UMB Financial Corporation (UMBF) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the UMB Financial Fourth Quarter 2012 Financial Results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session and instructions will be provided at that time. [Operator instructions] I would like to remind everyone that this conference call is being recorded today Wednesday, January 23, 2013 at 8:30 AM Central Time. I will now turn the conference over to Ms. Kay McMillan, please go ahead.

Good morning, everyone and thank you for joining us for our conference call and webcast regarding our fourth quarter and full year 2012 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 the management of UMB believes our assumptions are reasonable, UMB cautions that material change 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 SEC, may cause actual results to differ materially from those discussed in this call. UMB has no duty to update such statements and undertakes no obligation to update or supplement forward-looking statements that become untrue because of new information, future events or otherwise. By now, we hope most of you on the call are listening via webcast have had a chance to review our earnings release, which was issued yesterday afternoon. If not, you will find it on our website 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. Mariner will provide high level commentary on our results and Mike will review the details of our financials, then Peter will review key fee income business drivers. Following that we'll be happy to answer your questions. Now, I'll turn the call over to Mariner Kemper.

Thank you, Kay. Welcome everyone and thank you for joining us today as we talk about our 2012 results. For the fourth quarter we reported total revenue of $189.5 million an increase of 6.9% compared to the fourth quarter of 2011. Net income for the quarter was $21.1 million or $0.52 per diluted share. On a full year basis we achieved record net income and total revenue. For 2012 we generated net income of $122.7 million or $3.04 per diluted share, an increase of 15.3% compared to 2011 on total revenue of $778.2 million. Noninterest income increased 11.8% to $109.3 million for the quarter and represented 57.7% of total revenue. For the full-year noninterest income was $458.1 million an increase of 10.6% and represented nearly 59% of total revenue. This advantage has been more apparent in this protracted low interest rate environment. With rates likely to remain low for the foreseeable future, our net interest margin will continue to be under pressure. While we are focused on improving our loan-to-deposit ratio we'll continue to rely more heavily on growing our fee business. That said I am pleased to report double-digit loan growth once again, making this the 11th consecutive quarter of increased loan growth. Average net loans were $5.4 billion at quarter end, an increase of 11.6% over the fourth quarter of 2011, as stated total loans stood at $5.7 billion at period end. Compared to the industry, the nearly 1,000 regulated depositories that had announced year end quarter results as of January 21st reported a median increase in loan balances of just 1.5%. Commercial banking is a core competency at UMB. C&I loan balances were $2.9 billion at the end of the fourth quarter, up nearly 29% from $2.2 billion a year ago. Over the past 12 months our commercial lending team has added $639 million in outstanding loans and more than $700 million in new commitments. Commitments at December 31, had increased by nearly 12.6% and our utilization rate was 28.4% compared to 26% at the same point a year ago. We are pleased with this improvement although utilization rates remain significantly lower than historical averages. We have seen growth across our footprint as our lenders penetrate some of our newer markets. While the Kansas City and Denver areas continue to provide the largest dollar volume in new loans, the fastest growing regions are Arizona, Omaha and Oklahoma. To further demonstrate our commitment to commercial banking, I'm happy to announce the opening of a new loan production office in the Dallas, Fort Worth market. Dallas provides an excellent opportunity to expand our commercial and treasury management business footprint. Currently we have more than 100 clients in Texas using some of our national products. Credit quality at UMB remains strong and continues to differentiate us from our peers. Overall nonperforming loans as a percent of total loans were 0.49% and net charge-offs for the quarter were 0.29%. For the full year of 2012 our efficiency ratio is 74.01%, improved slightly from 75.04% for 2011. While we don't provide specific guidance related to our efficiency ratio we do recognize that this isn't where we want it to be. Part of our ongoing effort to drive growth includes investment in resources such as technology and people. As this difficult environment continues we are accelerating our focus on broad companywide expense management. Before we hear from Mike, I want to briefly mention the structural change to our bank charters. Effective January 1st, the charters of UMB National Bank of America, UMB Colorado, and UMB Arizona have been merged into UMB Bank NA charter. This change was seamless to our customers and eliminates some of the compliance and regulatory complexity that comes with multiple charters. With that I'll turn the call over to Mike Hagedorn, who will walk you through our financial results in more detail. Mike?

