UMB Financial Corp (UMBF) 2006 Q3 法說會逐字稿

Thank you for standing by. Greetings ladies and gentlemen. Welcome to the UMB third quarter earnings conference call. [Operator Instructions].

It is now my pleasure to introduce your host, Ms. Begonya Klumb, Director of Investor Relations. Thank you, Ms. Klumb. You may begin.

Good afternoon everyone and thank you for joining us today for our conference call and webcast regarding our 2006 third quarter 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 risk and uncertainties which could cause actual results to differ materially from those indicated in our statements made during this call. While management of UMB believes our assumptions are reasonable, UMB cautions that material changes in interest rates, the equity markets, general economic conditions as they relate to the Company's loan and fee-based customers, competition in the financial services industry, the ability to integrate acquisitions, and other risks and uncertainties which are detailed in our filings with the Securities and Exchange Commission, may cause actual results to differ materially from those discussed in this call. UMB has no duty to update such statements, and undertakes no obligation to update or supplement forward-looking statements that become untrue because of new information, future events or otherwise.

By now we hope most of you on the call or listening to the webcast have had a chance to review our earnings release dated October 24. If not, you will find it on our website at umb.com. Our earnings release includes both our GAAP-based income statement and our reconciliation to the non-GAAP measures discussed in the release and during this call, which includes certain pre-tax adjustments to non-interest income and non-interest expense, the tax effect of those adjustments, and adjusted net income. These adjustments comprise net gains and losses related to the sales and closures of banking facilities, the sale of employee benefit accounts, and charges related to the voluntary separation plan. The reconciliation for these items can also be found on our website at umb.com.

The non-GAAP results are a supplement to the financial statements based upon generally accepted accounting principles. UMB believes this non-GAAP presentation and the illumination of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance.

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 third quarter and year-to-date results. Peter will follow with a more detailed review of operating performance against our strategies. Following that, we'll be happy to answer your questions.

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

Thank you, Begonya. It's great to be with you again. Thanks for joining us today. Following the strong performance of the first half of the year, we continued to deliver a solid operating performance in 2006. Reported third quarter earnings decreased slightly by 1.9% to $15.9 million, from $16.2 million in 2005. Excluding adjustments that Mike will cover in his remarks, net income in the third quarter increased 22% to $16 million from $13.1 million in the third quarter of 2005.

For the year-to-date, reported net income increased $2.6 million, or 6.3%, and adjusted net income increased $7.4 million, or 20.5%, to $43.7 million. This improved performance is a result of our focused and disciplined approach to executing our growth strategies. Our performance in the third quarter was driven by organic growth, led by strong loan growth, as well as margin expansion and improvement in our fee business. Also, similar to the first half, we continued the momentum of driving greater accountability and improved results across the organization. As always we strived to maintain our high credit quality underwriting standards while achieving significant growth.

We completed the acquisition of Mountain States Bancorp in Denver on September 15, for a closing price of $81.3 million. This acquisition is strategic for UMB on an operational and financial basis. Mountain States Bank enhances our branch network, both in terms of scale and efficiency, and represents an excellent reinvestment of our capital. Mountain States added $227 million in total deposits to UMB Bank Colorado as of 9/30 of 2006, increasing its total deposits to $618 million. The purchase price represents 2.24 times tangible book and a 19.9% core deposit premium at the time of closing. Our consolidated financial results for the third quarter of 2006 include Mountain States' but only for about two weeks. We're actively integrating Mountain States into our network and expect this acquisition to modestly be accretive in our 2007 earnings.

Through 2006, we continue to focus on our five key strategies. As a reminder, they are first, a focus on yield enhancement in our investment portfolio and growth in our loan 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're performing against each of them.

First is our focus on yield enhancement. We made progress again in the third quarter by increasing our earning assets, as well as our margin. End of period loans grew 13.4% from the same quarter last year, or 8.2% without Mountain States, and 5.8% sequentially, or 1% without Mountain States. This was the eighth consecutive quarter of loan growth while maintaining our historical commitment to high quality lending.

