UMB Financial Corp (UMBF) 2010 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen. Welcome to the UMB Financial Corporation third quarter conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, October 27th of 2010. At this time, I would like to turn our conference over to Abby Wendel, Director of Investor Relations at UMB Financial. Please go ahead, ma'am.

Thank you. Good morning, everyone, and thank you for joining us on our conference call and webcast regarding our 2010 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 risks and uncertainties, which could cause actual results to differ materially from those indicated in our statements made during this call.

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

By now, we hope most of you on the call or listening via webcast have had a chance to review our earnings release, which was issued early this morning. If not, you will find it on our website at umb.com.

On the call today are Mariner Kemper, Chairman and Chief Executive Officer; Peter deSilva, President and Chief Operating Officer; and Mike Hagedorn, our Chief Financial Officer. The agenda for today's call is as follows. Mariner will provide high-level commentary on our results, and Mike will review the details of our third quarter 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 Abby. Welcome everyone, and thank you for joining us today. For the third quarter, we generated $168.5 million in revenue and posted $0.57 per diluted share on net income of net income of $22.8 million. Net interest income increased 3.3% to $78.4 million. Total noninterest income increased 11.9% year over year and represents 53.5% of total revenue for the third quarter.

These results are 5% lower on a year-over-year basis driven primarily by higher expenses. On a year-to-date basis, our results are ahead by nearly 10% compared to the same period a year ago. We believe these strong results demonstrate we continue to execute on our strategies as a diversified financial services company.

The increase to noninterest income was driven primarily by revenue in trusts and securities processing, which includes revenue from our fund administration and custody businesses, advisory fee income from Scout Funds and asset management fees. The increase also demonstrates the continued investment in people and acquisitions that are a good cultural fit and strategic fit for our company.

Further support of this during the quarter include closing of the Prairie Capital Management acquisition and announcing a definitive agreement to acquire Reams Asset Management, an institutional fixed-income asset management firm. We expect to close this transaction in the fourth quarter. Peter will discuss additional details regarding our fee businesses with you in the call later.

Although low interest rates persist, net interest income increased primarily due to a larger balance sheet, compared to the third quarter of 2009, and our low cost of funds. We believe core funding is a valuable aspect of our franchise and the long-term value of these deposits cannot be overlooked. The compression in net interest margins slowed this quarter, in part because of the positive impact from free funds, as Mike will discuss later on the call.

Of particular note, we are pleased that actual loan balances increased 6.2% compared to the third quarter last year, and average loan balances increased 4.9%, by comparison to the 143 banks that have reported third-quarter results as of October 25th, reported negative loan growth of 1.3% for the third quarter of 2010.

In an environment where loan demand is generally described as weak, these results are compelling and are a testament to the work we do every day to drive value for shareholders.

In our C&I loan portfolio, loans increased by nearly 2% to $2 billion. Outstanding commercial line of credit balances were $1.5 billion at the end of the quarter, an increase of 12.1%. Commitments in this category increased 8.5% at $4.8 billion. The resulting utilization rate increased slightly to 31.6% compared to 30.6% in the third quarter of 2009. This modest increase reflects the nature of the slow economy recovering.

Turning to commercial real estate, balances in the portfolio increased 8% to $1.1 billion. As we have discussed previously, the loans in this category provide financing primarily for owner-occupied real estate for customers we know and are largely within our footprint. These higher commercial loan balances reflect the hard work from our associates in providing the unparalleled customer experience. Loan growth is a key component of our business model and I'm pleased with these results as they continue to show improvement in a challenging economic environment.

Consumer loan balances increased this quarter, as well, which Peter will discuss in greater detail later in the call. Turning to expenses, a significant portion of our expense growth in the third quarter was due to the investment in acquiring strategic businesses, the expenses for which were approximately 40% of the total expense increase. We expect to reap benefits of this investment over the time through increased revenue, which will in turn improvement our operating leverage and efficiency ratio.

