UMB Financial Corp (UMBF) 2009 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. (Operator Instructions). As a reminder, this call is being recorded today, Wednesday, April 22, 2009. I would now like to turn the conference over to Ms. Abby Mayer, Director of Investor Relations, UMB Financial. Please go ahead, ma'am.

Thank you. Good morning everyone, and thank you for joining us for our conference call and webcast regarding our 2009 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.

UNB has no duty to update such statements and undertakes no obligation to update or supplement forward-looking statements that become untrue because of new information, future events, or otherwise.

By now we hope most of you on the call or listening to the webcast have had a chance to review our earnings release dated April 21. 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 of a liability accrual related to Visa's covered litigation escrow. 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 a more reliable -- indicators 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 with a particular focus on lending activities and capital management. Then Mike will review the details of our first-quarter results, and Peter will follow with a discussion of operating performance against our strategies, focusing primarily on noninterest income and fee-based businesses. At the conclusion of this call, we will be happy to answer your questions.

Now I will turn the call over to Mariner Kemper.

Thank you Abby. Welcome everyone and thank you for joining us today. UMB's results for the first quarter of 2009 demonstrate our continued commitment to stable, strong performance. Our net income for the quarter was $22.6 million, or $0.55 on a fully diluted basis. While this is a decrease from the same period last year, we increased average earning assets by $1.7 billion and improved net interest income by $10.8 million, all the while maintaining a tangible equity ratio of 8.52%.

We are pleased with these positive results. We continuously evaluate our strategies to ensure we align ourselves internally to achieve our goals, especially as we face an uncertain external environment. At UMB our mission is clear. We will continue to accelerate fee business growth, maximize efficiencies, grow loans and deposits, deploy capital prudently and appropriately, and deliver the unparalleled customer experience.

Our first strategy is to continue accelerating our fee-based business growth. Refining our capabilities to capitalize on diverse revenue streams will help us achieve this goal. Although we faced challenging equity markets, noninterest income generated nearly half of our total revenue during the first quarter. Overall, noninterest income was down 9.5% in the quarter, excluding the mandatory redemption of Visa shares in the first quarter of last year. Later in the call Peter will discuss our noninterest income in greater detail and will include a discussion regarding our operational performance of these businesses.

Our second strategy is to maximize efficiencies. While our expenses were up slightly over the same period last year, we remain laser focused on controlling expenses and fully maximizing efficiencies throughout the Company. There are several examples of this that will be highlighted later in the call.

Our third strategy is to grow loans and deposits. True to our plan to grow both sides of our balance sheet, our loans and deposits displayed solid growth in the quarter. Total loans grew 11.7%, excluding the impact of indirect auto loan runoff. This is evidence that UMB continues to extend credit to both new and existing customers across our entire footprint.

On an end-of-period basis, deposits grew 17.4%, and we are pleased to once again report that our noninterest-bearing deposits continue to make up a significant portion of our deposits at 34.1% of total deposits. Our ability to gather core deposits highlights a competitive advantage for UMB which allows us to fund the growth of quality earning assets while maintaining ample liquidity. To that end average earning assets increased 21.7%.

We continue to grow our loan portfolio without changing our risk profile. Our investment portfolio also grew again in the first quarter to $4.5 billion compared to $3.2 billion in the first quarter of 2008. As Mike will discuss later in the call, volume combined with low cost of funds allowed us to grow net interest income this quarter by 16.8%, which now represents just over 52% of total revenue. We are pleased with the healthy loan growth during these times, and our underwriting standards are strong as ever.

While we have seen a slight increase in our nonperforming loans and net charge-off metrics, these are a direct result of the economic environment. Our credit metrics continue to perform significantly better than the industry averages. Year-to-date net charge-offs were 0.40% percent of average loans, and nonperforming loans were 0.34% of average loans. In comparison, the industry's net charge-off ratio was 1.53%, and the nonperforming loan ratio was 2.92% at the end of the fourth quarter.

