UMB Financial Corp (UMBF) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the UMB Financial Corporation first-quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded today, Wednesday, April 23, 2008.

I would now like to turn the conference over to Ms. Begonya Klumb. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining us for our conference call and webcast regarding our 2008 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 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 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 call or listing to the webcast have had a chance to review our earnings release dated April 22. If not, you will find it on our website at UMB.com.

Our earnings release includes both our GAAP-based income statement and a reconciliation to the non-GAAP measures discussed in the release, which include certain pretax adjustments to noninterest income and noninterest expense, the tax effect of those adjustments, and adjusted net income. These adjustments comprise a gain on the mandatory redemption of Visa shares and the reversal for liability accrual related to Visa's covered 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 illumination 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 first-quarter results. Peter will follow with a discussion 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. Following a record year in 2007, UMB continued to deliver strong growth and record net income in the first quarter of 2008.

With or without the impact of Visa's initial public offering, net income totaled $32.4 million or $0.78 per diluted share, an 86.8% increase from the $17.3 million or $0.41 per diluted share for the first quarter of '07.

These results reflect the impact of the $8.9 million gain on the mandatory redemption of Visa shares related to the Visa IPO, as well as the reversal of the Visa covered litigation provision of $4 million.

Excluding these transactions, UMB reported record net income of $24.1 million or diluted EPS of $0.58, a growth of 39.1% over the first quarter of 2007. This strong financial performance was driven by record revenue, noninterest income and loan balances, together with modest expense growth.

As always, we have never wavered from our high credit quality standards while achieving these results. These times of unprecedented pressure in the financial services industry have validated our time-tested model based on prudent risk profile and uncompromised underwriting standards.

In addition to our solid foundation, we believe our performance is also evidence that our growth strategies are working. With disciplined execution, our associates are translating those strategies into improved performance and returns.

As a reminder, our first strategy is to focus on yield enhancement, and we are continuing to make progress optimizing the mix of our earning assets and liabilities.

During the first quarter of 2008, end-of-period loans increased 5.7% over the same period in 2007, representing the 19th consecutive quarter of year-over-year loan growth. We ended the quarter with $4.1 billion in loan balances, which reflect continued growth in commercial, credit card and home equity loans. These increases helped offset the decline due to our decision to run off our indirect auto loan portfolio last summer. As of March 31, 2008, our indirect portfolio had balances of $455 million, a 33% decrease over March 31, 2007.

Our commercial loan portfolio continued to perform well in the first quarter, with nearly an 18% increase in balances over the prior year. Currently, our overall loan pipeline continues to look good.

Our credit card portfolio increased more than 20% year over year, with all four segments -- consumer, commercial and private-label -- recording strong double-digit growth rates. While our credit card portfolio growth has been significant, our credit quality metrics remain strong and our underwriting practices have not changed.

Our home equity loans grew 32%, continuing a strong trend over the past three years. We have increased HELOC loans from 1.1% of our loan portfolio at the end of 2002 to 6.4% of our loan portfolio at the end of the first quarter of 2008. Finally, the credit quality of this portfolio also remains excellent.

We continue to focus on our existing customer base and footprint to generate this growth. Average deposits increased 8.9% over the same period in 2007, and our end-of-period deposit growth was 16%. Noninterest-bearing deposits were 30% of total average deposits, well above the industry average. This remains a key strength of our deposit franchise.

Our core investment portfolio average life was 35.1 months at the end of the first quarter of 2008 compared to 37.1 months at the end of the fourth quarter of 2007. Due to the current rate environment, we expect our core investment portfolio average life to become somewhat shorter as we avoid locking in low rates for long periods of time.

Our second strategy is to grow our strong fee-based businesses. Noninterest income represented approximately 57% of total revenue in the first quarter of 2008 and grew 26% compared to the same period of 2007. Without Visa-related transactions, noninterest income grew 12.9%.

Trust and securities processing income, deposit service charges and credit card service income continue to be major drivers of growth in fee income. Peter will cover this in his comments.

Our third strategy is to leverage our distribution network. As a part of this strategy, we will continue to make investments in targeted markets where we have identified demographic and business trends that fit our vision for growth and returns. 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 through our existing distribution and to deepen our relationships with our customers. Our marketing strategy supports these objectives through different activities, including the introduction of a new brand icon for the Company called the Nudge. We launched the Nudge during our HELOC campaign in print, outdoor, online and in radio spots in the majority of our markets. We are very excited and believe the Nudge will help differentiate us from a crowded marketplace and make our message more compelling. So look out for the Nudge.

On March 10, we launched a new 4.5% two-year fixed HELOC promotion. Given the current economic environment, we believe consumers are more rate-focused and, as a result, our strategy for HELOC campaign is to encourage switching rather than promote new purchases. The marketing campaign generated a record number of applications in March, with an approval ratio of 68%.

