UMB Financial Corp (UMBF) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the UMB Financial fourth-quarter 2012 financial results conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Wednesday, January 23, 2013 at 8.30 a.m. Central Time. I'll now turn the conference over to Ms. Kay McMillan. Please go ahead.

Good morning everyone and thank you for joining us for our conference call and webcast regarding our fourth-quarter and full-year 2012 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 the management of UMB believes our assumptions are reasonable, UMB cautions that material change in interest rates, the equity markets, general economic conditions as they relate to the Company's loan and fee-based customers, competition in the financial services industry, the ability to integrate acquisitions and other risks and uncertainties which are detailed in our filings with the SEC may cause actual results to differ materially from those discussed in this call. UMB has no duty to update such statements and undertakes no obligation to update or supplement forward-looking statements that become untrue because of new information, future events, or otherwise.

By now, we hope most of you on the call or listening via webcast have had a chance to review our earnings release which was issued yesterday afternoon. If not you'll find it on our website at UMB.com.

On the call today are Mariner Kemper, Chairman and Chief Executive Officer; Peter deSilva, President and Chief Operating Officer; and Mike Hagedorn, our Chief Financial Officer. The agenda for today's call is as follows. Mariner will provide high-level commentary on our results and Mike will review the details of our financials. Then, Peter will review key fee income business drivers.

Following that, we'll be happy to answer your questions. Now I'll turn the call over to Mariner Kemper.

Thank you Kay. Welcome everyone, and thank you for joining us today as we talk about our 2012 results.

For the fourth quarter, we reported total revenue of $189.5 million, an increase of 6.9% compared to the fourth quarter of 2011. Net income for the quarter was $21.1 million or $0.52 per diluted share.

On a full-year basis, we achieved record net income and total revenue. For 2012 we generated net income of $122.7 million or $3.04 per diluted share, an increase of 15.3% compared to 2011 on total revenue of $778.2 million.

Noninterest income increased 11.8% to $109.3 million for the quarter and represented 57.7% of total revenue. For the full-year noninterest income was $458.1 million, an increase of 10.6%, and represented nearly 59% of total revenue.

This advantage has been more apparent in this protracted low interest rate environment. With rates likely to remain low for the foreseeable future, our net interest margin will continue to be under pressure. While we are focused on improving our loan to deposit ratio we will continue to rely more heavily on growing our fee business.

That said, I'm pleased to report double-digit loan growth once again, making this the 11th consecutive quarter of increased loan growth. Average net loans were $5.4 billion at quarter-end, an increase of 11.6% over the fourth quarter of 2011. As stated, total loans stood at $5.7 billion at period end.

Compared to the industry, the nearly 1000 regulated depositories that announced year-end quarter results as of January 21 reported a median increase in loan balances of just 1.5%.

Commercial banking is a core competency at UMB. C&I loan balances were $2.9 billion at the end of the fourth quarter, up nearly 29% from $2.2 billion a year ago. Over the past 12 months, our commercial lending team has added $639 million in outstanding loans and more than $700 million in new commitments.

Commitments at December 31 had increased by nearly 12.6% and our utilization rate was 28.4% compared to 26% at the same point a year ago. We are pleased with this improvement, although utilization rates remained significantly lower than historical averages.

We are seeing growth across the footprint as our lenders penetrate some of our newer markets. While the Kansas City and Denver areas continue to provide the largest dollar volume in new loans, the fastest growing regions are Arizona, Omaha, and Oklahoma.

To further demonstrate our commitment to commercial banking, I'm happy to announce the opening of a new loan production office in the Dallas-Fort Worth market. Dallas provides an excellent opportunity to expand our commercial and treasury management business footprint. Currently we have more than 100 clients in Texas using some of our national products.

Credit quality at UMB remains strong and continues to differentiate us from our peers. Overall nonperforming loans as a percent of total loans were 0.49% and net charge-offs of the quarter were 0.29%.

For the full year of 2012, our efficiency ratio was 74.01%, improved slightly from 75.04% for 2011. While we don't provide specific guidance related to our efficiency ratio, we do recognize that this isn't where we want to be.

Part of our ongoing effort to drive growth includes investment in resources such as technology and people. As this difficult environment continues, we are accelerating our focus on broad Companywide expense management.

Before we hear from Mike, I want to briefly mention a structural change to our bank charters. Effective January 1, the charters of UMB National Bank of America, UMB Colorado, and UMB Arizona have been merged into UMB Bank NA charter. This change was seamless to our customers and eliminated some of the compliance and regulatory complexity that comes with multiple charters.

With that I'll turn the call over to Mike Hagedorn, who will walk you through our financial results in more detail. Mike?

Thanks Mariner and welcome everyone. First I will review our Company's financials and then provide a more detailed summary of our four business segments.

During the fourth quarter our balance sheet grew 10.6% and average earning assets increased 11.4% to $12.8 billion. The average balance in our investment portfolio for the quarter was $6.9 billion, 4.8% higher than last quarter and 15.3% higher than the fourth quarter a year ago. The average yield on securities was 1.96%, a decrease of 17 basis points from last quarter and a decrease of 36 basis points from the fourth quarter of 2011.

