UMB Financial Corp (UMBF) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the UMB Financial fourth quarter and year-end 2013 financial results conference call. (Operator Instructions). This conference is being recorded today, January 29, 2014. I would now like to turn the conference over to Abby Wendel, Director of Investor Relation. Please go ahead, ma'am.

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

Before we begin, let me remind you that our comments in this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of ‘1995. Such forward-looking statements rely on a number of assumptions concerning future events and are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated in our statements made during this call.

While management of UMB believes our assumptions are reasonable, UMB cautions that material changes in interest rates, the equity markets, general economic conditions as they relate to the Company'’s loan and fee-based customers, competition in the financial services industry, the ability to integrate acquisitions and other risks and uncertainties, which are detailed in our filings with the 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 our supplement forward-looking statements that become untrue because of new information, future events or otherwise. By now, we hope most of you on the call or listening via webcast have had a chance to review our earnings release, which was issued yesterday afternoon. If not, you will find it on ourwebsite at umb.com.

Also we have again published some supporting slides on our website that contains some of the drivers and metrics we will discuss today to make it a bit easier for you to follow along and review afterward. A link to this slides can be found at umb.com in the About UMB section or in the Investor Section under Presentation.

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 and Peter will review key income business drivers. Following that, we will be happy to answer your questions.

Now I will turn the call over to Mariner Kemper.

Thank you, Abby. Welcome, everyone, and thank you for joining us. For the fourth quarter we reported record total revenue of $221.5 million an increase of 16.9%compared to the fourth quarter of 2012. Net income for the quarter was $34.7 millionor $0.77 per diluted share. On a full year basis we achieved record revenue and record net income.

For 2013 net income increased 9.2% to $134 million or $3.20 per diluted share on revenue of $825.1 million. For the quarter non-interest income increased 24.1% to $135.6 million which is a 61.2%of total revenue. For the full year non interest income was $491.8 million an increase of 7.4% and represented nearly 60% of total revenue. Institutional Investment Management 26.4% growth slightly increased in non-interest income.

Also included in the quarters results were $13 million in unrealized gains and market adjustments to Prairie Capital Investments and the $7.6 million expense related to contingent consideration liability for acquisition of Reams Asset Management. The increase in our earn out liabilities in the current quarter is directly correlated to the success of our acquisition. Later in the call Peter will discuss our results by business segment to give you a clearer picture of the components that make up UMB business model.

Getting back to the income statement fourth quarter net interest income increased 7.1% to $85.9 million compared to the fourth quarter 2012, driven primarily by loan growth. On a full year basis net interest income increased 4.1% compared to prior year. Net interest margin remains under pressure, but our near $1 billion average loan growth this year offsets the declining average loan yields as illustrated on our press release.

I am pleased to report a 19.2% average loan increase for the quarter, making this the 15th consecutive quarter of year-over-year loan growth. The past eight of which were double digital percentage increase. For the year average net loans were up $970 millionto $6.2 or 18.5%. I am credible incredible proud of our team accomplishing fantastic loan growth in this environment. As of December 31, as stated net loans were $6.4 billion in 2013 and $5.6 billion in 2012 an increase of 14.8%. Compared to the industry the 1,723 regulated depositories that are reported year-end quarter results of January 27 reported a median increase in loan balances of 3.8%.

Five major points contribute to recent loan growth at UMB. First, not long ago we changed our approach to sales and incentive compensation practices to ensure we acquire and retain the best business development associates. Second, our low overall cost of funds of 0.10% allow us to meet the best pricing in competitive situations for high quality credit. Third, we are in four cities with MSA as big or bigger than Kansas City but have a fraction of the market. We have upgraded our team in most of these regional marketsand even slight market share improvements will have a significant impact on our loan volume at the Company. Fourth, historically UMB would not make a real estate loan to a company that didn't move their entire banking relationship. In more recent periods we will make loans to these companies on their real estate or equipment without requiring a move of the entire relationship, and we are doing this without changing our underwriting standards. And finally, we have had success expanding small businesses and private banking loan channels. Over the past year private wealth management added $76.8 million in new mortgage loans and for the fourth quarter small business increased average loans by $30.4 million compared to the fourth quarter last year.

Credit quality is incredibly important to us, and as I mentioned about our underwriting standards, we have not changed those at all. A strong loan book is something you come to expect from UMB, and with fourth quarter net charge-off of 0.26% of average loans and non performing loans at 0.47% of average loans our reputation for quality credit endures. Looking more closely at loan growth drivers C&I loans were up $427.8 million or 14.9%to $3.3 billion as of December 31, 2013, compared to December 31, 2012. For the same time period commercial real estate loans were up $266.3 million or 18.6 million to $1.7 billion.

Commitments at December 31st had increase ed by nearly 10.5% over the prior year, and our utilization rate was at 29.9% compared to 28.4%at the same point a year ago. Although utilization rates remain behind historically averages. We are seeing growth across our footprint as our lenders bring in new business. Kansas City, St. Louis and Colorado continue to provide the largest dollar volume in new loans and the fastest growing regions are Arizona, St. Louis and Oklahoma. Our Dallas office (Inaudible) $68.1 million in loans as of December 31, 2013. We are looking forward to expanding our Dallas market.