Our fourth strategy is to strengthen our asset management business. During the first quarter, trust and securities processing income increased 14.4% to $31.2 million. This improvement was primarily driven by increased assets under management and higher revenue from our UMB Fund Services Group. Peter will also cover this in his comments later.

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 acquisitions that are a good strategic financial, operational and cultural fit; and second, to consider increasing our dividend over time; and third, to repurchase stock when it makes sense to do so. To this end, in the first quarter, we repurchase 485,664 shares at an average price of $38.33 per share, for a total cost outlay of $18.6 million.

Also, yesterday, the Board increased the regular quarterly dividend by 10% to $0.165 per share, for a total outlay of $6.8 million. This is the seventh increase in our quarterly dividend since October of 2003, with a total increase over this period of 57%.

These five strategies, along with our focus on efficiency, will continue to drive performance in 2008 and beyond. With safety and soundness at our core, we remain committed to growing revenue while maintaining strong expense control, prudent credit quality standards and a company that is focused on the shareholders' investment.

Now I will return the call to Mike Hagedorn, our CFO, for some further comments. Mike?

Thanks, Mariner, and good morning to everyone. As Mariner indicated, we reported record quarterly earnings of $32.4 million or $0.78 per diluted share for the first quarter, up 86.8% from $17.3 million or $0.41 per share in this same period last year.

Excluding the Visa-related transactions, we recorded net income of $24.1 million or $0.58 per diluted share, up 39.1% from the same period last year. A key driver of our net income was our ability to effectively manage our funding costs.

Interest income for the quarter increased $7.4 million or 13% over the same period in 2007. As rates fell, our interest income declined 1.5%. However, this decline was more than offset by an 18.8% decrease in our total interest expense, leading to the 13% increase in our net interest income.

Net interest margin increased 18 basis points to 3.50% from 3.32% in the first quarter of 2007. This improvement was primarily due to the lower cost of interest-bearing liabilities.

In the first quarter of 2008, the cost of interest-bearing liabilities decreased to 2.67% compared to 3.56% for the first quarter of 2007, a decline of 89 basis points. This offsets the 46-basis-point decrease in average earning assets yields.

Due to the declining rate environment, free fund contribution declined to 67 basis points from 92 basis points in the first quarter of 2007.

On a sequential basis, although net interest income increased $3.5 million or 5.8%, net interest margin decreased 5 basis points compared to the fourth quarter of 2007. The linked-quarter margin contraction was primarily due to the increased size of the balance sheet as average earning assets increased $615.7 million from the fourth quarter of 2007. This was mainly related to the expected seasonality of the public fund business. By the end of March, public fund balances had predominantly returned to the levels they were at at March 31, 2007, as anticipated.

During the first quarter, $182 million in core portfolio securities rolled off at an average yield of 4.56%. In turn, we purchased $201 million of securities at an average yield of 3.63%. Over the next three months, $155 million of core investments with an average yield of 4.59% will roll off. Over the next 12 months, $651 million of core investments with an average yield of 4.48% will roll off.

In the current lower rate environment, we expect repricing of these securities to negatively impact our interest income. Nevertheless, thanks to the actions we took over the past three years to lengthen our core investment portfolio's average life, we are pleased to have some higher yields locked in for longer periods of time. In addition, 66% of our loan portfolio is expected to reprice during the next 12 months.

Noninterest income increased $17.6 million or 26% for the quarter ended March 31, 2008, compared with the same period in 2007. Excluding the Visa gains, noninterest income increased 12.9% from the same period last year. The improvement was primarily due to higher trust and securities processing income, deposit service charges, bank card fees and bond trading income.

Trust and securities processing fees were up 14.5%, primarily due to an increase of $774 million in assets under management and the UMB Scout Funds from the first quarter of 2007.

Deposit service charges increased 9.2% or $1.7 million, primarily due to higher deposit balances versus the first quarter of 2007. Trading and investment banking fees were up 14%.

Noninterest expense increased $1.1 million or 1.1% for the first quarter compared with the same period in 2007. Without the reversal related to the Visa covered litigation provision, noninterest expense rose $5.1 million or 5.2%. The most significant increases were in compensation expenses and processing fees.

Salaries and benefits increased $3.9 million or 7.5% as a result of higher commissions and bonuses, as well as equity-based compensation and employee benefit costs.

The processing fee increase is primarily related to increased third-party custodian fees related to international transactions from mutual fund clients. Fees are also up due to increased subtransfer agency fees paid to vendors and service providers for the shareholder servicing of the UMB Scout Funds.

Credit quality ratios in the first quarter of 2008 reflected UMB's continued strong commitment to high-quality lending. Nonperforming loans, including nonaccrual and restructured loans, decreased to $5.1 million as of March 31, 2008, or 0.12% of loans, from $7.6 million or 0.2% the same period last year.

