UMB Financial Corporation (UMBF) Q4 2016 Earnings Report, Transcript and Summary

Good day and welcome to the UMB Financial Fourth Quarter and Year End 2016 Financial Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kay Gregory. Please go ahead.

Good morning and thank you for joining us. On the call today are Mariner Kemper, President and CEO, Ram Shankar, CFO and Mike Hagedorn, CEO of UMB Bank. Before we begin, let me remind you that today’s presentation contains forward-looking statements, all of which are subject to assumptions, risks and uncertainties. Actual results and other future events, circumstances, or aspirations may differ materially from those set forth in any forward-looking statement. Information about factors that may cause them to differ is contained in our Form 10-K and subsequent Form 10-Qs and other SEC filings. Forward-looking statements made in today’s presentation speak only as of today and we undertake no obligation to update them. Our earnings release, as well as our supporting slide deck is available on our website at umbfinancial.com, under news and events in the Investor Section. The slides are also available in the webcast link for your reference. Reconciliations of non-GAAP financial measures have been included in the earnings release and on Pages 6 and 7 of the supporting slides. With that, I’ll turn the call over to Mariner Kemper.

Thank you, Kay. Welcome everyone and thanks for joining us. I’ll start this morning’s call with some high level results which reflect record annual net income double-digit year-over-year loan growth and continued improvements in profitability metrics. I’m incredibly proud of the hard work and the results our associates delivered in 2016. Last year was certainly an interesting year for our industry with the lower for longer outlook turning to a more positive outlook almost overnight following the election. We’ve been asked often about what a potentially new economic and regulatory environment could mean for UMB. And while it’s difficult to quantify the impact with only six days under a new President, some with a potential changes that have been suggested could benefit us all. To that extent we could see positive regulatory change as well as a higher rate environment. Any changes to the healthcare regulation could positively impact our HSA business overtime, and as a largely commercial bank increase infrastructure spending could benefit our C&I customers and spark additional investment. Suffice it to say, we are listening to the discussions and different thoughts on how the new administration may proceed and we look forward to seeing what 2017 holds for the industry and the economy. That said, our path this year is clearly to continue execution on our current strategy and priorities. While sentiment for the improvement is welcome, it is too early to draw any conclusions about impact and with the many variables could take quite some time to come to fruition. Now turning to our results for the fourth quarter on slide four you’ll see that net income was $42.9 million or $0.87 per diluted share. On a non-GAAP basis, adjusting for the items in the table on slide six, net operating income was $45.3 million or $0.91 per diluted share. For the full year net income was $158.8 million or $3.22 per diluted share and on a non-GAAP basis suggesting for items shown net operating income was $166.5 million or $3.38 per diluted share. It’s important to note that our results in this quarter includes some noise specifically on the expense side including costs, termination of a marketing agent contract and larger than normal variances both in legal and consulting expenses and some performance based incentives. Ram will give a more detailed look back on both expenses and income items in his remarks. On slide nine you’ll see that once again we delivered solid loan growth with average balances for the fourth quarter increasing 6.5% on a linked-quarter annualized basis and 12.4% compared to the same quarter last year. For the full year, average loans were $10 billion, an increase of $1.6 billion or 18.5% compared to 2015. On the following slide you will see a history of net charge-offs which were 0.22% for 2016 and have averaged just 0.29% over the 14 you have shown. Non-performing loans were 0.67% of loans in the fourth quarter compared to 0.77% in the third quarter which was an anomaly involving two commercial credits. We were able to resolve those two credits with minimal losses. As part of our credit culture we know our customers well and have the ability to identify and solve problems early. On slide 12 and 13 you will see trends on selected quarterly performance metrics. On an operating basis, ROE and ROA improved from the third quarter by 59 basis points and 3 basis points respectively. For the full year, our operating efficiency ratio was 71.2%. Finally, as we look back on our priorities I outlined at the beginning of 2016 I am pleased with the progress we are making towards improved returns and long term growth. As a reminder, those action items were to; first, build on our efficiency initiatives and continue to identify and implement operational improvements. We’ve seen improvements in our operating efficiency ratio to 70.1% for the fourth quarter down from 78.2% in the third quarter of 2015 when we announced the initiative. We remain focussed on our operational efficiencies on a daily basis and clearly there is more to be done here, even as we continue to invest in our technology platform. Second, grow the combined UMB and market customer base, following the completion of our integration in 2016. The acquisition doubled our presence in the Arizona and Texas regions and combined efforts of our teams help drive significant loan growth we experienced in 2016. Specifically in Arizona loans have increased nearly 25% since mid 2015 closing, led by our CRE and construction lenders. Third, continue our progress and optimizing our balance sheet by shifting earning assets in the loans. Results from these efforts are evidenced by our improving net interest margin which for the fourth quarter increased 24 basis points from a year ago to 3% driven by both loan volumes and more optimal asset mix. And fourth, effectively managed capital to enable profitable business growth and acquisition opportunities. During the year we accreted capital to total risk based capital with the ratio increasing two basis points to 12.82% even as total assets rose $1.6 billion.\ Overall, I am pleased with our results this quarter while acknowledging we still have work to do around expense growth. As I said in the past few quarters, we are focussed on efficiency in day to day operations. We will reduce the base expense growth and drive operating leverage and overall improvements in performance metrics overtime. Now let me turn it over to Ram who will discuss our results in further detail and provide a little more color on our segments and drivers. Ram?