Another topic I have spent a fair amount of time talking about on previous conference calls is expense growth and operating leverage. Although non interest expense increased 7.9% for the fourth quarter and 5.7% for the year, I am please ed to report that expenses in our Bank segment decreased 1.5% for the fourth quarter 2013 compared to the fourth quarter last year. For the full year the reduction was 1.4% compared to 2012. Total expense growth for both the fourth quarter and the year came largely from expense in our non bank segment. The increase is higher than I would have liked as we were aiming for a sub 5% growth rate for the year, but as a growth Company we are comfortable making investments in certain areas that have both attractive margins and momentum. For the full year 2013 expenses included an $11.3 million charge for increasing the contingent consideration liability related to three of our recent acquisitions . $6.9 millionof which were record in the fourth quarter. In 2012 the expenses related to contingent consideration liability was $6.1 million. The net increase to expense related to these acquisition year-over-year was $5.2 million.

As we think about 2014, keep these things in mind, as we have shown you in the past investor presentation we have been successful flowing the rate of expense growth. We remain committed to keeping operating expenses at that level or lower. Because of M&A activity and future investments, we could see additional volatility in both the earn out and income of the Company. The timing of the income and expenses may not always be in the same period. The good news is that these are all strategic investment that part of the Company's future. For the full year 2013 our efficiency ratio was 72.8%, improved slightly from 74% in 2012.

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

Thanks, Mariner, and welcome, everyone. End of period earning assets were $15.7 billion, average earnings assets were $14 billion for the year an increase of 13% compared to 2012 and $14.5 billion for the quarter a 12.7% increase compared to the fourth quarter 2012. The average balance in our securities available for sale investment portfolio for the quarter increased 2.2%,compared to the fourth quarter 2012, but declined 0.2% from the third quarter 2013 denoting a slight change in our earning asset mix. The fourth quarter average yield on securities was 1.97% an increase of 1 basis point from the fourth quarter last year and a decrease of 2 basis points from the third quarter 2013.

As you will see on our slide accompanying the call, activity during the fourth quarter included the roll-off of $308 million in portfolio securities at an average yield of 2.04%. In turn we purchased $355 million of securities at an average yield of 0.64%The average life is now 47.55 months down from 49.39 months last quarter. The average life in the fourth quarter of 2012 was 39.95 months. Duration for the fourth quarter came in at 44.12months shortened from 46.31 months in the third quarter of this year. Our bias is towards shortening and shrinking the investment portfolio and putting more deposit to working loans.

In previous years we have pre bought in the portfolio in anticipation of the seasonal and flex of public fund deposits. Instead during the fourth quarter of 2013 we left more in Fed funds at the Federal Reserve in preparation to fund the exit of a large depositor, which I will discuss in a moment. Over the next three months $398 million of investment with an average yield of 1.71% will cash flow and over the next 12 months average yield of $1.1 billion of investments with an average yield of 19.4% will cash flow. Additionally 66% of our total loan portfolio is expected to reprice or mature in the next 12 months.

Allowance for loan losses is $74.8 million and allowance as a percent of total loans is now 1.15% compared to 1.26% a year ago. Although allowance as a percent of loans has decreased, we believe this level is appropriate given the high quality of our loan portfolio and history of charge-offs. Our coverage ratio is just under 2.5 times the amount ofnon performing loans while the median industry allowance reported for the third quarter would have covered three-quarters of non performing loans according to data on the 400 publicly traded banks reported through S&L. We remain well capitalized with Tier One leverage in total risk based capital ratios of 13.61%, 8.41%, and 14.43% respectively.

Looking at the liability side of the balance sheet, average deposits for the quarter increased 14.6% to $12.7 billion for the fourth quarter compared to the same period last year. Average non interest bearing deposit were 38.6% of our total deposits which puts us in the top 6% of the industry according to S&L Financial. Our high percentage of free funds is a competitive and is reflecting in our low cost of funds. Our overall interest bearing costs of funds was 14 basis points for the fourth quarter versus 23 basis points a year ago. If you factor in free funds, this brings our overall cost of funds down to just 10 basis points for the quarter. For the year those cost were 17 basis points and 11 basis points respectively. The increase in deposits was primarily driven by institutional clients that leave sizable deposits on balance sheet.

The large depositor disclosed last September remains on balance sheet with increased deposit since the announcement. We expect a departure date of these funds is now mid first quarter 2014. Public funds remain a substantial part of our business, typically resulting in seasonal influx of depositsbeginning in the fourth quarter and usually peeking in the first quarter. We haven't seen substantial changes to public funds this year. The level of these deposits is similar to what we have seen in prior years. The short term nature of public fund inflows combined with anticipated large depositor outflow are the primarily reasons for the increase in interest bearing due from banks,from $720. 5 million on December 31, 2012 to $2.1 billion on December 31, 2013.

