UMB Financial Corp (UMBF) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the UMB financial first-quarter 2014 earnings call.

(Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Wednesday, April 23, 2014, at 8:30 AM Central Time. I will now turn the conference over to Abby Wendel, Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our conference call and webcast regarding our first-quarter 2014 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 within the Securities and Exchange Commission may cause actual results to differ materially from those discussed in this call.

UMB has no duty to update such statements and undertakes no obligation to update or supplement forward-looking statements that become untrue because of new information, future events, or otherwise.

By now we hope most of you on the call or listening via webcast have had a chance to review our earnings release that was issued yesterday morning. If not, you will find it on our website at UMBFinancial.com. Also, we have published supporting slides on our website that contain some of the drivers and metrics we will discuss today to make it a bit easier for you to follow along and to review afterwards. A link to the slides can be found at UMBFinancial.com in the About UMB section or the Investors section under News & Events, Presentations.

On the call today are Mariner Kemper, Chairman and Chief Executive Officer; Peter deSilva, President and Chief Operating Officer; Mike Hagedorn, President and Chief Executive Officer of UMB Bank; and Brian Walker, Chief Financial Officer.

The agenda for today's call is as follows. Mariner will provide high-level commentary on our results and Brian will review several details from our financials. Then Mike and Peter will review results from our four business segments. Following that we will be happy to answer your questions.

Now I will turn the call over to Mariner Kemper.

Thank you, Abby. Good morning, everyone, and thank you for joining us today. Since the conference call discusses the first reporting period of the year, I would like to take a moment to remind you that our priorities for 2014 remain the same.

First, we focus on quality through a strong balance sheet, solid credit metrics, low-cost funding, and effective risk management. Our second priority is to deliver profitable, sustainable growth. Third is to maintain diversified revenue streams and, fourth, we continue to focus on capital management.

We remain committed to our proven business model and doing what we believe is right to grow our business. We have proven the Company can perform in all business cycles.

Now let me share with you a few financial highlights from the quarter. As Abby mentioned, you will find the information in our earnings release and in our accompanying slide deck.

Net income was $23.4 million, or $0.52 per diluted share, a decrease of 33% compared to the first quarter of 2013. As you saw in our release, there are four items worth examining to understand the first-quarter net income.

First, we established a $15 million contingency reserve based on the probability we will resolve objections to our calculation of an earnout amount owed to the sellers of Prairie Capital Management and related incentive bonuses calculated. Although our view of the calculation differs, we have established a reserve based on the probability of resolution and because we want to avoid disruption to Prairie Capital's ongoing operations. It is a high-performing business units and it is important to our long-term strategies.

Second, we recognize an adjustment the contingent consideration liability, mainly for Reams Asset Management in the amount of $4.5 million. The good news about this type of expenses, as we have discussed, is that the business is performing better than originally modeled. A year ago at this time we recognized $3.3 million in expense for acquisition earnout adjustments.

Third, we recognized $1.5 million in gains on the sale of securities this quarter compared to $5.9 million in the first quarter of 2013. And, finally, we had an unrealized gain of $2.5 million on Prairie Capital Management investments for the first quarter of 2014. This is another example of the positive returns PCM generates for our customers and shareholders.

Moving on to the drivers for the quarter, total revenue increased 3.9% to $208.4 million. Net interest income was $85.4 million and increased 7.5% from the first quarter of 2013. Non-interest income increased 1.6% to $123 million from $121 million in the first quarter of 2013 and was 59% of total revenue.

Average net interest margin for the quarter decreased 12 basis points to 2.39%, reflective of lower loan yields, a larger Fed account balance, and slightly lower yield on available-for-sale securities portfolio. Return on average assets and return on average equity were 0.58% and 6.18% for the quarter, respectively. Including the $15 million contingency reserve and $4.5 million in expense for the contingent consideration liability for acquisitions, non-interest expense was $172.2 million for the quarter, an increase of 14.5% compared to the first quarter of 2013.

