UMB Financial Corp (UMBF) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the UMB fourth-quarter 2005 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session for analysts will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your moderator for this afternoon, Ms. Begonya Klumb. Thank you, ma'am, you may begin.

Good afternoon, everyone, and thank you for joining us today for our conference call and webcast regarding our 2005 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 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 their assumptions are reasonable, UMB cautions that material changes in interest rates, the equity market, general economic conditions as they relate to the Company's loan and fee-based customers, competition in the financial services industry 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 to the webcast have had a chance to review our earnings release dated January 24. 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 Michael Hagedorn, our Chief Financial Officer.

The agenda for today's call is as follows -- first, Mariner will highlight our results and strategies. Then, Mike will review the details of our full-year and fourth-quarter results. Peter will follow with a more detailed review of operating performance against our strategies. Following that, we will be happy to answer your questions.

Now, I will turn the call over to Mariner Kemper.

Thank you, Begonya, and happy new year to all of you on the phone with us today. We are pleased to report our earnings and answer any questions for you today.

As Begonya mentioned, I will be providing a high-level overview of 2005 results, briefly highlight our key strategies and then turn the call over to Mike and Peter to provide more color on the quarter and full year.

2005 was a solid year for UMB, with improved financial performance. Reported earnings increased almost 32% to $2.60 per diluted share from $1.97 in the prior year. Our operating performance was driven by significant loan growth, improvement in our fee business and improved operating efficiencies. Also contributing to the earnings increase in the year were net gains from the sale and closure of a number of branch facilities. These improvements were partially offset by a more normal tax rate.

We were able to drive operating efficiencies and improve organizational accountability and clarity while at the same time continuing to make necessary investments in our business and our associates. As always, we strive to maintain our high-quality credit underwriting standards while achieving significant growth in our loans.

In 2005, we continued to invest in our core growth strategies. These strategies are based on delivering an unparalleled customer experience, which in turn translates into higher share of wallet and new customer acquisition. Ultimately, our goal is to create sustainable growth and improved shareholder returns while we continue to maintain a sound balance sheet and strong capital ratios.

As a reminder, we plan to accomplish these goals by implementing our growth strategies that include, first, a focus on yield enhancement in our loan and investment portfolio; second, continued growth in our strong and diverse fee-based businesses; third, optimizing our branch distribution network, including investing in our retail business; fourth, strengthening our asset management business; and fifth, a focus on capital management.

Let me review how we are performing against each of them. First strategy is to focus on yield enhancement. And we are steadily making progress by better optimizing the mix of our earning assets and liabilities through strong growth in commercial loans. In addition, we made strides growing our home equity and credit card balances. As we move into 2006, we expect our small-business program to contribute to loan growth and improved yield.

We plan to maintain our strong demand deposit base, which today represents 35% of total deposits. We're also improving yield by modestly extending the average life of our investment portfolio over time while maintaining our traditionally strong liquidity position.

Despite a challenging rate environment, our core portfolios' average life went from 21 months at the end of 2004 to over 30 months at the end of 2005. Our core portfolio excludes very short-term discount notes held during the seasonal fluctuation related to our public fund deposits.

We have also moderately changed the mix of our investment portfolio. As of December 31, our core portfolio mix was 38% in treasuries and agencies, 25% in municipal securities, 21% in collateralized mortgage obligations and 16% in balloon and other pools. As we continue to improve our yield through mix and term, we do not anticipate any major changes in the portfolio mix in 2006.

We continued to take advantage of opportunities to improve yields in 2005, as we purchased 1.04 billion in our core portfolio. The opportunity for yield enhancement will continue with more than 900 million expected to roll off our core portfolio in 2006.

Also, total loan yields improved in 2005 to 5.66% from 4.91% in 2004, which, combined with significant loan growth, helped improve our net interest margin. However, this improvement was offset by an increase in non-interest expense due to our year-to-date average cost of funds going from 0.96% in 2004 to 1.93% in 2005.

Our second strategy is to continue to grow our strong fee-based businesses, which today represent approximately 58% of total revenue. Our strong fee-based businesses helped to offset UMB's lower-than-industry loan to deposit ratio. Peter will cover the statistics focus in this area in more detail.

Our third strategy is to optimize our distribution network, including continued investment in our retail business. This strategy includes gaining market share in larger urban markets such as Kansas City, St. Louis and Denver. In addition, we're looking to solidify our market share position in all the markets that we serve.