Our home equity loans grew almost 35% year-over-year due to a very successful summer marketing campaign that brought in more than $30 million in home equity balances. Our credit card balances also posted a strong showing, with 9.8% growth over the same period last year and 4.5% sequentially. We have talked about credit cards as a key driver, and we intend to focus on this area as we expand the portfolio both organically and through acquisition.

We're also seeing positive results from our continued investment in UMB's Small Business division which is ramping quickly from a small base. We continued to main a significant, low-cost, non-interest bearing deposit base, which at the end of the quarter represented 34% of total deposits. Our deposits are well positioned, as the value of non-interest bearing deposits carry a higher contribution in a rising rate environment.

While maintaining our traditionally strong liquidity position, we are also improving yield by extending the average life of our investment portfolio over time. Our core portfolio's average life continued to expand to 34.6 months at the end of the third quarter of 2006, from 33.6 months at the end of the second quarter of this year and 28.2 months at the end of September 2005. Any future expansion on average life of our core portfolio is expected to be modest. We expect moderate yield enhancement to continue with more than $922 million expected to roll off of our core portfolio, and 64% of our loan portfolio repricing, both through the end of 2007.

Our balance sheet is well positioned to benefit from the current interest rate environment. With stable rates, continued loan growth, our improving investment portfolio yield, and strong free-fund contribution, we expect net interest income to be a large driver of profitability in the near term. In the third quarter of 2006, our margin increased 17 basis points due to all of these factors. As a result of the Fed's tightening cycle, we've seen a significant increase in our interest expense during the third quarter of 2006. Interest expense related to interest-bearing liabilities increased 75% compared to the same period last year; however, we're starting to see interest expense increases moderate as the Fed has left short-term rates unchanged. Still, the deposit gathering environment remains extremely competitive making the funding side of the balance sheet a challenge for the industry and for us; however, we remain well positioned and committed to both sides of the balance sheet over the long term. In fact, based on recently released FDIC 2006 deposit reports, UMB was the only institution among the top five in the Kansas City metro area to grow deposit market share.

Our second strategy is to continue to grow our strong fee-based businesses, which in the third quarter represented approximately 54% of total revenue. Trust and card services income continue to be the catalyst of growth in our fee income. Peter will cover that in his comments.

Our third strategy is to optimize our distribution network, including continued investment in our retail business. This strategy includes gaining share in high-growth markets where we have established, proven leadership. As a part of this process, we continue to periodically evaluate branch performance to ensure long-term results are inline with the market opportunity. At the end of the third quarter, our net worth stood at 141 branches.

I've already touched on the acquisition of Mountain States Bank, which will give UMB a greater share in the Denver high-growth market where we're establishing a leadership position. At the end of September, Mountain States Bank had $174 million in loans, 81% of which were commercial loans. 19% were consumer loans. Mountain States Bank deposits at the end of the quarter amounted to $227 million, 30% of which were demand, 40% were transaction accounts, 15 in savings and 15 in time. We're very pleased with the deposit composition and it fits well with our acquisition strategy.

Part of our distribution strategy includes growing our retail franchise by adding customers and core deposits. In the third quarter of 2006, we grew our overall primary retail customer base by 3.3% compared to the same period last year. This growth was supported by a very successful HELOCs campaign over the summer, which featured an aggressive promotion of 6.75% fixed rate for three years. This campaign generated record numbers of applications processed, HELOC accounts opened, initial draws, and draws on existing lines.

During the third quarter, this campaign added almost 1,000 new loan accounts and more than $30 million in outstandings. The characteristics of our home-equity loan portfolio are attractive, with 57% average line utilization, higher than the 50% industry average.

Our fourth strategy is to continue to strengthen our asset management business. Growth in total assets in our management is a key measure of success for this strategy. Our scout funds continue to grow during the third quarter despite a challenging environment for all equity funds during most of the summer months, and we continue to benefit from an integration of our wealth management and brokerage businesses. Peter will cover that in detail later, as well, but this strategy continues to be an area of focus for UMB.