Activity during the fourth quarter included the roll-off of $392 million in core portfolio securities at an average yield of 2.2%. In turn, we purchased $672 million of securities at an average yield of 1.35%. The average life is now 39.95 months, down from 42.57 months last quarter. The average life in the fourth quarter of 2011 was 28.17 months.

Continued changes in the portfolio, along with some modifications to our security modeling inputs and tools, shortened the duration slightly to 36.96 months from 38.7 months in the third quarter of 2012.

Over the next three months, $421 million of core investments with an average yield of 1.92% will cash flow, and over the next 12 months $1.5 billion of core investments with an average yield of 1.89% will cash flow. Additionally, 71% of our total loan portfolio is expected to reprice or mature in the next 12 months.

As we've reported, the securities mix in our portfolio has shifted and just over 50% of the total was invested in mortgage-backed securities at the end of the quarter. We continually monitor our amortization risk and have not seen any significant changes in our average book price.

Allowance for loan losses is $71.4 million and allowance as a percent of total loans is now 1.26% compared to 1.45% a year ago. Although our allowance as a percent of loans has decreased, we believe this level is appropriate given the high quality of our loan portfolio and the history of charge-offs.

Our coverage is more than 2.5 times the amount of nonperforming loans while the median industry allowance reported for the third quarter would've covered just two-thirds of nonperforming loans. We remain well-capitalized with tier 1, leverage and total risk based capital ratios of 11.05%, 6.81% and 11.92% respectively.

Looking at the liabilities side of the balance sheet, average deposits for the quarter increased 12% to $11.1 billion. Average noninterest-bearing deposits comprised more than 42% of our total deposits, which puts us in the top 4% of the industry according to SNL Financial.

Our high percentage of free funds is a competitive advantage and is reflected in our low cost of funds. Our overall cost of funds was 23 basis points for the fourth quarter versus 32 basis points a year ago. If you factor in free funds, this brings the number down to just 14 basis points. For the year, those costs were 26 basis points and 17 basis points respectively.

As you know, we have a substantial public fund business that typically results in a seasonal influx of deposits beginning in the fourth quarter and usually peaking in the first quarter. We haven't seen any substantial changes this year, and the level of these deposits is similar to what we've seen in prior years.

Shareholder equity was $1.3 billion, a 10.5% increase from a year ago. Since the end of 2007, equity has increased 43.7%. Additionally, total shareholder return over the past five years was 25.2%.

For the same period, returns from the S&P 500 and SNL US Bank Index were 8.6% and negative 33.9% respectively.

Reviewing other financial highlights, return on average assets was 0.6% for the quarter, down from 0.74% in fourth quarter of 2011. For the full year 2012, return on average assets improved from 0.86% in 2011 to 0.92%. Return on average equity for the fourth quarter was 6.47% compared to 7.83% a year ago. For the full year, return on average equity was 9.75%.

Turning to the income statement for the fourth quarter 2012, net interest income was virtually unchanged, up just less than 1% to $80.2 million. As I mentioned, average earning asset balances increased 11.4%. However, the changing mix resulted in a lower overall yield of 2.78%, down 33 basis points from 3.11% for the fourth quarter of 2011.

Average net interest margin for the quarter decreased 27 basis points to 2.64%. For the year ended December 31, 2012, net interest income was up slightly to $320 million compared to $317 million in 2011. Average net interest margin for the year decreased 19 basis points to 2.75%.

Provision expense decreased $1 million or 20% compared to the fourth quarter 2011. For the full year, provision was 21% or $4.7 million lower than 2011. As we discussed in several prior quarter calls, our provision expense is a reflection of our consistent methodology which considers the inherent risk in our loan portfolio as well as other qualitative factors.

As Mariner mentioned, noninterest income increased 11.8% to $109.3 million, comparing favorably to $97.8 million for the fourth quarter of 2011. The increase in noninterest income was driven largely by a 14.2% increase in trust and securities processing revenue, which for the quarter was $58.3 million compared to $51.1 million for the fourth quarter of 2011. Also contributing to the increase in noninterest income for the quarter were 12.7% higher bankcard fees and an 8% increase in deposit service charges.

For the year, total noninterest income increased 10.6%, driven largely by an 8% increase in trust and securities processing income. Other noninterest income increased $14.6 million or 109.7%, due primarily to an $8.7 million adjustment decreasing the contingent consideration liabilities on acquisitions. As you may recall, we had an $8.2 million adjustment in the first quarter of 2012 and we made an additional adjustment of $534,000 in the fourth quarter. There are related entries that impact our expenses which I will discuss in a moment.

These adjustments were due to the 2012 adoption of new accounting rules related to fair value measurements along with changes in cash flow projections related to the earnout agreements on some of our acquisitions. We will continue to monitor these liabilities and will likely have some future adjustments, either up or down, throughout the earnout period.