Thanks, Mariner and good morning everyone. Looking first to the income statement, fourth quarter 2016 net interest income rose 5.4% on a linked quarter basis and 14.9% year-over-year to $131.5 million. For the first time since the third quarter of 2011 net interest margin reached the 3% mark for the fourth quarter and represented an increase of 13 basis points from last quarter and 24 basis points from the fourth quarter of 2015. The linked-quarter improvement was driven by several factors including the impact of the Fed December rate hike, higher libor rates, higher yields on new money purchases in our AFS portfolio, lower premium amortization in the mortgage backed securities portfolio and approximately 800,000 of benefit from purchase accounting accretion and prepayment fees. On a year-over-year basis, volume and mix had a greater impact on the NIM improvement. The average yield on earning assets increased 14 basis points on a linked-quarter basis to 3.17%. Loans comprised 55% of average earning assets for the full year 2016 versus 51% for the full year 2015 showing the impact of remixing our balance sheet over this period. Slides 15 and 16 show the details and primary drivers of the changes in non-interest income which on a linked-quarter basis decreased 4.6% driven largely by decreased gains on sales of securities and lower equity earnings on alternative investments. Trust and securities processing income remained stable as revenue from fund services and the asset management businesses within the bank more than offset the 1.7% decline in revenues from scout. The 3.3% year-over-year increase in non-interest income for the quarter was driven largely by positive movement in equity earnings related to our Prairie Capital Management fund investments along with revenue increases in brokerage fees impacted by growth in money market balances and 12b-1 fees following the December 2016 rate increase. In addition, the increase in other income reflected a $1.1 million increase in the fair value of company owned life insurance and a $900,000 increase in derivative income. Slides 19 and 20 as well as the press release contain detailed drivers related to the changes in non-interest expense which on a as stated basis increased $6.5 million or 3.6% compared to the third quarter of 2016. This increase included a $2.7 million non-recurring fee paid to terminate a third party marketing agent contract in our scout business along with other items listed on this slide. On a non-GAAP basis, operating non-interest expense for the quarter, which excludes the impact of the contract termination, acquisition expense and other severances, was $182.6 million, an increase of $4.5 million or 2.5% sequentially. The higher legal and consulting fees are due in part to technology related consulting expense and the increase in equipment expense is related to investments in hardware and software for cyber security, enhanced disaster recovery capabilities and the ongoing modernization of the company’s core system. As we’ve said in prior quarters, we’ll continue to invest in our platforms to make sure that our systems are competitive and will support our growth now and in the future. Salaries and benefit expense decreased $1.8 million on a linked-quarter basis despite the impact of $1.7 million of higher incentive expense related to one and three year performance for several of the scout funds. This increase was more than offset by expense savings due to lower overall employee headcount for the entire company and decreased medical expenses. Finally, our lower effective tax rate of 23.3% for the year reflects an increase in federal tax credits and a larger portion of income earned from excludable life insurance policy gains. We expect the tax rate for the full year 2017 to be approximately 25%. Now turning to the balance sheet, we had a solid quarter of loan growth as Mariner mentioned and Mike will provide more color on our loan portfolio in the bank segment discussion. Slide 21 shows the composition of our investment portfolio. The average balance of securities available for sale