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UMB Financial Corporation (NASDAQ:UMBF)

Q4 2009 Earnings Call Transcript

January 27, 2010 9:30 am ET

Executives

Abby Wendel – IR

Mariner Kemper – CEO

Mike Hagedorn – CFO

Peter deSilva – President and COO

Analysts

Chris Mcgratty – Keefe, Bruyette & Woods

Peyton Green – Sterne, Agee & Leach

Operator

Ladies and gentlemen, thank you for standing by and welcome to the UMB Financial Corporation fourth quarter conference call on 27 January 2010. Throughout today’s recorded presentation, all participants will be in a listen-only mode, after the presentation, there will be an opportunity to ask questions. (Operator instructions) I will now hand the conference over to Abby Wendel, please go ahead madam.

Abby Wendel

Thank you. Good morning everyone and thank you for joining us for our conference call and webcast regarding our year-end and fourth quarter financial results. Before we begin, let me remind you that our comments in this conference call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements rely on a number of assumptions concerning future events and are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated in our statements made during this call.

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

Our earnings release includes both our GAAP based income statement and a reconciliation to the non-GAAP measures recognized in 2008 that were discussed in the release, which includes pre-tax adjustments to noninterest income and noninterest expense, the tax effect of the adjustment and adjusted net income. The adjustment recognized in 2008 include a $8.9 million gain on the mandatory redemption of Visa A Class B common stock, a $4 million gain on the covered litigation provision of the Visa related transaction, and a $1.1 million gain on the sale of our securities transfer product. The reconciliation for these items can also be found on our Web site at www.umb.com.

The non-GAAP results are a supplement to the financial statements based upon Generally Accepted Accounting Principles. UMB believes this non-GAAP presentation and the elimination of these items is useful in order to focus on a more reliable indicator of ongoing performance.

By now, we hope most of you on the call who are listening to the webcast have had a chance to review our earnings release dated January 26. If not, you will find it on our Web site at www.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. First, Mariner will highlight our results for the year and update the progress on growing loans and deposits, managing capital and delivering the unparalleled customer experience, then Mike will provide additional details on our fourth quarter results. Finally, Peter will discuss results relating to our strategies of accelerating fee-income growth and increasing efficiencies followed by closing comments from Mariner. Following that we will be happy to answer your questions.

Now, I’ll turn the call over to Mariner Kemper.

Mariner Kemper

Thank you Abby, welcome everyone and thank you for joining us today. 2009 proved to be a challenging year for the financial services industry but as you have seen in our press release, our ability to stay focused and execute against our business strategies drove sound results. Even in what is now known as the great recession, UMB continued to meet our customers’ credit needs, grow our fee-based businesses and maintain outstanding credit quality and sustain a healthy net interest margin all the while growing capital.

We were delighted to receive a number of industry accolades this year particularly to be rated the Second Best Bank in America by Forbes Magazine. We were honored by this recognition and believe this is further validation that prudent business practices lead to positive results and steady growth. As you know, we strive to do what is right not what is popular. Our intention is to choose the path that best benefits our shareholders, customers and associates and communities that we serve. We remain focused on the long term in delivering sound results year after year.

Turning to specific results for the year, net income was $89.5 million or $2.20 per diluted share, this was a decrease from our 2008 net income of $98.1 million, which included a payment related to the sale of our securities transfer product and transactions related to Visa excluding the impact of those non-reoccurring items 2008 net income was $89.1 million. On a non-GAAP basis, our net income for the year was up slightly, which was particularly pronounced given our record year in 2008.

Our 2009 financial performance was driven by a 10.2% increase in net interest income. This growth was primarily due to higher average earning assets and our ability to manage funding cost. To that end, interest expense decreased nearly 53% outpacing the 8.2% decrease in interest income in this historically low interest rate environment. On a non-GAAP basis, noninterest income increased 2.4% to $310.2 million.

We continued to make progress in 2009 towards building scale in our fee-based businesses. Strategic acquisitions in key business segments contributed in part to our achievement this year. Total noninterest income was 50.6% of total revenue in 2009. As a trusted financial services organization, diverse fee and revenue streams is essential to maintaining stability and quality.