As our company evolves into a well-diversified firm with growing and diverse revenue streams, our practice has been to increase our dividend regularly, providing a good return to shareholders. By now I hope you have had a chance to review the press releases regarding our dividend increase. Yesterday our board of directors declared a $0.01 per share increase to the quarterly cash dividend, raising it to $0.195 per share. This 5.4% increase in the -- is the tenth increase since July of 2003 and represents a total quarterly dividend increase of 95% over that time period. In contrast, over the same period many of our peers have held their dividends steady or even decreased them. In fact, according to SNL Financial the median dividend increase among our peer group of 20 banks over that same period was a mere 1.29%.

With that, I'll turn the call over to Mike for additional detail. Mike?

Thanks, Mariner and welcome everyone. Growth on our balance sheet from third-quarter 2009 to the third quarter 2010 was fueled largely by increases in deposits, which resulted in both higher loan balances and a larger investment portfolio for the quarter. Reviewing assets, we ended the quarter with $11.3 billion compared to $10.2 billion at the end of third quarter last year. End-of-period loan balances were $4.6 billion, an increase of 6.2% compared to the third quarter 2009.

Loan demand improved modestly, demonstrated by the increases in both commitments and utilization of commercial credit lines, as Mariner mentioned earlier in the call. Even in these challenging economic times, our credit quality remains stable. We experienced a slight increase in our nonperforming loans and net charge-offs this quarter; however, we are well below the second-quarter 2010 industry medians of 4.07% and 1.13% respectively.

For the third quarter 2010, UMB's nonperforming loans were 0.55%, a slight increase from 0.52% when compared to the third quarter 2009. Net charge-offs were $5.1 million or 0.45% of average loans, also a slight increase from 0.42% a year ago. The majority of our net charge-offs are in credit card -- are in our credit card portfolio. For the third quarter, credit cards accounted for accounted for 70% of net charge-offs.

On a related note, allowance for loan losses is $72.7 million and allowance as a percent of loans is now 1.59% or 23 basis points higher than a year ago. Additionally, our allowance for loan loss coverage is nearly three times the amount of nonperforming loans. Activity in the investment portfolio during the quarter included $253 million in core portfolio securities that rolled off at an average yield of 3.89%. In turn, we purchased $577 million of securities at an average yield of 2.13% including $170 million of noncore bonds that had been earning 0.63%.

Over the next three months, $221 million of core investments with an average yield of 3.97% will mature. Over the next 12 months, $1.3 billion of core investments with an average yield of 2.87% will mature. In the continuing low-interest-rate environment, we expect the repricing of these securities to put pressure on our interest income. In addition, 70% of our total loan portfolio is expected to reprice or mature in the next 12 months.

Looking closer at our liabilities, average deposits increased by 10.9% to $8.3 billion for the third quarter. The primary driver of the increase in deposits was a 26.4% increase in average money market account balances and an 18% increase in average noninterest bearing deposits. Noninterest bearing deposits make up 32.3% of our total deposits, a significant contribution to our low cost of funds. We continue to be highly liquid with a 53.4% loan-to-deposit ratio, a slight decrease from 54.9% in the third quarter last year.

At UMB, we historically hold high levels of capital. For the third quarter 2010, equity increased 7.6% to $1.1 billion. We remain well capitalized with Tier 1 leverage and total risk-based capital ratios of 12.6%, 7.4% and 13.8% respectively. We continue to proactively manage our balance sheet risks, which include interest rate, credit, duration and liquidity risks. Our balance sheet has grown again this quarter and we've remained disciplined in our approach, not sacrificing duration for yield in the portfolio, or looking to alter our underwriting standards to improve returns on assets. This approach will prove beneficial over the long run.

Reviewing other financial highlights, return on average assets was 0.82%, a decrease from 0.97% in third quarter 2009. Return on average equity was 8.31%, a decrease from 9.43% a year ago.

Turning to the income statement for the third quarter 2010, net income was $22.8 million or $0.57 per diluted share. As Mariner mentioned, total revenue increased 7.7% to $168.5 million. Net interest income grew by 3.3% to $78.4 million. Two main drivers contributed to this increase. First, average earning assets increased 11.8% from $9 billion to $10.1 billion on a year-over-year basis. And second, cost of funds declined 33 basis points to 0.48% from 0.81% in the third quarter of 2009, resulting in a 34.7% decrease in interest expense.