in the fourth quarter was $6.4 billion a decrease both on a linked-quarter and a year-over-year basis. The average yield in our AFS portfolio increased to 2.04% compared to 1.91% in the third quarter as the spread between securities rolling off and those purchased improved. Our continued efforts to optimize our balance sheet include the remixing of our securities book. Since the first quarter of 2015, the AFS portfolio has experienced a continuous increase in yield rising 22 basis points even during a period when the average yield on the ten year treasury was near its lowest level. Details related to the past quarters activities and portfolio statistics are shown on slide 22. Turning to liabilities. Average deposits for the quarter were $15.7 billion an increase of 4.1% from the third quarter averages. Non-interest bearing demand deposits grew on average 8.8% from the prior quarter largely related to the increased institutional banking and commercial deposits. The cost of interest bearing liabilities for the fourth quarter was 26 basis points and the total cost of funds including non-interest bearing deposits was 17 basis points. Turning to the segments, you’ll see the financials beginning on slide 26 followed by details on each. I’ll cover just a few highlights and then turn it over to Mike for more detail on the bank segment. Detail for Institutional investment management, our Scout Investment business begin on slide 28. Results in this segment were impacted by the contract termination and performance related incentive expense I mentioned earlier. As is typical in the asset management business, our investment teams are compensated for performance in their respective funds. In 2016, six of our ten funds outperformed their bench marks and seven of the ten funds performed above dominion [ph] for their respective classes. Due to the out performance, calculated incentive payments increased $1.7 million compared to the third quarter. As you can see on slide 31, six Scout funds have a four star Morningstar rating. The Scout International fund is ranked in the top docile on a one and ten year basis in the four and large blend category. The Scout Midcap fund reached its tenth anniversary on October 31 and is ranked in the top percentile on a ten year basis. It has been in the top quartile in eight years of its ten year life. Assets under management stood at $27.3 billion at December 31, a reduction of 2.9% during the fourth quarter. Scout experienced total net outflows of $309 million during the quarter a negative market impact of $500 million as the rally and the equity markets in the quarter was more than offset by the impacts that rates had on the fixed income portfolio. As shown on slide 29, net outflows from the Scout funds were $240 million while outflows from separately managed accounts were $69 million. Performance improvements we’ve seen in several categories are encouraging and while we can predict future AUM levels positive flows generally follow periods of strong performance. Turning to the asset servicing segment, UMB fund services had a solid quarter with the pretax profit margin of 19.3% unchanged from the third quarter. Revenue in the segment comes from a variety of sources including number of accounts and transaction fees and average assets under administration which is greatly impacted by the health of the equity markets. At December 31, total assets under administration stood at $188.7 billion and we added 17 net new funds during the fourth quarter. Our investment management series trust which provide turnkey administrative and governance solutions for fund managers continues to grow. At December 31, we had 88 active funds in the trust and nine more pending with $17 billion in assets. Fund services had once again received industry recognition as the best administrator in the technology category in HFM’s US Hedge Fund Services Award. Slide 35 and 36 contains more additional highlights and metrics for this segment. I’ll now hand it to Mike to cover the details and drivers for the bank. And then we’ll happy to take your questions. Mike?