Reviewing other financial highlights, return on average assets was 0.89%for the quarter up from 0.60% in the fourth quarter 2012. For the full year 2013 return on average assets declined from 0.92% in 2012 to 0.89% in 2013. Return on average equity for the fourth quarter was 9.08%compared to 6.47% a year ago. For the full year return on average was 10.02%.

Turning to the income statement for the fourth quarter 2013, interest income increase 7.1% to $85.9 million compared to the fourth quarter 2012. On a linked quarter basis net interest income was flat. Fourth quarter average earning asset balances increased 12.7%year-over-year, however overall yield was 2.6% down 18 basis points from 2.78%for the fourth quarter 2012.

Compared to the fourth quarter 2012 average net interest margin for the quarter decreased 13 basis points to 2.51% As a reminder net interest margin is negatively impacted this time of year when public fund deposits come on balance sheet due to a more narrow spread. For the year ended December 31, 2013, net interest income was up 4.1% to $333.3 million compared to $320.1 million in 2012. Average net interest margin for the year decreased 20 basis points to 2.55% Provision expense did not change from 2012 to 2013 and was $17.5 million for the year. As we have discussed in several prior quarter conference 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 mention, non-interest income increased 24.1% to $135.6 million comparing favorable $109. 3 million for the fourth quarter of 2012. Two major components drove the improvement. First, we recorded $13 million in unrealized gains in market adjustments to Prairie Capital Investment. The second major component is the increase in trust and securities processing, which increased 22.9%. Our Institutional Investment Management segment lead the increase in this category with revenue growth of 36.8% for the fourth quarter 2013compared to the fourth quarter 2012. Peter will provide additional detail behind the improvement in this section of the call.

For the year total non-interest income increase 7.4% compared to 2012. Details can be found in the year-to-date section of our press release. For the fourth quarter non interest expense increased 7.9% or $12.5 million compared to the fourth quarter 2012 to $170.4 million. Expenses for the fourth quarter included $6.9 million related to the contingent consideration liability for two past acquisitions. As we have mentioned in prior earnings call an increase to expense in the short run indicates that the expected future performance of these acquisitions will be better than what it is today. In other words, we take the expense in the current period in exchange for the long-term positive impact we expect these businesses to generate . Additionally as you saw in the press release, higher salary and wages coupled with an increase in commission and bonuses were the majority of the increase combined with the adjustment.

For the full year 2013 expenses were up 5.7%% compared to 2012. This $33.7 million increase was due primarily to higher salary and benefit expense of $19.8 million. Other non interest expense increased $3.7 million or 11.4% driven largely by a full year adjustment of $11.3 million in contingent liability related to our earn out agreement versus an adjustment of $6.1 million in 2012 as Mariner mentioned in his remarks.

As part of our quarterly earning release process, we continue to include segment information in the slide deck accompanying the press release. We have covered the major items attributable to the changes and financial results for the segment earlier in the call and will be happy to take any specific questions during the Q&A session this morning. With that, I will hand the call over to Peter for more detail regarding the drivers behind the segment results.

Thanks, Mike, and good morning everyone. As Mariner mentioned earlier, non-interest income represented 61.2%of revenue for the quarter in comparison the industry median level of non-interest income to total revenue in the third quarter was 18.6% according to S&L Financial. As a reminder, the income at UMB is generated primarily by our Asset Management, Asset Servicing and payments businesses. To provide additional context to our results, I would like to discuss the primarily drivers of the income and highlight some of the development in each of our operating segments, much of the data I will cover is included in the supporting slides on our website.

Let me begin with Institutional Investment Management, which is comprised of Scout Investments, Equity and Fixed Mutual Funds and separately managed investment accounts. Revenue in this segment are driven by average mutual funds and separately managed account assets, the mix of those assets, net flows and finally equity in fixed income market performance. Solid performance in net flows combine to contribute to another good quarter for Scout. Assets under management at the end of the year were $31.2 billion an increase of 32.4% compared do year-end 2012. Scout fixed income mutual funds closed the year with assets of $2.8 billion and Scout equity mutual funds with of $12.6 billion coincidentally Scout fixed income separate accounts also total $12.6 billion and Scout equity separate accounts totalled $3.2 billion in assets under management.

We look at flows separated by equity and fixed income strategies across all Scout products including the Scout funds and separately managed accounts. Page five of the supporting materials shows the drivers of the change and assets under management including both net flows and market impact. As of December 31, 2013, assets in Scout equity strategies increased by $709. 6 million compared to September 30, 2013. Components of this increase included $106.7 million in net out flows for the Scout equity mutual funds, $13.6 million in net out flows. from Scout separately managed equity accounts and a positive impact of $829.9 million due to the overall increase in equity markets. For the year assets under management and Scout's equity strategies increased $4.5 billion compared to assets under management as of December 31, 2012. Components for the full year include (Inaudible) funds inflows of 468.8 million led by the mid cap and International funds. Net equity separately managed account inflows of $1.7 billion led again by the mid cap strategy, and positive market impact of $2.4 billion

Assets in Scout fixed income strategy increased by $1.1 billion from September 30, 2013 to December 31, 2013. Included in this increase was $799 million increase in net flows in the Scout fixed income mutual funds led once again by the Scout unconstrained bond fund, $253.2 million in net flows in to Scout's fixed income separately managed accounts and a net positive market impact of $86.8 million across all of our fixed income products during the quarter.

