UMB Financial Corp (UMBF) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the UMB Financial second quarter 2013 financial results conference call. During today's presentation, all parties will be in a listen-only mode, and following the presentation there will be a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

I would now like to turn the call over to Kay McMillan. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining us for our conference call and webcast regarding our second quarter 2013 results. Before we begin, let me remind you that our comments on this conference call contain forward-looking statements 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 the 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 SEC 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 are listening via webcast and had a chance to review our earnings release which was issued yesterday afternoon. If not, you'll 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 Michael will review the details of our financials. Then Peter will review key fee income business drivers and following that we'll be happy to answer your questions. Now I'll turn the call over to Mariner Kemper.

Thank you, Kay. Good morning, everyone, and thank you for joining us today. Our second quarter results continue to reflect strong performance by our business units. Net income was $29.9 million or $0.74 per diluted share, earned on total quarterly revenue of $195.9 million and return on average equity of 9.31%. Net interest income for the second quarter grew modestly, increasing 2.4% compared to the same quarter last year. Mike will discuss this in detail later in the call but I am pleased that growth in our earning assets and improved deposit pricing helped drive this increase. Non-interest income increased 3.1% to $113.6 million, driven primarily by a nearly 14% increase in trust and securities processing revenue which reflects solid performance from our fee businesses. The impact from the change in gain on sale of securities compared to the second quarter of last year partially overshadows these results. Non-interest income was 58% of total revenue for the quarter. Non-interest expense for the quarter was $150.3 million, an increase of less than 4% compared to the same period a year ago which, combined with our revenue results, drove an efficiency ratio of 73.5%. On a linked quarter basis, expenses remained flat.

Once again this quarter, I'm happy to report continued strong loan growth. Average net loans at June 30, 2013 were 18.1% higher than a year ago. On a linked quarter basis, this is an increase of 5.9%. This is our 13th consecutive quarter of loan growth and sixth consecutive quarter of year-over-year double digit loan growth. Utilization moved up slightly this quarter coming in at 31% for the quarter compared to 29% a year ago. Compared to the industry, the more than 1,500 regulated financial institutions that had announced results as of July 22, 2013 reported an increase in loan balances of just 1.4%. Our reputation in the markets we serve as well as the experience in tenure of our relationship-based lenders continues to drive our performance.

Loan growth continues to come primarily from an increase in market share. We saw growth in all of our markets, led by Kansas City in terms of actual balances followed by Denver and St. Louis. In regions where we have smaller market share, we also are seeing strong results. All of our regions reported double-digit year-over-year loan growth. In terms of loan type, C & I lending was the primary driver of this growth for the quarter. The June 30 loans balances of $3.3 billion, a $696 million or 26.4% increase. Commercial Real Estate also had a strong second quarter with ending balances of $1.6 billion or a 16% increase over the same period a year ago.

For the second quarter, our average loan to deposit ratio improved 53.2%. As we discussed last quarter, our goal is to replace securities that roll off our investment portfolio with high quality, higher yielding loans. As we grow and diversify our loan portfolio, our underwriting standards remain the same. Overall non-performing loans, as a percent of total loans, were just 0.40% and net charge-offs for the quarter improved to 0.21% compared to 0.41% a year ago. With that I'll turn the call over to Mike who will further discuss the financial results. Mike?

Thanks, Mariner, and welcome everyone. This morning I'll review our company's financials and provide a more detailed summary of our four business segments. During the second quarter, our average balance sheet grew 12.7% and average earning assets increased 13.2% to $13.8 billion. As we look to replace the roll off from the investment portfolio, nearly 60% of the earning asset growth came from loans. The average balance in our investment portfolio for the quarter was $7.2 billion, 10% higher than the second quarter a year ago. The average yield on securities was 1.95%, a decrease of 3 basis points from last quarter and a decrease of 27 basis points from the second quarter of 2012.

Activity during the second quarter included the roll off of $340 million in core portfolio securities at an average yield of 2.13%. In turn, we purchased $815 million of securities at an average yield of 1.41%. Continued changes in the portfolio combined with updated key assumptions, lengthened the effective duration to 47 months from 40 months on a linked quarter basis. That said, we do have a bias towards shortening the portfolios duration as securities mature which has the flexibility to fund loan growth. During the next three months, $269 million of core investments with an average yield of 1.81% will cash flow and during the next 12 months, $1.2 billion of core investments with an average yield of 1.88% will cash flow. The securities mix in our portfolio remained approximately the same as the first quarter. Mortgage backed securities dropped slightly to 45% of the portfolio while municipal securities grew to 31%. 69% of our total loan portfolio is expected to reprice or mature in the next 12 months and 58% will reprice, mature, or amortize next quarter.