Consistent with our distribution strategy, we also opened UMB Bank Arizona in Phoenix last November, which is focused on commercial banking and asset management. In addition, we will close on the acquisition of the Pulaski Bank's Kansas City location during the first quarter.

Another part of our strategy to optimize distribution is to rationalize and grow our branches to improve long-term profitability. As a result, in 2005 we sold 11 branches, closed five, and more importantly, opened four new branches in strategic locations.

At the end of 2005, UMB had 140 banking centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. Our focus is to have the right locations with the best people, products, and to grow our business profitably.

Lastly, we have continued to invest in how we package, price and market our retail products. In 2005, our successful Grab a Great Rate and home equity marketing campaigns helped us gain new customers and drive deposit and loan growth. In addition, we strengthened our small-business and private banking in the last half of the year by launching dedicated leadership sales force -- leadership and sales force for both business lines.

As a relationship-driven enterprise, we rely heavily on our people to differentiate us from our competition. We believe that the investments we're making in human capital will help us to provide the unparalleled customer experience. So as we hire, engage and empower our people, we will improve our customers' experience, increase our share of wallet and drive growth.

Our fourth strategy is to continue to strengthen our asset management business. Peter will cover more details later. But I will just tell you today, at the beginning of the call, that I am very, very pleased with the execution of our strategy, especially with the UMB Scout Funds, which saw record net flows in 2005.

Our fifth strategy is to better utilize our capital. To achieve this goal in 2005, we approved a 13.6 increase in our quarterly dividend to $0.25 a share. We repurchased shares and invested in technological innovation and organizational development. We also continue to evaluate strategic and accretive acquisitions that will improve our competitive advantage in targeted markets.

Our entire management team is focused on implementing these strategies, and we're all energized by the opportunities and prospects for growth and improved shareholder returns.

I will come back with a few concluding remarks, but let's go ahead with a detailed review of our full-year and fourth-quarter financial results with Mike Hagedorn. Mike?

Thanks, Mariner, and let me add my welcome to everyone. First, I will provide a review of the full year and then turn to a few brief remarks on the fourth quarter.

As Mariner indicated, we reported diluted EPS of $2.60 for the full year, up 32% from $1.97 in 2004, primarily due to higher net interest income, reflecting increased loan balances and securities interest income and higher non-interest income primarily from our fee-based businesses.

Net income increased to 56.3 million from 42.8 million in 2004. Non-interest income included net gains of 9.2 million in 2005, compared to 2.2 million in 2004, related to the sales and closures of banking facilities. In addition, we reported gains in both years on the sale of employee benefit accounts amounting to 3.6 million in 2005 and 1.2 million in 2004.

Finally, 2005 non-interest expense included a charge of 4.4 million due to the implementation of a voluntary separation plan in the first quarter. Excluding these three adjustments in both years, net gains from sales and closure of banking facilities, gains on the sale of employee benefit accounts and charges related to the voluntary separation plan, our 2005 net income would have increased approximately 25.3%.

A table reconciling GAAP net income for these items for both the quarter and full year can be found in our news release, which is available on our website at umb.com. You'll also notice in our news release that our effective tax rate was 26.2% in 2005, which represents a more normal rate for UMB on a historical basis, compared to 17.2% in 2004.

We expect this higher, more normal rate to continue or to slightly increase over time. As mentioned on our prior call, the lower-than-normal tax rate last year reflected higher tax-exempt income as a percentage of our total income and higher tax credits. The lower percentage of tax-exempt income alone caused the tax rate to increase 4.1% in 2005, with a $1.9 million reduction in rehabilitation credits accounting for most of the balance of the effective rate increase.

Excluding gains on the sale of branches and employee benefit accounts, our 2005 earnings improvement was driven by several factors, including a 5.1% increase in net interest income to 188.3 million, primarily due to an 18.3% increase in our loan balances and improved yields.

Loan interest income increased 29.8% to 176.8 million, but a 10.6% increase in securities interest income also contributed to the improvement. The year-over-year improvement in our securities portfolio was 39 basis points, finishing the year at 3.3%.

Net interest margin increased to 3.16% for the year from 3.10 in the prior year. As our assets reprice, we expect to see a positive impact on our net interest margin.