I want to note, however, that despite these unique items, we have been successful and will remain committed to our objective to keep operating expenses within a 5% growth rate. With that being said, it will not be a surprise that our efficiency ratio was 79.67% compared to 73.46% in the first quarter of 2013.

Putting the noise in the quarter aside, I wanted to stress how pleased I am with our ongoing operations. Loan growth for the first quarter was strong. It was our 16th consecutive quarter of loan growth on a year-over-year basis and our ninth quarter of year-over-year double-digit loan growth.

On a linked quarter basis, net loans increased 3.56% or 14.8% annualized. On a year-over-year basis, average loans were up $864.1 million, or 14.9%, and were 50.8% of deposits. Mike will elaborate on loan growth in his comments later in the call.

We were also pleased to see that our loan growth for the first quarter surpassed the industry growth. As of April 21, 2014, the nearly 1,200 regulated financial institutions that announced results reported a median increase in the period loan balances of 4.5% on a year-over-year basis. We attribute some of our success in growing the loan portfolio to diversification of our loan mix, which we have accomplished without sacrificing our underwriting standards.

As proof, loan quality remains outstanding. Net charge-offs as a percent of average loans were 0.23%, of which 55% of the charge-offs related were credit cards. Non-performing loans as a percentage of loans were 0.45%.

Pricing in all loan categories remains competitive. Like us, our competitors are working to add higher-yielding earning assets to their portfolios. For the first quarter, loan yields dropped 24 basis points compared to the first quarter of 2013 and declined 4 basis points on a linked-quarter basis.

Later in the call Brian will provide more detail on our financials and will round out the balance sheet discussion. Mike, in his new role as CEO of the Bank, will talk specifically about the Bank's segment operations. And Peter, in his role as COO of the holding company, who has all the fee-based businesses reporting to him, will talk about institutional investment management, payment solutions, and asset servicing segments.

As I mentioned earlier on the call, we remain optimistic about the business and we are pleased with our operating results, notwithstanding the volatility in earnings related to acquisitions. Some of this volatility will go away once the earnout period ends, but some will continue, such as the unrealized gain from Prairie Capital's activity in the past two quarters.

While it is difficult to model, you should expect it to remain as a component of our results going forward. We will certainly do our best to ensure you understand the factors affecting each situation.

With that, I will turn the call over to our new CFO, Brian Walker, who will highlight a few additional financial results. Brian?

Thanks, Mariner, and welcome, everyone. I am pleased to be with you this morning and look forward to meeting you in the coming months.

Picking up Mariner's discussion on the income statement, there were several moving parts that contributed to the year-over-year increase in non-interest income. First, the main driver was a $9.3 million, or 14.8%, increase in trust and securities processing income.

The contribution from institutional investment management improved by 20.2% to $33.8 million for the first quarter compared to the first quarter of 2013. And this segment's revenue contributed nearly 62% of the overall increase in trust and securities processing.

Looking further down the income statement, two line items created headwinds. The reduction in gains on sales of securities of $4.4 million and lower trading and investment banking revenue, which was down $2.8 million compared to the first quarter of 2013.

Revenue and bank card fees were down slightly year over year, but increased on a linked-quarter basis. Peter will discuss the drivers behind this change later in the call.

On the expense side, employee salaries, wages, and commission expense also contributed to increased non-interest expense. Next to the contingency reserves, salary and benefits was the most significant driver and increased 6.2% for the Company on a year-over-year basis.

Compared to the first quarter of 2013, our average balance sheet grew 11.6% and average earning assets increased 12.4% to $15.4 billion. Provision expense increased $2.5 million compared to the first quarter of 2013.

As management has shared in several prior quarters' calls, there are several components that go into applying the same consistent methodology to calculate provisions. Two of these items are historic losses and portfolio size. As the portfolio grows, the losses are applied to a larger base of loans in the calculation.

In looking at other earning assets, the average balance in our investment portfolio for the quarter was $7 billion, 1.9% higher than the first quarter a year ago. The average yield on securities was 1.98%, an increase of 1 basis point from last quarter and flat compared to the first quarter of 2013.

