UMB Financial Corp (UMBF) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the UMB Financial Corporation first-quarter conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, April 28, 2010.

I would now like to turn the conference over to Abby Wendel, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Christina. Good morning, everyone, and thank you for joining us for our conference call and webcast regarding our 2010 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 market; 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 the 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 27. If not, you will find it on our website at UMB.com.

On the call today are Mariner Kemper, Chairman and Chief Executive Officer; Peter deSilva, President and Chief Operating Officer; and Mike Hagedorn, our Chief Financial Officer. The agenda for today's call is as follows. Mariner will provide high-level commentary on our results, and Mike will review the details of our first-quarter financials. Then we will review our strategies and business drivers. Mariner will discuss results in our relationship-based Commercial Banking segment, then Peter will talk about strategies and results in our institutional businesses and our personal financial services business. Following that, 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.

As you've seen in our press release, UMB delivered solid financial performance in the first quarter. Earnings per share increased $0.10 per diluted share to $0.65, up 18.2% from the first quarter of 2009. We are pleased with these results and believe this demonstrates our business model is built for all economic environments.

With the persistently low interest rate environment, we continue to experience pressure on our net interest margin. Loan demand remains challenging, yet we continue to see an increase in deposits on a year-over-year basis. Putting those funds to work in this low interest rate environment has been a challenge as well. And fortunately, we continue to maintain a very low cost of funds. This resulted in an increase of just less than 1% in net interest income.

For the first quarter of 2010, net income was $26.2 million. We continue to execute against our business model, which affords us greater diversity of revenue and increased scale in our fee businesses. As a result, noninterest income increased 25.4%, reflecting the investments we've made in our fee businesses. We also recognized $5.4 million in securities gains this quarter.

As we evaluated the investment portfolio, we found two opportunities to sell securities. First, we sold mortgage-backed securities that were at risk of prepaying at an accelerated rate. Second, we took the opportunity to liquidate bonds that no longer met our investment guidelines.

A sign of the times for financial institutions is the increase in regulatory fees paid. In 2008, our obligation for FDIC premiums was $2.7 million. In 2009, the total paid dramatically increased to $15.7 million, nearly five times the amount paid the previous year. For the first quarter of 2010, we paid $3.2 million, an 87.5% increase over regulatory fees paid in the first quarter of 2009.

We also increased our provision this quarter by 38.5% to $8.3 million. Mike will provide additional detail about our provision methodology later in the call.

Despite the ongoing challenges in the economy and industry, we remain confident that the value of our franchise comes from three primary attributes of our business model -- first, our outstanding credit quality; second, our stable and low-cost funding; and third, the diversity of our revenue that our fee-based businesses provide. This model has produced consistent results year after year.

To recap our first-quarter financial highlights, total revenue increased 12.6% to $162 million. Return on average assets was 0.96%, an increase from 0.89% in the first quarter of 2009. Return on average equity was 10.25%, an increase from 9.23% a year ago.

Before Mike gets into the financial detail, I want to reiterate how we are looking at our business, beginning with the first quarter of 2010. As mentioned in our fourth-quarter 2009 conference call, we further refined our operating structure by aligning our Company into three operating segments to better meet our customers' needs. These segments are Commercial Financial Services, Institutional Financial Services, and Personal Financial Services.

Commercial Financial Services, or CFS, encompasses traditional commercial banking, including lending, treasury management services, commercial credit cards and capital markets. Institutional Financial Services, or IFS, includes institutional investment management, investment servicing businesses, and our payments businesses. Personal Financial Services, or PFS, combines our consumer bank, insurance and individual wealth management services.

Evaluating acquisition opportunities in each of these segments remains a core part of our strategy. We remain focused on developing our staff and adding key talent and resources to further build out our brand promise.

I am pleased to mention that, in both St. Louis and Milwaukee, UMB was recently named among the best places to work. An exceptional associate experience will ultimately lead to providing the unparalleled customer experience. This type of recognition validates the great work our team accomplishes day in and day out.

Now, I will turn it over to our CFO, Mike Hagedorn, for a closer look at our financial results. Mike?

Thanks, Mariner, and welcome, everyone.

During the quarter, our balance sheet grew, due in large part to the increase in deposits. As Mariner mentioned, loan demand continues to be soft. As a result, we have been forced to put these funds to work in our investment portfolio. As of March 31, 2010, the portfolio stood at $4.85 billion, 16.1% higher than at the end of the first quarter 2009.

We ended the quarter with $10.7 billion in assets. Loan balances were $4.3 billion, a slight decrease of 0.11% compared to the first quarter 2009, driven primarily by the decline in utilization of working capital lines of credit.