For the fourth quarter, noninterest expense increased 11.1% or $15.7 million to $158 million. This increase was driven primarily by higher salary and benefit expense of $9.1 million. Higher medical insurance costs and profit sharing drove the increase in employee benefits.

Other expense increased $2.3 million, primarily due to a $4.2 million fair value adjustment related to our earnout agreements. In the same period in 2011, these largely non-cash adjustments totaled $1.8 million.

For the full year 2012, expenses were up 4.9%. This $27.7 million increase was due primarily to higher salary and benefit expense of $25.1 million. Other noninterest expense increased $3 million or 10.2%, driven largely by a full-year adjustment of $6.1 million and contingent liabilities related to our earnout agreements versus an adjustment of only $2.6 million in 2011.

Now I will review the results of our four business segments. Peter will provide more detail on the drivers in these segments later in the call.

Looking first at Institutional Investment Management, for the fourth quarter, noninterest income was $25.5 million, an increase of 28.8% versus $20 million in the fourth quarter of 2011. Noninterest expense increased 37% to $20.2 million compared to the fourth quarter a year ago.

Net income before tax was $5.4 million, an increase of 5.2% when compared to $5.1 million in the fourth quarter of 2011. And the pre-tax profit margin for Institutional Investment Management declined from 25.7% in the fourth quarter of 2011 to 21%, due in part to the earnout liability adjustments mentioned earlier.

For the full year, noninterest income for Institutional Investment Management increased 19.2% to just over $100 million.

Expenses rose 10.1% to $70.5 million, and the resulting pre-tax income net income increased 48.2% to $29.6 million when compared to 2011. And finally, the pre-tax profit margin for this segment in 2012 was $29.5 million.

Moving to Asset Servicing, for the fourth quarter, total noninterest income for this segment increased 6.8% to $18.4 million. Noninterest expense increased 7.5% to $17 million compared to the fourth quarter 2011. Again, a portion of the contingent liability adjustment impacts expenses in this segment.

Net income before tax increased 12.8% to $1.8 million for the quarter. And finally, the pre-tax profit margin for Asset Servicing was 9.3% for the fourth quarter, improving from 8.9% a year ago. For the full-year, noninterest income for Asset Servicing increased 8.3% to $75.6 million.

Expenses rose 5.8% to $68 million, and the resulting pre-tax net income increased 33% to $9.2 million when compared to 2011. And finally, the profit tax -- or the pre-tax profit margin in this segment was 11.9% for 2012.

In Payment Solutions for the fourth quarter, total noninterest income increased 36% to $17.6 million. Net interest income increased 6.9% to $11.2 million and noninterest expense increased 30.5% to $19.9 million compared to the fourth quarter of 2011.

Impacting noninterest expense for this segment in the fourth quarter were additional salary and benefit expense for newly acquired positions related to certain client relationships acquired from First Data Resources. Net income before tax was $6.6 million, an increase of 22.2% from a year ago, and the pre-tax profit margin for Payment Solutions was 23% for the fourth quarter.

For the full year, noninterest income for Payment Solutions increased 20.1% to $65.7 million.

Net interest income increased 3% to $43.4 million and expenses rose 22.2% to $68.9 million. The primary drivers of increased expenses for 2012 included the salary and benefit costs that I mentioned, and some timing differences of cash payments and accruals related to advertising initiatives. The resulting pre-tax net income increased 5% to $30.8 million when compared to 2011 and the pre-tax profit margin for this segment was $28.2 million for 2012.

Finally, our fourth segment, The Bank in the fourth quarter had total noninterest income that was unchanged at $47.8 million. Net interest income for this segment rose slightly from $68.8 million in the fourth quarter of 2011 to $68.6 million this quarter, and noninterest expense increased 4.6% to $100.9 million compared to a year ago.

Net income before tax was $13.8 million for the quarter compared to $18 million a year ago, a decrease of 23.3%, and the pre-tax profit margin for the Bank was 11.9% for the quarter.

For the full year, noninterest income for the Bank increased 5.3% to $216.7 million. Net interest income increased less than 1% to $275.2 million and expenses rose $1.3 million to $383 million. The resulting pre-tax net income increased 11.6% to $100.7 million when compared to 2011, and the Bank's pre-tax profit margin for 2012 was 20.5%.

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

Thanks, Mike, and good morning everyone. As Mariner mentioned earlier, fees represented nearly 58% of revenue this quarter. This gives us a strong advantage in an industry where the median level of fee income to total revenue was 17.8% in the third quarter according to SNL Financial.

To provide additional context to our results, I'd like to discuss the primary drivers of our fee income and highlight some of the development in each of our operating segments. Let me first begin with Institutional Investment Management, which is comprised of Scout Investments, [their equity] and fixed income mutual funds, and separately managed investment accounts.

As we have noted before, Scout is a leading national asset manager supporting multiple distribution channels with high-quality investment solutions. Revenue in this segment is driven by average mutual fund and separately managed account assets, net flows and equity and fixed income market performance.