Slide 9 in the supplemental slide deck includes the detail on the available for sale portion of the investment portfolio, which represents more than 96% of our total securities portfolio. Yield was 1.89%, 2 basis points lower than in the first quarter of 2013. While reinvestment yields have not yet bottomed, the rate of decline has slowed, thereby lessening the impact of margin compression for the quarter as we continue to shorten the portfolio's duration consistent with our strategy to be poised to take advantage of a rising interest rate environment.

Additionally, 67% of our total loan portfolio is expected to reprice, mature, or amortize in the next 12 months and 56% will reprice, mature, or amortize next quarter. As we have discussed, the percentage of loans repriced and maturing have been trending down over the past several quarters as we put on loans with slightly longer terms.

Allowance for loan losses was $75.5 million and allowance as a percentage of total loans is now 1.12% compared to 1.16% a year ago. We believe this level is appropriate given the high quality of our loan portfolio and history of charge-off. Our coverage is more than 2.5 times the amount of non-performing loans, while the median industry allowance reported for the fourth quarter would have covered just over two-thirds of non-performing loans. We remain well capitalized with Tier 1 leverage and total risk-based capital ratios of 13.35%, 8.03%, and 14.14%, respectively.

Looking at the liability side of the balance sheet, average deposits for the quarter compared to the same period last year increased 12.8% to $13.1 billion. Average non-interest-bearing deposits comprised nearly 40% of our total deposits, which puts us in the top 5% 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 15 basis points for the first quarter versus 21 basis points a year ago. If you factor in free funds, this brings the number down to just 10 basis points.

As you know, we have a substantial public funds business that typically results in a seasonal influx of deposits beginning in the fourth quarter and traditionally peaking in the first quarter. The effect was less pronounced this quarter since the balances from the large depositor that was previously disclosed left the balance sheet in late February and early March, although balances for public funds and repos have been running $756 million higher than in the same period a year ago.

Average shareholder equity was $1.5 billion, a 20.7% increase from the same period a year ago. Due to the impact from the capital raise conducted in the third quarter of 2013, additionally total shareholder return over the past 10 years was 201%. For the same period, returns from the S&P 500 and SNL U.S. Bank Index were 103% and negative 6%, respectively.

Now I will turn the call over to Mike, who will review the results of the Bank segment. Mike?

Good morning, everyone. Thank you for joining us for our conference call. I would like to add my congratulations to Brian for his first appearance on our call today. I am happy to talk with you this morning about the Bank segment financials and business drivers, which can be found starting on slide 12 in the supplemental materials.

For the first quarter of 2014 compared to the first quarter of 2013 net interest income increased 5.7% to $71.1 million, driven primarily by rotating from investment securities to higher-yielding loans coupled with loan growth. Provision for first quarter increased $2.1 million in accordance with our consistent methodology, as Brian described. Total non-interest income declined to $47.4 million from $52.7 million, due primarily to the continued headwinds in fixed income trading and the $4.4 million decrease in gains on the sale of securities.

Non-interest expense increased 17.7% to $107.8 million due to the $15 million contingency reserve that Mariner discussed and higher salary and benefits expense. Net income before tax was $8.4 million and the pretax profit margin for the Bank was 7.1%.

Performance in the Bank segment's ongoing operations was strong on several fronts. First, the C&I portfolio increased $303.5 million, or 9.5%, compared to the period ended March 31, 2013. We put on $402.2 million in new commitments for the quarter compared to the same period a year ago and the utilization rate for commercial loans in the quarter was 32.2%, up from 29.8% for the first quarter of 2013.

Second, commercial real estate loans also contributed strongly to overall loan growth with an increase of $267.6 million, or 18.5%, compared to CRE loan balances on March 31, 2013. By diversifying our loan mix, we have been able to partially offset the seasonality inherent in C&I lending without sacrificing loan quality.