In 2006, 984 million in core portfolio securities should roll off at an average yield of 3.06%. The scale of the improvement will depend on the yield curve, as well as our ability to lengthen the core securities portfolio in this challenging yield environment.

Non-interest income increased 10.4% to 251.9 million in 2005. The change in net pre-tax gains from the sale or closure of branches and the sale of our employee benefit accounts contributed 39.6% to the total increase in non-interest income. This improvement also reflects primarily higher trust and securities processing fees, up 8.8%, and higher service charges on deposits, up 8%.

Our investment, corporate and banking services groups continue to support our growth by delivering competitive services to our private and public accounts, including strong net flows into our UMB Scout Mutual Funds. The growth in deposit service charges is mostly the result of repricing our fees for non-sufficient funds beginning in the third quarter of 2004.

Non-interest expense increased 2.3% to 358.1 million as a result of higher processing fees, bankcard expenses, charitable contributions and overdraft fee writeoffs, as well as voluntary separation plan costs. The 4.4 million charge related to the voluntary separation plan accounted for 55% of the total increase in non-interest expense.

The increase in processing fees was driven by higher distribution charges to our mutual funds. Bankcard expenses increased due to higher customer rebates related to our enhanced credit card reward program, while overdraft fee writeoffs were higher primarily due to the new computerized decision-making process for non-sufficient funds.

Our overhead expenses were basically flat for the year, with salaries and employee benefits up 0.2%. This includes the higher cost of the incentive compensation plans put in place in 2005 and the higher cost of several strategic hirings. These higher costs were offset by our lower headcount, as well as the reduced cost of our partially self-funded health insurance plan.

Credit quality ratios in 2005 reflected UMB's continuing strong commitment to high-quality lending. Non-performing assets at December 31, 2005, totaled 10.3 million or 0.3% of loans, down from 12.8 million or 0.45% in the same period last year.

Net loan charge-offs for 2005 totaled 7.7 million or 0.25% of total loans, compared with 6.1 million or 0.22% of total loans last year. The higher net charge-offs included 400,000 related to the recently revised bankruptcy legislation.

Turning to the balance sheet, our solid financial performance for the year was driven primarily by loan growth. At the end of December, loan balances were 3.4 billion, compared with 2.9 billion a year ago. Total loans grew 18.3%, driven by a 24.3% increase in commercial loans. We attribute this growth to the incentive compensation plans implemented for commercial loan officers last year, as well as a renewed focus on sales throughout the organization.

Our loan growth in 2005 also reflects a 96.5% increase in home equity balances to a total of 130 million at December 31, driven by a successful marketing campaign. Total deposits grew 9.9% from prior year, partially due to the highly successful Grab a Great Rate campaign and to higher seasonal public fund deposit inflows in the fourth quarter of 2005 compared to the prior year.

The average loan to deposit ratio continued to increase to 61% for 2005 from 55.9% last year. Our ratio of average loans as a percent of earning assets also continued to increase, to 49.9% for 2005 from 45.6% in 2004.

Return on average equity and return on average assets increased during 2005 to 6.79% and 0.79%, compared to 5.21% and 0.62%, respectively, for 2004. Capital ratios remained strong during 2005, with Tier 1, total capital and leverage ratios at 16.14%, 16.99% and 10.96%, respectively.

Finally, during 2005, we repurchased 222,519 shares at an average price of $59.29, and the Board approved a 13.6% increase in our quarterly dividend to $0.25.

Turning to the fourth quarter, diluted earnings per share increased 27.8% to $0.69, compared to $0.54 for the fourth quarter of 2004. This is based on net income of 15 million in the fourth quarter of 2005, compared to 11.7 million in the fourth quarter -- in the prior-year fourth quarter.

Net interest income increased 3.3 million or 7.3% during the fourth quarter of 2005, primarily due to higher loan balances. Net interest margin was 3.12% in the fourth quarter, compared -- fourth quarter of 2005, compared to 3.02% in the fourth quarter of 2004, but down from 3.26% in our 2005 third quarter.

The sequential trend is due to several factors. The first factor is the seasonal volatility of our tax payment-driven public funds, which inflate our deposit and repo balances during the fourth quarter and gradually decline during the first and second quarters. These funds are predominantly held in higher-costing accounts with the effect of a margin reduction in the fourth quarter.

