UMB Financial Corp (UMBF) 2016 Q4 法說會逐字稿

Good morning and welcome to the UMB Financial fourth-quarter and year-end 2016 financial results conference call and webcast. (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; Ron 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 the supporting slide deck, is available on our website and 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 will turn the call over to Mariner Kemper.

Thank you, Kay. Welcome, everyone, and thank you 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 have 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 our new president, some of the 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 over time. And as a largely commercial bank, increased 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, it could take quite some time to come to fruition.

Now turning to our results for the fourth quarter on slide 4, you will see the 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 6, 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, adjusting for the 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 include some noise, specifically on the expense side, including costs for 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 9, 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 or 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'll see history of net charge-offs, which were 0.22% for 2016, and have averaged just 0.29% over the 14 years shown. Nonperforming 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'll 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 progress we're 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 in the initiative. We remain focused on 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 Marquette customer base, following the completion of our integration in 2016. The acquisition doubled our presence in Arizona and Texas regions, and the combined efforts of our teams helped drive significant loan growth we experienced in 2016. Specifically in Arizona, loans have increased nearly 25% since the mid-2015 closing, led by our CRE and construction lenders.

Third, continue our progress in optimizing our balance sheet by shifting earning assets into 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 manage capital to enable profitable business growth and acquisition opportunities. During the year, we accreted capital to total risk-based capital, with the ratio increasing 2 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've said in the past two quarters, we're focused on efficiency and day-to-day operations. We will reduce the base expense growth and drive operating leverage and overall improvements in performance metrics over time.

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 at 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 noninterest income, which on a linked quarter basis decreased 4.6%, driven largely by decreased gains on sale of securities and lower equity earnings on alternative investments.

Trust and securities processing income remains stable as revenue from fund services and 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 noninterest 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 and brokerage fees impacted by growth in money market balances and 12b-1 fees following the December 20, 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 noninterest expense, which on an [assetated] basis, increased $6.5 million or 3.6% compared to the third-quarter 2016. This increase included a $2.7 million nonrecurring the 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 noninterest 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 systems.

As we've said in prior quarters, we will 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 10-year treasury was near its lowest level. Details related to the past quarter's 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 an 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 will cover just a few highlights and then turn it over to Mike for more detail on the Bank segment.

Details for our institutional investment management segment, 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 10 funds outperformed their benchmarks, and seven of the 10 funds performed about the median for their respective classes. Due to the outperformance, 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 decile on a one- and 10-year basis in the foreign large blend category. The Scout Mid Cap Fund reached its 10th anniversary on October 31, and is ranked in the top percentile on a 10-year basis. It has been in the top quartile in eight years of its 10-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 equity markets in the quarter was more than offset by the impact 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. The performance improvements we've seen in several categories are encouraging. And while we can't 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 a 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 has 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 contain 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 be happy to take your questions. Mike?

Thanks, Ram. In the Bank segment, pretax profit margin for the fourth quarter was 24.9% compared to 23% in the third quarter and 17.8% a year ago. On slides 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 increased $6.9 million or 5.7% compared to the third quarter, as loan yields expended by 10 basis points.

Along with the expense control portion of our efficiency initiatives, we have increased our discipline around pricing, putting on loans that lead to better risk-adjusted returns and are seeing the benefits in rising NIM.

Noninterest 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 the slide 39, we saw strong gross loan production of $685 million in the fourth quarter, one of our best quarters 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 have reported, our focused 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 top-line 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 a more detailed look at our CRE and construction portfolio. We added $214 million in those two categories during the fourth quarter, and $828 million during the past 12 months. Office building projects represented 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-end balances by 29.8% compared to September 30. For the full year, we funded 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 one-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 associated incentive structures. At year-end, 40 locations had transitioned to this model. And we're 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 to 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 following open enrollment season, and balances are impacted in first quarter as employers fund participant 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 catalysts, 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, increase national exposure for HSA plans.

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

(Operator Instructions). Chris McGratty, KBW.

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 certainly remain focused on that goal. And we -- I think that -- the real way to think about us, going forward, is if you kind of look back at 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 will see the results from 2016. We are beginning to really see that operating leverage, or effectiveness; the expansion between our expenses and our revenue. And we would like to 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 this 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 are making to improve the business. And then as I think in Mike's comments about the money that we're spending, Ram -- I think Ram actually -- about the money we're spending to maintain, 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 are 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 previous quarters, right now we are 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 there it is why we 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 focused on performance.

Grade. 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 the third quarter. So we always have some kind of purchase accounting adjustment or acceleration of fees when loans pay down. As Mike mentioned in his prepared comments, there was a little bit 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 $250,000 on a quarter-over-quarter basis.

Okay. And then could 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 is an ETR, yes.

Yes, thanks a lot. Appreciate it.

Steve Moss, FBR.

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% -- so based on everything that I just told Chris, approximately 4 to 5 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-off point for 2017 would probably be [2.95%] to [2.96%].

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 our balance sheet right now, we have only $350 million of these liquid agency and treasury securities; that's down from $1 billion, a year ago.

So if rates stay at the current level, we'll have the opportunity to reinvest some of this cash flow from our mortgage-backed bonds at higher rates. So the long and short of it is, as we look into 2017, the fourth-quarter reported run rate is probably good 1, if rates stay the way they are. Obviously there will 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 that 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 practice 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 the second part of that is also what drove the increase in paydowns this quarter?