Third, in the asset management businesses within the Bank we focus on institutions and high net worth individuals. Assets under management totaled $10.9 billion at the end of the first quarter, an increase of 17.9%. Of the $10.9 billion, $7.7 billion is private wealth plus brokerage assets under management and $3.2 billion is from Prairie Capital Management.

Average private banking loans increased to $341.5 million from $292.5 million at the end of 2013 and average deposits increased to $909.7 million from $850.3 million at the end of 2013. On the institutional side, we have bolstered the corporate trust default workout business, which generated $761,000 in first-quarter revenue, up 163% compared to the first quarter 2013.

Finally, in consumer banking, HELOC balances increased 2.8% year over year to $558.6 million. Our HELOC portfolio continues to perform extremely well with a utilization rate of 44.7% for the first quarter and delinquency rate of 0.17% at quarter end. This compares favorably to the industry average of 2.74% at the end of the fourth quarter 2013.

With that, I will turn the call to Peter to finish up our discussion on fee-based businesses.

Thanks, Mike, and good morning, everyone. For the final part of our call, I will review results from our three primarily fee-based business segments starting with institutional investment management, which is comprised of Scout Investments.

For the first quarter of 2014 versus the same period a year ago, non-interest income was strong at $34.1 million, an increase of 19.4%. Non-interest expense increased at 37.4% to $25.9 million. This includes the $4.2 million adjustment to contingent consideration liabilities for Reams Asset Management.

Reflective of those two components, net income before tax was $8.2 million, a decrease of 15.5%, and the pretax profit margin was 24%. Revenue in this segment is driven by average mutual funds and institutional and other managed account assets, the mix of those assets, net flows, and finally equity and fixed income market performance.

Net inflows to our fixed income strategies and positive fixed income market performance, combined with some net outflows from our equity strategies, provide the context for Scout's results this quarter.

At quarter end, assets under management stood at $32.2 billion, an increase of 24.9% compared to first quarter of 2013. The Scout mutual funds closed the period with assets of $15.5 billion. Scout fixed income, institutional, and other managed accounts totaled $13.4 billion, and Scout equity institutional and other managed accounts totaled $3.3 billion in assets under management.

We look at flows separated by equity and fixed income strategies across all Scout products. Page 18 of your supporting materials shows the drivers of the change in assets under management, both net flows and market impacts. For the quarter, Scout funds flow rate was 2.2%.

As of March 31, 2014, assets under management in Scout equity strategies had decreased by $283.3 million compared to December 31, 2013. Net outflows were primarily driven by the international funds, partially offset by net inflows to the midcap fund. Consistent with our strategy to further product diversification and offer new investment products, on March 28 we launched the Scout Equity Opportunity Fund, whose primary objective is long-term growth in capital. Over the past three years, we have launched six new funds including this most recent offering.

Turning now to fixed income, Scout's fixed income strategy increased assets under management by $1.3 billion from December 31, 2013, to March 31, 2014. The unconstrained bond fund continues to lead the way, capturing the majority of the flows in the fixed income strategies. As you can see from the slide, the fixed income market moved favorably for us, netting a $248.8 million increase in fixed income assets under management.

Also of particular note, Scout received approval for a UCITS structure this quarter. Similar to the US mutual fund structure, UCITS allows Scout to distribute its strategies internationally in a co-mingled product format, mainly in the EU and parts of Asia and South America. The unconstrained bond strategy will be the first product launch under this structure. Expanded international distribution of our strategies is a key component of our goal to grow assets under management.

Next up is the payment solutions segment. For the first quarter of 2014 compared to the first quarter of 2013 net interest income increased 7.3% to $12.4 million. Total non-interest income increased 4.1% to $20.2 million.

Non-interest expense increased 4.5% to $21 million and net income before tax was $9.5 million, an increase of 3.9% from a year ago. And the pretax profit margin for payment solutions was 29.2%.

I would like to spend a minute and walk you through the ways in which this segment contributes to our overall results. There are three business units within the segment: Healthcare Services, our credit and debit card-related activities, and a unit provides Treasury management products for the broker-dealer and mutual fund industry we call institutional banking and investor services or IBIS.