Allowance for loan losses is $71.6 million and allowance as a percent of total loans is now 1.13%, compared to 1.37% a year ago. Although our allowance as a percent of loans has declined, we believe this level is appropriate given the high quality of our loan portfolio and the history of charge-offs. Our coverage is more than 2.5 times the amount of non-performing loans while the median industry allowance reported for the first quarter would have covered just two-thirds of non-performing loans. We remain well capitalized with Tier 1, leverage and risk-based capital ratios of 10.72%, 6.76%, and 11.52%, respectively.

Looking at the liability side of the balance sheet, average deposits for the quarter increased 12.2% to $11.6 billion. As in the past several quarters, average non-interest bearing deposits comprise approximately 40% of total deposits. Our high percentage of free funds continues to be a competitive advantage and is reflected in our low cost of funds. Our overall cost of funds was 18 basis points for the second quarter versus 26 basis points a year ago. If you factor in free funds, this brings the number down to just 11 basis points. Average shareholder equity was $1.3 billion, a 3.6% increase from the same period a year ago. Additionally, total shareholder return during the past five years was 19.2%. For the same period, returns from the SNL US Bank Index were 14.6%. Reviewing other financial highlights, return on average assets was 0.81% for the quarter down from 0.89% in second quarter 2012. Return on average equity for the second quarter was 9.31% compared to 9.42% a year ago.

Turning to the income statement for the second quarter 2013, net interest income increased 2.4% to $82.3 million. On a linked quarter basis, net interest income increased by 3.6%. The drivers of the year-over-year change included $2.6 million in additional interest income from loans as well as a reduction of approximately $1 million in interest expense on deposits. Average net interest margin for the second quarter was 2.56%, improved slightly from 2.51% last quarter but 26 basis points lower than the second quarter of 2012. Despite the recent upward movement on the long end of the rate curve, short-term interest rates continue to remain low. Our loan yields are largely tied to the prime rate or LIBOR and will likely remain under pressure unless there's a meaningful move in the fed funds rate. For context, one month LIBOR was down six basis points for the 12 months ended June 30.

Provision expense increased $500,000 or 11.1% compared to the second quarter 2012. This increase reflects the growth in our loan balances and some other considerations such as the inherent risk in our loan portfolio and other qualitative factors. Non-interest income increased 3.1% to $113.6 million. As Mariner mentioned, trust and securities processing was the biggest contributor to non-interest income this quarter increasing 13.9% to $63.5 million. Additionally, service charges on deposits increased 9.9% to $20.9 million. Partially offsetting these improvements was a 52.9% decrease in gains on the sale of securities which for the quarter were $1.5 million compared to $3.2 million for the second quarter of 2012. For the second quarter 2013, non-interest expense increased a modest 3.9% or $5.6 million to $150.3 million. On a linked quarter basis, expenses were flat dropping less than 1%. The year-over-year increase was driven primarily by higher salary and benefit expenses of $5.6 million and increased processing fees of $1.7 million related to fees paid to third-party distributors of the Scout Funds.

Now I'll review the financial results of our four business segments. Peter will provide more detail on the drivers in these segments later in the call. Looking first at Institutional Investment Management, for the second quarter non-interest income was $29.2 million, an increase of 23.4% versus $23.6 million in the second quarter of 2012. Non-interest expense increased 14.8% to $18.9 million compared to the second quarter a year ago and the pretax profit margin for Institutional Investment Management increased to 35.1% for the quarter compared to 30.2% in the same quarter last year. Moving to Asset Servicing for the second quarter, total non-interest income for the segment increased slightly to $19.3 million. Non-interest expense fell by 1.4% to $17.1 million compared to the second quarter 2012, and the pre-tax profit margin for Asset Servicing was 14.1% for the second quarter, improved from 10.1% a year ago.

