UMB Financial Corp (UMBF) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Second Quarter 2011 Earnings Results Conference Call. (Operator instructions) This conference is being recorded today, Wednesday, July 27th, 2011.

I would now like to turn the Conference over to Director of Investor Relations Abby Wendel. Please go ahead.

Thank you.

Good morning, everyone, and thank you for joining us for our Conference Call and webcast regarding our second quarter 2011 financial results.

Before we begin, let me remind you that our comments in this Conference Call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements rely on a number of assumptions concerning future events and are subject to risks and uncertainties which could cause actual results to differ materially from those indicated in our statements made during this call.

While management of UMB believes our assumptions are reasonable, UMB cautions that material changes in interest rates, the equity markets, general economic conditions as they relate to the Company's loan and fee-based customers, competition in the financial services industry, the ability to integrate acquisitions, and other risks and uncertainties which are detailed in our filings with the Securities and Exchange Commission may cause actual results to differ materially from those discussed in this call. UMB has no duty to update such statements and undertakes no obligation to update or supplement forward-looking statements that become untrue because of new information, future events or otherwise.

By now, we hope most of you on the call or listening via webcast have had a chance to review our earnings release, which was issued yesterday evening. 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 review our strategies and will provide high-level commentary on our results, Mike will review the details of our second quarter financials, and Peter will review key fee income business drivers. 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.

For the second quarter, we generated net income of $26.3 million on record total revenue of $187.8 million, and diluted EPS was $0.65 per share. We're extremely pleased with this 14.4% increase over the second quarter of 2010, and it demonstrates our ability to grow the Company both through the strength of our business model and through the recent investments in several business areas. In fact, the majority of our business drivers are firing on all cylinders. I'm very pleased with our performance and again this quarter am happy to talk with you about our results.

True to our strategy to accelerate fee business growth, non-interest income was the primary driver behind the increase in total revenue and net income this quarter. Non-interest income increased 21.1%, to $107.9 million, led by the growth in trust and securities processing revenue. Later in the call, Mike will provide additional detail on the growth in this category.

For the second quarter, non-interest income was 57.4% of total revenue and covered 74% of non-interest expense. Although our expense grew 15.4% this quarter compared to the second quarter of 2010, non-interest income grew faster. In analyzing our strategy to maximize efficiencies, you will note that our efficiency ratio went from 73.9% to 75.8% over the same period last year. The most significant drivers of expense increase were salaries and benefits expense and funding an ESCROW account for a proposed settlement on an NSF/OD class action lawsuit.

Other expenses increase show that we continue to invest in our business. As noted in our press release, nearly 30% of our expense growth is due to acquisitions, the largest of which is salary and benefit expense. Through a combination of associates brought on through acquisitions and hiring, we have 121 more full-time equivalent associates than we did as of June 30, 2010. We believe investments such as these and progress made on our other growth strategies are how we will continue to gain operating leverage across all of our businesses over time.

Also in our press release, we announced our regular quarterly dividend of $0.195 for the second quarter. We continuously strive to return value to shareholders and deploy capital effectively. Additionally, we repurchased 48,695 shares in the second quarter. The average purchase price was $41.27, for a total cash outlay of $2 million.

Another important strategy for us is to grow loans and deposits. Average net loans for the second quarter grew 6.9%. On a linked-quarter basis, end-of-period loans grew 1.4%. Compared to the industry, the 2009 regulated depositories that reported second quarter results as of July 26 reported a median decrease in loan balances of 1.64% for the second quarter of 2011. We are very proud of our results.

Loans grew year-over-year in spite of the $57 million runoff in our indirect auto loan portfolio, which we decided to exit in August of 2007. Contributing to our second quarter loan growth, C&I and commercial real estate loan balances increased by more than $200 million on a combined basis when compared to the same period last year. Commercial loan balances were $2 billion at the end of the quarter, and commercial real estate balances were $1.3 billion. As a reminder, our CRE loans are primarily owner-occupied real estate and are underwritten similarly to how we underwrite all of our commercial loans.

Our credit quality speaks for itself, demonstrated by overall nonperforming loans as a percentage total loans at 0.33%, and net charge-off at 0.50%. We're proud of our underwriting practices and believe these metrics further differentiate us from our peers.

Although loans have increased every quarter for the past five quarters, our customers continue to hold cash and wait to invest in [their] business, caused in large part by continued economic uncertainty. At June 30, commercial loan commitments had increased 12.7% compared to the same point a year ago. But utilization rates remain relatively flat at 29.4%.