A responsible approach to capital management also contributed to our success in 2009. The acquisitions we made this year augmented the product offerings in our corporate trust and fund services businesses. Additionally, we bought back nearly 704,000 shares of stock at an average price of $38.22 per share. These acquisitions and share repurchases have been funded from our own equity.

At the end of the fourth quarter, we purchased American National Bank’s corporate trust business headquartered in Denver. This acquisition provides us an immediate substantial book of business in a growth market. With more than 1400 accounts and nearly 3 billion in assets under administration, this business has been the premiere corporate trust service provider in the Rocky Mountain region.

We believe we will continue to be well positioned to serve the market across our footprint, in fact, according to the securities industry and financial market association excepted sales of new municipal bonds will increase nearly 14% in 2010 as compared to the 2009 levels. Although we have not yet found the right bank acquisition for UMB, we continually evaluate banks and other fee businesses that are strategic, cultural and financial fit. As we stated before, our priorities as it relates to capital management are first, to invest in growth either through reinvestment in the business or through acquisitions that are good fit; second, to consider increasing our dividend over time; and third, to repurchase stock when it makes sense to do so.

Turning to our strategy to grow loans and deposits, end of period loans were flat compared to the prior quarter at $4.3 billion and were down slightly from end of period 2008. Excluding the impact of running off our indirect our auto portfolio, loans increased 1.7% for the quarter. Average loan balances for the year grew by 4.5% to $4.4 billion compared to average loans of $4.2 billion for 2008. There has been a lot of discussion lately in Washington regarding contraction of available credit in the marketplace. If our position is reflective at all of the market conditions, the lack of lending is more about the lack of demand than supply. For example, the utilization rates for our commercial lines of credit declined by nearly 8% from the end of 2008 to the end of 2009. However our new business generation efforts have resulted in increased commercial commitments of approximately $300 million.

At UMB, we continue to extend credit and we are meeting our customers’ needs. As the economy recovers, we anticipate credit demand will likely increase across the board within our footprints. Even in these challenging economic times, our credit quality remained stable largely because of our underwriting practices are among the strongest in the industry. While we have seen an increase in our nonperforming loans and net charge-offs, we are still well below third quarter industry averages of 3.28% and 1.11% respectively. For the fourth quarter 2009, UMB’s nonperforming loans increased from 0.20% to 0.54%, this increase is attributed to a single shared national credit participation that was placed on nonaccrual last quarter. Net charge-offs were 0.57% of average loans compared to 0.35% a year ago, with credit card charge-offs representing 61% of that total. Total credit card charge-offs were 4.31%. According to Fitch rating services, 2009 industry credit card charge-offs average 11.9%, almost triple our charge-off rate.

In our commercial loan portfolio, outstanding balances decreased 7.8% compared to last year. The reduction is attributed mainly to the decrease in our commercial line utilization rates mentioned earlier. As the economy recovers, we believe our business generation efforts and the new credit commitments UMB has gained throughout the past year will position us well to continue to grow our loans as customers gain more confidence in the economy and utilize their lines of credit.

Turning to real estate loans, balances increased $200 million at the end of the fourth quarter of 2009 compared to the same period a year ago. Growth was driven by an increase in two loan categories. First, commercial real estate loans grew $111 million or 12.8% to $987 million. Second, balances in our home equity lines of credit portfolio increased $64 million or 17.8% compared to the fourth quarter of 2008. Similar to our other portfolios, credit quality in this category is outstanding. December delinquencies in our HELOC portfolio were 0.09% for 30-day past due compared to 3.26% for the industry in the third quarter. Quality underwriting is a core focus and competency for us in all of our loan categories.

Turning to liabilities, average deposits for 2009 were $7.6 billion, up 16.1% from 2008. End of period deposits were $8.5 billion, an increase of 10.5% compared to the end of 2008. Average noninterest bearing deposits increased 22.5% at the end of the quarter and amounted to 32.5% of total deposits, well over industry average for noninterest bearing deposits of 14% of total.