Even in these challenging economic times, our credit quality remains stable, largely because our underwriting practices are among the strongest in the industry. While we saw an increase in our nonperforming loans and net charge-offs this quarter, we are still well below the fourth-quarter 2009 industry median of 4.12% and 1.53%, respectively.

For the first quarter 2010, UMB's nonperforming loans were 0.59%, up from 0.34% compared to the first quarter 2009. This increase is attributable to a single Shared National Credit participation that was placed on nonaccrual mid 2009.

Net charge-offs were 0.46% of average loans, an increase from 0.4% compared to a year ago. Mariner and Peter will provide additional color on our loan portfolio composition later in the call.

As a result of the increased funding and lower loan demand, the investment portfolio is now the largest earning asset on our balance sheet. Activity in the investment portfolio during the quarter included $323 million in core portfolio securities that rolled off at an average yield of 4%. In turn, we purchased $821 million of securities at an average yield of 1.23%.

Over the next three months, $334 million to $369 million of core investments with an average yield of 3.89% to 3.98% will mature. Over the next 12 months, $975 million to $1.1 billion of core investments with an average yield of 3.82% to 3.90% will mature. In the current lower rate environment, we expect the repricing of these securities to negatively impact our interest income. In addition, 67% of our total loan portfolio is expected to reprice or mature in the next 12 months.

On the liability side of the balance sheet, deposits totaled $8.2 billion, an increase of 7% compared to the first quarter of 2009. This compares favorably versus our peers.

For the fourth quarter 2009, the FDIC reported a 3.8% decline in deposits for all banks and thrifts with assets between $5 billion and $20 billion.

Of our total deposits, non-interest-bearing deposits make up 33%, a significant contribution to our low cost of funds. We continue to be highly liquid, and with a 52% loan to deposit ratio, we have money to lend.

At UMB, we consistently hold high levels of capital. For the first quarter 2010, equity increased 4.5% to just over $1 billion. UMB remains well-capitalized with Tier 1, leverage and total risk based capital ratios of 13.51%, 7.57%, and 14.64%, respectively.

As Mariner mentioned, we continue to evaluate M&A opportunities in each of our segments. As our acquisitions have shown, most recently with J. D. Clark and the American National Bank Corporate Trust Book, we are a strategic buyer focused on long-term profitability.

Turning to the income statement, for the first quarter 2010, net income was $26.2 million, or $0.65 per diluted share. Net interest income was $75.8 million, an increase of less than 1% compared to the first quarter 2009. This was driven by a 30.6% drop in interest expense. As we've mentioned in prior conference calls, we believe there will be limited opportunities for further funding cost reductions.

Net interest margin decreased 20 basis points to 3.19% compared with 3.39% in the first quarter of 2009. Average earning asset yields fell 42 basis points to 3.60%. Cost of funds declined 28 basis points to 0.59% from 0.87% in the first quarter of 2009.

Low interest rates continue to make margin management difficult. As economic conditions improve, we anticipate our loan portfolio will grow, thus easing the reliance on our investment portfolio.

Noninterest income was up 25.4% for the first quarter, compared to the same period in 2009, and was 53.3% of total revenue. The increase in noninterest income was driven primarily by a nearly 43% increase in trust and securities processing income.

As noted earlier in the call, we realized $5.4 million in pretax gains on the sale of securities to better position our investment portfolio. Our rationale for taking the gains is to purposefully manage the portfolio's duration and interest rate risk in anticipation of a rising interest rate environment. Without the securities gains, the change in noninterest income would have represented a 17.6% increase over the same quarter last year. Later in the call, Peter will discuss the drivers of fee income in greater detail.

Noninterest expense increased 10.1% to $117.4 million, compared to the first quarter last year. Salaries and benefits increased 7.3% due to new hires, staff added as a result of acquisitions, and increased benefits expense. As Mariner mentioned earlier, our premiums for FDIC insurance increased 87.5%, compared to the first quarter 2009, to $3.2 million.

Throughout the financial crisis, our credit quality has remained strong. As Mariner mentioned, we have maintained low nonperforming loans and net charge-offs, although both increased slightly this quarter. As a result, provision is up $8.3 million and our allowance as a percent of loans is now 1.57%, or 32 basis points higher than one year ago. Our provision model takes into consideration not only the inherent risk in our loan portfolio, but also includes a qualitative component.

With that, I will hand the call back to Mariner to begin the discussion of segment highlights and business drivers.

Thanks, Mike.

