UMB Financial Corp (UMBF) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen,thank you for standing by. Welcome to the UMB Financial fourth quarter and year end 2010 earnings results conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, January 26, 2011. At this time I would like to turn the conference over to Ms. Abby Wendel,Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning everyone. Thank you for joining us for our conference call and webcast regarding our 2010 fourth quarter and full year financial results. Before we begin, let me remind you that our comments in this conference call contain forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933, Section 21 E 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 C 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 via webcast have had a chance to review our earnings release which was issued early this morning. 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 fourth quarter and full year financials, then Peter will review key income business drivers. 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.

For the fourth quarter we generated $173.5 million in revenue, and posted $0.47 per diluted share on net income of $19 million. Although net income declined approximately 20% this quarter, revenue growth was driven by improvements in non-interest income. Net interest income improved slightly to $78.8 million, an increase of 1.4%. Non-interest income increased 13.6% to $94.8 million, and represents 54.6% of total revenue for the fourth quarter. Expenses associated with acquisitions which we will discuss later in the call made up approximately 36.9% of the expense increase for the quarter.

For the full year we generated a record $671 million in revenue, a 9.4% increase over 2009, and posted $2.26 per diluted share on net income of $91 million, an increase of 1.7%. Our Company is focused on generating quality earnings regardless of the economic environment. We continue to execute on our strategies demonstrated through our acquisitions and diverse revenue streams. As we look to 2011 these investments should allow us to achieve even greater operating leverage.

Additionally in the fourth quarter the increase in non-interest income was driven primarily by increased revenue and trust and securities processing, this includes revenue from our fund administration, custody business, advisory fee income from Scout Funds, institutional personal asset management fees, plus revenue from our card businesses. The increase also demonstrates the continued investment in people and acquisitions that are a good, cultural and strategic fit for our Company. As we have discussed previously our first priority now is to digest the acquisitions we have made to date. However we will continue to evaluate potential opportunities as they rise. Later in the call Peter will discuss additional details regarding our fee businesses.

Although low interest rates persist, net interest income held steady primarily due to our low cost of funds and to a larger balance sheet than compared to the fourth quarter of 2009. Core funding is a valuable aspect of our franchise and the long-term value of these deposits cannot be overlooked. The compression in net interest margin slowed this quarter in part because we continued to benefit from our low cost of funds as Mike will discuss later in the call.

Of particular note we were pleased to report that actual loan balances increased on a year-over-year basis 6.2% over the fourth quarter 2009 and 6.3% on an average basis. As we have discussed previously we are allowing our indirect loan balances to run off. If we exclude this impact our actual loan balances increased by 8.4% on a year-over-year basis. By comparison 122 banks that have reported fourth quarter income as of January 26 reported 1% median decrease in loans for the fourth quarter.

In an environment where loan demand is still described as weak our results are a testament of the work we do every day to drive shareholder value. Commercial lending lies at the heart of our bank. We are proud of our loan growth this quarter while maintaining a non-performing loan rate of 0.55% of total loans, and net charge-offs of 0.53% of total loans. With loan-deposit ratio of 50.8%, we have plenty of availability for our current customers and for any new opportunity that arises.

The main driver of increased loans for the quarter and the year continues to be new customer growth, as also was the case in 2009. Commercial real estate balances increased 16% to $1.1 billion, and HELOC balances at the end of the quarter were $465.4 million an increase of 8.3%. C&I loans increased 1.4% or $81 million to $2 billion.

The balances in our commercial lines of credit were $1.5 billion at the end of the quarter an increase of 18.5%. Working lines of credit commitments in this category increased 9.4% to $4.9 billion. The resulting utilization rate increased to 30.3% compared to 27.9% in the fourth quarter of 2009. This modest increase is encouraging, however, we continue to see lots of cash on our customers balance sheets as business owners remain uncertain about the economy. As a result, commercial utilization remains soft compared to our historical averages.

Turning to expenses. A significant portion of our expense growth in 2010 was due to investments in acquiring strategic businesses,the expenses for which were 36.9% of total expense increase. As amortization of intangibles lessens over time we should achieve greater operating leverage. Mike will provide further detail on expenses in just a few moments.