As of December 31, our public fund deposits and repo balances amounted to approximately $1.5 billion with an average yield of 3.38%, compared to approximately 1.4 billion with an average yield of 1.66% at the end of 2004.

Second, our fourth-quarter margin reflected the effect of two rate hikes by the Federal Reserve, which had a larger and immediate impact on our short-term liabilities, while our assets will take time to reprice.

Finally, the Grab a Great Rate marketing campaign increased the yield on our interest-bearing deposits.

Non-interest income increased 7.8% in the fourth quarter of 2005, reflecting increases in fee-based services, including trust and securities processing, service charges and bankcard fees. Non-interest expense for the fourth quarter of 2005 was flat versus the prior year, primarily due to lower salary and benefit expenses offset by higher occupancy, bankcard and other expenses and charge-offs.

Salaries and benefits decreased 7.3% in the fourth quarter versus the prior year, due in part to lower health insurance costs and lower headcount. The lower health insurance cost is due to an expense estimate reduction in our recently established partially self-funded health insurance plan of 1.4 million in the fourth quarter and 1.6 million for the year, as accruals were higher than actual medical claims for 2005.

The number of full-time equivalent employees was 3,433 at year end, a reduction of 140 or 3.9% compared to December 31 of the prior year. Going into 2006, we expect the implementation of SFAS 123R to result in an approximately $1.8 million increase in equity-based compensation expense versus the prior year.

With that, I will turn it over to Peter for some additional comments on our operating performance.

Thanks, Mike, and good afternoon. I'd like to spend a few moments providing some additional color on how we are performing with respect to our growth and our operational strategies. Mariner touched briefly on our strategy to grow our fee businesses. During 2005, we took some very important steps to strengthen UMB's position in the payments industry.

First, we are helping our customers transition from paper payment options to electronic payment solutions. We believe UMB is at the forefront of this trend by providing innovative products and services such as Paycard and remote deposit capture.

Second, we are investing in a significantly upgraded treasury management platform. This platform will enable enhanced information reporting and transaction initiation via the Internet, improved control of service through online self-administration, and strengthened system security through the most current features, including a two-factor customer authentication. We believe this upgrade will provide us with the latest technology and Web-based treasury management services.

Third, we have successfully adopted a wholesale health savings and flexible spending account strategy, focusing primarily on health care providers and third-party administrators. This strategy resulted in UMB achieving significant customer wins, including Assurant and Humana.

With the benefit of being a first mover in this space, UMB is now positioned as one of the top card and account solutions providers for flexible spending accounts and health savings accounts. At the end of the year, we had more than 35 million in deposits in these accounts.

In addition to our payments business, our Milwaukee-based mutual funds services business experienced strong sales from both existing and new customers throughout 2005. Our focus on providing services to the fast-growing hedge fund marketplace is beginning to show results.

Mariner touched briefly on our strategy to strengthen our asset management business. In 2005, we took important steps in this direction through the alignment of our brokerage and personal wealth management groups. As we continue to migrate to an investment advisory model, we will be better positioned to serve our customers.

In 2005, we added 12 actively managed mutual funds and 14 passively managed investments to our asset management offering. Additionally, our UMB Scout Funds benefited from record net flows of $842 million during the year, more than twice the 305 million of net flows registered in 2004 and 10 times the net flows in 2002. We attribute this growth to successful marketing and the opening of new distribution channels, such as investment advisers and mutual fund supermarkets.

One of the key strengths of our asset management business is the quality of our investment managers. For example, Bill Greiner, UMB Investment Advisors' CIO, was named Stock Market Strategist of the Year by Business Week. And Jim Moffett, Portfolio Manager of our Worldwide Fund, was runner-up for Morningstar's 2005 International Manager of the Year. We are very proud of Bill and Jim and the quality of people we have across our entire investment organization.

Before turning it back to Mariner, I'd like to just add a few comments about our ongoing operating strategies. The first is to continuously improve operating efficiencies. In addition to the rationalization of our branch network, this also includes the consolidation of our bond and trust operations and the voluntary separation program.

As evidence of this focus, our efficiency ratio improved to 79.18% in 2005 from 83.50% in 2004. The efficiency ratio in 2005 was positively impacted by the net gains from branch sales and closures and the sale of employee benefit accounts.