Commercial Financial Services, or CFS, covers traditional commercial banking, including lending, treasury management services and regional banking. We have a long history of serving clients in this space through relationship-based commercial banking. We know our customers well, and we lend within our footprint. This is a competency central to our business model.

We continue to meet the credit needs of our commercial customers. Our liquidity uniquely positions us to meet our customers' needs. We have been outwardly focused, since we do not have internal problems that would otherwise require our attention.

Commercial loan commitments are up 4.34% to $4.5 billion, yet the utilization rate is down to 29.3% compared to 34.4% in the first quarter of 2009. As a result, outstanding loan balances in our C&I portfolio decreased 5.7% compared to the first quarter of last year. However, our commercial real estate loan portfolio grew 11.7% to $1.2 billion. As a reminder, these loans primarily finance owner occupied real estate for customers we know and are within our footprint.

Moving to commercial credit cards, spending increased by 20.9% to $182 million versus $150.3 million a year ago. Commercial cards now make up 17.3% of our total card purchase volume.

With that, I will turn the call over to Peter to discuss our two other segments, Institutional and Financial Services. Peter?

Thanks, Mariner. Good morning, everyone, and thank you for joining our call today.

UMB has a set of very successful businesses that serve the institutional and financial intermediary marketplaces. We have been investing in these businesses over the past few years, seeking stronger fee business growth. Our Institutional Financial Services businesses include Scout Investment Advisors, UMB Healthcare Services, and UMB Fund Services, along with our card products and corporate trust services. Some of these businesses are already very well established, while others are smaller with significant future growth opportunities.

UMB Fund Services, Scout Investment Advisors and Corporate Trust are the three fee businesses that comprise the majority of trust and securities processing on our income statement. This largest component of our fee revenue increased $10.7 million, or nearly 43%, to $35.6 million from one year ago. Revenue in this segment is largely dependent on three key drivers -- one, new business; two, mutual fund and separate account flows; and three, equity market performance. Increased fund flows to Scout Investment Advisors, along with the addition of J. D. Clark revenue, were the main contributors to this growth.

First-quarter assets under management in Scout Investment Advisors increased to $9 billion. Of that, assets in the Scout Funds ended the quarter at $7.5 billion. Net fund flows into equity and bond funds were strong at $573 million for the first quarter. We credit the strong fund flows to our wide distribution network, strong long-term performance, and the recent accolades that Scout International Fund received from Morningstar, Lipper, and SmartMoney magazine.

We continue to build Scout Investment Advisors into a nationally recognized money management firm. New assets into separately managed accounts were a record $48.9 million for the first quarter, while total assets in separately managed accounts were 15% higher when compared to the first quarter of last year.

Turning to assets under administration, UMB Fund Services ended the quarter with $168 billion in assets under administration. Corporate trust ended the quarter with $11.4 billion in assets under administration.

As a reminder, last year, we added J. D. Clark's alternative investment servicing business to UMB Fund Services. This added $18 billion in assets under administration. For the first quarter, UMB Fund Services revenue increased $6.5 million to $15 million. J. D. Clark contributed $2.9 million of the increase.

Overall, we continue to capitalize on our strength in the alternative investment servicing business and have now rebranded our entire alternative investment servicing operations to J. D. Clark & Company.

Corporate Trust continues to gain market share across our footprint, growing primarily in the Rocky Mountain states through our acquisition of American National Bank's Corporate Trust business. The integration of that acquisition is now complete and we achieved a 96.5% client retention rate.

Turning to our Strategic Payments businesses, purchase volume across all of our card product offerings was up 18% in the first quarter when compared to the first quarter of 2009. Of particular note, retail credit card purchase volume increased 31.5% to $117 million. Interestingly, healthcare debit card purchase volume now comprises 37% of total card purchase volume, which speaks to the strength of our healthcare debit product. At the end of the first quarter, total card commitments were $1.8 billion with a 17.2% utilization rate.

Credit quality for cards is holding steady. Total credit card charge-offs were 4.74% of card balances and represented 60.5% of total-Company net charge-offs. According to Fitch Ratings Services, February 2010 industry credit card charge-offs averaged 11.1%, more than double our credit card charge-off rate.

Moving on to our Healthcare Services business, at the end of the first quarter, FSA and HSA account balances were $211.8 million, an increase of 25.9% when compared to the first quarter of 2009. We are pleased that we continue to build this important source of low-cost, stable funding.

FSA and HSA accounts totaled $1.3 million, representing a 17.7% increase from one year ago. Throughout the debate and following the passage of the healthcare reform bill, our team paid close attention to the details of the provisions in the bill. Overall, the final healthcare reform bill should be a net positive to our Healthcare Services business as more companies opt for the high-deductible option to better contain future healthcare costs.