By now most of you have also had the opportunity to review our dividend announcement. We are pleased to announce the payment of a $0.195 per share dividend for shareholders of record on March 11, 2011. The ten dividend increases since July of 2003 represent a total quarterly dividend increase of 95%. We hope that you have come to expect consistency from our Company in the form of results, credit quality, balance sheet growth, and dividends. We recognize the investments we are making in the short run have a drag on our net income in the short run. However, we remain focused on our ability to drive greater earnings power over the long-term investment horizon.

With that, I will turn the call over to Mike for further detail on our financial results. Mike?

Thanks Mariner. Welcome everyone.

The increase in our balance sheet from the fourth quarter 2009 to the fourth quarter 2010 was fueled largely by the increase in deposits. Loan balances also increased but as utilization rates remained soft, the remainder of the growth was invested in quality securities. As you know from following our Company we are, once again to start of the typical seasonality with an influx of commercial and institutional deposits, as well as the inflow of public funds which are running approximately $200 million higher than last year.

As a reminder, public fund balances increased in December and peak in the January/February timeframe. This activity results in a temporary adjustment to lower fed funds sold and reverse repurchase agreements. This action provides the best yield and liquidity and interest rate management capabilities as the public fund balances exit typically late in the first quarter. In addition this short-term balance sheet increase negatively impacts certain financial ratios.

Reviewing assets, we ended the quarter with $12.4 billion, compared to $11.7 billion at the end of the fourth quarter last year. End of period loan balances were $4.6 billion, an increase of 6.2% compared to the fourth quarter 2009. Loan demand improved modestly, demonstrated by the increases in both commitments and utilization of commercial credit lines, as Mariner mentioned earlier in the call.

Our credit quality continues to remain stable. For the fourth quarter 2010, UMB's nonperforming loans were 0.55%, flat from 0.54% a year ago. Net charge-offs were $6.2 million for the fourth quarter or 0.53% of average loans compared with 0.57% a year ago.

The majority of our net charge-offs are in our credit card portfolio. For the fourth quarter credit cards accounted for 62.1% of net charge-offs. Overall we remained well below the third quarter 2010 industry medians of 4.04% for nonperforming loans, and 1.1% for net charge-offs.

On a related note, allowance for loan loss is $74 million, and allowance as a percent of total loans is now 1.61% or 12 basis points higher than a year ago. Additionally, our allowance for loan loss coverage is nearly three times the amount of nonperforming loans. Activity in the investment portfolio during the quarter included $254 million in core portfolio securities that rolled off at an average yield of 3.94%. In turn, we have purchased $912 million of securities at an average yield of 1.87%. $148 million of the purchases totaled reflect non-core maturities that were moved to the core portfolio. Over the next three months, $413 million of core investments with an average yield of 3.04% will mature.

Over the next 12 months $1.4 billion of core investments with an average yield of 2.73% will mature. In the continuing low interest rate environment we expect the repurchasing of securities at lower yields to put pressure on interest income. Additionally, 72% of our total loan portfolio is expected to reprice or mature in the next 12 months.

Looking at our liabilities, average deposits increased by 12.9% to $8.8 billion for the fourth quarter. The primary increase in deposits was an 18.4% increase in average non-interest bearing deposits. Non-interest bearing deposits make up 32% of our total deposits,a significant contribution to our low cost of funds.

At UMB we consistently hold high levels of capital. For fourth quarter 2010 equity stood at $1.1 billion, a 4.5% increase from a year ago. We remain well-capitalized with Tier 1 leverage and total risked based capital ratios of 11.3%, 6.6%, and 12.5% respectively.

Reviewing other financial highlights. Return on average assets was 0.65%, a decrease from 0.91% in the fourth quarter 2009. Return average equity for the fourth quarter was 6.92%,a decrease from 9.22% a year ago. For the full year 2010, return on average assets and return on average equity were 0.82% and 8.53% respectively.

Turning to the income statement for the fourth quarter 2010, net income was $19 million, or $0.47 per diluted share. As Mariner mentioned, total revenue increased by 7.7% to $173.5 million for the quarter, and by 9.4% to $671 million for the full year 2010. Net interest income for the quarter increased slightly up 1.4% to $78.8 million.