Thanks Mariner and welcome everyone. First I'll review our Company's financials and then provide a more detailed summary of our core business segments. During the fourth quarter our balance sheet grew 10.6% and average earning assets increased 11.4% to $12.8 billion. The average balance in our investment portfolio for the quarter was $6.9 billion, 4.8% higher than last quarter and 15.3% higher than the fourth quarter a year ago. The average yield on securities was 1.96%, a decrease of 17 basis points from last quarter and a decrease of 36 basis points from the fourth quarter of 2011. Activity during the fourth quarter included the roll off of $392 million in core portfolio securities at an average yield of 2.2%. In turn we purchased $672 million of securities at an average yield of 1.35%. The average life is now 39.95 months down from 42.57 months last quarter. The average life in the fourth quarter of 2011 was 28.17 months. Continued changes in the portfolio along with some modifications to our security modeling inputs and tools shortened the duration slightly to 36.96 months from 38.7 months in the third quarter of 2012. Over the next three months $421 million of core investments with an average yield of 1.92% will cash flow and over the next 12 months $1.5 billion of core investments with an average yield of 1.89% will cash flow. Additionally 71% of our total loan portfolio is expected to reprice or mature in the next 12 months. As we have reported the securities mix in our portfolio has shifted and just over 50% of the total was invested in mortgage-backed securities at the end of the quarter. We continually monitor our amortization risk and have not seen any significant changes in our average book price. Allowance for loan losses is $71.4 million and allowance as a percent of total loans is now 1.26% compared to 1.45% a year ago. Although our allowance as a percent of loans has decreased we believe this level is appropriate given the high quality of our loan portfolio and the history of charge-offs. Our coverage is more than two and a half times the amount of non-performing loans while the median industry allowance reported for the third quarter would have covered just two thirds of nonperforming loans. We remain well capitalized with Tier one leverage and total risk based capital ratios of 11.05%, 6.81% and 11.92% respectively. Looking at the liability side of the balance sheet, average deposits for the quarter increased 12% to $11.1 billion. Average noninterest bearing deposits comprised more than 42% of our total deposits which puts us in the top 4% of the industry according to SNL Financial. Our high percentage of free funds is a competitive advantage and is reflected in our low cost of funds. Our overall cost of funds was 23 basis points for the fourth quarter versus 32 basis points a year ago. If you factor in free funds this brings the number down to just 14 basis points. For the year those costs were 26 and 17 basis points respectively. As you know we have a substantial public fund business that typically results in a seasonal influx of deposits beginning in the fourth quarter and usually peaking in the first quarter. We haven't seen any substantial changes this year and a level of these deposits is similar to what we've seen in prior years. Shareholder equity was $1.3 billion, a 10.5% increase from a year ago. Since the end of 2007 equity has increased 43.7%. Additionally, total shareholder return over the past 5 years was 25.2%. For the same period returns from the S&P 500 and SNL US bank index were 8.6% and negative 33.9% respectively. Reviewing other financial highlights, return on average assets was 0.6% for the quarter, down from 0.74% in fourth quarter 2011. For the full year 2012, return on average assets improved from 0.86% in 2011 to 0.92%. Return on average equity for the fourth quarter was 6.47% compared to 7.83% a year ago. For the full year return on average equity was 9.75%. Turning to the income statement for the fourth quarter, 2012 net interest income was virtually unchanged, up just less than 1% to $80.2 million. As I mentioned, average earning asset balances increased to 11.4%. However, the changing mix resulted in a lower overall yield of 2.78% down 33 basis points from 3.11% for the fourth quarter of 2011. Average net interest margin for the quarter decreased 27 basis points to 2.64%. For the year ended December 31, 2012 net interest income was up slightly to $320 million compared to $317 million in 2011. Average net interest margin for the year decreased 19 basis points to 2.75%. Provision expense decreased $1 million or 20% compared to the fourth quarter 2011. For the full year provision was 21% or 4.7 million lower in 2011. As we've discussed in several prior quarter calls, our provision expense is a reflection of our consistent methodology which considers the inherent risks in our loan portfolio as well as other qualitative factors. As Mariner mentioned, noninterest income increased 11.8% to $109.3 million comparing favorably to $97.8 million for the fourth quarter 2011. The increase in noninterest income was driven largely by our 14.2% increase in trust and securities processing revenue which for the quarter was $58.3 million compared to $51.1 million for the fourth quarter of 2011. Also contributing to the increase in noninterest income for the quarter we're 12.7% higher bankcard fees and an 8% increase in deposit service charges. For the year total noninterest income increase 10.6% driven largely by an 8% increase in trust and securities processing