Now, I will provide a few comments on our Personal Financial Services segment. At the beginning of this call, Mariner mentioned one of the strengths of our franchise is our core funding base. Fully 50% of our deposits come from our Personal Financial Services segment. Part of our franchise value remains rooted in our low-cost steady funding base.

Looking in greater depth at the Personal Financial Services segment, we have combined our consumer bank with our individual investment and wealth management solutions to provide a total lifecycle approach for individual consumers. We have placed a specific emphasis on investment and wealth management for emerging affluent and high net worth clients.

For the first quarter, total assets under management in this segment were $4.6 billion, a net increase of $133 million. This now represents assets in our personal trust organization. We are seeing growth in this business with new assets under management coming in at $170 million during the first quarter. Our private banking and wealth advisor teams continued to more deeply penetrate our existing customer base.

Excluding indirect consumer loans, which now hover at approximately $100 million, loans in PFS increased 10.9% with home-equity lines of credit leading the increase. At the end of the first quarter, HELOC balances were $453 million. Credit quality in this portfolio remains very strong with net charge-offs of only 0.029% of outstanding HELOC balances. This represents just 2.6% of total Company net charge-offs.

Total PFS deposits increased 7.3% to $4.2 billion and now represent 50% of the Company's total deposit base. Of this total, private banking had an 86% increase.

With that, I will hand the call back over to Mariner, who will close out our prepared remarks and will open up the line for your questions. Mariner?

Thank you, Peter.

In recent months, we've been recognized for our results, which is a validation of our business model and responsible business practices. We are proud of our strong balance sheet, which did not develop by accident. Rather, it has been purposefully designed.

Our unwavering approach to managing this Company has paid dividends over the long-term, regardless of the economic environment. Today, we stand at the crossroads of the financial industry in Congress seeking to ensure that another financial crisis doesn't happen. Like you, we are watching the developments in Washington and are concerned about the rising costs the industry will bear through increased regulation from entities such as the proposed Consumer Financial Protection Bureau.

We are particularly concerned that responsible banks like UMB will bear the cost of these new regulations, when it was other largely unregulated financial entities and products that were at the root of the financial crisis. However, we are confident that our business model will shelter us from the full brunt and force of the regulatory change, and that our results will suffer much less impact than the rest of the industry due to our balance sheet strength and diversity of revenue.

We've weathered this economic storm better than others because of our Midwestern roots and values. When you have a 97-year history, you tend to think in terms of decades, not days, when considering time horizons and Company performance.

Thank you for being on the call today, and we look forward to your questions. I will turn it back over to the conference operator.

(Operator Instructions). Peyton Green, Sterne Agee.

Okay, a question in terms of the J. D. Clark acquisition -- how much of the revenue increase year-over-year was J. D. Clark, and also how much expense was associated with that?

Good morning, Peyton. It's Peter. The revenue attributed to J. D. Clark in the first quarter was $2.9 million. And the expense, I don't have that right at my fingertips. Mike?

Yes, if you were to restate, Peyton, the expense, our expenses would only be up 2.2%, so the vast majority of the increase was J. D. Clark. Remember, within that 2.2% kind of core expense growth, $1.5 million of that would've been FDIC fees.

Okay. I guess to what degree -- I mean, were there any -- I guess where did you get the expense savings from I guess? Because this was a really strong expense result, given the heaviness of the noninterest income increase. Typically, I guess there's a little more variable expense associated with such a noninterest income performance. I'm just trying to understand a little bit there.

Are you referring specifically to J. D. Clark?

No, just in general. I mean, typically, when your market-related businesses do well, there's also expense on the other side associated with performance and the like. I was just wondering if there is a mismatch in the comp line that might catch up in future quarters or if you feel pretty good about the number holding.

I think we feel pretty good about it. You know, we have some increased expenses related to distribution for our Scout Fund fees through the national platforms, obviously, as our assets have risen. We pay incentives on asset acquisitions, so those incentives have been accrued for in the first quarter. So, I don't think there's any mismatch. I think you're seeing the full brunt, both on the revenue side and the expense side.

Okay. Then just a question in terms of the securities that are rolling over the course of the next quarter and also the next year -- to what degree are you willing to let the balance sheet shrink down at the marginal spread versus your cost of deposits has come in so much?

Yes I think naturally, Peyton, that's going to occur because of the public fund inflows. You know, we've had more of them stick around this time around than we've naturally had the last couple years. So I think those marginal deposits, if you would put them into that category, will naturally attrite off the balance sheet. That may shrink the deposit base a little bit.