Two main drivers contributed to this increase. First, average earning assets increased by 10.9% from $9.5 billion to $10.6 billion on a year-over-year basis. And second, cost of funds declined 27 basis points to 0.43% from 0.7% inthe fourth quarter of 2009 resulting in a 32.2% decrease in interest expense.

Year-over-year, average net interest margin decreased 22 basis points. However, on a linked quarter basis margin dropped 11 basis points, reflecting the deceleration in net interest margin compression. Offsetting these improvements, average earning asset yields fell 48 basis points to 3.42%. Provision expense decreased by $4.1 million or 35.6% when compared to the fourth quarter 2009, and remained flat on a linked quarter basis. Our provision expense is a reflection of our consistent methodology which considers the inherent risk in our loan portfolio, as well as some qualitative factors. In light of current economic conditions, we believe this level is appropriate when combined with the characteristics of the portfolio.

Turning to fee revenue. Non-interest income was up 13.6% for the fourth quarter compared to the same period in 2009, and was 54.6% of total revenue. The increase in non-interest income was driven primarily by a 34.7% increase in trust and securities processing revenue, comparing favorably to 34.4% in the fourth quarter of 2009. The primary components of the $11.9 million increase are as follows, $1.9 million from fund administration and custody services, a 12.8% increase,$4 million in advisory fee income from the Scout Funds, a 40.3% improvement,and $4.1 million in institutional and personal wealth management fees, a 336% increase.

Another factor contributing to our growth in non-interest income was a 23.3% increase in bank card fees. Revenue from bank card fees is comprised primarily of debit and credit card interchange. Year-to-date interchange revenue was $53.4 million. Approximately 30.3% or $16.2 million of that total is derived from non-healthcare debit cards. About 9.1% or $4.9 million of total interchange revenue is attributed to healthcare spending of cards.

On a year-to-date basis for 2010 total debit interchange revenue including healthcare debit interchange represents 3.1% of our total revenue. The non-interest income improvements just mentioned helped offset the impact of Reg E changes that went into effect in August 2010. For the fourth quarter, net NSFOD income from consumers was $3.4 million, or 19.5% of total deposit service charges of $17.5 million. Compared with the fourth quarter 2009, net NSFOD revenue from consumers declined approximately $3.2 million or 48%.

Total non-interest expense increased 15.6% to $138.5 million compared to the fourth quarter 2009. As Mariner mentioned earlier in the call, approximately 36.9% of this increase can be attributed to acquisition related expenses totaling $6.9 million, and is comprised of salary and benefit costs of $3.1 million, intangible amortization expense of $1.6 million, and legal and consulting fees of $2.2 million. Looking forward we should see operating leverage from these acquisitions improve resulting in a positive impact to overall results.

With that I will turn the call over to Peter to discuss the business drivers behind this quarter's results.

Thanks, Mike. And good morning everyone. We continue to successfully execute on our strategies as a diversified financial services company. Our results demonstrate the long-term importance of having a broad business mix.

In my comments today I will provide details about our sources of non-interest income, and I would like to highlight a couple of specific areas this quarter. First with our recent acquisition of Reams Asset Management and Prairie Capital Management, our total assets under management in Scout investments and in our bank asset management business now total $27.9 billion, an increase of 97.5% over year end 2009. We are very pleased with the growth of our asset management businesses, and I will share a little more detail on these areas in just a few short moments.

Another area where we are seeing significant growth is our health care services business, following the 2010 open enrollment period healthcare services deposits now stand at $255.2 million, an increase of 50.3% when compared to 2009 levels. In addition to these deposits we have $24.7 million in mutual fund balances associated with these accounts. FSA and HSA accounts totaled $1.8 million representing a 35% increase from one year ago, and a 35.6% increase on a linked quarter basis. The growth this these accounts tends to be cyclical, tracking with the timing of company open enrollment periods, the majority of which take place in the fourth quarter.