Our second operating strategy involves our continuing commitment to sound risk management standards. We accomplished this by focusing on maintaining strong credit quality, balance sheet and capital ratios, and instituting corporate governance best practices. Throughout 2006, we will be implementing a new enterprise risk management process and we expect continuous improvement in 2006 and beyond.

In addition, the regulatory environment continues to increase the costs associated with complying with the Bank Secrecy Act, anti-money laundering, and other regulatory mandates. We expect our regulatory and compliance costs to continue to rise.

Our third operating strategy is to continue to make investments in our human capital. As we emphasized earlier in this call, human capital remains at the core of all of our growth strategies. This includes hiring, retaining, training and developing the right associates, as well as aligning their incentives the right way to drive the right behavior.

Our fourth operating strategy is a commitment to investing in technology. We will continue to invest in technology to help us better compete and become more efficient over the longer term. In addition to our treasury management platform upgrade, other examples of our technology investments include the implementation of NCR's image-based check processing platform, our customer relationship management sales force automation tools and an upgrade to our interactive voice response system.

With that, I'd like to turn it back to Mariner for some concluding remarks.

Thanks, Peter. I want to conclude my formal remarks by commenting on our outlook for 2006. We anticipate two more Fed rate increases and then a stabilization of rates for the remainder of 2006. As always, we will evaluate and respond to unexpected changes in rates and the economy.

In 2006, we will continue the implementation of our five core strategies. We expect this to result in profitable organic growth, supplemented by strategic acquisitions if the right opportunity becomes available.

We're planning to open four branches in 2006 and will continue to acquire land for future growth in strategic locations throughout our network. We'll also continue to invest in our retail business to drive growth in this segment. And we will continually push the optimization of our distribution network and achieve better operating performance.

In summary, 2006 will be a year of continued investments in key technology, people and improvements in our distribution to build the foundation for long-term sustainable growth. In order to remain true to our 97-year history of solid values, we will continue our tradition of high-quality credit, liquidity and long-term relationships with our customers.

Thank you for being on the call today. With that, I'll turn it back over to the conference operator to open it up for questions. Thanks again.

(OPERATOR INSTRUCTIONS). Peyton Green, FTN Midwest Securities.

Mariner, I was wondering if you could follow up a little bit just in terms of the expense management going into '06? Last quarter, you all indicated that you would manage to basically self-fund your growth initiatives through additional efficiencies. Do you still feel comfortable with that in '06?

Certainly, we have a -- we maintain a focus on being able to self-fund as much of our growth as we can. Peter touched on some of the key investments that we are going to need to make in 2006, which is going to drive our overall net interest expense up beyond what we were able to maintain in 2005.

We also did not build as many branches in 2005 as we intend to build in 2006. I'll follow up by adding that we do continue to look at our network for ways to -- if there are branches that are still not performing -- not really willing to commit today to you which ones or how many, but we do think that there is still more room for improvement.

And then in terms of the consumer-oriented programs that you all launched -- in terms of the consumer-oriented programs that you all launched in the year, how much of an impact did that have on the margin in terms of the promotional pricing versus when the pricing would reset to more normal levels?

Peyton, it is Mike. That's a very good question. Most of the promotional pricing is in the home equity product. And so if you were to trend that out over 12 months, you would see a dip as those promotional rates start to have an impact on the overall yield. So it did actually start to come up in November. So you were starting to see an upswing in home equity yields in November of 2005.

On the deposit side, the promotional pricing on Grab a Great Rate, it did impact our overall funding costs. No doubt about it. But we also wouldn't have the growth in balances without it. To give you some idea of what the costs were at the time of that promotion, the money market account bore a 3.5% yield, the eight-month CD was 4% and the 22-month CD was 4.30.

And then in terms of thinking about balance growth going forward, how do you all feel about the pipeline from the loan side, based on what you see on the commercial side? And then your optimism about the other lines as well.

Well, I will take that one. I think there is going to be continued growth in our consumer home equity portfolio. We continue to promote that. We will have an aggressive program in the marketplace early in the spring, when most of that business comes on. Our credit card portfolio continues to grow at modest levels, but it continues to grow. And the yields there are very, very attractive to us. In terms of the pipeline, I would just say that it continues to look good and we are happy with the way it looks right now.

And Peter, if I might add, I would just add that as you are well aware, we have lots of potential within our distribution. You are well aware, as everybody on the call is, that our success at our network is underutilized. So we continue to focus on better utilization of that network. And with the continued focus on our product, pricing and packaging, we are optimistic about our improvements in that area.