For the year assets in Scout's fixed income strategy increased $3.1 billion compared to assets under management at December 31, 2012. Components driving the increases include $1.9 billion in fixed income mutual fund net flows,$1.3 billion in fixed income separately managed account net inflows and negative market impact of $58.7 million for the full year.

Part of our strategy for Scout is to have a diversified product mix. As of December 31, 2013, six of our strategies had more than $2 billion in AUM contrasted with only four strategies that had at least $2 billion in AUM at December 31, 2012. Our Asset Servicing segment comprised of UMB Fund Services ended the year with $191 billion in total assets under administration, an increase of 22.4% compared to $156 billion a year ago. Non interest income in our Asset Servicing segment is based on a variety of factors depending on client agreement including basis points on assets administered, transaction fees or (Inaudible) account fees. Drivers include new business, growth in the number of funds and shareholders we service, transaction volumes and our clients funds in their accounts and overall asset valuation. Page 10 of the supporting material shows metrics for some of our various services within UMB Fund Services. In Fund Accounting and Administration 40 new funds were added over the past year, and assets under administration stood at $63 billion at quarter end an increase of nearly 42.9% compared to the same quarter a year ago.

Fourth quarter non-interest income increased 12% compared to the fourth quarter of 2012 and increased 6.7% on a full year basis. Pre tax profit margins for the year improved to 12.4% from 11.2% in 2012. As a reminder the final earn out payment associated with our acquisition of JD Clark & Company occurred in April 2013.

In our Payment Solution 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. We grew card purchase volume into four major categories, commercial credit, consumer credit, consumer debit, and healthcare debit.

For the third quarter, purchase volume across our suite of interchange generating card products increased 18.4% to $1.6 billion when compared to the fourth quarter of 2012. For the full year, card purchase volume totaled $6.8 billion an increase of 16.8% compared to 2012. For the quarter, interchange revenue was $15.9 million an increase of 1.6% compared to the fourth quarter last year. For the full year 2013, interchange revenue was $66 million an increase of 6.6% compared to 2012.

Commercial credit card purchase volume continue to grow increasing 5.1% for the fourth quarter when compared to a year ago. Spending our by our commercial credit card clients represented 18.6% of total card spending for the quarter and continues to provide the largest portion of our interchange revenue representing 45.2% of our interchange dollars both for the quarter and for the year.

Moving on to healthcare services, customer deposits and assets in our custody accounts stood at $642.4 million at year end, an increase of 49.2% compared to 2012. The number of flexible spending arrangements in health savings accounts surpassed $4 million for the very first time. Representing a 32.7% increase from a year ago. We had another strong quarter in this area with purchase volume of $649.2 million in the quarter, an increase of 54% over the same period last year. For the year purchase volume in our healthcare business increased 41.7% compared to 2012 and represented 43.6%of total card purchase volume for the year.

Interchange revenue from healthcare card purchases in the fourth quarter was 19.3% greater than interchange in the fourth quarter 2012, increasing from $1.8 million to $2.1 million. For the year it increased 32.8% to $10.3 million. Healthcare services continues to be a reliable, strategic, and low cost source of deposits and a growing source of revenue from several streams, account transaction fees, card interchange, net interest margin and investment management fees.

The final segment I will cover today is our Bank represented by our commercial banking, consumer banking, and private wealth and institutional asset management group. Mariner covered our commercial banking highlights and the very strong loan growth there. Home equity lines and credit balances decreased 0.5% to $551.9 million when compared to December 2012. Since 2009 home equity commitments have increased 39.2% in outstanding balance by 28.5%. Portfolio utilization was 45.4%at year-end.

Assets under management, and Prairie Capital Management, private wealth management and institutional asset management stood at $10.2 billion at December 31, an increase of 16% from a year ago. Comprising the $10.2 billion is $7.3 billion in assets under management within private wealth and institutional assets management and $2.9 billion in assets managed by Prairie Capital Management. Our private banking team exceeded $325 million in average loans for the fourth quarter a 36% increase compared to the fourth quarter of last year. We are very pleased with this year-over-year performance.

With that, I will conclude our prepared remarks and turn it over to the call operator, who will open up the line for your questions.

Thank you. (Operator Instructions). Our first question is from the line of Herman Chan with Wells Fargo Securities. Please go ahead.

Thanks. Realizing the bank continues to invest in the fee income components, can you talk about the general expense trajectory as we head into 2014? Should we expect the bank to aim for another 5% expense growth ?

This is Mariner. Thanks for the question. As we have done in the past, I hope you have had a chance to look at our Investor presentation from the past we have a slide that has detailed what we have been able to do in over past few years in reducing the rate of expense growth and from 2011 to 2012 we brought that down to 4.9%. And it is our intention, it is our plan to continue to keep our core expenses at that level or better as we look forward.