Healthcare Services contributes spread income off the deposits in HSA accounts per account fees and interchange when customers use their healthcare-related debit cards that are attached to their FSA or HSA accounts. The card group is similar in that we earn spread on outstanding credit card balances and we earn an interchange fee on each debit and credit card transaction.

IBIS is a little different. Think of this group as a white label approach for ACH, check, wire services, and other Treasury services for broker-dealers and mutual fund companies. As you can see in the supplemental materials on slide 21, first-quarter purchase volume was $2.1 billion, an increase of 17.1% compared to the same quarter a year ago. Interchange revenue for the first quarter was $16.7 million, up 1% from the first quarter a year ago.

There are a couple of factors that contributed to the lower percentage increase in interchange revenue relative to the increase in purchase volume in the first quarter of this year. First, we are subject to the litigation settlements between US retailers and Visa MasterCard for a 10 basis point reduction over an eight-month period. The first-quarter impact was $692,000.

Second, within healthcare an innovative high-growth, but lower interchange rate product is gaining traction. This product called payor to provider is essentially a single-use virtual credit card. Third, we maintained numerous third-party relationships with our distribution partners with whom we share a portion of the gross interchange revenue.

All that being said, we remain very enthusiastic about this business and its future prospects.

As noted in our press release, HSA deposits increased 31.3% to $751 million. A feature of HSA accounts allows customers to move a portion of their deposit dollars to investment vehicles. When they do, those amounts move off our balance sheet and are considered HSA assets.

For the first quarter of 2014, HSA assets increased 60.5% to $57.1 million. HSA and FSA accounts topped $4 million for a 29.7% year-over-year growth rate.

Deposit service charges for this segment totaled $7.4 million, an increase of 11.3% compared to the first quarter of 2013. The increase was driven by the growth in healthcare accounts and new business earned in IBIS.

The final segment in my prepared remarks this morning is asset servicing. For the first quarter of 2014 compared to the same period a year ago, total non-interest income for the segment was $21.2 million, an increase of 4.6%. Non-interest expense decreased 11.6% to $17.6 million.

As a reminder, the earnout period for the acquisition of JD Clark & Co. ended a year ago at this time. Net income before tax rose $5.6 million for the quarter and resulted in a pretax profit margin of 24.1% for the first quarter. Asset servicing ended the quarter with $195.5 billion in assets under administration compared to $165.4 billion at the end of the first quarter of 2013.

During the quarter, UMB fund services was recognized with two prestigious awards including the best hedge fund of funds administrator as part of Acquisition International's 2014 International Hedge Fund Awards and the Best Administrator in North America as part of the 2014 Hedgeweek Awards based on reader voting. We also announced the consolidation of the JD Clark & Co. brand into UMB Fund Services.

The results in each of these three segments are important to our overall strategy of furthering sustainable growth and expanding diverse revenue sources. Along with strong quality and effective capital management, we have a unique business model that has stood the test of time in all economic environments.

Thank you for joining us today. We appreciate your continued interest in our company. With that, I will hand the call back over to the operator, who will open up the line for your questions.

(Operator Instructions) Chris McGratty, KBW.

Good morning, everybody. A lot of discussion in the market these days is about higher short-term rates. I am interested, Mariner or whomever, your expectations for how your margin, which is pretty low today, would react kind of when the Fed begins to move.

You want to take that, Brian?

I can take this. Within the Q we have a market risk schedule that talks about shock analysis. In a quick, rising rate environment we are poised to take advantage of our positioning of our balance sheet. Right now we are fairly neutral.

Okay. I'm also interested, Brian, on the impacts to many of the fee businesses. Are any of them tied to higher -- will they benefit from higher short-term risk?

Peter, why don't you take that? Not in any significant way, but (multiple speakers).

Not particularly. Our fixed income business at Reams Asset Management might have some impact as rates move on our fixed income portfolios, but that would be it.

That would be more of a rotation thing for us, positive on the other side likely.

Okay, and just last point on this sensitivity. Can you remind us the proportion of the loan portfolio that is variable [February]?