Our fifth strategy is a proactive approach to capital management. This includes a disciplined combination of investments in organic growth and acquisition, as well as the return of profit to shareholders in the form of dividend payments and share repurchase. We'll continue to take advantage of opportunities to grow our franchise as good acquisition candidates, such as Mountain States, arise. On October 2, the Company paid its regular quarterly dividend of $0.13 per share for a total outlay of $5.5 million. And finally, we repurchased 40,379 shares during the third quarter at an average price of $33.27 per share, for a total cost of $1.36 million.

As you've heard me say before, these five operational strategies serve as our roadmap to drive performance and results. In addition, we continue to employ productivity measures across the company, and we'll always ensure that our results are achieved with safety and soundness at our core. I'll come back to you with a few concluding remarks, but I'd like to turn it over to Mike Hagedorn for a detailed review of our third quarter financial results. Mike?

Thanks Mariner, and good afternoon to everyone joining us today. I'll start by discussing our reported third quarter results.

Diluted EPS of $0.37 for the third quarter is down a penny from $0.38 per share in the prior year third quarter. This is primarily due to lower, non-interest income from gains related to the sales and closures of banking facilities in 2005 and higher non-interest expense. Reported net income decreased slightly to $15.9 million from $16.2 million in the third quarter of 2005. As we've reported in prior earnings releases, non-interest income in the third quarter of 2005 included net gains of $4.8 million on the sale of branch facilities and other assets. Excluding these adjustments in both periods, our 2006 third quarter net income would have increased 22% over the same period in 2005.

Excluding the aforementioned adjustments in both quarters, our 2006 third quarter earnings improvement was driven by several factors, including a 12.5% increase in net interest income to $54.8 million. This was due to an 11.2% increase in our average loan balances and improved yields. Average loans for the third quarter of 2006 included $30.5 million of average loans from Mountain States Bank. Although net interest spread decreased by 11 basis points as compared to the same period in 2005, net interest margin increased 17 basis points due to the contribution of non-interest bearing demand deposits.

Margin expansion was nevertheless limited by the impacts of the last Fed rate increase which flowed through into our results in July, as well as the move of a large mutual fund, DBA account into a repo account. Going forward, we expect some pressure on the margin in the fourth quarter due to the seasonal increase of public fund accounts on our balance sheet. Although these balances have narrow spreads, all things being equal, the high volume effect historically translates into higher net interest income in the fourth quarter.

Compared to the same quarter a year ago, loan interest income increased 29.3% to $62.2 million, but a 31.9% increase in securities interest income also contributed to the improvement. During the third quarter, we had $240 million in maturing cash flow from the investment portfolio with a roll-off yield of 3.08%, which put us back on -- which was put back on our balance sheet at an average purchase yield of 5.27%. As a result, the investment portfolio yield increased 108 basis points over the third quarter in 2005, finishing the period at 4.48%.

During the fourth quarter of 2006, we expect $211 million in core portfolio securities to roll off at an average yield of 3.95%. The scale of yield improvement through reinvestment of this cash flow will depend on the yield curve as well as our investment purchase decisions over the coming months.

Reported non-interest income decreased slightly to $64.4 million in the third quarter from $64.7 million in the year-ago quarter. This year-over-year decrease was primarily attributable to the $4.8 million in net gains recognized in the third quarter of 2005 related to the sale and closure of banking facilities. These gains are detailed in our news release in the table reconciling GAAP net income for these items for both quarters. The impact of these gains in the third quarter of 2005 was offset by increases in trust and securities processing and bank card income. The 2006 third quarter results included a $4.4 million or 21.6% increase in trust and securities processing income, primarily due to a $1.5 billion or 46% increase in net assets in the UMB scout funds over the same period last year.