Understood. And can you give some color on the loan growth front in the quarter? From a period end stand point it looks like commercial loan growth was pretty strong. What were some of the offsets as you look into the fourth quarter and the period balances?

What happened in the fourth quarter with our loan growth really was simple, a lot of the expected pipeline growth from the fourth quarter moved into the first quarter first quarter, so we did have some of what was expected to close in the fourth quarter has moved into the first quarter. What I can tell you about the first quarter is the pipeline remains as strong as we said the fourth quarter was supposed to be. So we expect a descent pipeline in the first quarter.

Understood. Thank you very much.

Our next question is from Chris McGratty with KBW. Please go ahead.

In your prepared remarks I'm wondering if you can offer a little more color on the expenses. If we adjust for the $7 million earn out it look s like the fourth quarter expenses were $163 million, $164 million. Understanding that there were a lot of performance that were achieved and paid, but the question is the expense level that the street was looking for this came in quite a bit higher. Can you help us at all , Mike? I know you do not give guidance, but I think we would all appreciate a little bit of color where the expenses may go over the next few quarters.

Once you back out the almost $7 million adjustments for the earn outs, you have to keep your eyes on two other things, it is going to be salary and benefits, and a lot of the compensation expense increase related to the performance of fee income businesses increase, so you are going to have an increase there as well. Also keep your eyes on processing fees. As we continue to add more business, we are going to pay additional fees to third party processors. And those two alone are the places where you are probably going to see the most movement, and you did see that in the fourth quarter.

Okay. Aside from these line items, should we expect more of a migration back to the low the 150s, the mid 150s as we saw last quarter, or should we be assuming that the performance continues and this level of expenses will remain?

I'm apologize to do this to you, but I would point to the answer I gave Herman, which is we are shooting for the kind of expense growth without adjustments of what we were doing from 2011 to 2012.

Okay.

(Inaudible) that is growth, right. We are not going to be bringing down our expenses from some previous periods. We are growth Company, and you are going to see expense growth.

Okay. And then one for you, Mike. I think in the K or the Q you talk about the proportion of securities that are pledged, I think it is around 70%. Can you elaborate a little bit more on the impact for your margin in a different rate scenario or how we should be thinking about this dynamic?

I'm not sure I understand the question correctly. Is the question more around whether we have enough pledgeable securities to continue to bring on those kinds of deposit or is it something else? I'm not sure I understand it.

I guess from that perspective you have a reasonably low securities yield and a 250 margin, I'm wondering if the ball under the water is going to spring from the margin perspective, if you will, you will get the full benefit when rates go up?.

Now I understand what I think you are getting at. Two things to consider when you look at the margin in the fourth quarter, and this will be true probably a little lesser extent in the first quarter of 2014, it is negatively impacted, and we are talking about just margin here not net interest income, because of the thin spread we have for all those public fund deposits. That is not an on going run rate if you will. Those people familiar with our Company know that they have to account for that in the fourth quarter and the first quarter. So that is one issue. The second issue is as talked about in my prepared remarks specifically we do have a bias towards at least if we can't shrink the portfolio, we are certainly trying to do that with loans, but if we could not do that we are certainly shortening the duration. That comes with a cost and that cost shows up in the yield on the reinvestment that we are making each month in the investment portfolio. That is something we have been talking about doing for quite some time. It is not new.

I might add on to your expense question too that it is important for investors to understand we have introduce volatility into our income statement with the investments we have made in Prairie Capital as well as the other acquisitions we have made. And those investments are strategic and on going, and we will likely introduce additional volatility in the future, so keep that in mind.

Okay, great. Just one last one, the large depositor, I think I may have missed it in your prepared, remarks. The large deposit relationship that was supposed to exit the bank at the end of the year did that fully occur ?

No. It is now expected to occur sometime in the middle of the first quarter of this year.

And that is $1 billion, right ?

Plus, $1 billion plus.

Okay. And the thought on replacing the funds is still grow other source of interest bearing deposits and potentially some borrowing?

I doubt that we would probably be in the borrowing group, but is probably going to be mostly attributable to growth in efforts that we have to replace it.

We are in the deposit generating team. We pick up deposit all across our corporation, and that is pretty much the strategy.

All right. Thanks a lot.

Our next question is from John Rodis with FIG Partners. Please go ahead.

Good morning, guys.

Good morning, John.

Quick question maybe for you, Mariner, just back to loan growth or the fact that loans were sort of flat linked quarter. I know you talked about some carry over from the fourth quarter into the first quarter. Can you maybe talk a little bit about the nature of the pay downs and maturities during the quarter?

Sure. We had a couple of transactions take place in the fourth quarter of a couple of our larger borrowers that sold and went away, typical stuff that happens now and again. We just happened to have a couple of them in the fourth quarter.

Okay. The gains you had, the $13 million or so in gains you had, from Prairie Capital Management, I noticed you said they were unrealized gains. Do you expect to realize them at some point, or what is the distinction there? What are your thoughts ?

Obviously in this kind of investment when we are serving as the general partner on a fund at some point these things have an end date, so yes we do expect to at some point in the future realize cash into the Company. Keep in mind as we said these are unrealized and they are not cash. At some point --

But we do not control that.

