UMB Financial Corp (UMBF) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the UMB Financial Corporation's second quarter conference call on the 22nd of July, 2009.

Throughout today's recorded presentation, all participants will be in listen-only mode.

After the presentation, there will be an opportunity to ask questions.

(Operator Instructions).

I will now hand the conference over to Ms.

Abby Mayer, Director of Investor Relations.

Please go ahead, madam.

Thank you.

Good morning, everyone, and thank you for joining us for our conference call and webcast regarding our 2009 second quarter financial results.

Before we begin, let me remind you that our comments in this conference call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933; Section 21E of the Securities Exchange Act of 1934; and within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements rely on a number of assumptions concerning future events, and are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated in our statements made during this call.

While management of UMB believes our assumptions are reasonable, UMB cautions that material rate 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 listening to the webcast have had a chance to review our earnings release dated July 21.

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 Office; and Mike Hagedorn, our Chief Financial Officer.

The agenda for today's call is as follows -- first, Mariner will highlight our results and update the progress on our strategies to grow loans and deposits, and deliver the unparalleled customer experience.

Then Mike will provide additional details of our second quarter results and discuss our strategy to manage capital.

Peter will discuss results related to our strategies of accelerating fee income growth and increasing efficiencies, followed by closing comments from Mariner.

Following that, we'll be happy to answer your questions.

Now I'll turn the call over to Mariner Kemper.

Thank you, Abby.

Welcome, everyone, and thank you for joining us today.

UMB's timeless principles of safety, soundness, and [soundness] have kept us on solid footing for the past 96 years, and continue to benefit our shareholders.

We have made progress in executing on our strategies and are pleased with our second quarter results, despite external challenges such as lower equity markets, continued low interest rate environment, and regulatory fees.

For the second quarter, net income was $19 million, or $0.47 per diluted share, which is a decline of 19.8% from net income of $23.7 million, or $0.58 per diluted share in the second quarter of 2008.

As reported, our earnings release, the majority of this change is because of -- we accrued an additional $7.2 million in pretax regulatory assessments, of which the FDIC special assessment was $4.8 million, and the remainder was the increase to our regular deposit insurance premium.

Contributing to these results, total revenue grew 4.5% to $151.5 million, driven by a 12.4% increase in net interest income.

Non-interest income declined 2.1% to $77.3 million, largely due to equity market fluctuations.

Loans increased 5.5% and deposits grew 20.8%.

Our second quarter capital ratios remain strong, with tier 1 leverage and total risk-based capital ratios at 13.4%, 8%, and 14.4%, respectively.

We will discuss these results in more detail throughout the call.

Our time-tested approach is resonating with our prospects and is driving new business, demonstrated in part by our continued success in generating loans and deposits.

At the end of the second quarter, loan balances were $4.3 billion, an increase of 5.5% year-over-year; excluding the indirect auto portfolio, loans grew 11.2%.

We continue to see the balances of our indirect loan portfolio decline.

At the end of the second quarter, balances were $194 million compared to $385 million at the end of the second quarter last year, and $234 million at the end of the first quarter of 2009.

We've been able to grow loans without altering our risk profile.

Compared to the first quarter of this year, nonperforming loans were essentially flat at 0.33% and net charge-offs increased slightly to 0.47%.

Both metrics remain well ahead of industry averages of 2.44% and 1.21%, respectively.

Due to the slight increase in charge-offs combined with the prolonged recessionary environment, we increased our loan loss provision by $1.5 million.

We believe our loan quality is a competitive advantage for us, and we continue to be pleased and comfortable with the overall credit quality of our loan portfolio.

Contributing to loan growth this quarter, C&I loans grew 4% to $2.1 billion, with most of this growth coming from new customers.

Commitments for commercial lines of credit expanded $628 million, or 14.4% compared to last year.

However, line utilization is 3 percentage points lower than a year ago.

Despite the utilization reduction, growth in overall commitments has resulted in an increase of $71 million in outstandings.

We attribute this utilization decline to the general softness in the economy.

In other loan categories, commercial real estate loans increased 22.3% year-over-year.

Existing customers accounted for the majority of this growth.

As we've previously discussed, our commercial real estate portfolio is made up largely of owner-occupied and investor real estate.

Home equity loans grew 23.3% to $383 million.