income. Other noninterest income increased $14.6 million or 109.7% due primarily to an $8.7 million adjustment decreasing the contingent consideration liabilities on acquisitions. As you may recall we had an $8.2 million adjustment in the first quarter of 2012 and we made an additional adjustment of 534,000 in the fourth quarter. The related entries that impact our expenses which I will discuss in a moment. These adjustments were due to the 2012 adoption of new accounting rules related to fair value measurements along with changes in cash flow projections related to the earn out agreements on some of our acquisitions. We will continue to monitor these liabilities and we'll likely have some future adjustments either up or down throughout the earn out period. For the fourth quarter noninterest expense increased 11.1% or $15.7 million to $158 million. This increase was driven primarily by higher salary and benefit expense of $9.1 million. Higher medical insurance costs and profit sharing drove the increase in employee benefits. Other expense increased $2.3 million primarily due to a $4.2 million fair value adjustment related to our earn out agreements. In the same period in 2011 these largely non cash adjustments totaled $1.8 million. For the full year 2012, expenses were up 4.9%. This $27.7 million increase was due primarily to higher salary and benefit expense of $25.1 million. Other noninterest expense increased $3 million or 10.2% driven largely by our full year adjustment of $6.1 million in contingent liabilities related to our earn out agreements versus an adjustment of only $2.6 million in 2011. Now I'll review the results of our four business segments. Peter will provide more detail on the drivers in these segments later in the call. Looking first at Institutional Investment Management for the fourth quarter, noninterest income was $25.5 million, an increase of 28.8% versus $20 million in the fourth quarter of 2011. Noninterest expense increased 37% to $20.2 million compared to the fourth quarter a year ago. Net income before tax was $5.4 million, an increase of 5.2% when compared to $5.1 million in the fourth quarter of 2011 and the pretax profit margin for Institutional Investment Management decline from 25.7% in the fourth quarter of 2011 to 21% due in part to the earn out liability adjustments mentioned earlier. For the full year noninterest income for Institutional Investment Management increased 19.2% to just over $100 million. Expenses rose 10.1% to $70.5 million and the resulting pretax net income increased 48.2% to $29.6 million when compared to 2011. And finally the pretax profit margin for this segment in 2012 was $29.5 million. Moving to Asset Servicing for the fourth quarter, total noninterest income for the segment increased 6.8% to $18.4 million. Noninterest expense increased 7.5% to $17 million compared to the fourth quarter 2011. Again, a portion of the contingent liability adjustment impacts expenses in this segment. Net income before tax increased 12.8% to $1.8 million for the quarter and finally the pretax profit margin for asset servicing was 9.3% for the fourth quarter improving from 8.9% a year ago. For the full year noninterest income for Asset Servicing increased 8.3% to $75.6 million. Expenses rose 5.8% to $68 million and the resulting pretax net income increased 33% to $9.2 million when compared to 2011. And finally the profit tax or the pretax profit margin in this segment was 11.9% for 2012. In Payment Solutions for the fourth quarter, total noninterest income increase 36% to $17.6 million. Net interest income increase 6.9% to $11.2 million and noninterest expense increased 30.5% to $19.9 million compared to the fourth quarter of 2011. Impacting noninterest expense for this segment in the fourth quarter were additional salary and benefit expense for newly acquired positions related to certain client relationships acquired from First Data Resources. Net income before tax was $6.6 million, an increase of 22.2% from a year ago and the pretax profit margin for Payment Solutions was 23% for the fourth quarter. For the full year, non interest income for Payment Solutions increased 20.1% to $65.7 million, net interest income increased 3% to $43.4 million and expenses rose 22.2% to $68.9 million. The primary drivers of increased expenses for 2012 included the salary and benefit of cost that I mentioned and some timing differences of cash payments and accruals related to advertising initiatives. The resulting pretax net income increased 5% to $30.8 million when compared to 2011 and the pretax profit margin for this segment was $28.2 million for 2012. Finally our fourth segment, the Bank, in the fourth quarter, had total noninterest income that was unchanged at $47.8 million. Net interest income for this segment slightly from $68.8 million in the fourth quarter of 2011 to $68.6 million this quarter and noninterest expense increased 4.6% to $100.9 million compared to a year ago. Net income before tax was $13.8 for the quarter compared to $18 million a year ago, a decrease of 23.3% and the pretax profit margin for the bank was 11.9% for the quarter. For the full year, noninterest for the bank increased 5.3% to $216.7 million. Net interest income increased less than 1% to $275.2 million and expenses rose $1.3 million to $383 million. The resulting pretax net income increased 11.6% to $100.7 million when compared to 2011 and the bank’s pretax profit margin for 2012 was 20.5%. With that I’ll turn the call over to Peter to discuss the drivers behind our business results.