Net loan charge-offs also showed a positive trend, totaling $1.5 million for the first quarter or 0.15% of average loans when annualized, compared with $1.7 million or 0.17% of average loans when annualized during the same period last year.

Our credit quality continues to remain strong compared to both our standards over the past few years and the industry. Our provision for loan losses increased to $3 million in the first quarter of 2008 from $1.5 million a year earlier. However, our provision as a percent of loans has remained stable at 1.15%.

Now, turning to the balance sheet, one of the key performance drivers for the quarter was loan growth. At the end of March, loan balances reached a record $4.1 billion compared with $3.9 billion a year ago. Total end-of-period loans grew by 5.7%, primarily driven by a 17.8% increase in commercial loans, a 32% increase in home equity loans and a 20.7% increase in credit card balances.

This growth was offset by a 33.3% planned decrease in our indirect auto portfolio. As of March 31, our indirect auto portfolio stood at $454.7 million compared to $682.2 million a year ago. Again, this runoff is part of our yield enhancement strategy that Mariner discussed earlier during his comments.

During the first quarter of 2008, average total deposits were $6.2 billion compared with $5.7 billion a year ago, an 8.9% increase. Average deposits increased in each category except for savings.

Our ratio of average loans as a percent of earning assets decreased slightly to 52.4% for the quarter from 52.9% last year. This decline is partly related to the indirect portfolio runoff previously mentioned.

Return on average equity and return on average assets during the first quarter of 2008 improved significantly to 14.12% and 1.50%, respectively, from 8.19% and 0.86% for the same period in 2007. Excluding the Visa transactions, our return on average equity was 10.52% and our return on average assets was 1.12%, which are still significant improvements.

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

Thank you, Mike, and good morning, everyone. I would like to spend the next few minutes providing some additional details on our growth and operational strategies, starting with our strategy to grow our fee businesses.

One of our Company's greatest strengths during this time of economic uncertainty is our ability to continue to drive improvement in our fee-based businesses. This is reflected by our noninterest income growth of 12.9%, excluding the Visa-related gains.

We continue to add to our strong position in healthcare services. Specifically, we are focused on the administration, custody and debit card processing for HSA and FSA products. We are committed to maintaining our strong position by continuing to acquire new HSA and FSA savings and investment accounts and the associated debit cards and related transactions.

The number of accounts grew 58.8% in the first quarter, with deposits and assets increasing 48.9% when compared with the same period last year. At the end of the quarter, we had in excess of 814,000 HSA and FSA accounts and nearly $122 million in deposits and investment assets. We are pleased with the continuing growth that we are experiencing.

Growing our credit card business is another key part of our fee business strategy. This strategy is essential as consumer behavior continues to shift away from checks and currency to card-based transactions.

A key element of this effort is to grow our commercial credit card program. Cardholder volume increased 18.8% over the same period last year. Commercial cardholder volume posted another record month in March of 2008, with total volume of nearly $52 million. The growth in purchase volume also extends to our consumer and private-label customer segments.

As a result, our total cardholder volume increased by 21.7% to $271 million in the first quarter of 2008 compared to $222 million in the first quarter of 2007.

Likewise, new accounts for all segments totaled almost 15,000, an 11.6% increase over the new accounts generated in the same period last year. The new account volume was partly driven by successful sales campaigns throughout our branch network.

After a solid 2007, UMB Fund Services continues to report strong double-digit revenue and earnings growth. Noninterest income increased 41.7% over the same period in 2007, due in part to deepening relationships with existing customers, as well as new customer relationships in our mutual fund and alternative investment client base. Both of these led to higher fee income. Higher revenue, coupled with increased efficiencies and leverage of existing scale, led to strong earnings growth.

I would like to take a moment to comment about our strategy to strengthen our asset management business. Total assets under management increased 7.2% to $10.9 billion from $10.1 billion at March 31, 2007. Leading this growth continues to be our proprietary family of mutual funds. Total assets in the UMB Scout Funds increased 15.3%, from $5.1 billion at March 31, 2007, to $5.8 billion at March 31, 2008. During the first quarter, our UMB Scout Funds reported net flows of $319 million, which helped offset the adverse effect of lower equity markets.

During the quarter, we received national and local coverage for our UMB Scout Funds, with more than 25 stories appearing in print and broadcast mediums. Media relations is an important element in our marketing mix, and during the quarter we had stories and appearances on CNBC, CNNMoney.com, Investor's Business Daily and TheWallStreetJournal.com. These outlets provide us with an opportunity to tell our story to a wide audience.

Another important part of our asset management strategy has been the implementation of an integrated wealth management model. We are encouraged by the results from this approach we initiated just two years ago. With 10 client managers, private banking has more than $46 million in loans and nearly $154 million in deposits, compared to $12 million in loans and $76 million in deposits during the same period last year.