Credit quality in this portfolio also remains excellent, as our 30-day past due and delinquency percentage far outperformed the industry average of 2.06%.

At the end of the quarter, UMB's 30-day past due and delinquencies were only 0.24% of total home equity loans.

Our credit card portfolio experienced modest growth during the second quarter, with end-of-period balances of $260 million, an increase of $2.8 million.

Charge-offs in this category remain well below the industry average as well.

Turning to deposits, end-of-period balances increased 20.8% to $7.7 billion.

Nearly all deposit categories showed solid growth.

In these times, and in all times, the real value of a financial institution's balance sheet is its sustainable core funding sources.

Our non-interest-bearing demand deposits increased 20.3% in the second quarter, comprised of 32.7% of total deposits -- considerably higher than the industry average of 12.6%.

Interest-bearing demand and savings deposits increased 25.6%.

Much of this growth is due to funds generated from last year's Grab a Great Rate campaign.

And looking at our fee businesses, during the quarter, we acquired J.D.

Clark & Company, an alternative investment service provider.

This company will merge into our fund services business, providing us scale that we expect will enhance business opportunities and overall growth.

We also made a strategic decision to realign one of our business units.

As announced on June 1, we repositioned Scout Investment Advisors as a subsidiary of the holding company instead of as a subsidiary of UMB Bank and A.

And we created Scout Distributors LLC to market Scout funds and our institutional investment advisory products services.

Peter will discuss the transition of this business, and will provide more detail on the J.D.

Clark acquisition later in the call.

We continue to deliver the unparalleled customer experience.

As mentioned, last quarter, we launched a highly successful direct marketing campaign for our commercial business, designed to acquire new customers.

Recently, the campaign was highlighted in the Wall Street Journal.

A customer new to UMB was featured in the front page story about lending during these unique economic times.

To date, this campaign has proven successful, and we have since launched the second phase in most of our other markets.

We are pleased that Fitch ratings recently reaffirmed UMB's credit rating as stable.

In this credit opinion, Fitch cited UMB's good financial flexibility and earnings performance, while maintaining strong capital and liquidity, and sound credit quality.

Finally, UMB was ranked among the top five best capitalized banks in a financial stress test conducted by SNL Financial.

We also were named a top 25 performer in 2008 by American Bankers Association.

These recognitions are the result of the pride, power, and passion that each of our associates exhibit every day.

Now I'll turn the call over to Mike Hagedorn, our CFO, to provide additional detail on our financial results for the quarter.

Mike?

Thanks, Mariner, and welcome, everyone.

Mariner opened his comments by talking about the principles that serve UMB so well in this current environment.

Our balance sheet is governed by these same principles.

We are growing equity, even after we increased our provision, paid our regular dividend, repurchased shares, and acquired solid businesses -- and this is not an accident.

Simply stated, our results have been achieved without altering our risk profile.

As Mariner mentioned, our net interest income was up 12.4% this quarter.

Because interest rates remained low, our interest income declined 5%, but this decline was more than offset by a 48.6% decrease in our net interest expense.

Managing deposit rates effectively, making mix changes to our investment portfolio, and increasing average earning assets by 21.6% contributed to the net interest income performance.

Net interest margin decreased 29 basis points to 3.42%, down from 3.71% in the second quarter of 2008.

Average earning asset yields declined 110 basis points to 4.01%, while the cost of interest-bearing liabilities fell 106 basis points to 0.84%.

Free funds contribution declines to 25 basis points from 50 basis points over the same period last year, and was the primary reason for the net interest margin decline.

Even though rates have been historically low over the past year, net interest spread has been nearly flat.

Our efforts to optimize net interest margin led to a 3 basis point margin improvement from the first quarter.

During the quarter, $277 million in core portfolio securities rolled off at an average yield of 4.15%.

In turn, we purchased $534 million of securities at an average yield of 2.87%.

In the third quarter, $305 million to $352 million of securities at an average yield of 3.84% to 3.97% will roll off.

Over the next 12 months, $1.2 billion to $1.3 billion of core investments with an average yield of 4.02% to 4.07% will roll off.

In the current lower-rate environment, we expect the repricing of these securities to negatively impact our interest income.

However, the average life of the core portfolio lengthened to 29.4 months from 25.8 months in the first quarter of this year, as we estimated pre-payment speeds of our mortgage-backed security holdings did not materialize, and are virtually back to actual historical pre-payment levels.

