UMB Financial Corp (UMBF) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the UMB Financial third-quarter 2013 financial results conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time.

(Operator Instructions)

I would like to remind everyone that this conference is being recorded today, Wednesday, October 23, 2013. I will now turn the conference over to Kay McMillan, Director of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us for our conference call and webcast regarding our third quarter 2013 financial results.

Before we begin, let me remind you that our comments in 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 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 or listening via webcast have had a chance to review our earnings release which was issued yesterday afternoon. If not, you will find it on our website at UMB.com. Also, new this quarter, we published some supporting slides on our website that contain some of the drivers and metrics we'll discuss today to make it a bit easier for you to follow along and to review afterwards. A link to the slides can be found at UMB.com in the About UMB section, or in the Investor section under Presentations.

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 financials. Then 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, Kay. Good morning, everyone, and thank you for joining us today.

Our third quarter results continue to reflect strong performance by our business units. Net income increased 31.8% to $34.4 million or $0.83 per diluted share, earned on total quarterly revenue of $207.2 million. Net interest income for the third quarter increased 6.5% compared to the same quarter last year, driven primarily by increased balance sheet volume.

Non-interest income increased 14.4% to $121.6 million, largely due to nearly 22% increase in trust and securities processing revenue. Non-interest income was 58.7% of total revenue for the quarter. Non-interest expense for the quarter was $153.1 million, an increase of 4.9% compared to the same period a year ago. These results combined with our improved revenue drove an efficiency ratio of 70.8% compared to 74.3% for the third quarter of 2012.

Once again, I am happy to report strong loan growth. Total net loans, as of September 30, 2013, were $6.4 billion, 21% higher than a year ago. On a linked-quarter basis this is an increase of 2.6%. This is our fourteenth consecutive quarter of loan growth and seventh consecutive quarter of year-over-year double-digit loan growth. Utilization continued its upward trend increasing to 31.3% compared to 28.3% a year ago. Compared to the industry, the nearly 1,000 regulated financial institutions that had announced results as of October 21, 2013, reported an increased in loan balances of just 2.6%. Our reputation in the markets we serve, as well as the experience and tenor of our relationship-based lenders, continues to drive our performance.

Loan growth continues to come primarily from increased market shares. 65% of our year-to-date commercial loan growth has come from new client relationships. All of our regions once again reported double-digit year-over-year loan growth.

In terms of loan types, C&I Lending was the primary driver for the quarter, with September 30 loan balances of $3.4 billion, a $685 million or 25.5% increase. Commercial real estate had an impressive third quarter, with ending balances of $1.6 billion, a 22% increase over the same period a year ago.

As you come to expect, our underwriting standards remain the same even as our loan portfolio expands. Overall, nonperforming loans as a percent of total loans were just 0.48% and net charge-offs as a percent of average loans improved to 0.20% compared to 0.44% a year ago.

Before Mike gets into the rest of the detail about the quarter, I'd like to highlight some of the events of the past several weeks. On September 9, we announced our intention to offer 3.9 million shares of common stock in a follow-on offering. Over the past 5 years, our average loan balances have grown 52% and we've completed 14 acquisitions. Additionally, we've historically maintained higher levels of capital. Successful execution of our growth strategy has an impact on our capital, and the pace of that growth could surpass our ability to organically grow capital over time. The additional capital raised in the follow-on offering provides flexibility and allows us to continue our growth.

I'm very pleased with the strong investor response to our offering, which demonstrates the confidence the financial markets have in our strategy and ability to execute effectively. In the end, many of the institutions interested in the offering were new to UMB, a strong statement for our 100-year-old company.

Coincidentally, on September 5, the week before our stock offering, we filed an 8-K regarding a single client that is expected to migrate approximately $1.08 billion in deposits to another institution. While we felt it was appropriate to disclose this information, the timing was unfortunate, given capital raise we had been working on for several months. There was no relationship between the deposit migration and the offering. And while we're limited in what we could communicate around the time of the stock offering, I can now provide a bit more context.

The decision to move the deposits off our balance sheet was a result of an ongoing dialogue we've had with this customer for the past couple of years. If you've followed us for any length of time, you'd know that we have a long-standing risk management strategy. And during the review of potential deposit concentrations we approached this customer to reduce their deposits. The customer will continue to work with us on their asset-servicing business, even after the deposit have exited.

