximately 433,000 accounts and as the end of 2007, we have more than 794,000 accounts, an 83.4% increase. In the fourth quarter alone, we added more than 260,000 accounts. Total deposits and mutual fund assets were up 53.2% for the year and now exceed $100 million. These numbers are indicative of the tremendous growth potential in this business. Typically, we see large account growth in the fourth quarter as companies have their annual enrollment process for benefits, which tends to drive a large increase in accounts. We continue to see opportunity as many of the newly acquired customers begin to increase their balances and withdraw for their health-care needs using our multipurpose debit cards.

UMB Investment Services group continues to be a solid performer. Non-interest income for the year increased 15.9% over 2006. We made several key hires to strengthen the leadership team and acquired several new clients.

In addition to growing our fee businesses, we continue to focus on improving operating efficiencies. During 2007, average loans per FTE increased 10.7% to $1.15 million, and average deposits per FTE increased 5.8% to $1.68 million. And non-interest income per FTE increased a healthy 15.1% to nearly $85,000. At the end of the fourth quarter, we had 3,357 FTEs or 75 fewer FTEs than in the same period last year.

Our 2007 efficiency ratio improved to 76.3% from 78.95% during all of 2006. Over the past few years, our focus on accountability and discipline around expenses has allowed us to reduce our efficiency ratio from 83.5% in 2004 to our current level. Although we are pleased with the improvement, we recognize there is still opportunities for further improvement and remain focused on this area. With that, let me turn it back to Mariner for some concluding remarks.

Thanks, Peter. I'll end today's conference call by reminding everyone that 2007 was a great year for UMB, with both record revenue and net earnings. I'd truly like to thank our associates for their hard work and dedication in helping us achieve this for our shareholders. In the past few months -- if the past few months are an indication of what 2008 holds for the economy and the finance services industry, it will no doubt continue to be a bumpy ride for this sector. In these challenging times we plan to run our Company, as always, without deviating from our time-tested model and tradition of quality, liquidity and capital spend. With that, I'll turn it over to the conference call operator for any questions.

(OPERATOR INSTRUCTIONS). Peyton Green, FTN Midwest Securities.

Good morning. Michael, I was wondering if you could talk a little bit about the Feds rate cut yesterday and what effect that might have on the balance sheet or what actions you all might take to counteract it.

Good morning, Peyton. I think it's clear that people weren't expecting a 75 basis point cut and especially off cycle not during their normal meeting times. So with that said, we were preparing for Fed cuts on our deposit costs previous to yesterday's announcement and albeit, not 675 basis points. And so clearly it's going to reduce interest income, but whether it reduces interest margin or not remains to be seen. As we try to make cuts to our interest-bearing liabilities, and obviously become probably I would think a little less dependent on repo income go forward, especially once the public fund dollars work their selves through the balance sheet and they are probably off by March.

So I think the question really remains to be seen as far as how much can we do on the liabilities side to offset what's obviously going to reduce interest income go forward.

Okay. And I guess to what degree does the C&I book or real estate loan book reprice overnight?

It does not reprice overnight, as we talked about before. We did talk about a little more than 65% of our total loan portfolio -- I think it's 68 -- 63 -- close, within a year. So it does not reprice overnight. There will be a lag impact. Many of the loans are tied to various indexes, and it will take time for those indexes and the repricing characteristics, whether it be 30-day or 90-day T-bill either work their selves through the system.

Okay. And then separately, the personnel expense line was up about 9% year over year in the fourth quarter, and I was just wondering if you could indicate what portion of that was for I guess HR kind of plans or how much of it was related to salary increases or bonus accruals.

Remember in the fourth quarter we have the full-year impact because you are comparing it to you, I assume, the fourth quarter of '06. So you have the full-year impact of salary increases that were granted in 2007, so that's part of it. And we talked about the big driver that salaries play in there. We also talk about the fact that -- we did talk about the fact that we had an increase in our profit-sharing accrual. That was another $700,000 in the fourth quarter. And then we have some commission and bonuses programs related to higher performance this year that have gone up as well.

That's the bigger driver of the normal of the commissions.

Okay, great. And then if you could comment on the credit card announcement that you all made yesterday to kind of spur the growth of the credit card unit and what your expectations are. Is that more just on the consumer side or is that also commercial?

That's mostly consumer and it's sort of an offering enhancement. It's a technology company that we are associated with, that announcement, that allows us to customize the card on an individual basis. So it's an enhancement of the card offering at the retail level.

Okay.

If you want me to go any further I can. It's -- there's some image capabilities, customers can download images onto the card and there's a bunch of other features. But it's mainly an enhancement at the technology level.

Okay. And then in terms of your service charges on deposit accounts, with the Fed cutting so aggressively, does that help you from an earnings credit perspective?

Yes, it clearly does. Your timing is good. We actually met on this yesterday. We're taking a look at what those rates currently are and what they're going to be, obviously, on a go-forward basis given yesterday's action. But yes, that would help on the -- especially on the commercial side.

Okay. Good enough. And then are you all seeing any signs of increased stress in any particular regions right now throughout your footprint?

I wouldn't necessarily say so, Peyton. It's Peter. They are all relatively consistent. We're watching all of them very, very closely right now. But as you know, the Midwest portion of our market, which is where we live and breathe, didn't suffer some of the excesses that the coasts and other parts of the country did. So it is not something that we are particularly worried about, although it's something we're watching very carefully.

Okay, great. And then last question, Michael, in terms of the seasonal deposit flows, in the normal kind of 7 to 10 basis point drop in the margin between fourth and first quarter -- do you think that holds here or is there anything unusual about the flows this year?

There's nothing unusual about the flows, but remember these are indexed accounts and so they are going to reprice given what happened yesterday.

Okay.

Peyton, this is Mariner. I'd like to correct something. We're making two different announcements on the credit card side. And Centura, which is the release you are talking about -- I wasn't sure which one you were talking about -- it's still a technology play largely. It's a company that helps credit card operations model their portfolios and helps with profitability and modeling and that kind of thing. So two different announcements. I'm sorry, I didn't know which one you were talking about.

Okay great. Thank you.

(OPERATOR INSTRUCTIONS). At this time there no further questions. I'd like to turn it back to Begonya Klumb. Please go ahead, ma'am.

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 February 6. And as always, you can contact me at UMB Investor Relations with any follow-up questions by calling 816-860-7906. Again, we appreciate your interest and time.

Thank you, ma'am. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. Again, if you'd like to listen to a replay of today's conference call, you can dial 303-590-3000 or toll free 1-800-405-2236 and you can access that by using the code 11104690 followed by the #. Once again, those numbers are 303-590-3000 or toll free 1-800-405-2236 and you can access by using the code 11104690 followed by the #. Thank you for using ACT Teleconferencing. You may now disconnect and have a pleasant day.