In addition, 68% of our loan portfolio is expected to reprice during the next 12 months.

Non-interest expense increased to $12.5 million or 11.8% compared to the second quarter last year.

The result was primarily driven by the $7.2 million increase in regulatory fees Mariner mentioned earlier, and a $4.5 million increase in salary and benefits.

Market dislocation in the past year has presented an opportunity for us to add several high caliber sales associates to our fee-based businesses.

As such, our asset management, fund services, and banking services businesses represented more than half of the increase in salaries.

The increase in fund services salaries expense was driven entirely from the addition of J.D.

Clark, while investment banking commissions tied to an increase in bond trading, led to the higher banking services expense.

Our credit quality remains very strong.

Even though we increased our provision, the provision as a percentage of loans is 1.27% or just 10 basis points higher than the same period last year.

In addition, our provision covered non-accrual loans by 390%.

Net charge-offs to average loans increased slightly to 0.47% from 0.41% at the end of the second quarter last year.

We anticipated some upward movement in net charge-offs, given the current environment.

Average loans as a percent of earning assets decreased to 48.4% from 54.9% a year ago.

Average loans to average deposits also decreased to 58.3% from 65.9%.

The continued decline in the indirect auto portfolio and strong deposit growth contributed to the decline in both ratios.

Return on average equity and return on average assets in the quarter declined to 7.66% and 0.76%, respectively, from 10.37% and 1.12% for the same period in 2008.

Capital management is another key strategy for UMB.

During the quarter, we repurchased [121,283] shares at an average price of $40.03.

Our quality of earnings also made it possible for us to pay our regular dividend of $0.175 per share.

Many in the industry are focused on tangible equity in these turbulent times, and ours remains strong at 8.5% of tangible assets.

With that, I'll turn it over to Peter for some comments on our strategies to accelerate our fee income growth and maximize efficiencies.

Thanks, Mike, and good morning, everyone.

Being a well-diversified financial services organization continues to be one of our greatest strengths.

Our second quarter results reflect how our diverse revenue sources continue to serve us well.

Trusts and securities processing income, the largest component of fee revenue, is largely dependent on two key drivers.

First, the performance of equity markets; and second, net fund flows.

Over the past four quarters, the S&P 500 has fallen 28%.

However, our trust and securities processing income has decreased by only 13.6% or $4.5 million.

Positive net mutual fund flows and increased business in UMB Fund Services has helped offset the downward pressure we are experiencing from the equity markets.

Overall, non-interest income decreased by $1.7 million or 2.1%.

Trading and investment banking fee income increased $2.6 million to $9 million, helping to offset the decline in trust and securities processing income overall.

This improvement is due to strong fixed income sales to community banks.

Turning to specific results from our asset management team, non-interest income declined 18.9% to $19.9 million.

Total assets under management decreased 11.5% to $10 billion from $11.3 billion as of June 30, 2008.

However, mutual fund flows in our proprietary Scout fund complex remain strong.

The Scout fund bond and equity flows were $218 million during the quarter, and [$465 million] on a year-to-date basis.

Scout fund assets under management total $5.2 billion compared to $6.2 billion last year.

As Mariner mentioned, we successfully repositioned Scout Investment Advisors.

This move demonstrates our commitment to growing our institutional money management business.

Our focus in this area has never been stronger.

We will continue to develop new products and open new distribution channels.

This change will also enable us to hire and retain the investment talent necessary to build Scout Investment Advisors into a premier investment firm.

Another important element of our asset management strategy has been private banking.

We now have $91 million in loans and $342 million in deposits.

Private banking deposits have grown more than 112% over the past 12 months, while loans have grown more than 42%.

We have also continued to add key personnel to our asset management team.

During the past six months, we have added 14 private banking officers across the Company.

We have been able to take advantage of our strong brand and reputation to attract these professionals.

By adding seasoned associates, leveraging existing scale, and increasing efficiencies, our asset management business remains well-positioned to be a significant driver of non-interest income.

In our fund services business, non-interest income declined 8.2%, largely from the impact of lower equity markets on our fee-based income.

Nevertheless, building scale in this business is a key strategic focus for us.

During the quarter, we announced the acquisition of J.D.

Clark & Company.

J.D.

Clark & Company serves the alternative investment industry and is a complement to our mutual fund servicing business.