Year over year, net interest margin decreased 28 basis points. However, on a linked quarter basis, margin dropped just 6 basis points, reflecting the reduction in net interest margin compression. Slightly offsetting these improvements, average earning asset yields fell 52 basis points to 3.56%.

Provision expense increased on a year-to-date basis by $3.5 million. However, compared to the third quarter 2009 -- comparing the third quarter 2009 to the third quarter 2010, provision decreased by 7.2%. Our provision expense is a reflection of our consistent methodology which considers the inherent risk in our loan portfolio as well as some qualitative factors. In light of current economic conditions, we believe this level is appropriate based on the characteristics of the portfolio.

Turning to fee revenue, noninterest income was up 11.9% for the third quarter compared to the same period in 2009 and was 53.5% of total revenue. The increase in noninterest income was driven primarily by a 22% increase in trust and securities processing revenue. Total trust and securities processing income for the quarter was $39.8 million comparing favorably to the $32.6 million earned in the third quarter of 2009.

The primary components of the $7.2 million increase are as follows. First, $1.8 million from fund administration and custody services, a 12.9% increase. Second, $3.2 million in advisory fee income from the Scout Funds, a 36% improvement. And finally, a $1.6 million in revenue contributed by Prairie Capital Management. Another factor contributing to our growth in noninterest income was a 24.7% increase in bankcard fees. Revenue from bankcard fees is comprised primarily of debit and credit card interchange. Year-to-date revenue from interchange was $39.2 million; approximately 28.9% or $11.3 million of that total is derived from debit cards. Of the interchange related to debit cards, $3.8 million is attributed to health care spending cards, which were exempted from the interchange regulation in the Dodd-Frank Act.

Regarding Reg E changes that went into effect in August of this year, we continue to analyze results from our opt-in program launched earlier this year and we are working to understand how the new rules combined with changes in consumer behavior may affect us in the longer term. The full impact of the changes to Reg E are not yet clear, since the number of customers opting in for overdraft protection can change. For the third quarter of 2010, net NSF/OD income from individuals was $4.8 million or 24.7% of total deposit service charges of $19.4 million. Compared with the third quarter 2009, net NSF/OD revenue from individuals in the third quarter 2010 declined approximately $2.2 million. Total noninterest expense increased 13.3% to $130.6 million compared to the third quarter of 2009. Approximately 40% of this increase can be attributed to acquisition-related expenses totalling nearly $6.3 million, and is comprised of salary and benefits and tangible amortization expense and legal and consulting fees. Looking forward, we expect operating leverage from these acquisitions to improve, resulting in a positive impact to our overall results.

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

Thanks, Mike. Good morning, everyone. We continue to execute on our strategies as a financial services company, and our results demonstrate that our highly diverse business mix allows us to have a diversity of revenue and earnings that provides us stability. Because of this, we do not stretch for yield and we are not overly dependent on one source of revenue for our strong business results.

In my comments, I will provide some details about our sources of noninterest income, starting first with our payment businesses. Purchase volume across all of our card product offerings increased by 24.5% to $1.1 billion in this period, compared to the same period last year. Commercial credit card purchase volume increased 26.4% and reached $211.1 million this quarter, a record for us. Commercial cards comprised nearly 20% of total debit and credit card purchase volume for the third quarter.

We continue our efforts to increase penetration in both the public and commercial sectors on a regional, and in some cases on a national level. We are third in the nation in terms of purchasing and travel cards issued to state governments with card programs now issued in eight states. Consumer credit and debit card purchase volume made up 53.9% of total purchase volume this quarter and over 50% year to date. We have successfully integrated our recent credit card portfolio acquisitions and purchase volumes from these portfolios made up approximately 12.1% of total year-to-date consumer purchase volume.

Card credit quality remained superior when measured against the industry averages and has improved further throughout 2010. Total credit card charge-offs were just 3.8% of card balances this quarter, versus 4.8% in the third quarter of 2009, and represented 70% of total company net charge-offs. According to Fitch Rating Services, August 2010 industry credit card charge-offs averaged 10.5%, or more than double our credit card charge-off rate.