Real estate loan growth was the most significant contributor to loan portfolio this quarter, increasing $323 million or 24.8%. Our HELOC portfolio grew 39.1% to $[369.9] million, a result achieved without wavering on our underwriting standards. Charge-offs in this category were a mere 7 basis points of total home equity loans. We will continue to be competitive in this category by offering compelling products and maintaining our time-tested lending practices.

Commercial real estate loans also accounted for much of the growth in the real estate loans with a 21.9% increase. Our commercial officers have seen increased opportunities to provide financing for owner-occupied real estate to strong local companies. Commercial and industrial loans increased 2.5% at the end of the quarter at $2.1 billion. Driving the growth again this quarter were loans to new customers.

Credit card balances increased 9.5% to $258.5 million. Our credit quality remains strong due to our underwriting standards and customer mix. A large segment of our commercial cardholders are government entities that pay down their balances each month but provide steady interchange fees through the transaction volume. While our consumer card charge-offs are at historically high levels, it remains well below the industry average of 8.82%. For the first quarter our bank card charge-offs were $2.5 million, or 1% of credit card balances, and represented 59% of total net charge-offs for the Company.

Our fourth strategy is to cap -- is capital management, which focuses on an effective utilization of capital through a balanced approach of share buybacks, dividends, acquisitions, and internal growth opportunities. For the first quarter we repurchased 341,664 shares at an average price of $36.42. Our capital position allows us to repurchase shares at prices that are attractive and accretive to earnings per share. We are pleased to be able to continue this effort while many in the industry have halted buybacks even as share prices have fallen.

Many in the industry have also scaled back on dividends. UMB continues to have high-quality earnings, and as such we paid a dividend of $0.175 per share during the quarter. Capital levels remain strong at UMB. For the first quarter we reported a Tier 1 capital ratio of 13.9%. Our capital position is key -- is a key strength as it allows us to take advantage of opportunities in a number of areas to enhance shareholder value. For example, in our mergers and acquisitions group we continue to focus on finding acquisition targets that would make a good, strategic, financial and cultural fit for UMB. In all times we believe it is appropriate to maintain capital in excess of regulatory requirements.

Finally our fifth strategy is to deliver the unparalleled customer experience. We are pleased to work with such outstanding associates who deliver time and again to each other and to our customers. Recently UMB was recognized by the Kansas City Urban League for our commitment to diversity. Investing in our associates improves our capabilities to deliver on this promise.

Overall, 2009 is off to a good start as we continue to find opportunities to grow our business and remain focused on those areas that are within our control.

Now I will return the call, over to Mike Hagedorn, our CFO. Mike?

Thanks Mariner, and good morning everyone. Before getting into specifics about the financials, I think it is important in light of the current environment to emphasize the quality of our balance sheet. Our earning assets and loan growth are key strengths, and we are growing these categories without compromising our credit standards. We have maintained the high quality of our investment portfolio, which is the result of our continued practice of not buying securities outside of our quality standards and duration timeline for the sake of short-term yield improvements.

Secondly, the diversity of our deposit sources provides another key advantage. With the high level of free funds, we can maintain high levels of liquidity, better manage our funding costs, and reduce the need to borrow from other short-term funding sources.

Turning to the results for the quarter, net interest margin decreased 11 basis points to 3.39%. The yield on average earning assets declined to 4.02% from 5.50%, and the cost of interest-bearing liabilities fell to 0.87% from 2.67%. While spread increased, free funds contributed 24 basis points to margin, which was a decline of 43 basis points compared to the same period last year. During the last several calls we have emphasized our belief that margin would contract. So far the compression has not been as significant as anticipated. We continue to closely monitor net interest margin in this challenging yield environment and fortunately continue to add loans and investments with positive spread.

Return on average assets and return on average equity were 0.89% and 9.23%, respectively, down from 1.5% and 14.12% in the first quarter last year. The absence of last year's Visa items and this year's larger balance sheet were the primary drivers of this decline.