To add some context, the S&P 500 decreased 0.4% and the MSCI EAFE increased 6.6% during the fourth quarter. For the full-year 2012, S&P 500 increased 16% and the MSCI EAFE increased by 17.9%.

Positive financial markets, along with strong performance and net flows, combined to contribute to a solid year for Scout. At year-end, assets under management stood at $23.5 billion, an increase of 19.6% when compared to year-end 2011. Assets in Scout mutual funds closed the period at $11.3 billion.

Scout's fixed income separately managed accounts totaled $11.4 billion and Scout equity separately managed accounts totaled $925 million in assets under management. That level of assets under management was as of December 31, and we are pleased with the growth that Scout posted in 2012.

You may have seen Scout's recent news release that assets under management has reached a new milestone. Scout recently received its largest-ever equity mandate from a large insurance company to sub-advise two MidCap accounts. Those accounts funded this month in excess of $1 billion, and when combined with inflows and performance, it pushed our assets over the $25 billion mark.

I'd like to congratulate the entire Scout team on a great 2012 and a strong start to 2013.

As you know, we look at our flows separated by equity and fixed income across all of Scout's products, including the Scout Funds and our separately managed accounts. In the fourth quarter, Scout equity products posted $119.8 million in net flows. The Scout equity mutual funds added a $40.8 million with positive flows of $72 million in the Scout International Fund.

Scout's separately managed equity accounts had net flows of $78.9 million for the fourth quarter, also led by our international strategy. The improvement in the equity markets during the quarter positively impacted Scout's equity assets under management by $606 million.

Scout's fixed income products experienced net flows of $204.1 million during the fourth quarter. The Scout fixed income funds had net inflows of [$116 million], led by the Scout Unconstrained Bond Fund. Scout fixed income separately managed accounts experienced $88.1 million in net inflows.

Market action had a net positive impact of $2.4 million on assets in our fixed income funds and separately managed accounts during the quarter.

For the year, Scout equity products posted $705.7 million in net flows. The improvement in the equity markets during the year positively impacted Scout's equity assets under management by [$1.8 billion]. Scout's fixed income products experience net inflows of $564.6 million for 2012. Market action here had a net positive impact of $832.6 million on our fixed income funds and fixed income separately managed accounts during 2012.

Year to date, Scout Investments overall has achieved $1.3 billion in net flows for an organic growth rate of 6.5%. Looking just at the Scout Funds, the net flow rate for 2010 was 10%.

Scout has received many accolades during 2012, including national recognition from leading rating organizations and financial publications which have helped to increase investor awareness about Scout. In addition, the fixed income team at Reams Asset Management, a division of Scout Investments, was nominated for Morningstar's 2012 US Fixed Income Fund Manager of the Year.

Our Asset Servicing segment is comprised of UMB Fund Services. The primary drivers of revenue in this segment are new business, transaction volumes in our clients' funds and accounts, and overall asset valuations. Our fees are based on a variety of factors depending on client agreements (technical difficulty) basis points on assets administered, transaction fees or per account fees.

Asset Servicing ended the quarter with $156 billion in assets under administration compared to $150 billion at the end of September and $206.4 billion in the fourth quarter of 2011. New relationships as well as innovative products, such as our Multiple Series Trusts, contributed to the year-over-year increase in net income that Mike mentioned earlier in the call.

In our Payment Solutions segment, there are a number of important business drivers, including overall credit and debit card purchase volume and the resulting card interchange. HSA deposits, FSA and HSA accounts, and ACH wire and check transaction volumes drive this business.

We group card purchase volume into four major categories -- commercial credit, consumer credit, consumer debit and healthcare debit. For the fourth quarter, purchase volume across our suite of interchange-generating card products increased 8.4% to $1.4 billion when compared to the fourth quarter of 2011. For the full year 2012, card purchases totaled $6 billion, an increase of 11.6% compared to 2011.

For the quarter, interchange revenue was $15.7 million, an increase of 14.9% from a year ago. A strong performance given that the Durbin Amendment became effective in October of 2011. For the full-year 2012, interchange revenue was $61.9 million, an increase of 3.4% compared to 2011.

Spending by our commercial credit card customers increased 12.4% during the fourth quarter and 12.9% for the full year when compared to the same period in 2011. Purchase volume in this area has grown consistently, and commercial credit cards provide the largest portion of our interchange revenue, representing more than 45% of interchange both for the fourth quarter and for the year. We continue to develop new relationships, build pipeline strength and look at innovative products and technology in the payment space.

As Mike mentioned, in the fourth quarter, UMB assumed broker-dealer payment processing business from First Data Resources. This business provides check and ACH processing services for a variety of brokerage firms and other financial institutions. By adding these clients to UMB's existing institutional cash management business, we are able to grow a core competency and extend UMB's outstanding service to a new set of clients.