One of our unique debit card products is out health care debit card, which is tied, of course, to our health savings account and flexible spending account products. For the third quarter, health care debit card purchase volume comprised 24.7% of total debit and credit card purchase volume, which speaks to the strength of our health care debit product and the volume of health care-related spending through HSA and FSA accounts. At the end of the third quarter, health care services account balances were $215.2 million or an increase of 30.1% when compared to the third quarter of 2009. FSA and HSA accounts totalled $1.3 million, representing a 25.1% increase from one year ago.

The growth in these accounts tends to be cyclical. Tracking with the timing of company open enrollment periods, the majority of which take place in the fourth quarter. We will continue the build out this source of low-cost, stable deposits and related card-based transaction volumes.

I'll now turn to our asset servicing and asset management businesses. Revenue in these ares is largely dependent on one of three key drivers. First, new business. Second, mutual fund and separate account flows. And third, equity and fixed income market performance. In fund administration and custody services, we ended the quarter with $172.9 billion in assets under administration, an increase of 11.9% over the third quarter of 2009. Revenues increased $1.8 million or 12.9%. Over the past two years, we have been building out our product suite in UMB Fund Services. With the acquisition of J.D. Clark, and now the recent acquisition of JP Morgan's separately managed account platform, UMB Fund Services is able to provide administrative services to any type of investment management firm, including firms that offer mutual funds, alternative investments and separately managed account.

Continuing now with another aspect of our asset servicing businesses, corporate trust assets under administration were $11.5 billion at September 30, 2010, an increase of 25% over the same period a year ago.

Turning now to our asset management businesses. Assets under management in Scout Investment Advisors increased to 9.5 billion, which was a 23.1% increase when compared to the third quarter or last year. Assets in the Scout Funds represented $8.2 billion of that total. Net fund flows into the Scout Funds for the quarter were $228 million and market appreciation during the quarter resulted in a $1.1 billion increase.

Year to date, bond and equity fund flows into the Scout Funds totalled $1.2 billion compared to $739 million at September 30, 2009.

As Mariner mentioned, we recently announced the definitive agreement to purchase the assets of Reams Asset Management. This is another example of a good cultural and strategic acquisition for our company. After closing, we'll be able to offer our clients a greater selection of high quality fixed-income investment products. Reams' expertise in institutional fixed-income products will work well with Scout's knowledge and success in domestic and international equities and it will add approximately $9.8 billion in assets under management, bringing the total assets under management in Scout Investment Advisors to approximately $19.3 billion. We continue to be pleased with Scout's performance, and under the new leadership of Andy Iseman, we look forward to this business's continued growth, especially with institutional clients.

Continuing with our asset and wealth management businesses for individual, total assets under management stood at $6.9 billion for the third quarter, up from $3.5 billion just a year ago. This higher level of assets is attributed to a $2.2 billion increase upon closing our acquisition of Prairie Capital Management at the end of July. Prairie Capital's strong reputation, investment expertise and excellent customer base are a strong complement to our investment and wealth management capabilities. The integration is progressing well and we look forward to working with the Prairie Capital Team and their clients.

Trust income in the personal financial services segment stood at $9.2 million, an increase of 32.4% from the third quarter last year. $1.5 million of this fee revenue in the third quarter was directly attributable to Prairie Capital Management.

Turning now to consumer lending, HELOC balances were $465.8 million, an increase of 13.3% over third quarter '09. More than half of the increase in balances came from our private banking business. The utilization rate on home equity lines stood at 50% for the quarter. Credit quality of this portfolio remains outstanding with a delinquency rate of just 0.15%, up slightly from 0.3% in June. The industry-wide delinquency rate for HELOCs was 2.93% in August.

Our private banking and wealth advisor teams continue to deepen relationships with our existing customer base. Private banking deposits increased by 25.4% and private banking loans increased by 27.9% compared to third quarter of 2009. Deposits attributed to personal financial services stood at $4.2 billion at September 30, and represented 49% of the Company's total deposit base.

We are also pleased that our small-business banking platform continues to deliver strong results. This past Monday, we announced that we continue to be Kansas City's top SBA lender for the second year in a row, demonstrating that our dedicated small business strategy is successful. Small business loans have grown now for 15 consecutive months. On a year-over-year basis, total UMB small business loan balances increased 29.2%. Small business-related deposits increased by 26% from a year ago. We value these relationships and have the financial strength to lend money to support businesses of all sizes.