In Payment Solutions in the second quarter, total non-interest income increased 3% to $18.6 million. Net interest income increased 6% to $11.2 million. And non-interest expense increased $5.4 million or 32.3% to $22 million compared to the second quarter of 2012. This increase is largely due to a $1.6 million increase in staffing and expenses related to our assumption of the First Data Resources business in the fourth quarter of 2012 and $1 million of additional processing fees associated with the increase in sales volumes. The pre-tax profit margin for Payment Solutions was 15.2% for the second quarter 2013 compared to 34.1% for the second quarter 2012. Finally, our fourth segment, the Bank. For the second quarter, net interest income for this segment increased 1.7% to $70.6 million. Total non-interest income declined 6.5% to $46.5 million from $49.7 million due primarily to last year's gains on the sale of securities. Non-interest expense decreased 2.1% to $92.3 million compared to $94.3 million a year ago and the pre-tax profit margin for the bank was 19.7% for the quarter compared to 19% for the second quarter 2012. With that, I'll turn the call over to Peter to discuss the drivers behind our business results.

Thanks, Mike, and good morning, everyone. At Mariner mentioned earlier, fee income represented 58% of total revenue this quarter. As a point of comparison, the industry median level of fee income to total revenue in the first quarter was 18.5% according to SNL Financial. To provide some additional context to our results, let me discuss the primary drivers of fee income and highlight some of the developments in each of our operating segments.

Let me begin with Institutional Investment Management, which is comprised of Scout Investments, equity and fixed income mutual funds, and separately managed investment accounts. Revenue in this segment is driven by average mutual fund and separately managed account assets, the mix of those assets, and net flows along with the timing of those flows throughout the quarter and finally, equity and fixed income market performance. To add context, the S&P 500 increased 2.9% and the MSCI EAFE decreased 0.8% for the second quarter.

Solid performance in net flows combined to contribute to another good quarter for Scout despite sometimes challenging financial markets. At quarter end, assets under management stood at $26.3 billion, an increase of 17.5% compared to the second quarter of 2012. Scout Fixed Income Mutual Funds closed the quarter with assets of $1.3 billion and Scout Equity Mutual Funds with assets of $11.1 billion. Assets in Scout Fixed Income separate accounts totaled $11.6 billion and Scout Equity separate accounts totaled $2.3 billion in assets under management. We look at our flows separated by equity and fixed income across all of our Scout products, including the Scout Funds and separately managed accounts.

During the second quarter, assets in Scout Equity Strategies increased by $87.8 million. Components of this increase include $176.5 million in positive flows for the Scout Equity Mutual Fund led by the Scout International Fund with $132 million in net flows. $4.7 million in outflows in Scout's separately managed equity accounts and a negative impact of $84 million due to equity market volatility. Total assets in Scout's Fixed Income Strategies increased by $479.5 million during the second quarter. Included in this increase were $301 million in net flows into the Scout Fixed Income Mutual Funds led by the Scout Unconstrained Bond Fund, $428 million in flows into Scout's Fixed Income separately managed accounts, and a negative market impact of $250 million across all of our fixed income products during the quarter.

Our Asset Servicing segment comprised of UMB Fund Services ended the quarter with $168 million in total assets under administration representing an increase of 14% when compared to $147.3 billion a year ago. Asset Servicing revenue is based on a variety of factors depending on our client agreements. They include basis points on assets administered, transaction fees, or per account fees. Drivers include new business, growth in the number of funds and shareholders we service, transaction volumes in our clients' funds and accounts, and overall asset valuation. I'd like to highlight our alternative Asset Servicing business which since the acquisition of JD Clark in May 2009 has increased assets under administration by 53%. Also in our Transfer Agency business, one of the most important drivers of revenue is the number of shareholders in the funds we service. In the past year, 12 new funds have been added, increasing the number of shareholders by more than 28%.

In our Payment Solution segment, there are a number of important business drivers, including overall credit and debit card purchase volume and the resulting card interchange. HSA deposits, FSA and HSA accounts, and ACH, wire and check transaction volume. We group card purchase volume into four major categories, commercial credit, consumer credit, consumer debit, and healthcare debit. For the second quarter, purchase volume across our suite of interchange generating card products increased 16.5% to $1.7 billion when compared to the second quarter of 2012. For the quarter, interchange revenue was $17.1 million, an increase of 10% over the prior year. Increased purchase volumes contributed to the increased revenue in this segment in addition to revenues from the First Data Resources check and ACH processing business. Spending by our commercial credit card customers increased 10.6% during the second quarter when compared to a year ago and represented just under 19% of total card spend. Purchase volume in this area has grown consistently and commercial credit cards provide the largest portion of our interchange revenue representing more than 45% of our interchange dollars.