The alternative investment industry continues to shift towards greater transparency, as a result of government policy and investor demands for more independents.

This will help our accounting, custody, and record-keeping businesses.

We are pleased to welcome the 59 J.D.

Clark Associates and over 80 customers to UMB.

During the quarter, we continue to add to our strong position in healthcare services, where our focus is on the administration, custody, and card processing for health savings accounts and flexible spending accounts.

We are committed to maintaining our leadership position by adding new HSA and FSA savings and investment accounts and their corresponding debit cards.

The number of accounts grew 33% in the second quarter, with deposits and assets increasing 36% when compared with the same period last year.

We are monitoring the current debate in Washington with respect to healthcare reform to ensure that our products and services continue to meet the needs of our customers.

Our Payment and Technology Solutions business is another key area of focus.

We are well-positioned to take advantage of the continued long-term transition from paper payment methods to electronic solutions.

According to the most recent report on 2008 ACH payments from NACHA, the Electronic Payments Association, UMB ranked 26th among the top 50 originators of ACH, and 38th among the top 50 ACH receivers in the nation.

This is an improvement over last year, when we were ranked as the 45th largest ACH receiver.

We are able to achieve this disproportionately large share based upon our strength in mutual funds, institutional, and corporate payments.

Our card businesses also benefit, as consumers increasingly opt for card-based transactions.

Total accounts from our consumer, private label, and commercial segments increased 5.9% from the second quarter of last year.

Our customer mix is a competitive strength for us.

A large portion of our card base is comprised of commercial and government cardholders, who pay down their balances on a monthly basis, but provide steady transaction volume and interchange revenue.

As always, we underwrite our credit card customers with the same high levels that we do for all of our other loan categories.

Improving efficiencies is another core strategy of ours.

But as Mariner discussed earlier, FDIC assessments contributed greatly to our expenses this quarter.

We are also adding resources now that, over time, should drive additional revenues.

Our efficiency ratio increased to 76.4% on a reported basis compared to 71.6% in the second quarter of 2008.

We are focused also on improving revenue per FTE and increasing our retail customer cross-sell ratio.

Revenue per FTE increased 6% year-over-year, while our cross-sell ratio improved 10 basis points to 3.17.

We can drive our cross-sell ratio by providing unmatched service in a wide array of competitive products.

The more products each customer holds with us, the better the prospects of retaining that customer over the long-term.

Now with that, I'd like to turn it back to Mariner for his concluding remarks.

Mariner?

Thank you, Peter.

Going forward, we will remain focused on growing our fee business.

Our diverse revenue sources illustrate that UMB truly is a financial services organization.

Even though we faced challenging equity markets over the past year, we are well-positioned in our fee-based businesses, because we have the right people, the right products, and a relentless focus on serving our customers.

Second, we will not waver on our disciplined underwriting standards.

The fact that net charge-offs were only 0.47% of loans this quarter demonstrate our underwriting ability as a core competency.

Continued stable credit quality in this environment is evidence that we are doing the same things we've always done, and are sticking to our lending philosophy.

Third, we will use the dislocation in the industry to our favor, by acquiring and retaining top-notch talent who want to work for a healthy, stable financial services company.

Thank you all for being on the call with us today.

And with that, I'll turn it over to the conference call operator for your questions and comments.

(Operator Instructions).

First question comes from Chris McGratty.

Please state your company name, followed by your questions.

Good morning.

I'm calling from KBW.

I just had a question on how you guys are thinking about the balance sheet.

I guess, first question is, in terms of the securities portfolio, how you're thinking about, I guess, the overall size.

And then secondarily, I guess, loan demand, if you could speak to what you're seeing in terms of the pipeline and how you're thinking about overall balance sheet growth.

Good morning, Chris.

This is Mike Hagedorn.

I'll take the investment portfolio portion, and Mariner can talk about the loan portfolio.

On the investment side, essentially, we're going to try to keep the duration roughly where it is right now.

So we don't see the desire to extend the portfolio right now, given the interest rate environment that we see and our expectation for future interest rates.

We do keep -- and we've talked about this in the past -- our rather-large non-core portfolio.

It moves around a little bit, but normally that would leave us after the first part of the year, after the public fund business has left, that has not been the case.

And that portfolio now still maintains a balance of over $500 million.

And as it relates to the loan volume, in our comments, we speak to the fact that we've had significant growth in commitments in our commercial portfolio.