In our Consumer Lending business, home equity lines of credit increased to $502.9 million, an increase of more than 9%. Utilization in this portfolio remains approximately 48% borrowed. The HELOC delinquency rate was 0.18% in the second quarter, compared to an industry average of 2.56%.

Turning to our credit card portfolio -- commercial credit card balances increased 30.9%, to $96.5 million. While consumer balances dipped slightly, by 2.2%, to $316.1 million, card net charge-offs for the quarter were 2.8%, well below the industry average of 9.6% at the end of the first quarter of 2011. Later in the call, Mike will discuss deposit growth in detail, as it was the most significant contributor to balance sheet growth for the second quarter.

In other corporate highlights -- UMB continues to achieve accolades that reflect the commitment and hard work demonstrated by our over 3,300 associates. The unparalleled customer experience starts with the unparalleled associate experience, and we're proud that we have some of the best in the business.

During the quarter, our St. Louis franchise was named one of the area's best places to work. UMB Fund Services in Milwaukee, a winner of that strong accolade last year, was named a finalist again this year in a similar competition. We're also proud to win the Urban League of Greater Kansas City's Corporate Equalizer Award, celebrating companies for their excellence in their diversity initiatives and practices.

With that, I'll turn the Conference Call over to Mike Hagedorn, who will discuss the balance sheet and income statement in further detail. Mike?

Thanks, Mariner, and good morning to everyone.

The increase in our balance sheet continues to be driven primarily by the growth in deposits. As you know from following our company, we typically see a seasonal influx of public funds in the fourth quarter which started approximately $300 million higher than last year. Normally by now, these deposits have run off the balance sheet. But the rate environment and less attractive yield opportunities for public funds have resulted in additional funds remaining in deposit and repo accounts. This lower-than-usual decrease in public funds, combined with increases in deposits from institutional customers, have resulted in a 14.9% increase in average deposits compared to the same quarter last year. Non-interest-bearing deposits make up 38.5% of our total deposits, a significant contribution to our low cost of funds.

Loan balances increased again, as Mariner mentioned. But utilization remained flat, and the remaining deposits were invested in quality securities. Our investment portfolio grew by 11.8%, to $5.6 billion. As we've discussed on previous calls, we continue to position our portfolio for a rising-interest rate environment. We ended the quarter with $12.8 billion in total assets, compared to $11.1 billion at the end of the second quarter last year. End-of-period net loan balances were $4.7 billion, an increase of 6.4% compared to the second quarter 2010.

On a related note, allowance for loan losses is $72.4 million, and allowance as a percent of total loans is now 1.53% compared to 1.58% a year ago. Additionally, our allowance for loan loss coverage is 471% of nonperforming loans, while the median industry allowance at year end would cover just over half of nonperforming loans.

Activity in the investment portfolio during the quarter included roll-off of $325 million in core portfolio securities at an average yield of 2.9%. In turn, we purchased $443 million of securities at an average yield of 2%. Over the next three months, $269 million of core investments with an average yield of 2.37% will mature. Over the next 12 months, $1.2 billion of core investments with an average yield of 2.5% will mature. Additionally, 73% of our total loan portfolio is expected to re-price or mature in the next 12 months.

Equity was $1.1 billion at the end of the second quarter, a 6% increase from a year ago. As we mentioned last quarter, the components of our capital have shifted slightly, impacted by our acquisitions, with goodwill and intangibles increasing relative to Tier 1 capital. We remain well-capitalized with Tier 1 leverage and total risk-based capital ratios of 11.54%, 6.48% and 12.63% respectively.

Viewing other financial highlights -- return on average assets was 0.85%, flat when compared to the second quarter 2010. Return on average equity was 9.37%, an increase from 8.77% a year ago.

Turning to the income statement for the second quarter 2011 -- net income was $26.3 million, or $0.65 per diluted share. Total revenue increased 12.6%, to $187.8 million for the quarter. Net interest income for the quarter increased modestly, up 2.9%, to $79.9 million. Two main drivers contributed to this increase -- first, average earning assets increased 14%, from $9.9 billion to $11.3 billion on a year-over-year basis; and second, the cost of funds declined 19 basis points, to 0.34% from 0.53% in the second quarter of 2010, resulting in a 26.8% decline in interest expense.

Year-over-year, average net interest margin decreased 31 basis points, to 2.98%. Offsetting these improvements, average earning asset yields fell 44 basis points, to 3.22%. Provision expense decreased by $2.5 million, or 30.9%, compared to the second quarter 2010. Our provision expenses are a reflection of our consistent methodology, which considers the inherent risk in our loan portfolio as well as some qualitative factors.