Thanks Mike and good morning everyone. As Mariner mentioned earlier, fees represented nearly 58% of revenue this quarter. This gives us a strong advantage in an industry with the medium level of fee income to total revenue was 17.8% in the third quarter according to SNL Financial. To provide additional context to our results, I’d like to discuss the primary drivers of our fee income and highlight some of the developments in each of our operating segments. Let me first begin with Institutional Investment Management which is comprised of Scout Investments, their equity in fixed income mutual funds and separately managed investment accounts. As we have noted before, Scout is a leading national asset manager supporting multiple distribution channels with high quality investment solutions. Revenue in this segment is driven by average mutual fund and separately managed account assets, net flows and equity and fixed income market performance. To add some context, the S&P 500 decreased 4/10 of 1% and the MSGI EFA [ph] increased 6.6% during the fourth quarter. For the full year 2012 S&P 500 increased 16% and the MSGI EFA [ph] increased by 17.9%. Positive financial markets along with strong performance and net flows combined to contribute to a solid year for Scout. At year end, assets under management stood at $23.5 billion, an increase of 19.6% when compared to year end 2011. Assets in Scout mutual funds closed the period at $11.3 billion. Scout's fixed income separately managed accounts totaled $11.4 billion and Scout's equity separately managed accounts totaled $925 million in assets under management. That level of assets under management was as of December 31 and we’re pleased with the growth that Scout posted in 2012. You may have seen Scout’s recent news release that assets under management has reached a new milestone. Scout recently received its largest ever equity mandate from a large insurance company to sub-advised two mid cap accounts. Those accounts funded this month in excess of $1 billion and when combined with inflows and performance it pushed our assets over the $25 billion mark. I'd like to congratulate the entire Scout team on a great 2012 and a strong start to 2013. As you know, we look at our flows separated by equity and fixed income across all of Scout's products including the Scout Funds and our separately managed accounts. In the fourth quarter, Scout equity products posted a $119.8 million in net flows. The Scout equity mutual funds added $40.8 million with positive flows of $72 million in the Scout International Fund. Scout's separately managed equity accounts had net flows of $78.9 million for the fourth quarter, also led by international strategies. The improvement in the equity markets during the quarter positively impacted Scout's equity assets under management by $606 million. Scout's fixed income products experienced net flows of $204.1 million during the fourth quarter. The Scout fixed income funds and net inflows of $116 million led by the Scout unconstrained bond fund. Scout's fixed income separately managed accounts experienced $88.1 million in net inflows. Market action had a net positive impact of $2.4 million on assets in our fixed income funds and separately managed accounts during the quarter. For the year, Scout's equity products posted $705.7 million in net flows. The improvement in the equity markets during the year positively impacted Scout’s equity assets under management by $1.8 billion. Scout's fixed income products experienced net inflows of $564.6 million for 2012. Market action here had a net positive impact of $832.6 million on our fixed income funds and fixed income separately managed accounts during 2012. Year-to-date, Scout Investments overall has achieved $1.3 billion in net flows for an organic growth rate of 6.5%. Looking just at the Scout Funds, the net flow rate for 2010 was 10%. Scout has received many accolades during 2012 including national recognitions from leading rating organizations and financial publications which have helped to increase investor awareness about Scout. In addition, the fixed income team at Reams Asset Management, a division of Scout Investment, was nominated for Morningstar’s 2012 U.S. Fixed Income Fund Manager Of The Year. Asset Servicing segment is comprised of UMB Fund Services. The primary drivers of revenue in this segment are new business, transaction volumes in our client’s funds and accounts and overall active valuations. Our fees are based on a variety of factors depending on client agreements, in basis points on assets administered, transaction fees, or poor account fees. Asset servicing ended the quarter with $156 billion in assets under administration, compared to $150 billion at the end of September and $206.4 billion in the fourth quarter of 2011. New relationships as well