Thanks Ram. In the bank segment, pre-tax profit margin for the fourth quarter was 24.9% compared to 23% in the third quarter and 17.8% a year ago. On slide 37 and 38 we provided a look at the revenue expense and resulting net income contributions for each of the four businesses within the bank segment. Net interest income in the segment increase $6.9 million or 5.7% compared to the third quarter as loan yields expanded by 10 basis points. Along with the expense control portion of our efficiency initiatives we have increase our discipline around pricing, putting on loans that lead to better risk-adjusted returns and are seeing the benefits in rising NIM. Non-interest income represented 36.9% of fourth quarter revenue in the bank segment reflecting continued contributions from institutional banking, healthcare and the asset management businesses within the bank. Turning to slide 39, we saw strong gross loan production of $685 million in the fourth quarter one of our best quarter’s to-date. Total payoffs and paydowns for the quarter were $482 million outpacing the average of $334 million we experienced over the prior four quarters. As we’ve reported our focus efforts in the CRE and construction space over the past seven quarters have resulted in a $1.7 billion increase in balances in those categories and those loans represent 37% of total loans at year-end 2016 compared to 29% at the end of the first quarter 2015. As our CRE and construction book seasons, we expect clients will choose to sell properties to investors as well as the normal move from construction loans to permanent financing, often with non-bank lenders. As we look ahead strong topline production could be somewhat muted depending on the timing of payoffs which as you know are difficult to predict. The composition of our loan book and a regional view are shown on slides 40 and 41 followed by more detailed look at CRE and construction portfolio. We had $214 million in those two categories during the fourth quarter and $828 million during the past 12 months. Office building projects represent the largest category of new loans during the quarter followed by senior housing. Demand varies by region and for the full-year multifamily led the way in Missouri and Texas, industrial properties were strong in Arizona and also drove growth in Kansas. We monitor our portfolio concentrations and continue to apply the same disciplined underwriting standards to investment CRE as we do with all lending activity. Currently multifamily and other investment CRE represents 32% of the total CRE and construction loans on our balance sheet and 12% of our total loan portfolio. In the factoring business we added 11 new borrowers during the quarter and increased period in balances by 29.8% compared to September 30. For the full year we founded 48 new clients and our customer mix is approximately 49% transportation and 51% commercial. Looking ahead to 2017, the possibility of changes in infrastructure spending, tax reform and regulatory relief, all have significant importance for the trucking industry. Like banking, trucking is heavily regulated and reform if it does come to fruition could be expected to improve performance. Our personal banking division provides approximately a third of our deposits with average balances of $5.2 billion for the quarter and we continue to see growth in private banking with average loan balances increasing 3.3% during the quarter to $687.2 million. On the consumer side work continues to improve efficiency. During 2016 we consolidated 10 branch locations while opening one in a strategic location in the Kansas City area ending the year with 106 banking centers and three commercial and private wealth facilities. In 2017, 11 locations are scheduled for consolidation. We continually assess our network and how we deliver products and services to our customers and as such have recently launched an updated retail mobile banking application. We continue to make progress on our 4K delivery model, an efficiency program that includes changes to staffing, operating hours and associate incentive structures. At year-end 40 locations had transitioned to this model and we are now assessing the next phase of the program and identifying other locations that may benefit from this operating model. Initial results are showing efficiency improvements of 20% to 30% at the individual banking center level. Our institutional banking businesses continue to show strong results including the $52 billion FDIC suite program which offers broker dealer clients a liquidity alternative to overnight money funds. As you can see on slide 46 this product has a five-year CAGR of 28.6%. Additionally, we recently celebrated the opening of a New York City investment banking office which will initially house a team of five focused on underwriting, trading and distribution of bonds to institutional clients as well as corporate trust activities. In healthcare services the number of HSA accounts grew 982,000 at December 31, an increase of 22% year-over-year. You'll see on slide 47 that healthcare deposits stood at $1.6 billion and continue to be a growing source of funding for us providing 9.7% of total deposits at year-end. This contribution has grown steadily from just 3.4% of deposits in 2012. As we typically see the number of accounts ramp up in the fourth quarter of each year falling open enrolment season and balances are impacted in first quarter as employers fund for discipline accounts. UMB is ranked by Devenir Research as number six in the industry in terms of HSA accounts and number seven in terms of deposits and assets and like the rest of the industry we are encouraged by the potential opportunities for the HSA business under a new administration. Possible positive catalyst such as changes to the ACA, increased contribution limits and the expansion of HSAs to include Medicare recipients could impact the growth rate of accounts and balances at the very least increased national exposure for HSA plans. With that, I’ll conclude our prepared remarks and turn over to the operator who will open up the line for questions.