As Mariner discussed, non-interest income increased 21.1%, to $107.9 million, comparing favorably to $89.1 million for the second quarter 2010. The increase in non-interest income was driven largely by a 38.9% increase in trust and securities processing revenue, which for the quarter was $53.6 million, compared to $38.6 million for the second quarter of 2010.

Within this category, advisory fee income from the Scout Funds increased 39.1%, to $16.7 million. Fund accounting and administration income increased 16.3%, to $18.2 million. And income from personal and institutional wealth management increased nearly nine times, to $8.4 million. Another factor contributing to the growth in non-interest income was an 18.4% increase in bankcard fees, which Peter will discuss later in the call.

The non-interest income improvements continue to help offset the impacts of Reg E changes that went into effect in August 2010. For the second quarter, net consumer NSF/OD income was $3.6 million, which accounts for a $3.1 million or 46.7% decline from the second quarter 2010. Consumer-related net NSF/OD income amounts to 19.8% of total deposit service charges of $18.2 million.

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

Thanks, Mike, and good morning, everyone.

As you've seen in our press release, our results continue to demonstrate the long-term value of having a multifaceted business model. Throughout this morning's discussion, we've emphasized how our fee businesses and our recently completed acquisitions helped to deliver strong results during the second quarter of this year. To provide some additional context, I will provide details about the primary sources and drivers of our fee income, beginning with our Asset Management and Asset Servicing businesses. As noted in previous calls, revenues in these areas are largely dependent on three key drivers -- first, new business; second, mutual fund and separately managed account flows; and third, equity and fixed income market performance.

Our Asset Management businesses have grown substantially over the past year. We ended the quarter with total company assets under management of $29 billion, an increase of 127.1% over the second quarter of 2010. As a reminder, this increase is primarily due to the acquisition of Reams Asset Management, which closed in the fourth quarter of 2010.

Total assets in the Scout Mutual Funds reached $10 billion in the second quarter. Scout Fixed Income separately managed accounts ended the quarter with $10.1 billion in assets under management, and Scout Equity separately managed accounts totaled $600 million in assets at quarter end. Net flows into the Scout Equity and Fixed Income Mutual Funds were $315 million for the quarter, compared with $339 million in the second quarter of 2010.

Second quarter sales for Scout's separately managed account Equity and Fixed Income business were $303 million, compared with $39 million a year ago. This increase is due to two key factors -- the benefit from sales of fixed income strategies which were not available in 2010 and increased traction in our Equity separately managed account business.

A growth strategy within Scout Investments is to launch new products over time. On June 30, we were pleased to announce the launch of the new Scout Global Equity Fund. This fund will identify growth companies in the US and abroad and will combine the strengths and stock selection capabilities of Scout's five equity teams. This fund is a great complement to the existing lineup of Scout funds.

Moving on now to our Asset Management businesses for individuals -- total personal assets under management stood at $8.3 billion for the second quarter, an increase of 84.1% or $3.8 billion from a year ago. Comprising the $8.26 billion is $5.54 billion in assets under management within our traditional Trust and Personal Wealth Management group and $2.7 billion in assets managed by Prairie Capital Management.

Turning to asset servicing -- UMB Fund Services ended the quarter with $208.3 billion in assets under administration, an increase of 30.6% over the second quarter of 2010. Fund administration and custody [revenues this] quarter increased by $2.5 million, or 16.3%.

Corporate Trust assets under administration finished the quarter at $11.8 billion, up slightly when compared to the same period a year ago. This business continues to be challenged from low money market yields and a limited volume of new municipal offerings coming to market. To combat these pressures, we continue to diversify the business and strengthen existing client relationships while building on new ones.

Our company includes several other more traditional fee-based businesses as well. These areas within UMB Bank have also grown quickly and continue to perform strongly, providing a strategic source of core funding and revenue growth.

Looking first at our credit card businesses -- these are two important metrics that we track -- first, we track revenue from bankcard fees, which are composed primarily of interchange revenue. And second, we look at the underlying purchase volume that drives that revenue. Bankcard fees increased 18.4% over the second quarter 2010, to $16.5 million. Debit and credit card interchange was $15.8 million of that total.

Credit card interchange was $9.7 million, or 61% of the $15.8 million total. Debit card interchange, less healthcare-related debit cards, was $4.6 million, or 29% of the total. And healthcare debit card interchange was $1.5 million, or 10% of the total.