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

Thank you, Peter. Before we close, I'd like to take a moment to address the requests that we've received of late from analyst community to evaluate and discuss the inevitable impact we anticipate from the Dodd-Frank Act. While we believe it is premature to publicly predict the impact in its entirety, we continue to assess components of the law that apply to us and analyze alternative scenarios as we wait for the rules to be set. That said, we hope the additional detail provided in today's call regarding historic interchange and deposit service charges give listeners a better sense of our revenue profile.

No matter what environment we face, our business model, based on quality credit, diverse revenue, low-cost funding sources and a strong balance sheet, will serve us well as we adapt to the changing environment.

With that, I'd like to thank you all for being on the call with us today, and I'll turn the call back over to the conference call operator, then open up the call for your questions. Thank you.

Thank you, sir. Ladies and gentlemen, at this time we will now be conducting the question-and-answer session. (Operator Instructions). One moment, please. Our first question comes from the line of John Rodis with Howe and Barnes. Please go ahead.

Good morning, guys.

Good morning.

Good morning.

First off, I guess, a question on -- on Prairie Capital Management. You said that revenues in the quarter were about $1.6 million from Prairie Capital. And I guess, is it right that that was for two months in the quarter?

That -- that -- that's correct. We closed at the end of July, so you would have had August and September.

So -- so obviously just sort of on a monthly run-rate basis, that's about $800,000 per month. Is that sort of a good run rate going forward?

Yes, in terms of how the business looked when we picked it up, you -- the answer is yes. Of course, we hope to build a platform over time.

Okay. And as far as -- I understand that, but as far as expenses in the quarter related to Prairie Capital, can you sort of say what the incremental expenses were on a quarter-over-quarter basis?

And -- not -- this is Mike. Not as it relates specifically to Prairie, but obviously in our prepared remarks we talked about the increase in overall expenses related to acquisitions being about 40% of the total increase.

Okay.

So clearly our numbers are affected by -- and obviously Prairie was a big, big part of what we did in the quarter, so.

Yes. Okay. Okay. Fair enough. Hey, Mike, could -- could you -- you have some good detail on interchange and then the NSF fees and stuff, could you just run through that again, because I was having a hard time just keeping up with that?

(inaudible) predicting, I dog-eared the page. So that's good. Yes, I'll make the comments again. Year-to-date revenue from interchange was $39.2 million and approximately will round up 29% or a little more than $11 million of that total is from debit cards. And within that $11.3 million of debit card, $3.8 million is attrib -- attributed to our health care business, which is not -- or should maybe say it this way, is exempt from the Dodd-Frank Act as it is today.

Okay. And then -- I guess then the NSF fees also?

Yes, I did say that. I've got to find the page. Yes. Yes, from individuals, this was the -- the color that we provided this time. So from individuals NSF/OD was $4.8 million or 24.7% of total deposit service charges and those total deposit service charges were about $19.4 million.

Okay. And then I think you also said that was down $2.2 million from what period?

Third quarter of 2010, correct.

No, '09.

I'm -- '09, sorry.

Okay. Okay. Okay, that makes sense. If -- couple other -- just a couple other questions. The -- within the quarter, I guess, and within noninterest income trading, trading revenues were up a little bit, $7.9 million. Anything sort of nonrecurring in there or just sort of normal operations?

Normal.

Normal.

Normal, okay.

Nothing unusual.

Okay. And then as far as bank card fees, is it -- is it fair to assume, I guess, the fourth quarter should be seasonally even stronger than it was in the third quarter?

Well, certainly our purchase volume tends to increase in the fourth quarter with the holiday season, so I think that's a -- that's a reasonable assumption. There's no reason to think it would be much different than it has been in prior years.

Okay. And then the other line item was up a little bit on a core basis, is -- was there anything in there sort of nonrecurring?

Yes, that's where we have some investments in our own in-house mutual funds, and that's where the -- the market effect, the mark to market adjustments take place there, so, I mean, it completely depends upon, you know, equity markets.

They're small investments though.

Yes.

It's not --

That's seed money.