Our total assets under management, including personal and institutional accounts, increased $1.7 billion or 21.4%. Trading income was also positive, increasing 22.1% during the third quarter of 2006 due to several large municipal bond underwritings along with an overall increase in business related to the Fed's pause in policy direction.

Commercial deposit service charge income continues to be a challenge given the current rate environment and heightened competition to win corporate business. Still the growth in our consumer deposit service charges is benefiting from several pricing changes implemented since 2005.

Non-interest expense increased 7% or $6.3 million compared with the same quarter in 2005. The increase was primarily a result of modestly higher employee expenses, equipment costs, business development expense, and processing fees. The increase in employee expenses was mainly due to a $476,000 increase in equity-based compensation expenses related to the implementation of FAS 123(R), as well as a $655,000 increase in commissions and bonuses paid out as a result of new business development. In previous calls, we discussed the increased depreciation and amortization expense on computer equipment and software purchases, primarily related to the launch of several technology projects and products. The increase in processing fees was related to flows and to our scout funds.

Credit quality ratios reflected UMB's continued strong commitment to high quality lending. Non-performing loans at September 30, 2006, totaled $14.1 million or 0.37% of loans, compared to $9.8 million or 0.29% in the same period last year. The non-performing loans in the third quarter of 2005 were the lowest we've seen in the last three years. Our current level of non-performing loans is low, not only compared to our three-year average of 0.46%, but also when compared to the industry. Net loan charge-offs for the quarter totaled $2.4 million or less than 0.07 % of average total loans, compared with $1.5 million or 0.05% of average total loans for the prior year third quarter. Our credit quality remains strong, and in fact, our watch list as of September 30 was at its lowest point in the last 12 months.

Turning to the year-to-date results, reported diluted EPS of $1.03 increased 8.4% compared with $0.95 for the nine months of 2005. This is based on net income of $44 million compared with $41.4 million for the same period last year. Excluding certain items in both years, net gains and losses related to the sales and closures of banking facilities, the sales employee benefit accounts, and charges related to the voluntary separation plan, our net income would have increased 20.5%.

Our 2006 year-to-date underlying earnings improvement was driven by a higher net interest margin, as well as higher income from trust and securities processing, advisory fees, and bank card volumes. These favorable results were offset by decreases in deposit service charges and gains recognized in the same period in 2005.

The 2006 year-to-date net interest margin was 3.36%, compared with 3.17% for the same period in 2005. Although the spread declined 13 basis points, the margin increased 19 basis points as the contribution of free funds increased 31 basis points. The $20.4 million increase in net interest income for the first nine months of the year was almost equal, equally due to a positive rate variance related to the contribution of free funds and to a positive volume variance related to the growth in earning assets of $489 million.

Turning to the balance sheet, our solid earning asset growth for the third quarter was driven primarily by loan growth. Average total loans grew 11.2% to $3.6 billion. At the end of September, loan balances totaled $3.8 billion, compared with $3.3 billion a year ago. Loan growth was driven primarily by a 9.3% increase in average commercial and industrial loans. This growth is attributed to a continued focus on sales throughout the organization, the incentive compensation plans implemented for commercial loan officers, and increased loan demand.

On a sequential basis, end of period C&I loan balances remain steady compared to the second quarter of 2006. We typically see loans build up during the first half of the year with demand tapering off in the second half. During the third quarter of 2006, we experienced higher loan pay downs and lower line utilizations versus the second quarter of the year. Even though the sequential growth is at a slower pace than the first half of the year, we view this as typical from a seasonal perspective. In fact, our C&I pipeline looks strong at the moment.

Compared to the third quarter of 2005, average total deposits grew 6.1% or $311 million. Typically, the third quarter has the lowest non-interest bearing deposit balances of any other period. In addition, during the third quarter we had a significant non-interest bearing account transfer funds into a repurchase agreement. We are also striving to improve yield through a better balance sheet mix. Third quarter average loan-to-deposit ratio was 66.9% compared to 63.9% last year. Our ratio of average loans as a percent of earning assets also continued to increase to 54.2% for the third quarter from 52.1% in the same period last year.