Card purchase volume is a primary driver of the revenue in our card businesses. For the second quarter, purchase volume across our entire suite of card products increased 23.8%, to $1.4 billion, when compared to the same period last year. We group purchase volume into four major categories -- commercial credit, consumer credit, consumer debit and healthcare debit.

Commercial credit card purchase volume reached a record $266.2 million for this quarter, an increase of 28.3%; and comprised just less than 20% of total credit and debit card purchase volume for the second quarter. Consumer credit card purchase volume was 17% of total purchase volume in the quarter, and consumer debit purchase volume was 29% of the total. And healthcare debit represented 34% of the total.

Coupled with our Healthcare Services account debit card is a custody account. And at the end of the second quarter, deposits in our Healthcare Service custody accounts stood at $312.6 million, an increase of 46.3% when compared to the second quarter of 2010. A feature of these accounts is to sweep funds into a mutual fund above a preset balance. At the end of the quarter, we had $25.6 million in customer mutual fund assets. Total FSA and HSA accounts were $2.1 million, representing a 61.7% increase from one year ago. While today these make up a relatively small percentage of deposits and revenue, we're excited about the opportunities in this business and continue to invest in its capabilities.

As you know, the Durbin Amendment in the Dodd-Frank Act required the Fed to place a price cap on debit interchange revenue on card issuers across the country. Based on the $0.21 cap articulated in the Fed's most recent rule, we estimate our annual revenue exposure to be approximately $8.6 million. Because some uncertainty remains about how fraud, loss and prevention fees will be applied, this is our best estimate at this time and is subject to some change.

As you know, UMB is known for high credit quality. And the credit quality of our card products is no exception. Card quality remains superior to industry averages and has improved over the past several quarters, with delinquency rates dropping to 1.69% from 2.38% a year ago. As Mariner mentioned, total credit card charge-offs were 2.8% of card balances for the second quarter, versus 3.9% in the second quarter of 2010. According to Fitch Rating Services, first quarter 2011 industry credit card charge-offs averaged 9.6%, more than triple our credit card charge-off rate.

Turning to some other aspects of our banking business -- our private banking and wealth advisor teams continue to deepen relationships with our existing client base. Private banking deposits as of the end of June 2011 had increased 69.6%, and private banking loans had increased 17.4% when compared to the end of the second quarter 2010. Deposits attributed to consumer and private banking stood at $4.4 billion at June 30 and represented 44% of the Company's total deposits. Overall, deposits from consumers increased 4.7%.

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

Thank you, Peter.

We appreciate your interest in UMB and hope you find these calls valuable.

We are pleased with our results and continue to believe that among our peers, our diversified business model presents a unique investment opportunity. Our industry faces serious challenges, including an enhanced regulatory environment, an ongoing low interest rate, and global economic uncertainty. However, we believe that our solid business model, which has proven to be successful in all types of economic environments, will continue to benefit our customers and our shareholders.

With that, I'd like to turn the call over to the Conference operator for your questions. Thanks again for being with us today.

(Operator instructions) Chris McGratty, KBW.

I think I missed one of the numbers. Can you just repeat the Durbin impact that you talked about?

It's $8.6 million.

Annually? Okay.

Annually, correct.

Does that include the healthcare number in it? Or is that --

No.

No. We remain convinced that those cards will be excluded.

Okay.

We're not worried about those at the present time.

Okay.

And then, the roll-off in securities in the current quarter -- what was the -- was it $325 million? Is that what you said?

Let me go back and get the number for you, Chris. $325 million, at a yield [2.9]%.

[290]? Okay.

Yes.

On the investment portfolio -- what are you guys buying? What kind of yield are you picking up?

Yes, the combined yields I mentioned in my prepared remarks was 2%. The typical purchases right now are agency securities, some municipals and mortgage-backeds.

But that's shifting around based on availability.

Right.

Okay.

Traditionally, it's also included treasuries. But our treasury position is much smaller recently than it has been historically.

But the yield that you're getting is roughly around 2% on new purchases, okay.

Yes, everything purchased, yes.

Okay.

And then, can you speak to the growth outlook on the loan side? Obviously, your growth numbers were really good this quarter. Maybe talk about pipelines, and kind of expectations for the back half of the year?

Sure -- this is Mariner. As we've talked over the past few quarters, as mentioned, we had five quarters loan growth. We continue to see a strong pipeline. The pipeline looks very good. I would say that it doesn't have as much to do with business expansion; more to do with market share gains, and taking advantage of dislocation in the industry. But the pipeline across pretty much all of our regions, particularly in Colorado and Arizona, are very strong. St. Louis also is very strong. Really, all the way across the board -- the strongest pipeline is in Colorado.