That's seed money.

Okay. Okay. And then just finally, down in expenses, I guess the legal line item was a little bit higher. Anything going on there?

Yes, it's related to our acquisition cost.

Okay.

Clearly the things that revolve around doing acquisitions are -- are up in the third quarter, and that's one of them.

As it relates to that, Mariner, could you maybe just talk about -- maybe just give an update on your thoughts for M&A going forward and what you -- what you're seeing out there?

Well, I would say that we've got a -- we've got a lot to digest and a lot going on right now, so that's what we're focused on as a company. However, we continue to look for strategic opportunities and our M&A group remains active looking at -- looking at deals. Again, most of them, as we said before, tend to be in the noninterest income space, in our fee-based business space. It's hard to find banks in this environment that fit our profile, but we're looking -- we're looking to banks too. So we continue to look, but right now we're focused on digesting what we've acquired.

And as it relates to banks, if you were to do something, what markets would you be focusing on today?

Our primary markets and our -- the larger population bases in which we do business. I think we touched on that before. We've got a big presence in Colorado and St. Louis and Kansas City. And certainly if we found something that fit, we -- we'd be focused on Arizona too, but given the environment in Arizona, it's kind of hard to find something that fits our risk profile.

Okay. Fair enough. Thanks, guys.

Um-hmm.

Thanks.

Thank you, and our next question comes from the line of Peyton Green with Sterne, Agee Asset Management. Please go ahead.

Thanks. A question in terms of the Prairie Capital Management. Is it -- I mean, ignoring the amortization expense associated with it, is it contributing to pretax, precredit income in the third quarter, or is it something that you're going to have to grow it to get it to scale in conjunction with your existing business?

Well, the bigger issue there, Peyton, is the one-time cost that you have to take because of the accounting rules that exist today. So in the third quarter, the answer to that would be no. Ongoing answer will be yes, hopefully. And as Peter mentioned, the plan is to grow the revenue too, not have it be a stable revenue number.

Well, absent the one-time charges, it's profitable.

Oh, yeah. Sure. You know, it's -- it's prof -- it's the one-time cost related to acquiring anything, not just Prairie, that cause it to not be a positive contributor overall when you consider all expenses in just the third quarter.

Okay. And I guess I mean, thinking about the business going forward now that the -- that day one is over, I mean, is it a 20% pretax margin business or is it better than that?

I -- I don't know that we're prepared to share that with you.

Yes. I have a good idea it's not 20%. It's north of 20%, but.

Yes. Yes.

Okay.

But that's about as far as I want to go.

So it could be better than that? Okay.

Yes.

Okay. So I -- okay, and then in terms of the business, I guess it was the business you bought from JP Morgan, I mean that -- was that a revenue zero kind of business that you kind of really got a platform and you have to -- it's dependent on (inaudible) going forward or was there some revenue attached to that?

Peyton, it was a very, very small amount of revenue. You hit it exactly right. What we were able to get are 11 wonderful people, salespeople, operational people, client service people who have been in the business for a number of years with JP Morgan. We also got their relationship with Best Mark, which is a superior technology in the industry to provide separate account management. And so you're exactly correct, we bought the platform of people and technology and then we are already beginning to present this opportunity to each of our clients and we've had -- had some nibbles on it already.

Okay. All right. And then separately with respect to Reams, which I guess you expect to close by the end of the year, how would you expect their business -- I mean, how does it compare to your own asset management business, is it more profitable because there -- there are fewer people involved or how would you expect that -- again, ignoring the kind of day-one expense, but more of an on -- on an ongoing basis?

Yes, Reams is a little different from Scout in that it distributes primarily to institutional -- exclusively, rather, to the institutional channel. So they're $9.8 billion in assets is clustered in a very small group of clients. And their average account size is in excess of $100 million, and so they clearly are in the large institutional space with pension funds, with municipalities, with large corporate. And as a consequence they do have a healthy margin because the cost to do that, both on the distribution side as well as the service and investment side, are less than it is if you have a more retail-oriented platform.

So, again, institutional distribution is a key with Reams, large clients, and as a consequence it has a very good -- has a very good margin.