Moving to UMB Healthcare Services, deposits in our custody accounts stood at $400 million at quarter end, an increase of 33.9% compared to the fourth quarter of 2011. The total number of flexible spending arrangements and health savings accounts surpassed $3 million for the first time, representing a 27% increase from just one year ago.

We had another strong quarter in the business with purchase volumes of $421 million, an increase of 20.4% over the same period last year. Interchange revenue from healthcare card purchases increased 25.7% over last year to $1.8 million. Healthcare Services continues to be a reliable, strategic and low-cost source of deposits in a growing source of debit card interchange for us.

As Mariner mentioned earlier, UMB is known for strong credit quality. And the quality of our card portfolio is certainly no exception. Credit card quality remains superior to industry averages and has improved over the past several quarters, with delinquency rates dropping to 1.5% from 1.8% a year ago.

Total credit card charge-offs were 2.2% of card balances for the fourth quarter versus 2.7% in the fourth quarter of 2011. According to Fitch Ratings services, third quarter 2012 industry credit card charge-offs averaged 4.6%.

The final segment I'll cover today is our Bank, represented by our commercial banking, consumer banking, and asset management businesses. Mariner covered of the highlights of our commercial banking business and the very strong loan growth there. In consumer banking we reported an increase of 7.7% in home-equity line of credit balances, which now stand at $574 million. Since 2008, the beginning of the economic crisis, home-equity line commitments have increased nearly 60% and outstanding balances have risen by 50%.

Portfolio utilization was approximately 47% at year end. They HELOC delinquency rate was 0.22% in the fourth quarter compared to an industry average of 3% at the end of the third quarter.

Assets under management for individuals and institutions stood at $9.6 billion at December 31, an increase of 15.5% from a year ago. Comprising the $9.6 billion is $6.4 billion in assets under management within our Investment and Wealth Management Group, and $3.2 billion in assets managed by Prairie Capital Management.

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

As we end the call today, I'd like to share a little of what we're hearing from our customers. In general, our commercial customers are experiencing modest growth and limited acquisition plans. Although certain industries such as energy, healthcare, and transportation continue to expand capital spending, manufacturing and service sectors seem more cautious pending final determination of the ongoing fiscal matters in Washington and the new healthcare laws. Many are still taking a wait-and-see approach.

Unemployment rates in our larger markets continue to improve and most areas are at early 2009 levels. Home prices have increased in several of our markets, specifically in Arizona where prices are 20% higher than a year ago, and in Colorado, which has seen an 8% increase in prices.

Despite the drought, the agricultural economy continues to be strong. Many of our customers are involved in production agriculture and they are reporting no substantial increase in operating costs in most categories. We continue to have a strong commercial loan pipeline going into the first quarter and are solidly focused on loan growth.

2013 marks our 100th anniversary. We look forward to celebrating this milestone on April 25, when we will officially open the trading day on the NASDAQ. Please save the date to join us as we will be hosting an investor day in New York to share with you all our vision for our Company. Watch for more details soon.

We appreciate your interest in UMB and hope that you find value in listening to our quarterly conference call. With that I'll turn it back to the operator, who will open the line for your questions. Happy New Year and thanks for being with us.

(Operator Instructions). Chris McGratty, KBW.

This is John Barber filling in for Chris. You know, in your prepared remarks, you indicated the margins would likely be under pressure. I was just wondering, given the strong loan growth you've had over the last few quarters, if you think you'll be able to grow NII in 2013.

We continue to feel the pressure. I don't see that pressure alleviating because of loan growth. We will certainly be focused on loan growth, but you've got to run three times as hard in this environment with interest rates being where they are.

Okay.

John, this is Mike. I would say clearly our strategy is to replace the growth you've seen in the investment portfolio with loans that obviously have a higher yield. I think the thing to watch would be the growth on the liabilities side, will that outpace our ability to do more loans.

Okay thanks. And excluding the $4 million charge this quarter, is this a good run rate for expenses going forward?

Yes, so there is a noisy quarter as it relates to noninterest expense. Let me kind of go through a couple of items I think you should be aware of. As we disclosed, the $4.2 million for earnout liability, there is also $0.5 million in additional profit-sharing that we took as a result of the record year and full-year earnings that we had.

There is also $1.3 million related to the First Data Resources that both Peter and I talked about. That's the impact of having that from November through December. It's not a full quarter. And then there were some other purchases of computer equipment in the fourth quarter. So if you combine all that, there is about $6.8 million of those types of items that are built into the fourth quarter expense base.

Great. Thanks for the detail. Last question I had, the tax rate this quarter, is that a good effective rate for 2013?

Yes, so as you look forward to 2013, one of the benefits that we are going to derive him charter collapse is hopefully an effective lower tax rate. Recently you've seen some increases, if you look back at UMB, on the tax rate. Most of that is the effects of state marginal tax rates going up, and also a lower amount of municipal revenue compared to the total.

But as we look forward with the charter collapse, an increased use of tax credits for various projects that we're involved in, we think the effective tax rate will go down slightly in 2013, probably be somewhere in the neighborhood of about 27.2%.