Okay. Thanks again.

And all industries also.

(Operator instructions) Peyton Green, Sterne, Agee.

Just a question -- in kind of thinking about the numbers, as you all reported them -- then backing out -- I think last year you had a $3.5 million expense and also income item that offset one another. But if you looked at the non-interest income and the non-interest expense year-over-year, the non-interest income growth was about 21%, and the expense growth was about 11%, adjusting for the unusual items in terms of the litigation expense this year and the charitable expense last year. Do you feel better about being able to keep that kind of operating leverage going forward? Or do you feel like the investments you have to make will continue -- will be required versus optional?

Peyton, I would say that for the most part, the investments we made and the acquisitions we've made really fill out our complement of businesses and fill the gaps in the products that we have, and for the most part have completed the offerings we have in the businesses that we were focused on making those acquisitions in. So I would say the investments we've made at this point we should start to see operating leverage from. And so, our expectation is, from here on out, to see operating leverage from those investments.

So the focus still is on operating leverage.

Yes.

In thinking about the loan growth opportunity -- are you seeing it -- for two or three quarters now, you've had pretty broad-based growth across consumer and commercial lines. Is there anything that you see that concerns you about that going forward? Or do you feel better about it today than you would have, say, six months ago?

I wouldn't say we feel better about it. We feel the same about it. I think HELOC demand seems to have slowed a little bit. But commercial demand -- demand is probably the wrong word -- the pipeline looks good. The demand, as you can see from the utilization rates, is relatively soft. But we've been able to bring on new customers at a very good clip, and, as I mentioned, I think the pipeline across the whole footprint.

What I would say is we are seeing regional leverage for the first time in our company's history, at a strong -- the regional loan growth is having a strong impact on total loans at this point.

(Multiple speakers)

Meaning the regions outside of Kansas City. Is that --

Yes.

Okay.

Peyton, I would just chime in and say that we are very focused on execution in all of our businesses right now --

Yes.

-- whether that's Commercial Lending or Scout Investments, or Healthcare for that matter. And what you're seeing, I think, is the result of our very, very strong focus on execution and results coming out of both the acquisitions and the commercial lending space in particular.

Okay.

And then, what do you anticipate doing in terms of trying to offset or mitigate the $8.6 million in loss debit card interchange? Are there any opportunities that you have, because you are a card-issuing bank, that maybe others in the industry that are just agent issuers don't have the ability to do?

There's really nothing fundamentally different that we can do, different from other institutions, to offset it, other than grow. And Healthcare being excluded, and that being a major growth emphasis for us, we should perform better, arguably, than some of the other institutions that are more dependent on consumer-oriented debit. I think all we can do is grow our way through this, Peyton.

And like everybody else, we're resetting the products, resetting the way they're designed. We're investing in technology to make it more simple and more efficient, so that we can leverage profitability in the business. And nothing we're doing that JP Morgan isn't already doing. There's nothing unique to our model.

Okay.

And then, last question -- as the service charges on deposit accounts continues to be a bit soft compared to prior quarters, is there anything -- do you get a sense that's starting to stabilize?

Yes, I can answer that. I think it has just about reached bottom. Last year, we put the new NSF/OD fees in. We've got the settlement behind us. We're continually looking at what the CFPB is going to be suggesting we do or mandating that we do here in the coming quarters. So to the extent that they mandate additional changes in how our deposit accounts are structured, you could see some additional weakness. But assuming that doesn't happen in the short term, we think we've worked our way through most of the decline.

Okay.

I said that was the last question, but I lied. One more -- the legal and professional jumped pretty significantly linked-quarter. Would you expect that to kind of drop back to where it's been in prior quarters? Or is that a new run rate?

Yes, Peyton, this is Mike. That's mostly related to the settlement costs. So I would think that you'd see a more normalized cost go-forward.

Okay.

We sure would like to see that. Washington these days adds a whole never level of complication to the business.

Okay. Congratulations on a very solid quarter.

Thanks, Peyton.

Thanks, Peyton.

Thank you.

Management, I'm showing no further questions at this time. Please continue.

Thank you.

Thank you very much for your interest in UMB. This call can be accessed via replay at our website beginning in about two hours, and it will run through August 10th. 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 Call for today. If you would like to listen to a replay of this Conference, please dial 1-800-406-7325 and enter in the access code 4455422.

We'd like to thank all of you for your participation, and you may now disconnect.