Another strength of our business model is our healthy, well diversified mix of revenue streams. Net interest income comprised 52.2% of total revenue compared to 45.8% last year excluding the Visa redemption, and increased 16.8%. Net interest income gains were primarily the result of increased volume as average earning assets grew $1.7 billion or 21.7%.

The increase in average earning assets was comprised of two parts -- a $1.4 billion or 42.8% increase in total securities, and a $333.3 million or 8.2% increase in average loans. These results were also achieved in part by reducing total interest expense faster than the decline in total interest income.

To respond to challenging economic conditions, we are focused on cost control efforts. Although noninterest expense increased 3.3% compared to the first quarter last year, excluding the Visa provision it decreased 7% on a linked-quarter basis. The year-over-year increase was due to a $3 million increase in salary and benefits expense and a $1.1 million increase in bank card expense primarily due to higher card processing expenses.

Turning to the investment portfolio, we project an average life of 26 months. During the quarter $264 million in core portfolio securities rolled off at an average yield of 4.19%. In turn, we purchased $204 million of securities at an average yield of 3.02%. Over the next three months $249 million to $358 million of core investments with an average yield between 4.41% and 4.52% will roll off. Over the next 12 months $1 billion to $1.4 billion of core investments with an average yield of 4.15% to 4.34% will roll off.

In the current low-interest-rate environment we expect the repricing of these securities to negatively impact our interest income. We are providing ranges for these figures because of some remaining uncertainty regarding prepayment speeds on our mortgage-backed securities portfolio. To date, actual prepayments have been slower than projected. Under faster prepayment assumptions the average life is about 25 months, and with actual prepayments projected, it would be closer to 33 months. In addition 62% of our loan portfolio is expected to reprice during the next 12 months.

Keeping to our high standards, we finished the quarter with strong capital ratios. Tier 1 capital, total risk-based capital, and leverage ratios were 13.9%, 14.9%, and 8.1%, respectively.

For the rest of 2009 we will continue to focus on growing both sides of our balance sheet. We believe the remainder of 2009 will present opportunities for quality growth. Now I will turn it over to Peter, who will provide details regarding our noninterest income and operational performance.

Thanks Mike, and good morning everyone -- from downtown Kansas City. As Mariner discussed, we continuously examine the operating environment and refine our strategies accordingly. We also gauge our operating performance against these strategies to measure our progress. I would like to highlight our operating growth strategies and our progress against each of them. I will focus primarily on our fee businesses and noninterest income.

We continue to focus on accelerating the growth of our fee businesses. In this environment the equity markets represent a short-term headwind. The current market environment has negatively impacted our noninterest income, which decreased 9.5% excluding the impact of the Visa redemption in the first quarter of 2008. This decline was primarily due to trust and securities processing income, which fell $6.3 million to $24.9 million.

One of the key drivers in the fee-based category continues to be our asset management business, which consists of personal trust services, institutional money management including the Scout Funds, private banking, correspondent services, corporate trust, and brokerage services. Noninterest income from this segment decreased 15.8% to $19.3 million.

Total assets under management fell 16.5% to $9.1 billion from $10.9 billion on March 31 of 2008. Our Scout Funds had balances of $4.5 billion at the end of the quarter, down 22.4% from March 31 of 2008. In comparison, the industry's assets under management declined 33.4%.

For the quarter Scout Fund net equity and bond fund flows were a positive $247.1 million. Money market funds experienced $309.6 million in net redemptions during the quarter. While this quarter proved challenging for the investment management business, we continue to invest in this business line, and we are positioned well to benefit as markets improve and investors return to the equity and fixed income [markets].

Another driver in trust and securities processing income is our fund services business. Negative market action also impacted this business, as fee income is partially asset-based and as a result, it declined 29.1% to $8.7 million.