Finally, capital ratios remain strong with Tier 1, total capital, and leverage ratios at 14.37%, 15.22%, and 10.3%, respectively. With that, I'll turn it over to Peter for some additional comments on our operating performance.

Thanks, Mike. And let me add my welcome to everyone on the call this afternoon.

I'd like to start by spending just a few moments commenting on our strategy to grow our fee business, which is essential to our continued success.

UMB continues to strengthen its position in the healthcare services industry as one of the top five providers in this space. During the third quarter of 2006, our healthcare services group continued to gain momentum. The number of cards issued under our HSA and FSA programs grew more than 250% year-over-year and 25% over the second quarter of this year. We're committed to maintaining our leadership position through account acquisition and discipline execution. We also continue to innovate in this space, and during the third quarter, we rolled out a line of credit linked to healthcare savings accounts.

Our credit card business represents the second of our fee business strategies, and it also contributed to the fee income growth during the third quarter. This growth is primarily driven by our commercial credit card program where cardholder volume increased 19.6% over the same period last year. We strengthened our credit card business by recently hiring George Schmelzel to run this division. George will be responsible for evaluating the potential acquisition of portfolios, port product management, and marketing. George was recently senior vice president of marketing for the First National Bank of Omaha, a major player in the credit card business.

The third strategy to grow our fee business is a continued emphasis on treasury management sales. We continue to position our enterprise at the front-end of the trend from paper payment methods to electronic solutions. These investments require lead times, but we're optimistic that with strong execution, we will gain a competitive advantage in not only retaining current customers but also increasing share. After coming out of a beta testing period, our remote deposit product is receiving a very positive response and is now running in 17 companies in 35 locations.

Next, I'd like to comment on our strategy to grow our asset management business. Our scout funds had $47 million in net flows and our team delivered strong growth in the non-mutual fund asset category with more than $140 million in net new assets under management. At the end of the third quarter, our team managed $9.6 billion in total assets, including the scout funds, a 21.4% increase from the same period last year. We strengthened our asset management team in the quarter with the addition of Patrick Dunkerley. Patrick most recently managed a top ranked, mid cap fund with Victory Capital Management. He brings more than 13 years of portfolio management experience to UMB. We plan to leverage Dunkerley's track record and experience to launch a scout mid cap fund in the fourth quarter to complement our existing offerings.

We continue to evaluate opportunities to aggressively grow the mutual fund business in other asset categories where we believe we can effectively compete. In addition to growing our fee businesses, we continue to focus on improved operating efficiencies and cost savings. We continue to drive productivity improvements at the corporate and branch level. At the end of the third quarter, our FTEs were 3,455, including 57 FTEs from Mountain States Bank. Excluding Mountain States' employees, our FTE number was 48 less than in September of 2005. We actively evaluate productivity measures on an FTE and branch basis for our lines of business and regions. During the third quarter, average loans for FTE increased 11.6%, and average deposits per FTE increased 6.5%. Our efficiency ratio was 78.92% in the third quarter of 2006 compared to 77.44% in the third quarter of 2005. Excluding net gains from the sale and closure of banking facilities in the third quarter of both years, our efficiency ratio improved to 78.84% from 80.78% during the same period last year.

With that, let me turn it back to Mariner for some concluding remarks. Mariner?

Thanks, Peter. I'll conclude our remarks by simply stating that our team is doing a great job executing on our growth strategies and process improvements. During the third quarter, we delivered solid loan and asset growth along with improvement in our net interest margin in a very competitive and difficult rate environment. This required investment, not only in technology, but more importantly, in our associates, who are helping UMB drive performance throughout the organization and delivering the unparalleled customer experience.

The pipeline is looking strong and I'm optimistic about the opportunities to leverage our franchise and deliver for our shareholders going forward. Credit quality remains strong and we've been able to grow the franchise with quality loans. As we look forward, we will maintain our focus on cost, risk, and capital management. As always, we appreciate your time, interest, and certainly your low cost deposits.