I might add, Peyton, I mean, strategically what that acquisition is all about is we were a largely equity retail-based shop and -- so this balances our offering between equity and fixed income, and adds the institutional cap -- capacity, so it really completes -- it completes Scout Investments from a balanced offering perspective and a distribution channel perspective.

Okay. And then what was the role on the bond portfolio in the third quarter, Mike, I missed the number you mentioned?

Sure. Let me go back and get it for you. You want just the third quarter, Peyton.

Yes. I think the yield was [389] but I didn't catch the volume.

Yes, $253 million.

Okay. And you bought $577 million at [213]?

That's correct.

Okay. All right, good. And then, I guess in terms of thinking about the quarter, in terms of loan growth, I mean you saw some C&I activity, which still most have not seen. Any color you can give there?

I -- I think it's probably just a simple -- it's certainly not -- it certainly doesn't have anything to do with the economy. It has almost entirely to do with the fact that we're not focused internally cleaning up loan problems and we've got our sales force on the street. We're -- we've been able to pick up volume from our competitors. And I would say that we expect to be able to continue to benefit from the dislocation in our industry and from our competitors as we look forward. So it's not -- not the economy, it's not an improvement in the economy. It's entirely market share grab and we still feel very positive about that opportunity.

Okay, great. And then last question. I missed the CRE number that you gave in terms of the growth on that?

It was 8%, is that -- I think it's 8%. Let me -- bear with me, I can find that for you. It was 8%.

Is that --

(Multiple speakers).

Is that year over year?

Yes.

Yes.

Okay. All right, great. Thank you.

Yes.

Congratulations on a good quarter.

Thanks. Thanks, Peyton.

Thank you.

(Operator Instructions). Our next question comes from the line of Chris McGratty with KBW. Please go ahead.

Hi, good morning.

Morning.

Hi, Chris.

Still there? We lost him.

Yes.

Can you talk about expected revenues that you expect maybe the next quarter?

I don't know if we missed the first part -- you want to hit that again? Somehow there was a cut out, we just (multiple speakers).

Yes, I'm sorry, can you hear me -- can you hear me, guys now?

Yes, we can hear you now.

Yes, on the Reams transaction, the $9.8 billion of assets acquired, can you talk about expected revenue and margin contribution looking ahead?

I think we'll probably have to come back to you on that after we close.

Okay. And then the other -- the other question I had, Mike, in your comments on a service charge, that was very helpful, but just I want to make sure I understand the numbers correctly. The year-over-year decrease of $2 million, $2.2 million, was that all fin reg-related or is -- was there anything else in that number?

It wouldn't all be fin reg. I mean, obviously you have all kinds of changes going on with personal behavior. But what we're trying to do is give you a flavor for how much of that total is attributed to individuals and how much of that total then, in turn, is impacted by the fact that we have a large portion of our interchange income coming from our health care business.

Right. But the hope that --

Go ahead.

The full impact was in the quarter, though, right? I mean, that's July 1, it's been three months. I mean, it's all in the -- so this is a good run rate kind of going forward to (multiple speakers).

Oh, yeah. Yes. Yes.

Okay. Just a couple of housekeeping items. The tax rate, is 32% still kind of a -- the right number to use?

It's going to bounce between 29% and 32% more than likely.

Okay.

But there -- there are variables in there. I mean, that's a good assumption to run with, but not an absolute, for sure.

Okay. And that amortization expense for the quarter, that's a -- that's what we should be using going forward, or is there a one-timer in there? (Multiple speakers).

There's not a one -- there's not a one-timer, I mean, but you do have the impact of Reams once it comes on board too, later on, to think about.

Okay. Okay, and then -- and then with -- kind of a big picture question, my last question, when you think about kind of earnings contribution for the Company, and with (inaudible) deals, obviously improving some of the parts the way I think about it, can you -- can you maybe spend a minute just on expected earnings from banks versus trust and asset management kind of going forward?

Well, we -- we're certainly -- I mean, restating the obvious. We've made a lot of investments in our fee-based businesses with the expectation that they continue the exceptional growth rates that they have had. They -- their growth rates are higher than the bank's growth rates and -- so I mean, you can kind of run your own numbers, I suppose. We're investing in the bank just as -- just as heavily as we are in the fee-based businesses, but the growth profiles certainly have higher rates of growth on our -- certainly our asset servicing and asset management businesses.