Core deposit funding is a key component of our franchise. In addition to our traditional sources of deposits, we have developed three new deposit generators over the past few years that contribute to our core funding strength, healthcare services, small business banking and private banking are combined deposits exceeding $921 million for the quarter, which is 64% higher than this time a year ago. Just four years ago, the balances in these three businesses were a combined $28 million. This group will continue to be a key area of focus for our company.

Success is not defined by strong financials alone. At the foundation of everything we do is attracting and retaining the best people, sustaining a performance culture in building our brand. We deliver the unparalleled customer experience through focus on our people, our customers and our communities. With that, I will turn it over to Mike Hagedorn our CFO to provide additional details on our financial results for the quarter. Thank you, Mike?

Mike Hagedorn

Thanks Mariner and welcome everyone. In this continued historic low interest rate environment, we have maintained a healthy net interest margin even as the duration of our investment portfolio remains relatively short. One of the advantages of having a low cost of funds is that we do not have to stretch for earning asset yield thereby putting our good credit quality in jeopardy. We will continue to analyze our investment portfolio and make decisions that we believe will position us better for future rate environments. As an example in 2009 we sold securities, experienced a total gain of $9.7 million to capitalize on the market opportunity. These actions were taken to modestly shorten our duration that in turn should position us well for a rising interest rate environment.

Looking at results for the fourth quarter of 2009, net income was $23.9 million or $0.59 per diluted share, an increase of 18%. Interest income decreased 9.7% primarily due to the continued low interest rate environment, however this was partially offset by a larger earning asset base. Interest expense dropped 43.2% but as we have mentioned during prior calls, we believe there will be limited opportunities for further funding cost reductions. Net interest margin decreased 25 basis points to 3.41% compared to 3.66% in the fourth quarter of 2008. Average earning asset yields fell 68 basis points to 3.9% while the cost of interest bearing liabilities dropped 55 basis points to 0.70%. Free fund contribution declined to 21 basis points from 33 basis points over the same period last year. Low interest rates continued to make margin management difficult. In an improving economy, we anticipate our loan portfolio will grow thus easing the emphasis on our investment portfolio.

Turning to the investment portfolio, $272 million in core portfolio securities rolled off this quarter at an average yield of 3.71%. In turn, we purchased $671 million of securities at an average yield of 2.16%. Purchases were considerably higher than the roll off this quarter due to the expected public fund inflows. Over the next three months, $359 million to $395 million of core investments with an average yield of 4.12% to 4.18% will roll off. Over the next 12 months, $1.2 billion to $1.4 billion of core investments with an average yield of 4.02% to 4.06% will roll off. In the current lower rate environment, we expect the re-pricing of these securities to negatively impact our interest income.

In addition 56% of our total loan portfolio is expected to re-price or mature in the next 12 months. Noninterest income was up 19.7% for the fourth quarter compared to the fourth quarter 2008 and was driven by trust and securities processing income, bond trading and investment banking, and bank card fees. Also as noted earlier in the call, we realized $4.5 million gains during the quarter to better position our investment portfolio. Later in the call, Peter will focus or will discuss our fee income in greater detail.

Noninterest expense increased 4.4% compared to the fourth quarter last year to $119.8 million. About half of the increase is due to the acquisition of JD Clark & Company completed in the second quarter of 2009. Regulatory fees increased $2.2 million from $800,000 to $3 million primarily from higher FDIC deposit insurance premiums and the utilization of FDIC deposit insurance credits. Also at the end of the year we recorded a prepayment of $34.8 million for the next three years of FDIC insurance premiums.

Although our credit quality remained strong, we increased our provision for the fourth quarter to $11.5 million, an increase of $6 million from the fourth quarter of 2008. Our provision model methodology takes into consideration not only the inherent risk in our loan portfolio but also includes the qualitative aspect, The provision as a percent of loans is now 1.49% or 30 basis points higher than in the same period last year. On a linked quarter basis, provision as a percentage of total loans is up 13 basis points.