And then last question. You all mentioned that there was about 1.5 billion in public funds money that had moved in to the quarter-end balance. How much was in the balance at September 30?

Peyton, it's Mike again. Almost none of that was there at September 30.

Josh Ross, [OZ Capital].

This is Chris Buonafede. A couple of questions, one on -- I guess the deposit sequentially grew about $900 million. I know that there's a lot of inflows relating to the mutual fund and custody business in the fourth quarter. How much of the deposits at year end reflected that side of the business?

You're speaking of the public funds, or--?

No, I guess in the fourth quarter, there's typically this surge in custody kind of deposits that you usually see.

That is usually more related to the public fund business, not so much the custody business.

I see, okay. And that's been disclosed. Okay. And then secondly, the previous question talked about loan growth, and you said the pipelines look pretty good. Is there some seasonality to the kind of trajectory of growth? Because I think there was some extremely strong loan growth in the third -- excuse me, in the first and second quarters, and actually I think the third quarter of this year, and then sequentially it slowed down a little bit in the fourth. What did you see relative to what you were seeing I guess earlier in the year?

I would say that generally speaking, the industry would see a slowdown in the fourth quarter. The fact that we had a stronger second and third quarter than our first quarter has more to do with timing and timing of our pipeline and our prospecting and the like, less to do really with seasonality.

Got you. And then the last question I have is the Company has a pretty healthy tangible capital ratio, typically running over -- well over 10%. What are the plans to I guess to utilize that or to better utilize that to work that down to some degree?

Well, we are actively considering what to do with our capital. We feel the same way as you do, that we have capital that we can put to work. We have several things we can do with that capital. We can do acquisitions, we can repurchase shares and we can do stock dividends and the like.

I would tell you that we are very much engaged in the process of using that capital. We are interested in doing acquisitions. As it relates to how that ties into whether we do the other options, we are going to be weighing our options throughout the year as it relates to how we are operating.

And you guys have -- you do have a share repurchase program that was authorized, I believe, that still has shares remaining to be -- you're able to still repurchase shares under that previous program. What are your thoughts there? I guess a couple of quarters ago, you bought some stock back and then there hasn't been much since. What are kind of the thoughts there?

This is Mike. In the fourth quarter, we purchased 71,832 shares at an average price of 65.26. And I think the thing that is important there is with the quiet period, we were really reduced in the amount of time that we can buy shares in the fourth quarter of 2005. So obviously, repurchasing shares is one of the things we can do with our excess capital. We did some of that in 2005, and we will remain focused on that again.

Brian Hagler, Kennedy Capital Management.

I guess a couple of my questions have actually been touched on, but just to clarify, the deposit surge this quarter was roughly 1.5 billion of public funds? Or what part of that was seasonal?

You will notice that on the liability side of our balance sheet, it will increase on the average for the month of December in 2005, and it has done this for several years in the past, almost $1 billion, and in some cases more than $1 billion.

To kind of clarify maybe on Peyton's question earlier, we have public fund deposits at any one point in time. So, for instance, at the end of September, we have what I would consider, if you want put in quotation marks, normal public funds, just part of the business -- you know, the balance is going to move up and down on any given day.

But at the end of September and the current year, we had about 35.6 in demand deposits. And in total, we had 172 million. And then we had repos and securities sold of about $723 million. So you got to look at it on the average. But we experienced the same thing that we've experienced in the past, which is this roughly billion dollar increase on our balance sheet.

So you'll say that roughly 1 billion of the 1.5 billion was kind of seasonal and the rest of it was kind of normal flows?

That is in the ballpark, yes.

And then, like you said, this isn't a new dynamic, but since I'm fairly new to the story, can you maybe talk about -- you mentioned trailing off over first quarter into second quarter. Is most of that there for most of the first quarter? Because if you look back at kind of the previous couple first quarters, your margin seems to come in quite a bit in the first quarter compared to the fourth. Do you anticipate that again?

Just to clarify what these are, these are pretty much tax payments. For example, Jackson County here in Missouri sends their tax payments through us in the fourth quarter, particularly in December. And they begin to roll out in January, February, March and sometimes even into April.

But we will have a fair amount of this 1.5 billion for January, and again, it will diminish as you go into February and March and get to a more normal level, as Mike was describing, by the time you end the first quarter. It's hard to predict the exact pattern, but it should be back to a more normal level by the end of the first quarter.