In September we announced addition of a new national sales team to help support our expansion into the broker sold channel. We will continue to build out this strategic source of low cost stable funding and related card based transaction volumes and fee revenue. Our healthcare debit card product which is tied to our Health Savings Account and Flexible Spending Accounts comprised 23.3% of total debit and credit card purchase volume in the fourth quarter, and 28% of full year volumes.

Moving on to other aspects of our payment businesses. Purchase volume across all of our card product offerings increased 27.3% to $1.1 billion in the fourth quarter when compared to the same period last year. Commercial credit card purchase volume increased 29.7%, and reached $225 million this quarter alone, a record level for us. Commercial cards comprised nearly 21% of total debit and credit card purchase volume for the fourth quarter.

As we mentioned last quarter, we continue our efforts to increase penetration in both the public and commercial sectors on a local and regional level. Consumer credit and debit card purchase volume made up 54.6% of total purchase volume this quarter, and more than 51% on a year-to-date basis. We successfully integrated several credit card portfolio acquisitions in 2010, and purchase volume from these portfolios made up approximately 40.6% of total full year consumer credit card purchase volume.

Credit card credit quality remains superior to the industry averages, and has improved steadily throughout 2010 with delinquency rates dropping to 2.3% from 2.8% just a year ago. Total credit card charge-offs were 3.5% of card balances for the year, versus 4.6% in 2009. According to Fitch Rating Services third quarter 2010 industry credit card charge-offs averaged 8.5%, more than double our credit card charge-off rate.

I will now turn to our asset servicing and asset management businesses. Revenue in these areas is largely dependent on three key drivers. One, the acquisition of new business. Two, mutual fund and separate account flows. And three, equity in fixed income market performance. Our fund administration and custody services ended the quarter with $179.3 billion in assets under administration, an increase of 10.4% over the fourth quarter of last year.

Revenue for the quarter increased $1.9 million or 12.8%. During the past two years we have largely complete pleated the buildout of our product suite for UMB Fund Services with the acquisition of JD Clark and JPMorgan separately managed account platform. UMB Fund Services is now able to provide administration services to any type of investment management firm including firms that offer mutual funds, alternative investments and separately managed accounts.

Continuing with another aspect of our asset servicing business, corporate trust assets under administration stood at $12.2 billionat December 31, 2010, an increase of 2.7% over the same period a year ago. 2010 sales in this business were strong,however, this business continues to suffer from low money market yields resulting in lower incentive payments from money market fund sponsors.

As I mentioned earlier our asset management businesses have grown substantially over the past year with total year end 2010 assets under management standing at $27.9 billion. Starting with our institutional asset management business, total assets in Scout investments reached $19.9 inthe fourth quarter,Assets in the Scout Funds stood at $8.3 billion,Assets in Scout institutional accounts stood at $618.2 million, and Reams Asset Management managed $10.2 billion in assets at year end. Scout money market assets were $813.5 million. Net fund flows into the Scout equity and Fixed Income funds for the year were $1.5 billion compared to $1 billion in 2009. And market appreciation for the year resulted in a $956.2 million increase in assets under management.

The successful acquisition of Reams Asset Management is another example of a good cultural financial and strategic acquisition for our Company. We are now able to offer our institutional clients and prospects a broader selection of high quality fixed income investment products. Reams expertise in institutional fixed income products blends well with Scout's knowledge and success in domestic and international equities.

Continuing with our asset management businesses for individuals. Total personal assets under management stood at $8 billion for the fourth quarter, an increase of 78.2% or $3.5 billion from a year ago. Assets managed in our personal trust and wealth management businesses were $5.5 billion, and assets managed by Prairie Capital Management were $2.5 billion. Prairie Capital's strong reputation, investment expertise, and excellent customer base have proven to be a strong complement to our investment and wealth management capabilities.

Trust income in the Personal Financial Services segment was $11.2 million, or an increase of 46.7% from the fourth quarter of 2009. $3.5 million of fee revenue in the fourth quarter could be attributed directly to Prairie Capital Management.

Turning to consumer lending, HELOC balances were $465.4 million, anincrease of 8.3% over the fourth quarter of 2009. More than half of the increases in balances came from private banking. The utilization rate on home equity lines was 49% for the quarter relatively unchanged from the prior quarter. Credit quality of this portfolio remains excellent, with a delinquency rate of 0.2%, up slightly from 0.15% in September. The industry-wide delinquency rate for HELOCs was 2.64% for the third quarter of 2010.