Turning to the balance sheet, we ended the quarter with more than $11.7 billion in assets and more than $1 billion in equity. UMB remains well capitalized with tier-one leverage and total risk-based capital levels of 13.11%, 7.87%, and 14.18% respectively. As Mariner mentioned, we continue to buy back shares, increase our dividend, and make acquisitions as appropriate all while growing our capital levels. Return on average equity and return on average assets during the fourth quarter of 2009 were 9.22% and 0.91% respectively, up from 8.43% and 0.83% for the same period in 2008. For the year, return on average equity was 8.89% and return on average assets was 0.89%, down from 2008 ratios of 10.51% and 1.1% respectively. For the quarter, average loans to average deposits for the fourth quarter decreased to 55.4% from 60.8% in the fourth quarter of 2008. The continued run off in the indirect auto loan portfolio, lower commercial line utilization, and higher deposit levels contributed to the decline.

With that, I will turn it over to Peter for additional comments on our operating performance.

Peter deSilva

Thanks Mike and good morning everyone. Being a well diversified financial services organization continues to be one of our greatest assets. We continue to strength our competitive position in our fee businesses through investments in infrastructure, personal and key acquisitions. Our fourth quarter results demonstrate that maintaining a variety of revenue sources continues to serve us exceedingly well.

Trust and securities processing income, the largest component of fee revenue increased $8 million or 30.4% to $34.4 million from one year ago. Revenue in this segment is largely dependent on three key drivers, one, the acquisition of new business; two, mutual fund flows; and three, equity market performance. Increased business in both our fund services and asset management segments were the primary drivers of growth this quarter.

Looking at specific results, trust income from Fund Services increased 60.9% or $5.5 million compared to the fourth quarter of 2008. More than 50% of this growth was the result of our acquisition of JD Clark & Company, which closed in the second quarter. As we mentioned previously, JD Clark serves the alternative investment marketplace and has added significant scale to our preexisting alternative investments business.

UMB’s asset management business can be broken into two platforms, one is Scout Investment Advisors including our Scout Mutual Fund complex and the other is personal investment and wealth management. In our Scout Fund family, assets under management grew $2 billion or 39.1% to $6.9 billion from $4.9 billion at the end of the fourth quarter of 2008. Equity and bond fund flows were $280 million during the quarter and stand at $1 billion for all of 2009. We are pleased to note that our Scout mid cap fund earned a 5 Star Morningstar rating in October of this past year for the three-year performance period. We have already begun to see improved fund flows as a result of this recognition.

On the personal asset management side, our investment and wealth management business gained sales leverage in 2009 with new recurring revenues increasing 11.9% to $3.9 million compared to $3.5 million for all of 2008. Total assets under management at the end of the fourth quarter was $4.5 billion compared to $3.7 billion just one year ago. During 2009, we have invested in this business by hiring seasoned professionals and we are positioned for further growth in this area. Also during the quarter, the number of health savings accounts and flexible spending accounts grew 21.6% with deposits and assets increasing 35.7% when compared to the same period last year. At the end of the quarter, we had over $1.3 million HSA and FSA accounts and more than $190 million in deposits and investment assets. 2009 healthcare related spending on our debit cards increased 42.3% and now makes up more than 50% of our signature based debit card volume.

As payments continue to shift to electronic transaction, our card businesses are benefitting. Commercial cardholder purchase volume posted a strong quarter with total purchase volume of nearly $174 million, an increase of 10.6% when compared to last year. The number of accounts for this segment increased 11.1%, which was driven by both new and existing customers. We were pleased to add two new large customers from the government and commercial sectors during the period. Gross active accounts from our consumer card area increased 6.3% due primarily to account growth in our affinity card portfolio in response to the new requirements imposed by the changes to Regulation E, we are evaluating product alternatives to provide customers with a form of overdraft protection. In accordance with the new rules, we will also be mailing to our customers information about their accounts and the opportunity to opt in or out of our overdraft protection programs.

In addition to growing our fee businesses, we continue to focus on improving operating efficiencies and managing expenses. Throughout the year, we have accomplished several cost containment initiatives. Courier rationalization and implementation of remote branch deposits led to savings of almost $700,000 in 2009. We have also recognized savings in our telecommunication expenses through contract re-negotiations and vender refunds; we have realized $2.2 million on a year-to-date basis. Our banking operation area, which consists of lending support, check, cash and customer account services increased productivity by 7.1% in 2009.