67% three prices within the next 12 months. That's correct, right?

That's correct. And within that 67%, 53% of that in the commercial portfolio reprices at 12 months or less.

Okay. This last one on the expense guidance; I think you talked about 5% full year. I just want to make sure I heard that correctly. I think that's consistent with what you guys talked about last quarter, but that adjusts for all the kind of unusual items. Did I hear that right?

Exactly. That's the case we are making is you should expect -- without noise you should expect a 5% or less expense growth rate from us.

Great, and just last one on capital. I saw the announcement on the buyback last night. Mariner, can you maybe offer an opinion on whether this is just out there opportunistically? Given your price-to-book multiple, I would imagine there's probably better uses of capital at these levels.

Yes, if you pay attention to our annual vote results, you will notice that we have been voting that in every year. It's really just to give us that flexibility if circumstances would look good to do so, so it's nothing new. We have been approving that amount for many years.

All right, thanks a lot.

Matt Olney, Stevens.

Going back to the margin discussion, obviously the margin got hit in the first quarter from high liquidity. Can you give us more of an outlook on the margin?

And how comfortable are you assuming the market has bottomed from here, if we assume that liquidity falls as normal seasonal patterns and decreases the next few quarters and you get the continued positive mix shift towards loans? Could we see the margin improve throughout 2014 and have a positive bias into 2015, notwithstanding higher short-term rates?

I'm going to ask Mike to answer that as the Treasurer reports to him at this point. Mike?

Thanks, Matt. Without the large depositor that we've previously discussed, we estimate that our net interest margin in the first quarter would have been 14 basis points higher. And as we've looked at throughout the first quarter we've actually seen improvement in the margin as a result.

Now to kind of the future thing, given that we have so much of our earning asset base in the short term, the ability to reprice at a relatively quick basis, we would expect that with interest rate movements, yes, our earning asset base would price up. On the liability side, we are talking about can you get 1 basis point better, so I don't think that's going to be much of a driver of future NIM performance.

But the negative side is moderating for sure.

Absolutely.

All right, that's helpful. Then, Peter, going back to the discussion on interchange on slide 21, you highlighted the litigation settlement impacting the first quarter. I missed the details of this. What was the dollar amount of the impact in the first quarter? And is first quarter -- the first quarter of the impact of this or could this continue for a while?

So the settlement ran from September of last year through the first quarter of this year and for the first quarter of this year the impact was $695,000. It is essentially done at this point.

Okay. Then lastly, Peter, you mentioned you launched some new products more recently. Can you remind us of where you are in the overall product sets and should we expect additional product launches for the rest of the year?

Yes, we continue to look at the market opportunistically for places where we think we have expertise where we can launch new products. The Scout Equity Opportunity Fund that we just launched was a manager that we picked up out of Denver who had an expertise that we were able to add on to our portfolio. So we are always looking at new products and you can expect that from us in the future.

I would just add simply that that is definitely part of the strategy and the structure of the future for the organization.

Thanks, guys.

Peyton Green, Sterne Agee.

Good morning. I was wondering if you could just clarify with regard to Prairie. I guess the purchase was done on July 30, 2010, and I guess the earnout will roll on July 30, 2015, but the original purchase price was listed somewhere around $53 million. And I guess the thought is that that did not capture the incremental $15 million that is due under the earnout or --?

How much of the $15 million is all of the earnings? Is that all the earnings that Prairie has generated over the time? Help us understand the magnitude of what's really going on and when would you expect the disputed amount to be fully resolved.

Peyton, good morning. I'm going to kick this off and then ask Brian to chime in because it's mostly an accounting issue. I think what we need to clear up for you mostly is there is multiple things going on here and I think sometimes it's interpreted in the same bucket. So I'm going to turn it over to Brian to try to help further explain what the $15 million means to us.

Good morning, Peyton. Taking you back and trying to frame this acquisition; in 2010 we paid $25.9 million in cash and at that point in time we estimated $26 million in earnout payments over the five-year period. As of 12/31 we had estimated $16.6 million and that number should not be confused with our unrealized gains that are the similar number.