With that, I'll turn it back to the conference operator for your questions. Thank you.

All right, thank you. [Operator Instructions]

Our first question is coming from Troy Ward with A.G. Edwards. Please go ahead with your questions, Mr. Ward.

Thank you. Good afternoon.

Hi Troy.

Good afternoon.

You guys gave a lot of detail, and we appreciate that on the call. I'll have to go back to the transcripts to get it all jotted down. But Mike, if you could follow up real quick on, you gave the numbers for what you expect to roll off out of the securities portfolio in the fourth quarter and also the yield of that rolling off. Could you repeat that? I think it was $2-, $240, maybe.

You're talking about just the third quarter results?

Is that what rolled off in the third or what's expected in the fourth?

Yes.

I'd actually like to have both.

Well, in the fourth quarter, it was $211, or it is expected to be $211 million with a roll-off yield of $395.

Okay. And then what was that in the third quarter? What rolled off and at what yield?

$254 million rolled off. I know the repurchase yield was $527, and the roll-off yield was $308.

Okay. And what -- so $254 rolled off. What percentage of that was reinvested? Was it all?

Pretty much all of it -- the majority of it.

Okay. And you said the pick up was up to $527?

That's correct.

Okay. Great. And Mariner, if you could speak a second on the Mountain State acquisition. Remind us of the origins of that transaction. Was that an auctioned transaction, or was that privately negotiated?

It was an auction, kind of a private auction if you will. The bank, through its investment banker, had selected five parties.

And how were you one of those parties? Do you have a previous relationship?

I personally know the investment bankers very well, as well as the management of the bank. So through my efforts with management and the investment bankers, and their knowledge of our institution and our -- who we are and what we're all about.

Okay. And, Mike, this may be a better question for you, but on the Mountain States acquisition, Mariner mentioned that it was moderately accretive in 2007. I guess my first question is what does moderate mean? And, secondly, how do you look at something -- is it accretive? Is that through an expense saved or higher revenue expectations, or how do you come to that accretiveness?

Yes. There are two questions there. I'll handle the latter half first. It really is both. It's not -- the deal is not predicated solely on expense synergies. It's actually both. One of the best things that we have with this acquisition is a real opportunity for UMB to bring new product and service that wasn't previously available to Mountain States' customers. For example, they do not have a credit card product, and we do.

Trust services, their legal lending limits, treasury management services --

-- on and on.

It goes on and on. We've already been able to recognize great opportunity through the synergies of the two organizations. And just to expand on what Mike said, it's going to come through some expense reductions and certainly some leverage of revenue enhancements.

Okay. And then the first part of that is, I guess, what does moderate mean?

Well, we're not going to give guidance, I don't believe today, exactly what the number is. But it will be accretive. We've said previously that we will do accretive acquisitions, and this will certainly be accretive in 2007.

All right. Thank you, gentlemen.

Thank you, Troy.

Thank you, Troy.

All right. Thank you. Peyton Green with FTN Midwest Securities. Please go ahead with your question.

Yes. Good afternoon. I think in your prepared comments last quarter, you all indicated fairly decent comfort with margin expansion in the back half of this year. And I mean, was the third quarter somewhat in line with how you expected the margin to play out, or was it a little weaker than you expected? And what's your outlook for the fourth quarter? Do you think you'll get some expansion, excluding the wholesale business that normally comes on there?

Peyton, its Mike. Good to talk with you again. I think that we were pleased with the margin expansion that we got in third quarter. You know many banks in the United States were not able to grow margin, and we were among the many, or the few I should say, that were able to do that. The thing that made it challenging in the third quarter -- at one point, two-year money was down to 470, the low 470s. Now, it's back up to 490 so there's been some volatility in the bond market, and depending upon what time you have cash flow coming due and what your reinvestment is, 20 to maybe as much as 30 basis point swings can obviously affect what you get.