We will now begin the question and answer session. [Operator instructions]. Our first question comes from Chris McGratty of KBW. Please go ahead.

Good morning. Thanks for taking the questions.

Good morning, Chris.

Mariner, maybe a question for you. You guys made notable progress on the efficiency ratio, 300, 400 basis points this year. I believe in the past you have talked about that 70% bogey, and you are well on your way to getting there. I believe in the past, you’ve also said you need higher rates to get there. And again, we are starting to get that. Is that a fair starting point for this year? If we do get further moves by the Fed, and you can continue to tick up the earning asset yield, is that -- can you get to 70% with the investments you are making?

Well, we are certainly remained focused on that goal, and we you know, I think that the real way to think about us going forward is we kind of look back sort of -- our general effectiveness going back as far as 2013. We got really focused on expense control. As you know by launching that initiative in 2015 and you'll see the results from 2016 we are beginning to really see that operating leverage or effectiveness, the expansion between our expensive and our revenue. And we’d like to kind of get you guys more focused on I guess the effectiveness or the operating leverage itself and less on the absolute expense growth rate itself. I think the trajectory of our expenses in 2016 is a good way to think about the same trajectory for 2017 based on our continued focus on our fixed expense base allowing for the variable expenses to float up and down based on investments that we’re making to improve the business. And then, I think in Mike’s comments about the money that we’re spending. Ram actually about the money we’re spending to maintain and improve and keep the health of our technology platforms sound.

Okay, that's helpful. Thank you for that. The distribution of your AUM has obviously, over the past couple of years, shifted towards more fixed income. As we’re entering presumably higher environments, is there any consideration to go external and potentially acquire some equity assets? I know you guys have had a strong history of acquiring in the past; and just wondering, appetite and what potential opportunities might present itself?

As we’ve said in the previous quarters right now we’re really focused on making sure that performance is where it needs to be. And as Ram noted in his comments and you can see in the slides, in the deck, performance is strong and we’re not seeing the flows yet from that performance and that's why we kind of had the expenses without the revenue to go with it in the fourth quarter. But I would just say, that’s where our focus is right now, is on the performance side. We continue to look at all options, but really mostly focus on performance.

Great. And maybe one or two for Ram. The accretable, the $800,000 purchase accounting benefit, was that just the total benefit, or was that just the tick-up of the unusual in the quarter? And then also could you specify what the delta was in the premium amortization that helped the margin in the quarter? Thanks.

Yes. Sure, Chris. The $800,000 was the delta between the fourth and third, so we always have some kind of purchase accounting adjustment or acceleration of fees when loans paydown. As Mike mentioned in his prepared comments those are little more paydowns in the commercial book than prior quarters and so we accelerated some fees related to that. And then, on the premium amortization it was down about 250 on a quarter-over-quarter basis.

Okay. And then, can you just repeat the tax rate guidance relative to the fourth quarter?

The tax rate for 2017 should be approximately 25%.

That’s an effective tax rate?

That’s an ETR, yes.

Thanks a lot. Appreciate it.

The next question comes from Steve Moss of FBR. Please go ahead.

Good morning.

Good morning.

I was wondering, with regard to the margin here, obviously rates are higher. And you guys are asset-sensitive, given your variable-rate mix. What are your expectations for the first-quarter margin?

Thanks, Steve. So, if you look at the fourth quarter margin of 3%, right, so based on everything that I just told Chris approximately four to five basis points was due to benefits that we don't expect to recur which is the premium amortization or given the purchase accounting adjustments, so a jump of point for 2017 would probably be 295 to 296. If you look at 2016, our NIM benefited largely from rotating within our securities portfolio and also from securities portfolio into loans, so if you look at balance sheet right now we have it only $350 million of these liquid agency and treasury securities that’s down from $1 billion a year ago. So, if rate stay at the current level we’ll have the opportunity to reinvest some of this cash flows from our mortgage backed bonds from at higher rates. So the long and short of it is, if you look in 2017 the fourth quarter reported run rate is probably a good one, if rate stay the way they are. Obviously there’ll be some upside if there are more rate hikes sooner than projected. And then mostly, just like in 2016 our focus will be on net interest income growth, volumes will drive that net interest growth. I will say that the first quarter will be seasonally weak because lower number of days and also the impact of the paydowns that Mike talked about in the fourth quarter.