Then the earnout period will be evaluated up and down through the end of July 2015. Does that help?

It helps, but I guess $15 million versus $16 million. That's half or -- where -- what generates the dispute I guess? Accounting is one thing, but this sounds like legal. What's the real issue?

The dispute is over non-cash items. The $16.6 million that we booked in the third and fourth quarter of 2013 was an unrealized gain and the dispute surrounds that amount and whether it should be included in the earnout or not. We have not included in the earnout, but we have chosen to provide a best estimate for a resolution to their objections to maintain distractions from future operations.

We are negotiating this to get it behind us. We still think it should not have been in our calculation, but we don't want to deal with this dispute and Prairie Capital is a very successful organization driving all sorts of fantastic results for us. We want to just get this behind us and move forward and keep building the business.

Okay. So you will book an incremental expense going forward as they continue to generate those unrealized gains, is that right?

The unrealized gains will become -- we have not got to an agreement yet, but the unrealized gains would become a proxy to how we calculate either up and down through the end of the period.

All right. Then I guess, Mariner, if you could comment about loan growth. It would seem -- you all's loan growth certainly going back over the last two or three years, up until the last couple quarters was substantially stronger than the industry and now it seems like competitive factors may be slowing you all's growth down a little bit. How does the pipeline look and do you think double-digit loan growth is sustainable over the balance of the year?

As I said in previous quarters, our pipeline remains as strong going into the second quarter as it did in the first quarter. It is important to note, as we did -- talked about about fourth-quarter results, we did have a couple large credit payoffs in the fourth quarter. And in the first quarter we also moved off some higher-yielding, lower-performing credits off as we have worked on cleaning up our balance sheet a little bit.

So our growth rate is actually still remaining -- we still feel very good about our pipeline and actual new business growth for the organization looking into the second quarter.

Okay. Then last question and I will get back in the queue. But with regard to the bond portfolio referenced on slide 9, you've got about $260 million or so in cash flow coming in the fourth quarter. Based on market rates, do you still see kind of 100 basis points or 75 basis point give up on what you're willing to buy?

Is that the right way to think about the marginal cash flow that's going to get reinvested? So if we are at [$200 million to $203 million] over the next year expect reinvestment rates around 1.25, or have you pretty much done the shortenings that you would like to do?

I am going to take a stab at least to set that up or to answer that for you. Keep in mind, if we are successful with our strategy we shouldn't have to reinvest that much cash flow. In other words, our real goal is to not reinvestment that cash flow and put it to work in loans. So if that happens we won't even be talking about this or at least we will be talking about a lesser amount.

If it is -- if it does go into investments within the fixed income portfolio, it's going to be a function of our expectation for future interest rates and what we believe are acceptable asset classes to buy at that time.

I guess are you making an assumption that deposit growth will be zero?

No, I just think that we are trying to execute our strategy to reduce our dependency on the fixed income portfolio and have more earning assets in loans.

Again, at the end of the day, if you grow deposits you are going to be doing something with the cash flow. My assumption is you going to grow deposits I guess, but maybe that's not right.

No, that is a fair assumption.

So if you did grow deposits is a reinvestment rate in the 1.25% range, is that reasonable?

Depends on what we buy. I think it's not unreasonable, given what we might buy from a mix perspective, what we know today.

You just using what we know, which is what we did in the first quarter, so if that's a proxy, which Mike is trying to tell you that there are variables. But if the first quarter is a proxy, you're making good assumptions.

All right. I'm just trying to understand if you have kind of achieved all you wanted to achieve and now you would be more -- maybe you would take advantage of opportunities if they came about. Okay, great.

(Operator Instructions) There are no further questions at this time. Please continue.

Thank you for joining us for our first-quarter 2014 financial results. As a reminder, the call will be available on our website for replay until May 9. And as always, if you have additional questions you may contact UMB Investor Relations at 816-860-1685. Thank you for joining us today.

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