Moving on to healthcare services, deposits in our custody accounts stood at $558 million at quarter end, an increase of 43.8% compared to the second quarter of 2012. The total number of flexible spending arrangements and health savings accounts increased by 36% from last year to $3.2 million. We had another strong quarter in this business with purchase volumes of $749 million, an increase of 39.6% over the same period last year. Interchange revenue from spend in our healthcare debit cards increased 43% over last year to $2.7 million. Healthcare services continues to be a reliable, strategic, and low cost source of deposits and a growing source of revenues from several streams, including account and transaction fees, card interchange, net interest margin, and investment management fees.

The final segment I'll cover today is the Bank, represented by our commercial banking, consumer banking, and private wealth and institutional asset management areas. Mariner covered the highlights of our commercial banking business and the very strong loan growth there. In consumer banking, home equity lines of credit balances now stand at $551 million. Since the second quarter of 2008, home equity line commitments have increased 84% and outstanding balances have risen 79% or at a compounded annual growth rate of 12.3%. Portfolio utilization was 46% at quarter end. The HELOC delinquency rate was 0.22% in the second quarter compared to an industry average of 3% at the end of the first quarter. Assets across our Private Wealth and Institutional Asset Management groups stood at $10.3 billion at June 30, an increase of 20.5% from just a year ago. Comprising the $10.3 billion is $6.8 billion in assets under management within our bank asset management groups and $3.5 billion in assets managed by Prairie Capital Management. With that, I'll conclude our prepared remarks and turn it back over to the operator who will open up the line for your questions.

(Operator Instructions)

Our first question does come from the line of Chris McGratty with KBW.

Mariner, you've had three straight I think 20% annualized growth quarters, so I wonder if you could speak to pipelines today, mid-year, and whether you this level of growth may be sustainable in the back half of the year?

Sure, you know, we continue to have a strong pipeline. Activities are strong and the pipeline continues to stay strong.

Okay, so is this a fair level of growth or should we see is there any seasonality that in the back half of the year we should expect?

No, seasonality to it and like I said, I think comparable pipeline strength through previous quarters.

Okay. And then on acquisitions, wondering if we've seen a few bank deals in the past couple weeks. You guys have a strong currency to go out and do something. Is that something you're contemplating at this point and is there any markets particularly maybe some of your newer growth markets that you may be interested in?

Sure. For folks that have followed us know that we first think about culture and fit and with that being said, we would be interested doing a bank deal in our footprint in our larger markets that are showing growth and strength for us and have stable and growing population bases, so we would like to do a deal and we are always looking.

In terms of size and then I'll jump out. What's the type of bank, what's the profile of the bank? Obviously, the culture is important but how big of a bank would you contemplate?

We don't really give that kind of guidance so it would be probably stepping out a bit to give that kind of information but that's probably about all I can do for you.

Okay, thanks.

Our next question does come from the line of Matt Olney with Stephens.

Hi, guys. This is actually Tyler in for Matt. I just hopped on pretty late so I apologize if you already covered this in your prepared remarks, but I was wondering if you could give an update on the progress and success of your new Dallas loan office you opened up two quarters ago and then how much of the 2Q growth was attributable to that new office?

So pretty simple. It's incredibly early so there's really, really not a lot to report. We're excited about it. We've hired a handful of people down there, locals, high profile local people to help us build the business. We signed a lease. That's about it. We have some business that we've had. We've been calling there for 30 plus years so we have a book of business, a base of business to work from but at this point we signed a lease and have a team on the ground and look for future quarters and future news on that one.

Okay, thanks and then within your Investment Management business, can you remind us where you are in terms of adding new personnel and maybe new products coming down the pipeline?

Tyler, this is Peter. You know in the last couple years, we've rolled out a number of new products including emerging markets recently. We've rolled out an unconstrained bond fund in the last 18 months and we continue to look at opportunities to do that. The new products we've rolled out have done extraordinarily well, particularly the unconstrained bond fund which is the fastest fund we've ever launched, over $500 million in AUM. We continue to look at opportunities for new products. We're very deliberate in the areas that we choose to launch new products in and I think you'll continue to see new products from us but I don't have much else to say about that this morning.