That is correct, we do not.

Unknown data and unknown value in the future.

And it could move the other direction, so to be fair the adjustments this time are up based upon the valuation estimates, but the valuation estimate in future periods could be defer.

And we do not control that event either.

Correct.

Okay. Fair enough. And I hate to do this again, but back to the expenses the salary line item, just to get specific on salaries, were up $5 million linked quarter. Given Mariner what you are saying of 3% to 5% growth going forward, is that $88 million to $89 million a new run rate to use going forward given the level of earn out and so forth you talked about with the recent acquisitions?

I'm going to refer you to, we have a pretty good page hopefully this answer question, Page four in the slide deck. It is actually not in our slide deck. Sorry. Can you ask the question again ?

I was trying to drill down again on expenses, and if you looked at the linked quarter increase on salary expense it went from roughly $84 million to call it $89 million a linked quarter basis. So is that $89 million a new run rate going forward, or are there some year end incentive comp and so forth that would cause that to drop back down in the first quarter ?

As Mike said earlier incentive comp is an on going variable based on the success of mostly our non bank businesses.

Okay.

So the extent those continue to be successful, we will continue to have elevated incentive comp.

Okay. So on expenses, back to a prior question, is the right way to look at it is to take the 170 back out the $6 million or $7 million adjustments for the earn out annualize that and assume you are going to grow low single digits off of that? Am I hearing you correctly?

We are going to have to let you do that without because we don't give guidance, that is about all we can do for you.

The only thing I would add is you should look at the seasonality of the quarters that is one thing, because obviously as the year goes on you get a better picture for the performance of incentive in particular in fee based businesses. So you are on the right track with what we provide to you.

The fourth quarter is usually a little higher for us any way. There are some elevated expenses in the fourth quarter of every year, so if you look in prior periods, you will see that also.

Okay. That is fair enough. And, Mariner, just would like to hear your thoughts in the M&A environment. You sort of give your update every quarter, so I'd like to hear your thoughts there.

Sure. So it is not a lot new to what I have said in the previous period is we have re-engaged our M&A group, we are active in both looking for bank deals and then non bank deals in our main area. All I can say is we would like to find a deal that matches with the kind of Company we are and gives us scale on the bank side, we penetrate further, deeper into our major markets. And the other opportunities outside of the bank we don't have any product gaps so they would really be bolt on or scaling type opportunities. So nothing to report. We are active and we very much would like to do a deal, do a transaction.

Fair enough. Thanks, guys.

Our next question is from question Peyton Green with Sterne, Agee. Please go ahead.

Good morning. I was wondering if you could talk a little bit about the payments business profitability and maybe what are credit charge-offs in the fourth quarter versus a year ago and what were they for 2013 versus 2012? The overall charge-off rates seems quite good, and I'm just wondering why there would be more provision in that business?

It is an allocation. It is something we have been looking at recently. It is based on, believe it or not, more balances than actually the history of charge-offs, but yes it is something we are looking at. Keep in mind, even if we were to change the allocation of provision to the card business, it is likely that we may allocate that back in to commercial side. So I don't know if it would change the provision for the Company in total.

If you look at slide 11, which is maybe where you are looking, Peyton, you will see the allocation increase from $8.2 million to $12.3 million for the card segment for the full year of last year, and Mike is right. We have been taking a look at that and making sure that allocation of the card segment is right. Our charge off continue to look great, superior to industry averages for sure. I think we were 45 basis points --26 basis points, and we don't see any concerns with that portfolio. It is still clean as a whistle. The real answer is there won't be any change to the total because it is an allocation within the mix.

I guess just looking at the pre tax margin of 12% down from 25%, it just seems like the banks profitability is overstated versus the Payment Solution's business. I guess I'm thinking it about it wrong. But credit cards were flat year-over-year, even commitments were only up slightly. I don't know. And maybe on the interchange --

(Inaudible).

Okay. And then on the interchange for the volume to be up like it was the non interest income was roughly flat, what is the nature because all else equal 5% increase in commercial card should have generated a like increase in the interchange and it doesn't seem like it is. And certainly the other side the, if FSA, HSA swipe fees don't seem to be adding much to the pie even though the volume is going up. Can you talk a little about that ?

Sure. If you are talking about mix, then you are exactly correct. The highest interchange we have for any interchange producing product is commercial credit, so growth there is a very positive contributor. The lowest we have is healthcare, and as you know we have arrangements with a lot of Institutional partners, and that holds down the debt interchange and that has been running in the mid 30 basis points versus about 150 basis points for the commercial card interchange. We are seeing nice growth in both, but when you look at interchange dollars certainly the overweight and interchange being generated by healthcare is suppressing the overall growth in interchange dollars.

But the volume is the answer, right. That is the short term problem because the success we are having with healthcare and (Inaudible) healthcare should outpace over time in dollar volumes the margin compression there.

(Inaudible) to scale business with 20% of the GDP of the United States in the healthcare space.

And we are having very good success.

But it will be a lower interchange revenue generating line item, healthcare will be.