Thank you.

Matt Olney, Stephens.

Good morning, and first off, thanks for all the details in the prepared remarks; very helpful. Start with Mariner, you mentioned the Dallas LPO office. Can you let us know kind of what types of customers you will be focused on and how that differs from other markets? And secondly, will you be lending directly to energy borrowers in Dallas?

Thanks for the question, Matt. We expect to really expand into Dallas the same way we expanded into any of our other expansion markets, with mostly being commercial borrowers and treasury management clients. Certainly selling any of our other national products that we can.

We do intend to lend into the energy market down there. That's not new for us. We're already in Oklahoma and Colorado, where we lend into those markets, and obviously a very natural slide into the Dallas market with it being highly dominated by energy. But, like any large market, as Dallas is, there's certainly need for all the other services and manufacturing. So there's a pretty broad-based, diversified market down there. We fully intend to penetrate across all sectors.

Okay. Thanks Mariner, that's helpful. And I guess sticking with the bank segment, obviously good loan growth in the fourth quarter. I guess some of your peers, Mariner, have talked about the significant closings of some of these loans prior to year-end, which is obviously good. But the closings were so strong in 4Q 2012, some of your peers talk about a softer pipeline heading into the first quarter.

So, how should we think about your pipeline today versus three months ago?

I would say that it -- while we did also, like other banks, see year-end special borrowings related to anticipated tax changes, we see a similar pipeline really going into the first quarter. It remains as strong as it was in the fourth quarter.

Okay. And then lastly, it looks like the issue with the stock price being down this morning is on the expense side. I know you've been very active in reinvesting within some of your core businesses. So, strategically, do you anticipate a similar reinvestment of your core businesses in the future years? Or are you looking at all the slowdowns, some of your reinvestment in those businesses?

This is Mike. I'll take that one. You know, we are going to constantly invest where we think we can get a proper payout. So I don't think you should think of something as stopping or slowing down materially. It depends on the opportunity.

That said, Scout and the Asset Servicing businesses are in pretty good shape. They're going to need investment, but they're in pretty good shape. The Bank is probably, from a core technology perspective, the place where you'll see the largest investments.

Most of the care and feeding investments are not -- all we've closed, we've closed most of the gaps we have, so it's really keeping things healthy.

It will be more technology, to Mariner's point, than say brick-and-mortar as an example.

But don't underestimate the burdens being imposed upon us with new regulations, both in terms of technology, in terms of people, and in terms of just keeping up with the myriad of regulations that are currently being thrust upon us.

Yes, that's a great point. Most people think about the compliance costs just showing up on the GL line for compliance. It actually shows up in people.

And tech.

Yes.

Okay, thanks guys.

Peyton Green, Sterne, Agee.

I was wondering if you could comment, Mike. I think you mentioned this a little bit later in the prepared remarks. But if you could comment on the expense side, you mentioned that there was over $6 million in lumpiness in the fourth quarter.

Yes, that's --

I heard that $500,000 of profit sharing and $1.3 million related to First Data, but if you could maybe -- I did not catch what the other $4.5 million or so was related to.

The earnout liability.

That's the earnout liability that was in the prepared remarks.

Okay. And I guess, is there -- I mean the personnel expense versus the revenue growth, when does that slow down? When do you get leverage from having a lot of people on the ground in 2011 and 2012 versus the prior years? Or with this margin environment, are we just not going to see it until rates go up?

Peyton, this is Mariner. I think that that is mostly the answer which is, we are really seeing leverage on an independent business unit level. If you look at the investments we've made in those businesses, we are seeing leverage.

The pain you're seeing is, as you mentioned, really at the Bank level with the margin compression and the persistent low interest-rate environment. And it's really hard to outgrow that. And our best ability to do that is to grow loans and to control expenses at the Bank level. And we're doing everything we can, and are very focused on it.

Okay. And then with regard to loan pricing, I think a couple of quarters ago you were hopeful that pricing was starting to stabilize. Yet loan yields continue to come down. How would you expect that trend to carry out into the first half of 2013?

You know, I wish I knew. I wish I could tell you for sure the answer to that, because I have talked about feeling like it had slowed down in the past, and it has continued to come down a bit.

I think part of that -- part of the reason for our anticipation, and then that not coming through, is how long we've been in this interest-rate environment. The longer we stay in, the harder the banks compete for the few limited options we have to put our money to work.

And so, I would like to think that we are coming to the bottom. But, you know, it's still highly competitive and the options we have for putting our money to work outside the loan portfolio are still very limited as an industry. So, there could be more pressure. (multiple speakers)

Okay. And I guess maybe to ask it another way, year-over-year to what -- how much spread compression did you see in the spread over LIBOR in your C&I loans?

On the spread to LIBOR, you know, I would have to go back -- I don't have that handy. It's come down. If I were guessing, I would say we've seen 25 basis points compression there. I'd have to -- we can get -- I don't have that at my fingertips (multiple speakers). I think specifically, we can talk about market contraction across the board, but I think specifically related to LIBOR --.