Our efficiency ratio increased slightly to 73.1% from 71.5% last year primarily due to the one-time gains we had in 2008. Our efforts resulted in improved revenue per FDE and retail cross sell ratio compared to the same quarter last year. Revenue per FDE increased 6.2% year over year while our new customer retail cross sell ratio improved from 3.05 to 3.20 products per customer. Delivering the unparalleled customer experience will continue to improve this ratio over time and we are pleased with the results in this area so far.

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

Mariner Kemper

Thank you Peter. We are all watching with great interest the daily news that is coming out of Washington. While we do not have a crystal ball to predict what is in store for us in 2010, we do have the utmost confidence in our time-tested business model. We believe that diversity of revenue will become increasingly important as the industry transforms under the new regulatory environment.

Diversity of income has been important in our past and we believe it will anchor our future. We have the scale and the capacity to win business, provide the unparalleled customer experience and we have the best people in the business. That said, we believe the financial services sector is re-setting to a new normal, what that would like is still wide open for debate, but one thing is certain. At UMB we take great pride in hoping reshape the customers’ perception of the financial services industry and we have done that for 97 years.

Finally, as we have positioned UMB to compete in the new environment, we have made some changes in our company to further leverage our unique financial services business model and organise ourselves around our clients’ needs into three distinct segments; commercial financial services, personal financial services and institutional financial services.

Commercial financial services covers traditional commercial banking including lending and treasury management services and regional banking. Personal financial services brings together our consumer bank with our individual investment and wealth management business. The range of services offered to UMB clients extends from a basic checking account to a state planning and trust services. Institutional financial services includes the suite of fee businesses that serve our intermediaries. Businesses here include institutional investment management and investment services functions such as our Scout Investment Advisors, UMB Fund Services and corporate trusts plus our smaller growth businesses such as credit card and credit card services and UMB Healthcare Services. These changes have been received well by our associates and will support our focused approach to serving our clients’ needs.

Thank you all for your participation on the call today and your interest in our company. With that, I will turn it back over to the conference call operator.

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions) The first question comes from Chris Mcgratty from KBW. Please go ahead.

Chris Mcgratty – Keefe, Bruyette & Woods

Good morning guys.

Mariner Kemper

Good morning.

Chris Mcgratty – Keefe, Bruyette & Woods

Maybe you guys could start by talking about the overall strategy with the balance sheet, at current levels, securities and loans are essentially equal as a percent of earning assets, I guess maybe you could talk to your expectations of this trying to continue and maybe longer term what the overall balance sheet strategy will look and the balance sheet will look like over the next couple of years.

Mike Hagedorn

Hi Chris, this is Mike, I will take a stab at that. I think the first thing to know on that is what Mariner mentioned earlier and that is that the utilization rate on commercial lines of credit is down. So I think when you look at loan-to-deposit ratio, you have to consider that this is not a normal lending environment as it relates to volume. So that is the first thing. Second, on the investment portfolio, we pre-purchased roughly $200 million in securities in the fourth quarter to lock in higher spreads for the public fund inflows that we always get at the end of the year that carry on into the first quarter of the subsequent year. So the portfolio growth is slightly exaggerated, I guess is the best way to put it, because we did pre-purchase some of those securities. So, as those roll off, that non-core portfolio that we have where you block in the spreads in those deposits will roll out as well. And so I think if you see the balance sheet is a little bit larger obviously for those reasons alone.

Chris Mcgratty – Keefe, Bruyette & Woods

What is the size of the non-core securities?

Mike Hagedorn

Just slightly over a $1 billion.

Chris Mcgratty – Keefe, Bruyette & Woods

Okay and then what is the duration, how quickly can you take that off?

Mike Hagedorn

The duration is five months.

Chris Mcgratty – Keefe, Bruyette & Woods

Okay.