But given where rates are today, it looks better. As we said in the call today, I don't know that we'll get margin expansion necessarily in the fourth quarter, but we'll certainly get net interest income expansion with the addition of the public fund business that typically comes on.

Okay. Great. And then in terms of the expense side or the reinvestment side in the Company and the initiatives that you might have mapped out, what is a reasonable expectation? I mean, do you think '06 ends up being kind of a heavy year compared to what '07 will look like, or what kind of qualitative answer could you give for that?

You're comparing our expense load, our efficiency ratio? Is that what you're getting at?

I think in terms of like the occupancy and equipment expense lines --

Sure.

-- went up pretty significantly this year compared to last, and I was just trying to wonder how that might feel and look next year. What kind of major programs do you have that you need to support parts of this year?

Well, we continue to make investments in the businesses, as we described throughout our prepared remarks, and those are around our technology platforms, which I'd love to tell you are inexpensive, but they're not. We are making investments in our healthcare business. We've made some investments in our private banking business. We've made some investments in our overall small business area. Those investments are certainly expected to pay off at a greater rate as we go down the pipe next year.

In terms of remaining investments we need to make over the next couple of years, I don't want to be too specific Peyton, but in groups or categories, technology certainly will continue to be an area of investment. We'll continue to invest in people to make sure we have the right people on the ground delivering our products and services. And we're going to continue to develop product innovation. We think we need to continue to offer worldclass product into the marketplace, and we've got some work yet to do there.

If I could just add, Peyton -- it's Mariner. I think going into '07, we feel very strongly that we need to measure the ROI on the investments we're making, and we've prioritized them down to fewer investments in '07. And we understand the load that we're carrying coming into '07 much better than we have in the past. So we've managed the list down, and we've prioritized it stronger against ROI, and you should see that from us.

Okay. All right. And then, just in terms of looking at your businesses and measuring them more thoroughly than you might have in the past, are there things that you might get out of in '07 that have had maybe two or three years to kind of get moving and haven't? Or are you pretty comfortable with the businesses that you've got and how they look and feel? It's just a matter of growing them.

Well, in my comments, Peyton, we talked about small businesI, and you could add private banking to that, and then you could add, onto the tail of that, which is probably bigger because of the expense load which would be the retail business and the product and pricing work that we've done the last couple of years. We are very pleased with the progress in all three of those areas. We have much greater expectations for all three of them in '07, and we'll be watching them very closely. And we're also measuring, in '07, ourselves. On our scorecards, we've heightened the weighting against our efficiency ratio and leveraging these investments. It's very important to us, and we are looking for great improvement in all three of those areas.

Okay. Great. That helps a lot. And then in terms of the M&A front, I mean, are you all seeing -- I mean, you all took a long time off, I guess, in terms of being a bank acquirer. Are you seeing more deals, or are pricing expectations too high versus what you're seeing from what the firm or bank might provide to you as value? How can you characterize the environment?

I guess I'd say yes, yes, and yes. I mean, we're looking at a ton of stuff. The activity has picked up significantly. The pricing is still -- seems to be out of line, though we feel very comfortable with what we paid for Mountain States given the pricing that -- you've seen as much of it as we have. You've seen the pricing out there. We think we did really well with Mountain States.

We're not going to be making acquisitions if it's something over the wire. We're very conscious of how accretive they are and how they fit and culturally and what they do for our organization, so it's hard to come by. We're a unique organization, and finding somebody who fits is hard to do, but we're actively looking.

Okay. And then last question, how would you characterize the feel of your commercial customer base? I think historically, say over the last 12 to 18 months, they've been optimistic about growing their businesses. How do you think they feel now?

Well, we talk with them all the time and all of us, both our customers and us, are talking about all the signs, which would say that things seem like they're softening a little bit. But as you talk to them about their backlogs and you talk to them about their customer bases, they all talk about strengths. They talk about backlogs and customer growt,h and so you tell me what that means. They all seem to be feeling pretty good about the future, but they also all talk the same way we do, as an industry, and economists across the country do about the signs of some softening.