How many years will you stomach a 16% to 25% increase in the expense side versus a nominal increase in the revenue side? Maybe that is a better way to ask the question.

Are you talking about Payments generally or healthcare specifically?

Just the Payment Solution business. If I look year-over-year revenue was up about 2% in the fourth quarter, it was up maybe 6% to 7% year-over-year, but expenses were up 16% and 25%. I'm just wondering what is the outlook for the next couple of years? Was there a large investment stomached in 2013 that won't be as noticeable in 2014 and 2015?

You have hit it is investment.

We had a number of things going on. One you may recall we reported in prior years that we acquired the book of business from first data resources. That added a significant amount of expenses starting in 2013 as we acquired that book in December 2012. That is one element of it, and we have corresponding revenues associated with that obviously. Secondly, we got a little expense and we did a reduction in force, a little bit in the later part of 2013 to try to right size some of the expenses. Third, you talked a little bit about difference in interchange between healthcare and our commercial and consumer credit card. Fourth, we haven't been doing portfolio acquisition in the last three years. We did some very successful portfolio acquisitions in the prior period. So all taken together you are right we won't tolerate a 25% expense growth which we experience from 2012 to 2013 in non-interest expenses. You noticed the three months was only 16%, and there is someseverance cost in there and such. So we are beginning to right size the expense load for the revenue that we expect from this area.

Yes, and it wasn't actually a reduction in force. We are cleaning up some areas of the organization and bringing people together. The force ended up being smaller, but we didn't do a reduction in force actually.

Okay. And then on the assets servicing business, I presume $1.1 billion in deposits that will roll out in the first quarter follow the net interest income will flow through that asset servicing business; is that right?

That is correct. That is correct. You net interest income move from $1.8 million in 2012 to $2.4 million roughly in 2013 and some of that will move on in 2014.

Okay. That business had -- would you expect the profit margin on the asset servicing business to improve? Certainly you had a very strong assets under administration improvement year-over-year. Should we expect more lift in the pre tax margin in 2014?

The pre tax manager end up at 12% as noted in 2013 and based upon sales activity and sales growth we are seeing yes I do think the margin should improve in 2014.

Okay. In terms of the bond portfolio buying $355 million worth of bonds part of this -- forget the expense, you are growing, you have had good revenue growth over the years, but some of it is inefficient allocation or generation of revenue I guess. Buying bonds that yield 64 basis points in a time period where rates have effectively increased 100 basis points to 130 basis points, I don't know, that just doesn't seem to add up with adding a lot of variable rates loans with the margin too. Couldn't you have bought assets back product that yielded 1 to 1.5? How long will you buy stuff that yields 50 or 65 basis points?

Peyton, this is one of your favoritequestions.

It is your best opportunity to earn more money short run so.

Part of the answer is there is a whole lot of moving parts. It is not as simple as that, but, Mike, do you want take it?

There is a couple of things in there. You talked about adding variable loans actually if you look back to early 2013, 75% of the portfolio price in 12 months we are now down to 66%. So we are putting actually more duration risk, if you will, into the loan book not less.

Intentionally.

Intentionally.

We talked about that (Inaudible) in the last quarter of intentions to remix on the loan side up from variable and put some fixed rates loans on and we have had some success in doing that.

The second part is obviously we are concerned whether you look at average life or duration is your measurement of how much we would play in a rising rate environment. Now let's be clear about what is a rising rate environment. The reference you made to 100 basis points up is not the cash flows we are buying. They are 10 year and out cash flows. We are talking about five years and in, maybe even three years and in and that is where the yield is. So if we are going to continue to run a portfolio with an average life that we talked about going down not up, we are obviously going to be buying lower yields, lower average life securities for some period of time, not forever.

You have to pay attention, Peyton, obviously to potential unrealized losses, right, in the future and future periods and that has a lot to do with our buying also to make sure we don't put undue risk in the organization.

Mariner has made a great point that our sensitivity to market risk is something we watch very closely and obviously unrealized losses and what that can do to your tangible capital is something we are considering in those investment decisions as well.

Right. So there is a lot of moving parts, a lot of things to consider. We would love to be able (Inaudible) at a higher yield ourself, but if you are trying to keep within five years as Mike said your options are very limited.

Okay. From a production capacity, Mariner, on the loan growth side, you mentioned that the pipeline really slipped from what you thought funded in the fourth quarter to will happened in the quarter. Do you feel like you are constrained at all, or do you feel like the capacity is still really good?

I have been able to give you a look over the last year or so on a quarterly basis as to what the pipeline looks like and going into the first quarter we feel as good about the coming quarter as we did during last year's outlook if that makes sense.

So you feel really good about the volume. Naturally the growth rate will slow because you have a bigger denominator, but you still very feel really good about the volume?

It is a descent outlook in the first quarter.

Okay. And then maybe the notion of trying to drive operating leverage and get paid back for all the investments you have made, what is an acceptable decline in the expense growth rate? If we just take reported numbers and assume it all evens out over time the expense growth rate slowed from about 6.5% down to about 5.7%. When would you expect a bigger pay off or more utilization of productive capacity versus what you have to pay ?