I would add though we do – that’s a stop – that’s a jumping off place, but we do continue to see benefit from mix changes in our loan portfolio and better practices and discipline in pricing. So, we should continue to see some improvement in the pricing on the loan book.

Okay. And then, with regard to loan growth are you seeing an improvement in the loan pipeline and second part to that is also what drove the increase in paydown this quarter?

So, as we’ve done on in the past we’ve been able to give you what we believe is an outlook for our pipeline into the coming quarter as that as far we’re comfortable doing. And I would say that the gross loan on the pipeline side remains as strong as it has been. Mike’s comments in his prepared remarks really kind of speak to, I think, the answer to your question, but I’ll do it again which is really that as our CRE book is maturing and seasoning we do expect that growth loan production that we've been seeing historically to be somewhat muted. We don't know at what level because its hard to predict, but we do believe that we somewhat muted in the first quarter as that seasoning takes place and we see turn paydowns and payoffs.

Great. Thank you very much.

Thanks, Steve.

Our next question comes from Ebrahim Poonawala of Bank of America. Please go ahead.

Good morning, guys.

Good morning, Ebrahim.

Quick question, I hopped on a little late. I just want to make sure I heard Mariner correctly on the efficiency ratio. We sort of improved the ratio by about 500 basis points year-over-year, when I look at fourth quarter versus 2015. Did we say that we should expect, directionally, efficiency ratio going down, or a similar rate of improvement in 2017?

At some level with no specific target, I mean, I think the expense level, growth rate level of 2016 from a trajectory perspective is one that would be a safe assumption about the trajectory for 2017.

And Mariner answered, saying that our focus in 2017 and on is going to be on positive operating leverage, Ebrahim, so by default that should benefit the efficiency ratio. So, we’re going to maintain positive operating leverage, manage expenses, managed the fixed expenses and then the variable expense will vacillate with the revenues up or down.

Understood. And just -- and again, I'm sorry if you have already talked about this, just in terms of HSA deposits, I guess growth was relatively flattish in the fourth quarter, but strong year-over-year. As we look into 2017, if you can just sort of help quantify the opportunity in that business, as we think about the next 12 months?

Ebrahim, this is Mike, as we talked about prior during the conversations, our deposits within just that segment are at $1.6 billion. And if you look at page 47 on the investor presentation you’ll note that on year-over-year basis we’re up 37%. So we feel really good about our HSA business and the growth. And if you see a slowdown in deposits between quarters, third to fourth most likely what you'll see is an acceleration, fourth quarter to first, because we’re now in a open enrolment period, and as I said in my prepared remarks that's when most employers fund their accounts. The other thing to keep in mind you know there are lot of things being talked about with the election and what the administration we do, we think there's three things that are likely to come out of that discussion. First, just a higher participation rate in HSA in the country and expansion possibly of HSAs into Medicare and then higher contribution limits. And the higher contribution limit seems to be the least controversial of those three items. If you take that and you go to the contribution limits that are proposed which get much closer to 401(k)s that would put an additional $236 million in deposits on our books and at our estimated current spread right now are 280 basis points that would be $6.6 million. So we have a normal growth and then we have this on top of it. So we feel pretty bullish about this business.

That's helpful. Thanks Mike. And just one last question Mariner, I guess in terms of when we think about M&A you've talked about sort of the desire to do more M&A beat in some of your existing markets, including in Texas. Just if you can give us a sense of where we are on that and how realistic is it? Again it's hard to predict the timing. But how realistic is it to expect that you might do some sort of a deal for the next 6 to 9 months?

So this will sound very similar to what I’ve said in the past which is that we do have a dedicated team focussed on targeting and having account [ph] with potential banks that would we feel be good fit for us, however we I think the real answer to your question is that we believe that currently given several things probably most importantly the expectations for a new Trump administration that sellers are we believe particularly the ones we would be interested in are looking to benefit from some of that before they take the chips off the table. So we just think that the pricing metrics and the likelihood of things happening in the near terms are pretty muted based on environmental factors.

Understood. Thanks for taking my questions.

Thanks, Ebrahim.