I'd echo Mariner's comments. I think our commercial borrowers generally seem to feel quite solid about their prospects. That said, I think there is a little bit more uncertainty working its way into their thinking relative to making large investments. But to this point, most of them are looking really good. You saw our non-performings and the like, and we continue to have very, very strong results in that respect. So I think the momentum is still there, Peyton.

Yes.

So performance of our portfolio, if it was an indicator, it looks better than it has in awhile, as far as the quality of the companies in there and their balance sheets.

Okay. Great. And then, last question -- I think in the annual report last year, you all cited kind of a consumer growth rate of about 3%. Have you all tracked that real time, and how does that look and feel year-over-year through the third quarter?

I think we said in our comments today, we're up 3.3%.

Okay. Okay, sorry.

I know we gave you a lot of info so --

Yes. Sorry I missed it.

That was in there, 3.3% growth.

That's a customer acquisition growth number.

Yes.

Okay. Great. Thank you very much.

Yes. Thanks, Peyton.

All right. Thank you. Next we have a follow-up from Troy Ward. Please go ahead.

Hey Mariner, could you spend just a second here and comment on your market presence and maybe even specifically your current market traction, in what we consider your four top markets?

Excellent question. We have some great data for you on that. Actually as of -- I mentioned in Kansas City, in my comments, that the FDIC numbers as of the six months of '06 over -- or sorry. It's an annual figure that comes out in June of '06, our Kansas City FDIC numbers. We -- what did we grow? We -- this is not what I'm looking for. We grew by what? Do we have that?

Your share growth.

We went from 8.3% market share to 9.19%. Bank of America, which is the largest bank in our town from a deposit market share perspective, went from 11.3% to 9.95%. And Commerce, which is number two, went from 9.6% to 9.3%. Out of the top five, we're the only one who gained market share. We gained a whole percent. Bank of America lost a whole percent, and Commerce lost a little bit.

So in Kansas City, on the deposit side, we've gained significant traction. We're very pleased, obviously with our acquisition in Colorado. We get into, depending on how you measure it, top 14 or within the top 10, depending on how you measure that, whether iI's MSA or FDIC. MSA information just gives you Denver County. If you do the seven counties, we'd be top 10. And Salina, we're number one. St. Louis is relatively flat, but we have a decent size market share there at a little over 1% of the market share in St. Louis.

Can you add any commentary on the other side of the balance sheet specifically at commercial loans? Are you guys getting good looks at the business happening in the St. Louis market and Kansas City and such? And how do you see that progressing?

Our pipeline and our looks are significant. We were just looking at our Board today at the looks for CN in St. Louis. We're getting a ton of looks. It's very competitive. We're not winning them all, but we are definitely getting traction in St. Louis at the number of deals we're seeing and the quality of deals we're seeing. In Kansas City, same thing, great traction. You've seen the loan growth so you know we're doing really well on the loan growth side of commercial level -- significant growth in Colorado, significant growth in Kansas, slight growth in Omaha.

And those would be our major markets. We've had pretty decent growth in Oklahoma. Quality's been very good in Oklahoma.

Okay. Thanks.

All right. Thank you. [Operator Instructions].

Ms. Klumb, there does not appear there are any further questions. Please continue with any closing comments.

Thank you all. I'll turn it over to Begonya in a second, but I just want to thank you all for joining us and your interest.

Yes. Thank you very much for your interest in UMB. The call can be accessed via replay at our website beginning in about two hours, and it will run through January 24. And as always, you can contact UMB Investor Relations with any follow-up questions by calling 816-860-7906. Again, thank you very much for your time and interest.

All right. Thank you. This does conclude today's conference. Again, if you would like to listen to a replay of today's conference call in its entirety, you can also do so by dialing 303-590-3000 or 800-405-2236, using the access code 11072670. Those numbers again, 303-590-3000 or 800-405-2236. You can put in the access code 11072670. Thank you for using the ACT Conferencing. You may now disconnect. Have a very pleasant day.