Our private banking and wealth advisory teams continue to deepen relationships with our existing customer base. Private banking deposits increased 24.7% and private banking loans increased 24.3% compared to the fourth quarter of 2009. Deposits attributed to consumer and private banking businesses stood at $4.3 billion at December 31st, and represented 47.8% of the Company's total deposits. The penetration rate for our consumer related businesses improved in December, compared to the same period a year ago. At end of December 2010 our consumer cost/sell ratio was 3.28 products per customer, 5 basis points higher than in December of 2009.

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

Thank you Peter. As we continue to execute on our strategies, we remain mindful and are keeping a close watch on the developments in Washington as regulators further define new rules under the Dodd Frank Act. A lot of uncertainty remains about the impact these new regulations will have. However, we remain confident that our business model affords us the quality, diversity, and stability necessary to continue to achieve growth even through these uncertain times.

We appreciate your interest in UMB. And I would like to thank you for being on the call today. With that, I will turn the conference call back over to the operator to open up the call for your questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Chris McGratty with KBW. Please go ahead.

Good morning, guys.

Hey Chris, how are you?

Was the tax high a little bit high this quarter, or is that a good run rate on the tax rate?

Hi Chris. This is Mike. It was. And really there are three main reasons why the tax rate is a little different as compared to the prior period. First, there were some one-time tax benefits recognized in 2009, specifically relating to historic rehab tax credits and some state tax positions that we don't have similar benefits for in 2010. We also had a valuation allowance that was recorded in the fourth quarter of 2010 that increased our effective tax rate, and then the last thing is a smaller portion of our overall revenue is coming from municipal holdings. Those are the three main drivers.

Okay. So going forward what should I peg for a tax rate?

I won't give you a percentage per se. I will say this much. I think that the tax rate in the fourth quarter was higher than the ongoing tax rate would be, most notably for that valuation which was almost $700,000.

Okay. That helps. On the expenses, you guys outlined obviously the increase in costs year-over-year because of the acquisitions you made and amortization. There were any obviously legal costs were a little higher. Any one-time expenses in this quarter, or is this kind of a good run rate to work with?

Sure, there were some I will call them cleanup issues. Those equate to a little more than $1 million in the fourth quarter, and then there are other things that we talked about earlier. The salary and benefits related to our acquisitions. Not all of that is ongoing costs. We do have one-time payments that we make to folks as we close acquisitions. Legal and consulting clearly is higher, and is not indicative of ongoing run rate,and clearly the intangible is.

Okay. And then last, Mike, maybe you could just talk about on your overall balance sheet strategy, in terms of ALCO positioning, for obviously rates moved in the fourth quarter, wondering what your goal is, where you are from an ALCO perspective?

Obviously as every day goes by, we become more and more asset sensitive, that is clear. Having said that, we did talk about in the prepared remarks the fact that there is a deceleration going on. In other words, as the investments that are maturing are maturing at lower and lower interest rates relative to what they were, say in the second quarter or the first quarter of this year or last year I should say, that gap is starting to narrow. So that bodes well for the future obviously, assuming that we have interest rate increases at some point, which is our expectation. We have talked about that in the past that we do expect higher interest rates to start. Exactly when that will happen is anybody's guess, but we are preparing the portfolio for that.

Did you say in the reinvestment that the negative drag from reinvestment rates is moderating you are saying?

It is moderating, yes.

Okay. That is all I had. Thanks a lot.

Thank you. (Operator Instructions). I am showing there are no further questions in the queue. We will turn it back over to management for closing comments.

Thank you. Thank you very much for your interest in UMB. This call can be accessed via a replay at our website beginning in about two hours, and it will run through February 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. Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7235 enter the passcode 4398639. Once again those numbers are 303-590-3030 or 1-800-406-7325, enter the passcode 4398639.

This does conclude today's UMB financial fourth quarter and year end 2010 earnings results conference call. Thank you for your participation. You may now disconnect.