Our next question comes from John Rodis of FIG Partners. Please go ahead.

Good morning, guys.

Hey John.

Morning, John.

Thanks for taking my questions. Most of my questions were asked and answered. But, Ram, maybe just a question for you on the provision that was down from the third quarter which was relatively high. I guess as we look at the provision going forward, is it fair to assume that 2017 provisioning is probably more at the fourth quarter rate all things considered?

Yes I mean obviously in the third quarter we had a couple of blips that in the commercial side that Mariner mentioned so that’s why it was down. So the 7.5 million or so that we add in the fourth quarter is – you know if you look at the last quarters before that, that’s been that run rate.

As you all are aware there are a lot of metrics that go into really what that looks like and its very scripted and per scripted. So its hard to tell exactly what will happen if several things in their last history growth rate etcetera rates, so there is variables and then they are going to drive that, but third quarter was probably higher based on activity in the portfolio.

Okay, and you said you did resolve those two credits during the quarter, Mariner?

Yes.

Okay, okay. Maybe just one other question for me. Just any update on the energy portfolio, I think it's been around 3% of loans roughly

No change. Yes, unchanged and you know sentiment wise obviously energy prices been where they are, really probably provides a little bit of relief to those companies operating with them, within the base.

Have you seen any growth in that portfolio, or is it trending down?

No at December 30th it was still only 3.5% of the total loan growth which I think is pretty much flat from what it had been before, which means it’s slightly smaller because the loan portfolio is bigger. So you know we are not trying to grow it or shrink it, because I think we are just managing the book and looking for a good quiet of customers.

Okay. And then Mike, maybe just a quick question for you on deposits. I guess we saw a run up in the fourth quarter, and just I'm assuming some of that is seasonality. Would you expect to see some of that run off I guess in the first, second quarter, in deposits?

Well remember we have the public fund deposits you are going to see differences obviously due to that as far as the largest mover. You know as we have talked about before, we think the real value on any banks balance sheet is on liability -- continue to work and lead our industry around building a core deposit franchise that’s made up of sticky customers and are reliable and sustainable. And we’ve been pleasantly surprised so far with our ability to hold pricing where we have with the first of that increase but obviously we are going to go though if the fed increases happen as planned in 2017 we’ll have a much better idea of what that repricing looks like?

How much of the increase in the quarter was related to the public funds? Roughly?

Total deposits not much, because you see most of it in the first quarter, so...

Yes, it’s not a material mover.

Okay. Thanks guys.

Thanks John.

Our next question comes from Matt Olney of Stephens. Please go ahead.

Good morning guys. This is Matt Sealy on for Olney. I want to circle back on the margin, particularly loan yields. Some nice expansion and I know you accredited a good bit of this to higher paydowns during the quarter. But kind of looking forward in 2017, what are new yields coming on at? And what do you expect those to trend towards, if we get -- in this rising rate environment?

Yes, Matt this is Mike. So, we had a 10 basis point increase in loan yields in the quarter and you know a rough breakdown of that 10 basis points is three basis points were due to existing clients borrowing more. We have four basis points that are due to paydowns and payoffs where the weighted cost of their borrowings is less than what the total portfolio is obviously it raises the portfolio. And then as Mariner or as Ram mentioned in his prepared remarks a little over three basis points due to the acceleration of some fees. So none of that is really about necessarily pricing new loans in the environment. Those are extraneous to that. I would say and Mariner could jump in here. I think that pricing has been relatively flat. I don’t see it right now as a driver of increase loan yields and I think those explanations I just gave you for the 10 basis point show that.

Just that I think we will see some positive affect going forward continued as we continue to remix a little bit. So I think as we continue to see the strength and term in real estate we will see our loan yields probably continue not at the same accelerated rate as we have seen, but we see some – I think there is some likely to see some upsides, slight upside improvement there as well as just our general discipline. So we have been more disciplined and we have been seeing that and I think we will continue to see that.

Now that doesn’t include our index loans that obviously didn’t enjoy a full quarter at the new Fed rates so that you’ll see that in the first quarter results, and obviously that will go up.

Right.