With that, I'll turn the conference call over to Mike, who will discuss our financial results in further detail. Mike?

Thanks, Mariner, and welcome, everyone.

This morning I will review our Company's financials and provide more details from our four business segments results. During the third quarter, our average balance sheet grew 13.3%, and average earning assets increased 14.1% to $13.9 billion. As we execute our strategy to replace the roll-off investment portfolio to achieve a more favorable earning asset mix in this low interest rate environment, more than 65% of the average earning asset growth came from loans.

The average balance in our investment portfolio for the quarter was $7 billion, 7.3% higher than the third quarter a year ago. The average yield on securities was 1.99%, an increase of 4 basis points from last quarter and a decrease of 14 basis points from the third quarter of 2012. Detail on the investment portfolio can be found on the last page of the supporting slides available on our website.

Activity during the third quarter included the roll-off of $265 million in portfolio securities at an average yield of 1.85%. In turn, we purchased $77 million securities at an average yield of 1.02%. Change in the portfolio, combined with updated key assumptions, shortened the effective duration slightly, from 47 months to 46.4 months on a linked-quarter basis. We continue to have a bias towards shortening the portfolio's duration as securities mature, which gives us flexibility to fund loan growth.

During the next three months, $305 million of investments, with an average yield of 2.02% will cash flow. And during the next 12 months, $1.1 billion of investments, with an average yield of 1.88% will cash flow. The securities mix in our portfolio remain approximately the same as the second quarter. Mortgage-backed securities and municipal securities represent 46% and 30% of the portfolio respectively. 56% of our total loan portfolio is expected to re-price or mature next quarter and 68% will re-price or mature in the next 12 months.

Balance for loan losses is $74.9 million; and allowance as a percent of total loans is now 1.15% compared to 1.32% a year ago. We continue to believe this level is appropriate given the high level of our loan portfolio and history of charge-offs.

Our coverage is nearly 2 1/2 times the amount of nonperforming loans, while the median industry allowance reported for the second quarter would have covered just over two-thirds of nonperforming loans. We remain well capitalized with Tier 1 leverage and total risk-based capital ratios of 12.93%, 8.34% and 13.74%, respectively. As Mariner discussed, our recent common-stock offering bolstered our capital position and will support our continued growth.

Looking at the liability side of the balance sheet, average deposits for the quarter increased13.5% to $11.8 billion. As Mariner mentioned, we announced in September that a large client would migrate their deposits to another institution. As of September 30, 2013, this client's deposits totaled $1.1 billion and remain on the balance sheet.

Average non-interest-bearing deposits continue to comprise approximately 40% of our total average deposits. Our high percentage of free funds continues to be at competitive advantage and is reflected in our low overall cost-to-funds. Our overall cost-to-funds was 16 basis points for the third quarter versus 24 basis points a year ago. If you factor in free funds, this brings the number down to just 10 basis points.

Average shareholder equity was $1.3 billion, virtually unchanged from the same period a year ago. The impact of the additional capital from the equity offering can be seen in actual end-of-period shareholder equity, which increased 13.1% to $1.5 billion. Additionally, total shareholder return during the past five years was 13.7%; for the same period, returns from the SNL US Bank Index were negative 6.9%.

Reviewing other financial highlights, return on average assets improved to 0.92% for the quarter from 0.79% in third quarter 2012. Return average equity for the quarter improved to 10.84% from 8.12% a year ago.

Turning to the income statement for the third quarter 2013, the interest income increased 6.4% to $85.5 million. On a linked-quarter basis, the interest income increased by 3.9%. The drivers of the year-over-year change included $4.6 million in additional interest income from loans, as well as a reduction of approximately $1 million in interest expense on deposits. Average interest margin for the third quarter was 2.61%, improved from 2.56% last quarter, but 19 basis points lower than the third quarter of 2012.

As you know, our loan yields are largely tied to the prime rate or LIBOR, and will remain under pressure unless there is a meaningful move in the Fed funds rate. For context, the one-month LIBOR was down 3 basis points for the 12 months ended September 30.

Reflecting the expansion of our loan portfolio, provision expense increased $2 million or 44% compared to the third quarter 2012. Non-interest income increased 14.4% to $121.6 million.