We are constantly watching the whole total of our deposit base to make sure that we still have a positive carry. As long as we do that, I don't know that you would necessarily assume that the balance sheet would shrink.

We have no desire to purposefully run off higher expense deposits. We are very focused on maintaining our deposit franchise.

Okay. Then how big was the public fund balance at the end of March? I mean, just a ballpark idea.

Yes, at least $200 million.

Okay. I guess, in years past, it would tend to be about 0 by now or --

Yes, you're getting close.

Okay, great. Thank you very much.

Chris McGratty, KBW.

Good morning, guys.

I think, in your prepared remarks, you talked about that you sold some bonds, given some prepayment risk in the portfolio. I guess what were your assumptions for that piece, and I guess what is your overall assumption for the core MBS portfolio?

Yes, the main assumption for the sales in the first quarter were the fact we had a certain section of our CMO portfolio that had or presented significant extension risk. So, that was something that, given that we've already made it clear we expect a rising interest-rate environment, that was something we thought wasn't in the best interest of the overall management of the portfolio, and so we sold those at a gain.

Okay. So, on the securities portfolio -- on Peyton's question -- if you add the other short-term securities, on an average basis, it was around -- I'm looking at like $5.8 billion. I guess what is your -- so Mariner's comment, if I'm interpreting his comments correctly, is that to say that is a pretty good balance to start with for the next quarter in terms of the overall size if loan demand stays kind of where it is?

Yes, there's not a lot we can -- we are predicting much like you are I suppose at some level, but we feel confident that our deposit base is relatively sticky at this point with no guarantees obviously, but it stuck around longer than we thought it would already. Loan demand does remain relatively soft, so I don't know if that answers your question.

So I guess what you're saying is the $10 billion or so of earning assets is probably a fair number to work with, I guess, over the near term?

Yes. The only thing I would see that would move that number in the short run, in a quick way, would be if the public fund deposits that have stuck around decided to leave, but we don't see that right now. So yes, it makes sense.

Okay. A couple other questions --

If loan demand comes back through the economy strengthening, we have a great potential through increased commitments for an increase based on loan demand.

Right. I saw yesterday the press release on the buyback. I guess how are you guys thinking about managing your capital base over the next couple years? Obviously, you guys have some flexibility that many of your peers don't. But I guess what's your overall strategy in terms of what kind of a capital ratio, TC ratio are you guys looking to manage to, and how aggressive -- should we assume that that 2 million share authorization kind of comes through the numbers in the next 12 months?

Well, I guess the answer to your question is "prudently". We don't really give direction on what we are managing to on our capital levels. However, I would say that our primary focus and use of our capital is to find accretive acquisitions. So the share purchase, while authorized, would be secondary to us getting the right acquisitions done.

Okay. Then on the tax rate, what's the tax rate I should be using?

Yes, 28%, 29%, all in.

Okay. Great, thanks, guys.

(Operator Instructions). Peyton Green, Sterne Agee.

Yes, I was just curious. I mean, what signs of increased economic activity are you seeing in your customer base? Have you seen any improvement in the commercial customer component? I guess, at least anecdotally, are you starting to see more signs of that now? Thank you.

Peyton, I'd like to tell you something more bullish or positive than I'm about to. It seems as though our customer base has done the right things to control expenses, but as far as revenues go and inventory builds and such, it does not seem, within our portfolio anyway, that there are a lot of signs of any type of significant improvement.

None of them feel particularly concerned about it getting worse. But they all seem to be, as we move around our footprint and talk to our customer base, somewhat concerned about the backlog and, to be honest, the environment in Washington. Most of our small business and middle market customers are very concerned about the healthcare -- the cost of healthcare and a lot of them talk about holding back on their hiring based on waiting to see what the final full brunt of what's going on in Washington is going to cost their businesses -- a lot of uncertainty.

So you still haven't seen any change? It's just kind of more of a response to the newspapers rather than the real activity?

Our utilization rates are up slightly, on a linked-quarter basis -- so there is some slight improvement if you use just our utilization rates as an indicator.

Okay. All right, great. Thank you.

(Operator Instructions). I'm showing there are no additional questions at this time and I will turn the call back over to Ms. Abby Wendel.

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 12. 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, this concludes the UMB Financial Corporation first-quarter conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 and enter in the access code 4277507. It will be available until May 12, 2010. The replay is also available on the Company's website at UMB.com.

ACT would like to thank you for your participation. You may now disconnect.