Mariner Kemper

I might add, I mentioned that commitments were up on the commercial side as well. So you have utilization on the entire portfolio being down into the mid 20s percentages and then you also have the commitments that we have made of over approximately $300 million, which also have lower utilization rates. So I think as the economy recovers, we are going to have immediate impact just from the business we booked along with our continued growth in market share.

Peter deSilva

I might also add, our deposits that we talked about were up significantly, so you have the double challenge of a much larger deposit base against the lower demand for credit in the short term but we believe that liquidity will get stopped up over the next year or two as the economy improves.

Chris Mcgratty – Keefe, Bruyette & Woods

Then a question on the margin, you guys talked about pre-paying or pre-buying some bonds this quarter, but you have been cautious the last few quarters on lower reinvestment rates and securities portfolio, can you talk a little bit on your (inaudible) to the margin, did we continue to increase the balance sheet to meet the spread income number or eventually will this stop and margins just have to come down along the spread income?

Mariner Kemper

There are a lot of ways you could go with that one. I think the first thing you would have to consider when you look at that is in the fourth quarter, at least at the end of the fourth quarter and clearly for most of the first quarter of 2010, you are still going to have those public fund balances on and so the spreads on those dollars are narrow, and so they negatively impact net interest margin. So it is not a normalized net interest margin. That said, as we disclosed in our pre-comments, securities are rolling off (inaudible) and new purchases have it too. So by that very nature there has been margin compression. I think the thing to keep in mind there though is you are pre-positioning yourself for higher interest rates with slight duration reduction and we think that is the right strategy right now.

Peter deSilva

We are making decisions for the long term here with our investment portfolio and not reaching for some yield in the short term to give up the next few years of earnings potential out of our investment portfolio.

Chris Mcgratty – Keefe, Bruyette & Woods

Okay and then just a follow-up on longer term kind of how you are thinking about profitability, in terms of the efficiency ratio (inaudible) a little bit elevated and capital, returns on capital a little bit below probably the full earnings potential of the company, can you talk about your longer term goals in terms of timing to improve loans.

Mariner Kemper

First of all, what is the new normal for our industry on those ratios but I think you will see us certainly put our capital to work. We are much more judicious maybe than others in how we use our capital, so we are not particular type investors and we are looking for things that add value to our company and in this environment it has been very hard to come by those things. You have seen us do some, we did two, for our side of the balance sheet we did two relatively significant transactions in 2009 from our perspective anyway and we will continue to look for ways to do bolt-on acquisitions to our fee-based businesses and we are very, very actively looking for the right bank deals to do but we are not going to do them just to do them, we are going to do them because they add long term value to the company.

I think you will see us do some deals, we would certainly like to, we are very focused on it and I think back to the loan-to-deposit ratio and our liquidity, we are going to continue to gain market share as our balance sheet is positioned very strongly and we have got a great deal of liquidity, we do not have the problems that the industry has, so our people are out selling and building, we are not inwardly focused on our problems. So I think you will see continued improvement across the board.

Mike Hagedorn

I will add one thing to that, especially when we look at ROE, you realize all the things that we did as far as capital management goes in 2009 would be buying back shares or acquiring businesses and yet our equity is higher. So the denominator in that calculation is growing even while we are doing things that really should reduce it. Over time, as you continue to do that, I think you will see higher return on equity numbers.

Mariner Kemper

You will see the value of some of our acquisition as they are over the next coming years.

Chris Mcgratty – Keefe, Bruyette & Woods

Last question, what kind of tax rates you use for 2010?

Mike Hagedorn

Yes, we obviously did some effective tax work in the fourth quarter that reduced our overall rate; probably in the high 20s would be a more normalized tax rate.

Chris Mcgratty – Keefe, Bruyette & Woods

High 20 effective tax rate, okay.

Mike Hagedorn

Yes.

Chris Mcgratty – Keefe, Bruyette & Woods

Thanks.

Mike Hagedorn

Thanks Chris.

Operator

The next question comes from Peyton Green from Sterne, Agee & Leach. Please go ahead.