We are fortunate to have broad diversity in our fee revenue, and I would like to share results from a couple of business lines that performed very well during the first quarter. In just three years, our private banking group has delivered strong operating results. The group has increased its loan portfolio by more than 91% and increased deposits 107% in the quarter. We have been fortunate to capitalize on the existing market dislocation to hire several seasoned private banking and wealth management professionals. We believe UMB's positive reputation and strength during these very turbulent times played a significant role in attracting these individuals.

Turning our attention to healthcare services, we continue to build on our strong position in this space. The number of accounts grew 35.4%, and deposits and assets increased 38.1% when compared with the same period last year. At the end of the quarter, flexible spending accounts and health savings accounts exceeded $1.1 million while deposits and investments exceeded $168 million. Since 2004 deposits attributable to healthcare services have increased at a compounded annual rate of 83%.

Our second strategy is to continue maximizing efficiencies while retaining our unique relationship-based approach. [While our] efficiency ratio for the quarter was 72%, we continually evaluate our cost structure for opportunities to moderate expense growth without sacrificing our growth initiatives. For example, in November we outsourced our credit card collections process. We also anticipate additional savings through technology implementations such as remote deposit capture, which has already been rolled out to 30 UMB branches thereby reducing or eliminating transportation costs for paper checks.

We are also focused on increasing key operational metrics. Revenue per FTE increased 4.5% excluding the Visa redemption. Noninterest expense per FTE increased 5.2% over the year excluding Visa, but declined 6.6% on a linked-quarter basis.

We've also placed emphasis on our retail customer cross sell ratio, which was up another 10 basis points from the prior period to 3.15 average accounts per customer.

Our third strategy is to steadily grow our loan and deposit franchise. To support this effort we recently reallocated a significant portion of our marketing budget to launch a campaign aimed squarely at our commercial banking business. We are also pleased that a significant amount of the loan growth came from new relationships to UMB.

A key component of our capital management strategy is our M&A team. On April 1, 2009 we announced an agreement with the investment adviser to the TrendStar Small-Cap Fund to integrate it into the newly formed mutual fund within the UMB Scout Fund family. The transaction is expected to close late this quarter or early in the third quarter.

Our final strategy is to -- effectively executing on delivering the unparalleled customer experience. We achieve this strategy by acquiring, developing, and retaining our most important asset, our talented associates. To measure our effectiveness on this strategy, we recently engaged Market Strategies, a leading, independent, national research firm, to measure our progress in this area.

Nearly 1,000 customers in total were interviewed. We interviewed a mix of commercial, small business, high net worth, and retail customers. We are extremely pleased with the results. All four segments scored significantly higher than the banking industry overall on three common measures examined by the American Customer Satisfaction Index. The UMB high net worth client segment scored 10 points higher than the banking industry average. In other parts of the survey almost 20% said they were extremely likely to open an account with UMB within the next year. The survey also found that a high number of customers will recommend UMB to others. When you serve your customers with top-notch products and unparalleled service, they clearly become your number-one advocate.

With that, let me turn it over to Mariner for a few closing remarks.

Thanks Peter. As our results show, our time-tested business model continues to perform well even in these uncertain times. This is a model that works. Midsize regional banks are among the best performers in the financial services industry.

It is important to me that not all banks are painted negatively with the same broad brush. I have been speaking publicly and with our elected officials in Washington DC with a message that most banks continue to lend and that it is necessary to differentiate between organizations like UMB and financial services companies that contributed to the situation we face today. More often than not, these are actually non-bank entities.

We are proud to provide leadership in our industry in a time when it is most needed. Banks like ours that operate from a position of strength built upon sound business practices can be a voice of reason during these challenging times. We believe we can help restore confidence in the industry.

At UMB our purpose is clear. We are a strong, well diversified financial services company, and our results stand the test of time. For more than 96 years we have followed prudent business practices and have reaped the benefits of our commitment to quality.

With that, I will turn it back to the conference call operator to open the session for your questions. Thank you.