So as we've done in the past, we've been able to give you what we believe is an outlook for our pipeline into the coming quarter. It's about as far as we are 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 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 gross loan production that we've been seeing historically to be somewhat muted. We don't know at what level, because it's hard to predict. But we do believe it will be somewhat muted in the first quarter as that seasoning takes place and we see term paydowns and payoffs.

Great, thank you very much.

Ebrahim Poonawala, Bank of America.

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 think the expense level, growth rate level of 2016 was -- 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 expenses will vacillate with 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 conversation, 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 a year-over-year basis, we are 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 and fourth, most likely what you'll see is an acceleration fourth quarter to first, because we are now entering open enrollment period. And as I said in my prepared remarks, that's when most employers fund their accounts.

The other thing to keep in mind -- there are a lot of things being talked about with the election and what the administration may do. We think there's three things that are likely to come out of that discussion: first, just a higher participation rate in HSAs in the country; an expansion, possibly, of HSAs into Medicare; and then higher contribution limits.

The higher contribution limits 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 of deposits on our books. And at our estimated current spread right now of 280 basis points, that would be $6.6 million.

So we have our 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 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 said in the past, which is that we do have a dedicated team focused on targeting and having conversations and building relationships with potential banks that would -- we feel would be a 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 term are pretty muted, based on environmental factors.

Understood. Thanks for taking my questions.

John Rodis, FIG Partners.

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 had in the fourth quarter is -- if you look at the last quarters before that, that's been the run rate.

As you are well aware, there are a lot of metrics that going to what that looks like, and it's very scripted and [proscripted]. So it's hard to tell exactly what will happen. There are several things in there: loss history, growth rates, et cetera. So there's variables in there that 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 sentiment-wise, obviously, energy prices being where they are really probably provides a little bit of relief to those companies operating within the base.

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

No. At December 30, it was still only 3.5% of the total loan book, which I think is pretty much flat from where we have been before.

Which means it is slightly smaller because the loan portfolio is bigger. So we're not trying to grow it or shrink it. Because I think you know we're just managing the book and looking for good 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 in the first, second quarter, in deposits?

Well, remember, we have the public fund deposits, so you're going to see differences obviously due to that. That's probably the largest mover. As we have talked about before, we think the real value on any bank's balance sheet is on the liability side. And this is a place where we will continue to work and lead our industry around building a core deposit franchise that is made up of sticky customers, and are reliable and sustainable.

We have been pleasantly surprised so far with our ability to hold pricing where we have with the first Fed increase. But obviously we're going to go through -- if the Fed increases happen as planned in 2017, we will 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. (multiple speakers) Yes; it's not a material mover.

Okay. Thanks, guys.

Matt Olney, Stephens.

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 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 rough breakdown of that 10 basis points is 3 basis points were due to existing clients borrowing more. We have 4 basis points that are due to paydowns and payoffs where the weighted cost of their borrowings is less than what the total portfolio is. So obviously it raises the portfolio.

And then as Mariner -- or as Ram mentioned in his prepared remarks, a little over 3 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 is been relatively flat. I don't see it right now as a driver of increased loan yields. And I think those explanations I just gave you for the 10 basis points show that.

Just that -- I think we will see some positive effect going forward -- continued, as we have -- as we continue to remix a little bit. So I think as we continue to see the strength in term and real estate, we will see our loan yields probably continue, not at the same accelerated rate as we've seen; but we see some -- I think there's some -- likely to see some upside -- 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.

That doesn't include our index loans that obviously didn't enjoy a full quarter at the new Fed rates. So you will see that in the first quarter as well. So obviously, that will go up.

And rate improvement from the -- 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 we should benefit from that as well.

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

(Operator Instructions). Peyton Green, Piper Jaffray.

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, it would be in line 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 a third party. So we just terminated -- we are basically terminating a marketing agreement with a third party and retaining, on a go-forward basis, those revenues through sales activities for Scout.

Okay, so was there -- if you terminated in the fourth quarter, is there a potential -- 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 I would say, directionally, yes without giving you a number, which I can't give you a number. But yes, we should benefit -- it's not material to us. It would be -- call it slight improvement.

Okay. All right. And then you mentioned -- have you all seen any change with regard to your pipeline? Mariner, you mentioned that it was still very strong. Are you seeing any change within the segments? 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. The size of those construction and the CRE loans are much bigger than what we're used to doing. So they will probably continue to outpace in 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 of 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 quarters. And I was just wondering if you could maybe talk about the outlook there in terms of maybe what is 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. In ABL, their 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 the paydown paydown, there was nice growth in that business that just didn't show up because of some other activities going on in the portfolio.

In factoring, we are up about $40 million. And it's been a very nice lift there as we've diversified not just into transportation, but also in commercial. So that -- it's about a 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 successfully fluctuated based on gas prices.

Okay. And then last question on that front. Mariner and Mike, 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?

Without thinking about other business lines, we think there is plenty opportunity just to expand our exposure to asset-based lending in factoring through just organic expansion, 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 program 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, 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 trajectory-wise, you should expect to continue to see that investment. Without giving any particular guidance on what that number is, 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. Reflect back on what I just said, I guess. (laughter)

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

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.