But it will likely have a negative impact on your margin in the first quarter?

Yes, I mean, there are so many variables tied in there, along with our growth in other deposit categories, our loan growth -- you name it. This is Mariner, Brian. I would hate to give you some direction on that, because I think there are too many variables.

I guess I'm just asking, is there any reason it would diverge from the last couple years' trends we saw, but that's fine.

I mean, you're talking about deposits that are in multiple categories, too. So if somebody leaves them there longer than they have historically done, it is going to change the yield. It's really -- it's a moving target.

And then I guess this next question, one, I didn't exactly understand the comment on the quiet period. I'm not exactly sure how long that is. And I guess that ties into my last question, which is I guess I'm still not sure why you're not buying back stock while you're potentially looking at acquisitions.

On the quiet period comment, we've talked to our legal counsel, and I guess if we had come out with a program in advance to say we're going to be buying during the quiet period at a steady rate, they feel comfortable with that. But since we don't have that announcement or that program in place, we view that we were precluded from buying shares during the quiet period.

This is Mariner. I'll take the last question, and then I guess we need to --

How long is that quiet period?

45 days, prior to our earnings announcement.

That's never talked -- heard any other company mention that that was a problem. Okay.

Well, it is. Can we have the next question?

Jay Willadsen, Lee Munder Capital.

Just to kind of piggyback on Brian's point on the acquisitions, you mentioned it a couple times, and it seems like you're kind of setting up to do something. And if that's so, are you looking at a bank deal? Are you looking at insurance? I guess if I look at your stock and look at where it's trading versus the group and look at all the opportunities you have, I just can't imagine a better use of capital than buying back stock. And I think doing a deal, you're just going to dilute your book value. I'm just trying to understand the rationale here.

Well, you know, obviously there are several ways to use our capital. Acquisitions -- we are very focused as a company on further penetration in the places that we do business. And acquisitions are one way to gain penetration if we can do them accretively. Obviously, we all know what buying back our stock does -- it helps our earnings per share. So it is a pretty simple, easy way to understand what that does for us.

We are -- I guess to answer your question without getting into it too deep, we want to the right thing for the long term for our Company. And certainly buying back our stock is one of those options. And doing acquisitions is another.

So can you maybe just discuss what the return on capital is on doing a deal? What is your hurdle rate?

Give a range.

This is Mike. You know, it depends on the deal. If you're going to compare a bank to an asset management company, they are different. But from a range perspective, we are certainly looking for double digits, on the average probably around 13% internal rate of return.

But I think when you look at bank deals, and even when you look at bank de novo deals, we are looking for $30 million in deposits within three years. And so when we look at bank acquisition deals, we're looking at size of the marketplace, what's our current size, what's the demographics of the location, what's their distribution network -- it's multiple factors.

And if you look at an acquisition in and of itself and think that maybe that's in the short run not going to return exactly what you want, but long term has great value, you have to look at that. And there's just too many factors I think to nail it down to just return on investment.

It is not cut and dry.

I guess I just reiterate as a shareholder I'd rather have you buy back stock and boost your own ROE and eventually, then, you would get the multiple and it would be a less dilutive deal to do acquisitions, but --

Well, thank you, we appreciate your interest. Next, please?

Chris [McCrady], KBW Asset Management.

Quick question on the expense. I saw a meaningful decline this quarter in the personnel line item. Wondering if seasonal factors, or maybe you mentioned it before, but maybe a little color would be great.

As we mentioned during the actual conversation in the script, one of the things you have to consider is there was a $1.4 million accrual reversal in health care costs. So that's a major driver in the reduction of expenses. But also the lower headcount year over year is a major driver as well.

That explains the linked quarter. About $6 million, if my math serves me correct. So you said 1.4 million was the reversal?

Correct.

(OPERATOR INSTRUCTIONS). Ms. Klumb, it appears that there are no further questions from our participants at this time.

We thank you very much for your interest in UMB. The call can be accessed via replay at our website beginning in about two hours. It will be running through February 2. As always, you can contact UMB Investor Relations with any follow-up questions by calling 816-860-7906. Again, we appreciate your interest and time.

Ladies and gentlemen, this concludes today's teleconference. We thank you for your time and participation and you may now disconnect your lines.