As Mariner mentioned, trust and securities processing, which largely comes from our asset management and asset servicing businesses, was the biggest contributor to non-interest income this quarter, increasing 21.6% to $68.5 million. Additionally, you'll note that the Other category in non-interest income increased by $3.4 million or 68.6% compared to third quarter 2012, driven largely by a $3.9 million unrealized market adjustment on an equity method investment.

For the third quarter 2013, non-interest expense increased 4.9% or $7.2 million to $153.1 million. The primary components of this year-over-year increase were a $4.9 million increase in salary and benefit expense, a $1.9 million increase in equipment expense, and a $1.5 million increase in processing fees, largely due 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 of these segments later in the call. Looking first at Institutional Investment Management for the third quarter, non-interest income was $33.8 million, an increase of 36.5% versus $24.8 million in the third quarter of 2012. Non-interest expense increased 21.8% to $21.1 million compared to the third quarter a year ago. This increase is largely due to the increased processing fees to third-party distributors that I previously mentioned. And the pretax profit margin for Institutional Investment Management increased to 37.6% for the quarter compared to 30.1% in the same quarter last year.

Moving to Asset Servicing, for the third quarter non-interest income for the segment increased 11.6% to $20.4 million. Non-interest expense was flat at $17.2 million and the pre-tax profit margin for Asset Servicing was 18% for the third quarter, improved from 8.7% a year ago.

In Payment Solutions, for the third quarter non-interest income increased 14.5% to $18.4 million. Non-interest income increased 6.9% to $11.6 million. And non-interest expense increased $3.8 million or 21.4% to $21.6 million compared to the third quarter of 2012. This increase was primarily related to increased staffing and other expenses related to our assumption of FDR's processing business in fourth quarter 2012 and bank card processing fees associated with the increase in sales volume. The pre-tax profit margin for Payment Solutions was 12.5% from the third quarter 2013, compared to 28.2% for the third quarter 2012.

Finally, our fourth segment, the Bank -- for the third quarter, net interest income for this segment increased 6.3% to $73.4 million. Non-interest income increased 3.8% to $49 million. Non-interest expense decreased slightly, to $93.2 million, compared to $93.7 million a year ago. And the pre-tax profit margin for the bank was 22.3% for the quarter, compared to 16.9% for the third quarter 2012.

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

Thank you, Mike, and good morning everyone.

As Mariner mentioned earlier, non-interest income represented 58.7% of revenue this quarter. As a comparison, the industry median level of non-interest income to total revenue in the second quarter was 19% according to SNL Financial. To provide additional context to our results, I'd like to discuss the primary drivers of fee income and highlight some of the developments in each of our operating segments. Much of the data I'll cover is included in the supporting slides on our website.

I'll begin with the Institutional Investment Management segment, 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 funds and separately managed account assets; the mix of those assets and net flows; and, finally, equity and fixed-income market performance. Solid performance and net flows combined to contribute to another good quarter for Scout, despite sometimes volatile financial markets.

As we announced last week, quarter-end assets under management stood at $29.3 billion, an increase of 29.6% compared to third quarter 2012. Scout's fixed-income mutual funds closed the quarter with assets of $1.9 billion and Scout equity mutual funds with assets of $12.1 billion. Scout fixed-income separate accounts totaled $12.3 billion and Scout's equity separate accounts totaled $3 billion in assets under management. To add some context, the S&P 500 increased 5.2% and the MSCI EAFE index increased 11.6% for the third quarter.

We look at our flows, separated by equity and fixed income strategies, across all of our Scout products, including the Scout Funds and separately managed accounts. Page 5 of the supporting materials show the drivers of the change in assets under management, both net flows and equity and fixed-income market impact.

During the third quarter, assets in Scout equity strategies increased by $1.7 billion. Components of this increase included; $229.4 million in positive flows to the Scout equity mutual funds, led by the Scout mid-cap fund with $132 million in net flows; $416.2 million in net flows into Scout's separately managed equity accounts, with a net $395 million coming into the international strategy; and a positive impact of $1.1 billion due to the increase in the equity market. Assets in Scout's fixed-income strategies increased by $1.3 billion during the third quarter. Included in this increase were $610 million in net flows into the Scout's fixed-income mutual fund, led once again by the Scout's unconstrained bond fund; $629 million in net flows into Scout's fixed-income separately managed accounts; and a net positive market impact of $56.2 million across all of our fixed-income products during the quarter.