Okay. All right. Thanks, guys.

Our next question does come from the line of Peyton Green with Sterne, Agee.

Good morning. I was wondering if you could talk a little bit about, Mike, possibly about the earning asset mix shift you would like to see over the coming year. I know, I guess loan growth represented about 58% to 60% of the overall year over year increase in earning assets and I was just wondering might we see an acceleration in that given where rates are and also the robust pipeline that you've got.

Yes, I'm going to point you backwards on that one. If you look backwards in time, we have been able to grow roughly about $300 million in loans and as Mariner said, the pipeline is roughly the same so we are looking for somewhere in the neighborhood of $900 million to $1 billion a year right now so that would give you a good idea. That's about equal to what's rolling off the investment portfolio so strategically, we would like to replace that roll off with high quality, higher yielding loans.

I would caution you, too, a pipeline is a pipeline, so that's if the past is any indication of the future, that's a fair statement.

Yes.

And Mariner, on the loan utilization, this is the first quarter that it's really picked up. Is that because the new volume came on at a higher utilization or did you see existing customers tap lines more?

Yes, I would say that's just an indication of the slight recovery that we see across the economy. As you know, it's well paid and our underwriting has not changed, so that's more of an indicator of economic activity than it is a change in the way we are underwriting.

Okay, and then just thinking about operating leverage going forward, I mean if I look at the expense base, it grew 11% year over year in the fourth quarter and about 6% in the first and now 4%. Should we still expect a continued decrease in the year over year growth rate and overhead?

I think I'd point you back to our previous comments about our commitment to reduce expense growth and without any specific number there, we're committed to keeping that below 4.9% where it was last year.

Okay, okay, and then in terms of just the overall strategic opportunities that you're seeing, you mentioned that you would be willing to do a bank deal but it seems to me over the last few years, the most attractive and probably best acquisitions that you all have done maybe in your history have been on the non-bank or financial services end. How would you kind of rank between the two?

Well, I think so the ones we've done in the non-bank space have given us scale, they've closed gaps, they've added real value to the offering or changed the complexity of a business. You look back on the last couple of bank deals we've done, you could call them bank acquisitions but they've effectively really been branch acquisitions and so if we're going to do a bank deal, we are going to do a bank deal that is more of a bank deal than a branch deal, so without getting into numbers and size, it certainly is going to be one that gives us breadth and depth as opposed to a branch, if that's helpful.

Okay. And then I guess just to follow-up on that, your organic growth is stronger than its ever been in the company's history. Why bother with changing something through a bank acquisition?

That's fair and certainly that is our primary goal is to keep doing it the way we're doing it but you know, as it relates to geographic expansion in some of the places where we like to build scale, an acquisition could be very helpful in building scale and building the foundation for future growth. So whether it's a new market we're in whether it's Dallas or whether it's growth markets for us like Denver or Phoenix, you know, if we can find a deal in markets like that, that help give us foundational scale to help build from, that would be something we would be interested in doing if we can find it.

Okay, and then maybe this is for Peter but the bankcard fee line was down year over year and was down link quarter and I was just wondering if there was any -- what might have caused that.

Bankcard fees -- the interchange was up $1.7 million. I'm trying to figure out which line you're looking at.

Oh, it may have been that last year we had a one-time benefit from a Visa contract extension that we signed and we also had the benefit from the FAS91 changes that happened in the second quarter of last year. That's the primary driver.

Okay, and then link quarter, was there any reason for it to fall?

Not particularly. Mix maybe of the healthcare which is at a lower level, healthcare is strong typically in the first and fourth quarters so it might have been a mix shift but nothing that strikes me.

Consumer spend has been a little light, I guess. But nothing material.

Nothing that strikes me as unusual.

Okay, great. Thank you very much.

(Operator Instructions)

At this time, I'm not showing any further questions. I would like to turn the call back to management for any closing comments.

Thank you very much for your interest in UMB today. This call can be accessed via replay at our website beginning in about two hours and will run through August 8. Again, we appreciate your interest and time. Thank you.

Thank you. Ladies and gentlemen, that will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.