We are aiming for I'm assuming a lot of movement doesn't take place around the edges. We are aiming to do what we did from 2011 to 2012 or there abouts. And you can refer back to Investor Day that is a 4.9% number. And again I'm not giving guidance on that that is a desired outcome and range around that. Does that make sense?So it would be a range.

My only thing to add to that would be to make sure you are accounting for the fact that earn out liabilities have variability up or down. Obviously as we have talked about an increase in those liabilities, i.e. an increase in the current year expense is an indicator of the strength we expect to get from the cash flow of those investments in future periods. I know it doesn't feel right to take the expense up front, but that is in fact what it means. So don't discount that. And that number can be significant from time to time.

And our next question is from Tyler Stafford from Stephens. Please go ahead.

Good morning, guys.

Good morning.

Just a follow up question on the $13 million unrealized gain from Prairie, in the press release you pointed out $14.7 million of earnings from (Inaudible) investment. Can you help me understand what that $1.7 million difference is between the $14.7 million and the $13 million from Prairie?

Yes, so the $13 million is specific to one investments. We have considerable more than one investment with Prairie so there is adjustments on all the other things they do as well, obviously big difference in the valuation between the two.

Okay. Do you have an apples to apples comparison of what that would have been in 3Q?

For just the one investment?

I think there was $3.9 million of Prairie related gain and ex that.

You got it, Tyler, that is it. $3.9 million.

Okay, just the $3.9 million. Okay. And then switching over to the (Inaudible) quickly. How far do you think we are from seeing an inflection in the loan yields ?

That is a great question. We do feel like that is starting to moderate and as we mentioned the remixing that is starting to take place and we should start to feel that level out both because I think at a competitive level that is starting to slow and for us in particular remixing should contribute as well.

Okay. Thanks. All my other questions have been answered.

Our next question is from John Rodis with FIG Partners. Please go ahead.

Just a follow up question to Peyton's on the asset servicing business, I know initially you said the one large depositor that was leaving will remain a servicing client is that still the case?

Indeed.

Very much so. They are very happy with us, great relationship.

Indeed.

And then, Mike, to your comment about the higher earn out and taking the expense up front for better future cash flow. I guess those better future cash flows would flow through and trust and securities processing line item is that correct ?

No, we are talking about net interest margin.

No, he is asking where they would flow-through, so we are taking the adjustments and where would in the future period --

You are talking about the --

The earn out.

-- the earn out. Yes, for the most part it would be in that line item, correct. Sorry I misunderstood your question.

Thanks, guys.

And our next question is from the line of Peyton Green. Please go made go ahead.

Yes, just a follow up on the Institutional Investment Management business over time the operating leverage has been quite substantial due to the acquisition Reams acquisition, which has been a great one. I just want to make sure I understand the earn out on that rolls in December of 2015; is that correct ?

Yes.

Okay. And Prairie would roll in July or August of 2015 also ?

Correct.

Okay. So if you had such success on the constrained bond fund but yet there were still fee and expense wavers in place say for 2013 and 2014 but they would roll in 2015 I guess that would significantly effect your outlook for profitability for Reams and the potential earn out; is that the right way to think about it?

Correct, yes.

That is exactly right, yes.

Okay. So there is really a year gap between what you would expect operating leverage to be all else equal in 2015 versus 2014 due to the unconstrained bond fund; is that fair?

Yes, I think that is a good way to think about it.

Absolutely true.

And we do have the (Inaudible) play today.

So when you announced Reams I think the original cash fees was about $45 million and the earn out was estimated about $33 million. What is the earn out estimated at today?

I don't know the number off of the top of my head in total for the future periods. I'm not sure that we have ever made that public honestly, Peyton. We can get back to you. We will look into that and see.

What we have disclosed if you want to (Inaudible) on that one. I think we have been doing that period by period.

This goes back when it was announced. The basic point though is that earn out is no longer $33 million. It is substantially higher than that.

It is going to be, yes. It has performed better than model if that is your question.

It sounds like that is your question. It has performed better than model.

And the earn out from those are cash not stock; is that right?

Correct.

Okay. All right. Good deal. Thanks for clarifying that.

And our next next question is from Chris McGratty with KBW. Go ahead.

Just so I am clear, Mike, on the expenses, apology, the 3% to 5% that, Mariner, you spoke about, that adjusts for the full earn out liability, correct?

That is correct. For the full earn out liability and also I would say for those things that are seasonal in nature that always occur in the fourth quarter. So what are those things? Market and some business development tends to always be higher in the fourth quarter than the previous three. We bought a little bit of equipment in the fourth quarter and had higher expenses of about $1 million as result. So there is always some seasonality in the fourth quarter.

Right. And I didn't use the word 3%.

Thank you.

Thanks, Chris.

And there are no questions at this time. Please continue with any closing statement.

Thank you very much for your interest in UMB. This call can be accessed via replay at our website beginning in about two hours and it will run through February 6. And always you can contact UMB Investor Relations with any follow-up questions by calling 816-860-1685. Again, we appreciate your interest at this time.

Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. You may now disconnect.