I'd also like to take a moment and recognize our Scout International team. In September, the Scout International Fund celebrated its 20th anniversary. Lead Manager Jim Moffat has been at the helm since the fund's inception in 1993. During those 20 years, the fund has grown to more than $10 billion in assets under management and is viewed as our flagship equity strategy.

Our Asset Servicing segment, comprised of UMB Fund Services, ended the quarter with $181.7 billion in total assets under administration, an increase of 21% compared to $150 billion a year ago. Asset Servicing revenue is based on a variety of factors depending on our client agreement. These include basis points on assets administered, transaction fees, or per account fees. Drivers include new business, growth in the number of funds in shareholders we service, transaction volumes in our client's funds and accounts, and overall asset valuation. Page 10 of the supporting materials shows metrics for some of our various services within fund services. In fund accounting and administration, 26 new funds were added over the past year, and assets under administration stood at $58.2 billion at quarter end, an increase of nearly 40% compared to the same quarter just a year ago.

In our Payment Solutions segment, there are a number of important business drivers, including overall credit- and debit-card purchase volume, and the resulting card interchange; HSA deposit, 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 third quarter, purchase volume across our suite of interchange-generating card products increased 19.6% to $1.6 billion when compared to the third quarter of 2012. For the quarter, interchange revenue was $16.4 million, an increase of 6.6% over the prior year.

Spending by our commercial credit card customers continues to grow, increasing 9.9% during the third quarter when compared to it just a year ago. Spending by our commercial credit card clients represented nearly 20% of total card spending for the quarter and continues to 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 $637.8 million at quarter end, an increase of nearly 50% compared to the third quarter of 2012. The total number of flexible spending arrangements and health savings accounts increased 41% from a year ago to $3.2 million. We ended with a nice quarter in healthcare, with purchase volume of $680 million, an increase of 51.8% over the same period last year. Interchange revenue from healthcare card purchases increased 30.6% over last year to $2.3 million. Healthcare services continues to be a reliable, strategic, and low cost source of deposits and a growing source of revenue from several streams, including accounting transaction fees, card interchange, net interest margin, and investment management fees.

The final segment I'll cover today is our Banks, represented by commercial banking, consumer banking, and private wealth in our institutional asset management group. Mariner covered our commercial banking highlights and the very strong loan growth there. Home equity lines of credit balances now stand at $555 million. Our lending teams have added $62 million in new commitments over the last 12 months. And portfolio utilization was 46% at quarter end.

Assets in private wealth and institutional asset management stood at $9.4 billion at September 30, an increase of 21% from a year ago. Comprised in the $9.4 billion is $6.7 billion in assets under management within bank asset management, and $2.7 billion in assets managed by Prairie Capital Management. Our private banking teams have added an average of $85 million in loans over the past 12 months, bringing the average balance to now $305.3 million for September.

With that, I'll conclude our prepared remarks and turn it back over to the operator who would open up the lines for your questions.

Thank you. Ladies and gentlemen, we will now conduct an question-and-answer session.

(Operator Instructions)

Your first question today comes from the line of Chris McGratty of KBW.

Good morning guys. Mariner or Mike, can you talk about pipelines today versus June 30, as well as geography?

Sure. Pipeline is about what it was in the last quarter. And we continue to feel good about the pipeline as we did in the second quarter, in the -- for the third quarter, similarly, as we look into the fourth quarter. And regionally, it seems to be coming from all of our regions, dollar volume, as always, tends to come from headquarters in Kansas City, but percent growth looks pretty strong across all the regions.

Okay. And maybe a comment on pricing. You talked about how quickly the book will turn over. I've been wondering what you're seeing in terms of structure and price in new spreads.

Yes. We do continue to see pricing pressure for all the same reasons that have existed for the last year, at least, with this persistent low interest environment. Banks have continued to have limited options for how to invest their capital and how to invest their deposits. So it's continued to apply pressure. I think the spreads are starting to tighten a little bit. We're going down less than we were. So there's not as much pressure, but there is continued pressure on the.

On the term side, again, continue to see banks do things that remind us of previous periods, we're doing -- starting to do silly things. We, obviously, never play those games, but we are seeing continued term expansion and -- if that answers your question.

That's helpful. And one on the depositor. The $1.1 billion that's going to leave in the fourth quarter, can you help us with the next -- the largest accounts that you have at the bank. How granular is the book and was this the largest deposit relationship at UMB?