Yes, we don't have a specific target in mind, like we're trying to get to 60% noninterest income to total revenue --

Right.

-- or anything like that. We're investing where we see good returns and good opportunities both in the bank space and in the nonbank space.

Just naturally we're going to see higher growth rates in our fee-based businesses. But we're actively growing both sides of the business.

Okay. And then lastly, with the -- with the positive trends in loan growth, any chance you're going to deploy some of the securities into the loan growth to kind of prop up the margin going forward?

The answer to that is our balance sheet has grown. The volume and liquidity has grown on our balance sheet because of the environment that we're in. We are actively putting on loans and looking for ways to grow the loan portfolio. We're not holding anything back, so.

Another thing to consider is remember we'll have over a billion dollars if the history of this company is -- remains true. Increase in deposits due to public funds in the fourth quarter and first quarter of next year -- fourth quarter this year, fourth quarter -- first quarter of next year.

Combined, right?

Yes.

Combined, so.

Yes.

Even if that were to happen, having those securities now and hopefully having them purchased at better rates than what will be available later, that will -- that will equal out.

Yes, but I don't know if maybe the other part of your question, which is something that's frustrated folks like us in the industry for a while, we -- we strongly believe that this -- this issue of deploying fixed-income assets into loans is more a matter of demand than it is -- than it is supply. And we're looking for every good opportunity we can.

If you look at our -- where utilization rates are down as an industry, I mean, they're slightly coming up, but they're still down, depressed. There's a lot of liquidity on corporate balance sheets that companies have to work through before they borrow. This is not a matter, in my opinion, in our opinion, of banks holding back. This is totally a demand issue.

All right. Thank you very much.

Yes.

Thanks.

(Operator Instructions). Our next question comes from the line of Melissa Miller, with Ceredex Value Advisors. Please go ahead.

Hi, good morning.

Morning.

Morning.

Good morning. Just a question on, I guess, bank acquisitions. We've seen a little bit more activity from the FDIC in your market and I just wondered if you are taking a look at these deals?

This is Mariner. Thank you. We look at everything and take all opportunities seriously. I'll reiterate what we've said consistently throughout this period about FDIC assisted-deals and deals that are under letter. We have interest in doing deals but we are not going to do deals that change our risk profile. We don't need to change our risk profile to improve our earnings.

And so we're -- we continue to focus on doing quality deals and we hope to be able to do those in the coming years. But we have a hard time seeing the value of some of these assisted deals. It's our opinion that they're hard to -- hard to see the value in most of them.

Okay, great. Thank you.

Thank you. And our next question is a follow-up question from the line of John Rodis with Howe and Barnes. Please go ahead.

Yes, just one quick clarification question on Prairie Capital. You said there were some sort of more one-time costs in the quarter, and would that have been in the salary line item?

Well, it's in salary, benefits, amortization, legal.

(Multiple speakers).

Yes.

It's all over the place. Yes, there are some.

I mean, can you quantify, roughly, how much that is --

No.

-- on a go-forward -- or -- excuse me?

No. We've not made that available. I mean, could -- do we have the ability to do it? Yes. Have we made that available specifically just to that acquisition? No.

Well, all acquisitions it was $3.7 million in the quarter --

For salaries.

-- for salaries and benefits. But -- including all the other items, it's $6.3 million.

Okay, thanks.

Thanks, John.

Thank you and I'm showing there are no further questions in the queue. I'll turn it back over to Ms. Wendel for closing comments.

Thank you. Thank you very much for your interest in UMB. This call can be accessed via replay at our website beginning in two hours and it will run through November 11th. And as always, you can contact UMB Investor Relations with any follow-up questions by calling 816-860-1685. Again, we appreciate your interest and time.

Thank you. Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 303-590-3030, or 1-800-406-7325, enter the pass code 437-0229. Once again, those numbers are 303-590-3030, or 1-800-406-7325, enter the pass code 437-0229.

That does conclude today's UMB Financial Corporation's third-quarter conference call. Thank you for your participation. You may now disconnect.