And rate improvement if they happen in the last half of the year we still have a high percentage of our loans even with the remixing, repricing within 12 months, so I think we should benefit from that.

Okay. Great. Well, that does it for me, guys. Thanks.

Thanks, Matt.

[Operator Instructions] Our next question comes from Peyton Green of Piper Jaffray. Please go ahead.

Hi, good morning. A question with regard to the marketing and referral agreement -- and I apologize if I missed the explanation of this earlier. But was that contemplated as part of the efficiency effort that was outlined last year. And just the timing of it happened to be in the fourth quarter, or is that something different? And then what would the potential cost savings be from getting out of that agreement?

It is unrelated to the initiative however would be inline with our thinking about just improving overall results. It allows us basically to really ultimately make more of the money in Scout that we were sharing with the third party so we just terminated, we are basically terminating a marketing agreement with the third party and retaining on a go-forward basis those revenues through sales activities for scout.

Okay, so was there – I mean if you terminated in the fourth quarter, is there a potential I guess -- if you are not sharing the revenue or paying expense in the first quarter, how meaningful would that be? It's a pretty meaningful number to terminate the agreement.

So all I will say directly yes without giving you a number which I can’t give you a number but yes, we should benefit. It’s not material, we call it slight improvement.

Okay. All right. And then you mentioned I mean have you’ll seen any change I guess with regard to your pipeline. Mariner, you mentioned that it was still very strong. Are you seeing any change within the segments? I mean are you seeing more C&I or more term real estate? Any change directionally there?

Not particularly I think we are seeing strength across all of it. You know the size of those construction and CRE loans are much bigger than what we are used to doing so they will probably continue to outpace and the total volumes percentage growth just purely by the size of each particular deal, but other than the size I would say the growth and the sort of energy is strong across all the segments.

Okay. And then I guess a little bit separate from that, the two Marquette specialty lending lines, which are showed particular strength over the last couple of quarters. And I was just wondering if you could maybe talk about the outlook there in terms of maybe what’s going right now as opposed to what maybe didn't -- I guess what is better at the margin for those businesses?

Yes this is Mike. Thanks for noticing that by the way. That’s important and obviously it was important to our acquisition. You know in ABL, the numbers on a revolving credit basis would actually be better on the balance sheet but they had some customers that actually paid off and sold their businesses in 2016. So while we don’t give you the gross number and a paydown and paydown there was nice growth in that business that just didn’t show up because there is some activities going on in the portfolio. In factoring, we are up about $40 million and it’s been a very nice slip there as we’ve diversified not just into transportation but also in commercial, so that it’s part of 50:50 split now and we feel good about those businesses going forward. And we are putting efforts in them to grow.

And gas prices given the fact that 50% of the business is transportation related it will fluctuate some of that successful fluctuation based on gas prices.

Okay. And then last question on that front. Mariner and Mike, I mean with the success of those businesses and relatively higher -- I guess different businesses to what UMBF was engaged in prior to the acquisition. Are you looking to get into more lending lines like that in 2017?

Well without thinking about other business lines we think there is plenty of opportunity just to expand our exposure to asset base lending and factoring through just organic extension and hiring and expanding those businesses themselves. But earlier you asked was the M&A question, we do think that those are part of our outreach programs is our other asset based lenders and factoring businesses to bolt on to those businesses.

Okay. And then last question. There was a reference to modernizing your systems in the press release. With that, I mean with that would you expect equipment expense to rise meaningfully in 2017? Or is the 2016 growth rate good?

Well as I said I think at a minimum sort of trajectory wise you should expect to continue to see that investment. Without giving any particular guidance or number you should see us continue to invest at those levels.

Okay, all right. But you wouldn't expect it to be a double-digit growth rate.

No guidance there. I’ll just reflect back on what I just said I guess.

All right, fair enough. Thank you very much. Congratulations on a good quarter and a very strong year.

Thanks Peyton.

This concludes our question and answer session. I would now like to turn the conference back over to Kay Gregory for any closing remarks.

Thank you for joining us today. This call can be accessed via replay at our website beginning in about two hours and it will run through February 8. As always, you can contact UMB Investor Relations with any follow-up questions by calling 816-860-7106. Again, we appreciate your time and interest. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.