We pretty much have to stick with what we've already shared on that, for the most part. As we said before, we have no other depositors that have similar characteristics. And that is a fact and it's about all we're able to share.

All right. Thanks.

Your next question will come from the line of Matt Olney, of Stephens Inc.

Good morning, guys. This is Tyler in for Matt. I wanted to start with loan growth. Over 4% average growth versing 2.5% in a period, was the higher average growth more a function of the strength coming off Q2, or was the growth consistent throughout the quarter and you saw some heavier paydown's at the end of the quarter?

Would you mind doing that again?

Yes. Average growth was much higher than end-of-period growth. Just curious, the movements throughout the quarter, do you see some higher paydowns at the end of the quarter causing end-of-period to be lower than the average growth?

No. There's nothing really in the data there driving any of the material. Just fluctuations.

Switching over to capital. Given the backdrop of your recent capital raise and then your expectations for the level of recent loan growth to be here, I guess for the perceivable future, how low are you comfortable managing your capital, in terms of the PCE ratio?

Well, obviously, that -- as we mentioned in the prepared remarks, obviously, that's part of why we raised additional capital. We have plenty of runway. I'm not sure we're disclosing where we're willing to get our PCE to, but we believe we have plenty of runway.

Okay. All right. Thanks.

(Operator Instructions)

Your next question will come from the line of Erika Najarian, of Bank of America.

Hi, good morning.

Hi, Erika.

My first question is a follow-up to the pricing question asked earlier. As we think about the trajectory or magnitude of margin compression going forward, could you help us get a sense of where you're pipeline yields are relative to the 365 that you reported this quarter?

Sure. We talked, I think, last quarter -- on the last quarter conference call about, as we continue to manage the entire balance sheet, both the fixed-income side and the loans, we are attempting to get shorter on the fixed-income book side and allowing for some duration expansion on the loan book in order to gain some yield in this environment. So we are re-mixing. We hope you'll see that in our book over the coming quarters as we attempt to put more term in real estate debt on the books. We have plenty of room for that as it relates to our mix, currently, and it does allow us to see some expansion there. You should see that on a linked-quarter basis, you did see that, a couple basis points there. And hope to demonstrate that in coming quarters.

And that's very helpful in terms of earning assets -- how we should think about the earning asset yield going forward, but maybe, could you give us some color -- I know you gave us quantitative color on -- where the spreads are relative to LIBOR in terms of the C&I loans that you are putting on?

Mike, you want to take that?

Erika, if I understand your question, you're asking about spreads to LIBOR for new loan volume?

Yes, sir.

I thought you're asking about the whole book. The whole -- Go ahead.

I think she's asking about new loan spreads to LIBOR. I think, for us to have, as we disclosed in our prepared remarks, to have any kind of material movement in that number, or in the absolute yield you have to have an index change. Until we get an index change, you're not going to see a material change. And are we going to see continuing pressure on the spread? All things being equal, I think that's exactly what banks will experience. We're not unique in that.

Just so that I can understand correctly, the strategy in the bond portfolio is completely removed from the movements and loan rates, in that, while we may see some duration extension at other banks, your strategy is to continue to shorten to be able to fund your loan growth, regardless of where long rates go from here.

Yes. I'll take that one. I think it's two-pronged. I think, yes, obviously, we want to fund loan growth first and foremost. So you have that right. But also, if our balance sheet continues to grow, and you saw our deposit growth was pretty robust in the third quarter, the investment portfolio will grow as well. And so I think, at least at this point, we think the smart money is on a slightly lower duration in investment portfolio than in an expanding duration.

Quite honestly, even if we were to expand average life for duration in the investment portfolio, we wouldn't buy the kind of tenor necessary to actually make a material movement in the duration of the portfolio, anyway. We're not buying, for instance, 10 plus your cash flows in the investment portfolio. I think it's going to be very difficult, honestly, to get average growth there and to do it in a smart way, given that we expect interest rates to go up.

Got it. Thank you for taking my questions.

I'm showing no further questions at this time. I will now turn the call back to management for any closing.

Thank you very much for your interest in UMB. This call can be accessed via our replay at our website beginning in about two hours and will run through November 6. Again, we appreciate your interest and time. Thank you.

Thank you. Ladies and gentlemen, this does include does conclude the conference call for today. Again, we thank you for your participation and you may now disconnect your line.