Peyton Green – Sterne, Agee & Leach

Yes, good morning, question just in terms of the overall customer base, when you are out meeting with customers, what gives you the impression that the Fed is going to raise rates, it is like everybody has got a decrease in their loan growth and kind of a decrease in the aptitude [ph] to borrow due to business conditions, do you get the impression that that is starting to turn?

Mariner Kemper

If you look at the blue chip and most of the economists, it looks like the second half of the year; we still believe that the rates will start to rise in the second half of the year. Your guess is as good as mine, if Bernanke’s reappointment has any change to the speech [ph] that came out in the latter part of last year but we are still counting, we still believe that the latter part of the year you will see interest rates rise, I do not know if that answers your question.

Peyton Green – Sterne, Agee & Leach

So what would it take for the kind of bonds that you buy, I mean, how much of an increase in yields would you have to see before you would start buying them again?

Mariner Kemper

We are buying them right along – you mean –

Mike Hagedorn

I think you are talking about buying core portfolio kind of back to the normal purchases Peyton?

Peyton Green – Sterne, Agee & Leach

Sure.

Mike Hagedorn

Yes, we probably would like to be buying somewhere in the – it depends on the kind of security so it is a hard question to answer but probably in the three to five-year range but if you believe that rates are going to be a little bit higher, you would not be buying those bonds today.

Peyton Green – Sterne, Agee & Leach

I guess my question is this, you got close to a $1.1 billion in interest bearing due from banks up from $600 million a year ago, when does that number go back to normal I guess.

Mike Hagedorn

Your guess is –

Peyton Green – Sterne, Agee & Leach

What does it take for rates to do for that number to go back to normal? I am just trying to gauge how long – if rates do not go up, how long you sit on it?

Mariner Kemper

You are talking crystal ball stuff here; we do not have those answers. We are going to position ourselves to be ready basically for those changes and outside of that we do not know when that is going to happen.

Peyton Green – Sterne, Agee & Leach

Okay and then I guess back to the customer question, you are seeing our customers certainly did a good job gaining the business but the overall, I guess, spirit there is to reduce leverage, do you see any signs that that might be turning in the first half of the year?

Mariner Kemper

Not from the data that we have, as a matter of fact on a linked quarter basis from third quarter and fourth quarter the utilization rates have gone down even further, so I would expect that they certainly stay low for a while until our customers just like us start feeling the economy is turning.

Mike Hagedorn

We are very focused on sales, we are very focused on winning new business, we have had a lot of success in that regard. Eventually they will borrow Peyton and again some of the success liquidity will go away we hope.

Peyton Green – Sterne, Agee & Leach

Okay and then last question, just in terms of the expense growth year over year, was there anything in expense numbers that maybe was unique compared to last year other than the FDIC expense or the regulatory expense?

Mike Hagedorn

Peyton, this is Mike. Short of the ones that you mentioned FDIC being probably the largest, keep in mind that JD Clark, which we closed down in April I believe, increased our expense base.

Mariner Kemper

Yes, we had eight months of expenses as it related to the acquisition including what we had to take in terms of the amortization, the purchase premium and such.

Peyton Green – Sterne, Agee & Leach

Okay and then I guess just in terms of the processing fees, was there anything unofficially high in that in the fourth quarter versus prior quarters or –

Mariner Kemper

It is the benefit of JD Clark if you are talking about our Trust income.

Peyton Green – Sterne, Agee & Leach

Okay.

Mariner Kemper

It is JD Clark hitting the income statement both on the expense side and the revenue side.

Peyton Green – Sterne, Agee & Leach

Okay, all right, thank you.

Mariner Kemper

Thanks Peyton.

Operator

(Operator instructions) And there appears to be no further questions at this time sir.

Abby Wendel

Thank you. Thank you very much for your interest in UMB. The call can be accessed via a replay on our Web site beginning in about two hours and it will run through February 10, and as always, you can contact UMB Investor Relations with any follow-up questions by calling 816 860 1685. Again we appreciate your interest and time. Thank you.

Operator

Ladies and gentlemen, this concludes the UMB Financial Corporation fourth quarter conference call. Thank you for participating. You may now disconnect.

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Source: UMB Financial Corporation Q4 2009 Earnings Call Transcript
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