And demand has been strong for us as a company; continues to be strong for us as a company, through largely dislocation in the industry.

And we perceive that that will continue for us.

We've had a very good time of picking up business through the dislocation and the inward focus of our competitors.

Okay, that's helpful.

And just in terms of the margin, the repricing, there's some downward repricing over the next 12 months, it sounds like.

Just maybe can you speak to how you're thinking about the absolute margin.

You saw a little bit of an increase this quarter, but lesser, I think, than you've experienced in the second quarter in prior years.

How are you guys thinking about just overall absolute margins?

Yes.

I think the thing you have to think about is there's a lot of moving parts here.

First, I'll go back to that non-core portfolio I mentioned -- it has a very low yield because it has a very short life.

If that were to leave us, you could get a short-term pop in net interest margin; if it sticks around, it depresses net interest margin.

We've also had some success with our loans repricing, at least in the commercial space -- repricing up as their floors have been hit, for instance, or they've been gone through renewal.

So, I think that it's more in the earning asset side where you're going to see movement and less so, I think, on the deposit side.

With our deposit costs being now in the low 80 basis point range, I wonder how much more movement there will be downward.

Most of this execution volume will drive it for us.

We've got a great funding source and, as I mentioned, we've got dislocation in the industry.

And we plan to take advantage of that and take -- hope to execute against margin compression with volume.

Okay.

And then my last question just on the strong trading and IB numbers this quarter.

Can you just talk a little bit more about -- I may have missed it on your prepared remarks -- but just what went into the strong quarter and how the pipeline looks?

Yes.

Our investment banking business really is a fixed income sales business, if you will, the community banks downstream.

And community bank loan demand, of course, has been down pretty much across the industry, so they're pretty liquid right now and looking to us to fill up their investment portfolios with bonds.

And so we've had good trading, very good demand for trading, and for fixed income sales.

Going forward, I think it's going to be dependent on loan demand and how much need they'll have for bonds to augment their loans.

Great.

Thanks a lot, guys.

(Operator Instructions).

Next question comes from Kenneth James.

Please state your company name, followed by your question.

Hi.

Kenneth here with Sterne, Agee.

I had a question on the large and increasing amount of interest-bearing deposits you guys have on balance with other banks -- and I'm assuming that's the Federal Reserve.

I guess, the first question, is that the non-core kind of short-term portfolio you were referring to?

Yes, you have to think about it in two pieces, right?

There's the earning asset piece of it, which is the [due from] that we're leaving at the Fed, 25 basis points, so you're right about that.

And then what drives that balance, if you will, and that's the interest-bearing deposits that keep coming into the bank -- both interest-bearing and non-interest-bearing, actually.

There's been a very strong demand inside the Company for deposit balances, and folks are leaving dollars with us.

Right.

I was -- I'm talking about the -- just the -- strictly the earning, from the earning asset piece, the $539 million on average or about $700 million at the end of the quarter.

Yes.

No, it's the Fed.

So I was wondering what the prospects were to see that number come down and see that deployed into something a little higher yielding in the quarters ahead.

It sounds like with you guys not looking to extend it all, that maybe that will hang around for awhile?

You know, as Mariner mentioned, I think, earlier, it's -- I think more of our ability to grow margin will be dependent upon volume and less on rate, at least in this current environment that we have right now.

If volume picks up, it will certainly erode that.

If it doesn't or if there's more deposits that come our way, that balance is likely to continue.

It's hard to say.

(multiple speakers) a conservative approach to that balance.

Kenneth, this is Peter.

I might just add that the mix of that balance tends to be skewed towards large institutions.

And so it can be large mutual funds that deposit with us waiting to reenter the equity markets; large public funds; large corporate money that's sitting on the sidelines.

And so we want to be cautious in not extending that out too far, given the potential volatility of those funding dollars.

Okay.

So, a safe assumption would be that next quarter, there won't be $700 million of new five-year bonds.

That number goes to $0, because that would -- you'd get a large margin pickup off that.

We can't really predict that for you at this point.

Okay.

All right.

Thank you.

There appears to be no further questions, sir.

Please go ahead with any points you wish to raise.

Thank you very much for your interest in UMB.

The call can be accessed via a replay at our website beginning in about two hours, and it will run through August 5.

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.

Thank you.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.