(Operator Instructions). Chris McGratty, KBW.

Just a quick question on the expenses -- expense run rate was a lot lower than it's been the last couple of quarters. I was wondering if there, A, was anything unusual, any reversals. And then I guess secondarily, how should I think about a run rate going forward?

Hi Chris. It's Mike Hagedorn. There are no one timers or reversals in the first quarter of 2009. As we mentioned in the call, advertising costs being diverted if you will to the commercial campaign contributed to that at some level. The other thing I think you have to think about is when you compare it to the fourth quarter, there is some seasonality as well. For instance there are true-ups at the end of the year because we had a record year in 2008, and so there were some true-ups in there for commissions and other bonuses.

Okay. So is the third quarter kind of -- the second and third quarter of '08 kind of the 106 to 110 [range] kind of (multiple speakers)?

I think it's more indicative of the run rate, yes, than the fourth quarter.

That's helpful. I guess my second question is on the balance sheet. You indicated that you plan to grow both sides of the balance sheet this year. I was wondering if you could differentiate between whether that's going to come from increased securities or from the loan portfolio?

That's a specific -- this is Mariner. That's specifically related to adding loans -- on that side of the balance sheet obviously.

Okay. And then I guess how do you guys -- how are you guys thinking about the overall size of the investment portfolio? Obviously there is some seasonality with it quarter to quarter, but how should I think about it over the next couple of quarters versus first quarter?

You know, one of the things that we have done in the past is bifurcate our portfolio into a core and non-core portion. And that non-core portion is still very significant right now on our balance sheet. That is not typical compared to the last several years where we've had public funds run off the balance sheet roughly around this time. There are more deposits hanging around with us, and so I think that you will see a larger -- if you are comparing it back to prior periods, you will see a larger investment portfolio, go-forward.

Again, that's going to have to do with our ability at some level, how much we can put to work on the loan side, and we do see good progress there.

Yes, let me -- I should make that a little more clear. I don't mean that it's going to increase necessarily from what it is today. It will be larger than it has been historically on the balance sheet.

As a percentage of earning assets (multiple speakers)

You got it.

Okay. But second and third quarters, how are you thinking about absolute size in the next couple of quarters? Should it be down (multiple speakers) slightly but --?

I think that's where Mariner's comment comes in. If we get loan growth, clearly we would rather put it to work in loans. The yields are better there than the investment portfolio.

Also keep in mind, we still are running off the indirect auto loans, which obviously is a negative against our loan growth in a -- on an absolute basis, and we've got about $300 million left to go in that portfolio.

(Operator Instructions). Charles Ernst, Sandler O'Neill [Associate] Management.

Can you guys just comment on what kind of IRR you generate from doing a buyback at say today's prices?

I don't think that's something we are able to comment on.

Yes. You know, the IRR isn't necessarily the main driver of our decision. Obviously EPS accretion is, and we know that buying back shares up to a very high price is still accretive to shareholders, and so we'll do that from time to time. It depends upon the availability of other things that we talked about in the call as well -- acquisition opportunities, investments in the core business.

But if you are not exceeding your cost of capital, does it really make sense?

We are trying to exceed our cost of capital. Without being specific about the number, we are clearly trying to exceed the cost of capital.

And then I apologize if I missed this earlier, but can you just make a comment about what you're seeing in terms of fund flows in and out of your -- the Scout Funds?

They were very strong in the first quarter, [140] (technical difficulty) (multiple speakers)

Yes. $247 million in net -- positive net inflows into our equity and bond funds, and a little over $300 million net outflows in our money market products.

On a relative basis, the performance is still very good, and we suffer from market action mostly.

(Operator Instructions). I'm showing that we have no further questions at this time. Ms. Mayer, I will go ahead and pass it back to you.

Thank you. 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 6. And as always you can contact UMB investor relations with any follow-up questions by calling 816-860-1685. Again, we appreciate your interest and time.

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