Finally, corporate trust continues to experience strong growth. Corporate trust assets under administration increased 8.8% from March 31, 2007, to March 31, 2008. We achieved this growth while the overall market suffered a 50.3% decline in municipal bond issuance in the first quarter of 2008.

In the first quarter's corporate trust rankings released by Thomson Financial, UMB continues to maintain our ranking of fourth by number of transactions of overall municipal trusteeships and paying agencies combined. Our performance against much larger competition is a reflection of our strong reputation for superior customer service.

And we continue to focus on enhancing our operating efficiencies. We currently have numerous cost-saving efforts underway. Our disciplined approach is not only to increase revenue, but also better manage expenses. This has led to the operating leverage reflected in our first-quarter results.

Excluding the Visa transactions, our revenue grew 12.9%, while expenses grew only 5.2%. This led to a non-GAAP net income growth of 39.1% and a non-GAAP efficiency ratio of 71.8%. This is our lowest quarterly efficiency ratio since the first quarter of 2001.

We also continue to see improvements in key productivity metrics. For example, average loans per FTE and revenue per FTE increased 7.9% and 22.8%, respectively, from the same period last year. Excluding the Visa-related gain, revenue per FTE increased 15.5%. Our end-of-period FTEs decreased by 94 to 3306 as of March 31, 2008, from 3400 in the same period last year.

Finally, we continue to make strides on our green initiative. This initiative not only demonstrates our support for a cleaner, more sustainable environment, but also makes good business sense. During the first quarter, we worked on several efforts to reduce energy usage and improve the carbon footprint across all UMB facilities. We are also putting the systems in place to track our progress against this initiative.

In addition to protecting the environment, we expect these actions will lead to expense savings, and more importantly, to increased trust from our associates, customers and shareholders.

With that, I'd like to turn it back to Mariner for some concluding remarks. Mariner?

Thank you, Peter. As I commented earlier, this quarter was a record quarter on its own merit. Many in the industry posted improved earnings, largely or solely due to the Visa transaction. This is not the case with UMB.

Over the past 95 years, we have built a bank that is safe, strong and stable during all types of economic times. Our ability to weather the current storm during this time of unprecedented pressure in the financial services industry has validated our time-tested business model based on uncompromised underwriting standards and our philosophy of taking risks based on relationships.

While many of our competitors are experiencing loan losses and retrenching in their approach to credit extensions, we have capital and liquidity. This advantage provides us with opportunities to generate more loans and to service our customers' needs better. As always, our customers know they can count on more from UMB.

Thank you for being with us on the call today, and I will turn it back over to the conference call operator to open the session for your questions. Thanks again.

(OPERATOR INSTRUCTIONS). Peyton Green, FTN Midwest.

I was wondering if you could comment a little bit -- you mentioned that you would suffer from the repricing of investment securities going forward. But to what degree would you operate with a smaller portfolio rather than reinvesting in shorter, lower-yielding bonds?

It's Mike. As we mentioned earlier, over the next 12 months, the rolloff yield is 4.48%. We obviously expect to reinvest those at lower yields, and some slight reduction in the duration of the portfolio is something that we are currently looking at.

Okay. All right, great. And then --

Second part of your question is would we replace them, I assume, with loans otherwise, right?

Yes.

And of course, we are looking for good quality loans all the time. And to the extent that that eats its way into the size of the investment portfolio, either way we are happy.

Okay. And then in terms of the loan growth, you all had very strong commercial loan growth. Was there any particular sector that contributed to it this quarter that it might not have been apparent over the past couple?

It's interesting. We are particularly pleased -- it's actually come across our entire footprint in all of our markets. I would -- I somewhat attribute it to -- my best guess here is that while our competitors were retrenched and looking internally, we are out -- we have been able to -- our sales force has been able to be out on the street and shaking trees and developing new relationships. So it's just across the board. It's new business alongside extensions from current customers.

I would also comment -- it's Peter -- that we are not in Arizona in a big way. We are not in Vegas. We are not in California or Florida or some of the places that have been particularly hard it. But we are in the heart of the country right now, where agriculture and energy are doing particularly well, and the economies in the cities we generally do business in are not being hurt quite as significantly as some of the other parts of the country.

Okay, great. And then on the deposit side, you all saw pretty good deposit growth. Anything in particular going on there, or is it just more of what you saw on the loan side, just better selling?

Selling, and I think also, at the institutional level and some of the larger depositors, there's a flight to quality. There's -- a lot of mutual funds are going to cash, and there seems to be a sense of insensitivity to interest rates right now as rates have been dropping.

Great. All right. Thank you very much.

(OPERATOR INSTRUCTIONS). I'm showing that we have no further questions at this time. Please continue.

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 May 1. 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.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.