Yes, I think Mariner's guesstimate there is pretty close, because our net interest margin compression from a year ago was 27 basis points and you said 25. So I think that's probably a pretty good number.

Okay. And then on the charter consolidation, how much in expense savings on the pre-tax side would you hope to get? You know, ignoring the lower effective tax rate?

I think we'll certainly see some at this point. As of January 1 it's just a legal consolidation so, as we sit here today, we're talking basically about compliance and regulatory burden relief.

As we get in towards the end of the year, when we're likely to do the system collapse, you know we'll have more free on that later. We have some estimates of our own but they're probably premature to share with you. There is certainly savings there, but it's probably too early to guesstimate that or estimate that for you.

Okay. So, again, there is no systems attached to do that?

Not at this point. Not at this point.

Okay. And then the First Data business, how is that going to help your scale in that business? And what was the revenue contribution from that given the expenses of about $1.3 million?

Yes, so for the fourth quarter, remember it wasn't a full fourth quarter because that business came over on November 1. We estimate that at about $1.5 million in revenue. And there is a revenue share component of that, that runs for about two years. And so we won't realize the full operating leverage on this business at least until two years, when that revenue share is no longer part of the equation.

Peyton, this is Peter. In terms of the strategic imperative to do it, we picked up some of the largest broker-dealers in the country. I can't give you their names, but trust me, they are three, four, five largest broker-dealers in the country. It was a piece of business FBR had for a long time and it just wasn't strategic to them any longer.

For us it is strategic. We're trying to build scale in the payments business in a whole bunch of different ways, and this gave us immediate scale, or added scale to our already pretty impressive business in providing check and ACH processing.

But the real opportunity here isn't about providing check and ACH processing for these large BDs. It's really about penetrating those households more deeply with our credit card products come with our debit card products, with our new e-play products, and other products that we brought to market recently.

And so we really want -- a lot of these broker-dealers are getting rid of their banks. You know many of them started to go into banking. They realized the regulatory burdens and the capital requirements were something they didn't want to deal with.

And so as a consequence, our strategic positioning really is to be their bank partner, allowing them to provide banking services while we handle all the real administrative and legal and risk and compliance issues related to banking.

Okay great, thank you.

James Ellman, Ascend.

Thanks for taking my question; I actually have two. The first one would be, if you could just comment on the loan loss provision going forward, you've talked to -- the provision has been bleeding down a bit over time. I just note -- what should we expect the trend to be going forward? Will you be maintaining it or will you be allowing it to continue to bleed down?

This is Mariner. Obviously there are many variables that go into that calculation, and so it's hard to answer that directly, because as you are well aware from following the industry, it ties to credit quality roll-off of certain types of quality loan growth, etc.

So, as the year unfolds, it has to do with the size of our portfolio and how the portfolio performs, and what bad credit history rolls off, our history, etc. So, as long as our quality holds up, we're likely to be able to maintain levels, I guess, if that's helpful. But it's really hard to give you any -- anything much more concrete.

All right. Well, with the loan loss reserve to loans having fallen over the course of the year from 145 bips to 130, should we expect to continue to see that continue to drop?

Well, that has dropped mostly because of our quality continues to improve, and loan growth. So, whether it drops much more, hard to tell, but as long as credit quality stays as strong as it has been, we certainly won't have to increase it at higher levels.

All right. So, as you open up new loan production offices in new markets, doesn't that lead to some requirement to maintain the loan loss reserve at a certain level of loans?

I don't believe that's the case. No. It's just about totals.

No, I mean GAAP requires us to measure the inherent loss at a point in time, so you can't necessarily say that because you're making loans, for instance in Texas, that it absolutely has to go up. Reasonably speaking it probably will, because you're going to increase loan balances, but it doesn't necessarily mean it has to go.

It will be because of totals, not because of markets.

Okay, and one quick question on the investment portfolio side. With your taxable securities yielding a little more than 150 basis points right now, in this environment do you think you can maintain that? Or what's the marginal return on your taxable investments going forward?

I'm going to answer that one. This is Mike. I think you should think about that question differently. We think about that more about the percentage of what asset class we have in the investment portfolio. And so maintaining some level of diversification in the portfolio, assuming that there is availability -- and let's be honest, right now the market has limited availability in some of the classes that are out there.

We really like the municipal market. It's been a good class for us. I think you'll continue to see us hold a large portion of our investment portfolio in that, but it wouldn't make sense for us to have that become, say, greater than half of the portfolio or the vast majority of the portfolio, just from a diversification strategy.

So, it isn't so much about the yield from a taxable basis as it is about what we have available in the market and keeping a certain mix in the portfolio.

All right, so with that said, since taxable is going to remain a relatively large percentage of the portfolio, for just diversification purposes, what would you say is the likelihood that we're going to see that 156 basis points move down in the current interest rate environment?

Tell me what prepayments fees will be in the MBS portfolio and I can answer that. The pressure is clearly down, or the bias is down.

Okay, and what sort of tenor do you expect that you would be comfortable with in the taxable portfolio, please?

I'm not going to give you a specific number, because we don't give guidance. But I would say that we do look at the rates and the yields based upon our expectation for the likelihood that those securities will be around for a period of time. And if we don't feel like we're being paid for that risk, then we won't buy that security.

So if that's what you're getting at, that is absolutely part of the equation. But I'm not going to give you guidance on where that threshold is.

And I'm not sure whether you're asking whether we are -- how comfortable we are at holding munis, at what level, if that's part of your question. And we're very comfortable with the municipal market, if that's part of your question.

It's MBS.

Yes, but he's talking about the taxable, nontaxable income.

Okay, thanks so much for the time.

(Operator Instructions). John Rodis, FIG Partners.

Just a quick question on the -- you mentioned I guess so far in January, you won one large mandate. Did you say whether that was on the equity side or fixed income side or --?

It's a MidCap mandate. So it's on the equity side. It's a separately managed account that was funded early in 2013.

Okay. And then, Mike, maybe back -- just a little follow-up again I guess on expenses. The First Data expenses -- where did those expenses primarily go through, the $1.3 million?

I was waiting for that question. The vast majority of First Data expenses are people. We acquired 73 people. And while there may be a little bit of technology, obviously, because you have to run the shop and a little bit of property related expenses, the vast majority is in the personnel cost line.

It's all in the Payment Solutions segment.

Yes.

Okay. Okay. So, maybe just sort of -- I guess because I think the focus for a lot of people, and maybe just said a different way, is really the quarter over quarter increase in salary expense. So if you sort of started it at $83 million where you came in for the quarter, if you back out the profit-sharing of $0.5 million and then you back out the $1.3 million of First Data, that kind of gets you down to $81 million. And that's sort of like an $81 million over $78.8 million in the third quarter. Is that sort of the right way to look at it?

That's the right way to do it. We'll let you do the math but, yes, that's the right way to do it.

Okay, and then I guess just my one additional question would be that, call it, $2 million increase. Is there anything in there that would be nonrecurring? Or should I assume that that's just added costs going forward?

Given the things I've already talked about that were in the fourth quarter, I think there are some parts of that obviously. But in the personnel cost line specifically, no, I think you should think about that as a run rate.

Because I think in the press release you mentioned higher benefits expense. Was there anything sort of elevated this quarter as it relates to benefits?

Profit-sharing?

Well, we talked about the profit-sharing. The other thing is, we are a self-insured insurance program here at UMB, and so our ability to increase our accrual for that self-insured insurance program is really based upon loss rates and claims. And so it can ebb and flow any quarter.

Okay I'm sorry, I didn't mean insurance. Okay, that helps. Okay. Thanks guys. You guys are really putting up some big loan growth. It's nice to see. So thanks.

Peyton Green, Sterne, Agee.

I was just wondering on the timing of the nature of the contingent payments on the acquisitions that you've done, did JD Clarke roll off in 2012?

Yes, so the last payment that we will make for earnouts for JD Clarke will be in April of this year 2013. And I can actually tell you the other ones, too, if I can find the right page. The last payment related to PCM will be in the third quarter of 2015 and the last payment related to Reams -- the payment is actually -- will be calculated in 2015, but will most likely occur in the first quarter of 2016.

Okay, but you'll be done with the accruals by the end of 2015.

Correct. The accrual adjustments, yes.

And I would tell you this much, the way the accounting works on this, as you get closer to the last date that you make the payment, the certainty of those payments should become more certain than they are today.

Okay, and how much of it was cash flow change versus discount rate change?

Well, most of the discount rate was taken in the first quarter of 2012, so, not so much discount rate. More a factor -- now we're really going to get complicated here. I could go really deep into this and then Mariner will give me the hook.

When you are calculating the fair value on a discounted cash flow model, and you're dropping off the last year that you just paid, the remaining years tend to be higher based upon the modeling that was done at the time we purchased. Assuming that these businesses are still doing really well and all three of them are doing very well, especially on a bottom-line basis, we will continue to see larger cash flow projections. And that will drive higher earnout liabilities.

Okay, and I guess maybe my memory is too unclear. But I thought there was a cap to the contingent liabilities. Is there not on the earnout?

No.

No.

No.

Okay. All right.

The good news is they're obviously based on performance. So this is -- bodes well for the future theoretically, right?

Sure.

Yes, we get that it feels bad that there is a hit to the income statement, but that means that obviously the expectation for these businesses is better, and that's good for shareholders.

Okay great. Thank you very much. Appreciate the clarity.

There are no further questions at this time. Please continue.

Thank you very much for your interest in UMB today. This call can be accessed via a replay at our website beginning in about two hours and it will run through February 6. As always, you can contact UMB investor relations with any follow-up questions by calling 816-860-7106. Again, we appreciate your interest and time. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your line.