as innovative products such as our multiple service trust, contributed to the year-over-year increase to net income that Mike mentioned earlier in the call. In our Payment Solutions segment, there are a number of important business drivers, including overall credit and debit card purchase volume and the resulting card interchange. HSA deposits, FSA and HSA accounts and ACH wire and check transaction volumes grab this business. We grouped card purchase volume into four major categories: commercial credit, consumer credit, consumer debit and healthcare debit. For the fourth quarter purchase volume across our suite of interchanged generating card products increased 8.4% to $1.4 billion when compared to the fourth quarter of 2011. For the full year 2012, card purchases totaled $6 billion an increase of 11.6% compared to 2011. For the quarter, interchanged revenue was $15.7 million, an increase of 14.9% from a year ago. The strong performance given as the Durban amendment became effective in October of 2011. For the full year 2012, interchanged revenue was $61.9 million an increase of 3.4% compared to 2011. Spending by our commercial credit card customers increased 12.4% during the fourth quarter and 12.9% for the full year when compared to the same period in 2011. Purchase volume in this area has grown consistently and commercial credit cards provide the largest portion of our interchanged revenue, representing more than 45% of interchange, both for the fourth quarter and for the year. We continue to develop new relationships, build pipeline strength and look at innovative products and technology in the payment space. As Mike mentioned, in the fourth quarter, UMB assumed a broker dealer payment processing business from First Data Resources. This business provides check and ACH processing services for a variety of brokerage firms and other financial institutions. By adding these clients, UMB’s existing institutional cash management business were able to grow a core competency and extend UMB’s outstanding service to a new set of clients. Moving to UMB Healthcare Services, deposits in our custody accounts stood at $400 million at quarter end, an increase of 33.9% compared to the fourth quarter of 2011. The total number of flexible spending arrangements and health savings accounts surpassed $3 million for the first time, representing a 27% increase from just one year ago. We had another strong quarter in the business with purchase volumes of $421 million, an increase of 20.4% over the same period last year. Interchange revenue from healthcare card purchases increased 25.7% over the last year to $1.8 million. Healthcare Services continues to be a reliable, strategic and low cost source of deposits and a growing source of debit card interchange for us. As Mariner mentioned earlier UMB is known for strong credit quality and the quality of our card portfolio was certainly no exception. Credit card quality remained superior to industry averages and has improved over the past several quarters with delinquency rates dropping to 1.5% from 1.8% a year ago. Total credit card charge-offs were 2.2% of card balances for the fourth quarter versus 2.7% in the fourth quarter of 2011. According to Fitch rating services third quarter 2012 industry credit card charge-offs averaged 4.6%. The final segment I’ll cover today is our bank, represented by our commercial banking, consumer banking, and asset management businesses. Mariner covered the highlights of our commercial banking business and the very strong loan growth there. In consumer banking we reported an increase of 7.7% in home equity line of credit balances, which now stands at $574 million. Since 2008 the beginning of the economic crises, home equity line commitments have increased nearly 60% and outstanding balances have risen by 50%. Portfolio utilization was approximately 47% at year-end. The HELOC delinquency rate was 0.22% in the fourth quarter compared to an industry average of 3% at the end of the third quarter. Assets under management for individuals and institutions stood at $9.6 billion at December 31, an increase of 15.5% from a year ago. Comprising the $9.6 billion is $6.4 billion in assets under management within our investment and wealth management group and $3.2 billion in assets managed by Prairie Capital Management. With that let me hand the call back over to Mariner, who will close out our prepared remarks and open the line for your questions. Mariner?

As we end the call today I’d like to share a little of what we’re hearing from our customers. In general our commercial customers are experiencing modest growth and limited acquisition plans, although certain industries such as Energy, Healthcare, and Transportation continue to expand capital spending. Manufacturing, Service sectors seem more cautious pending final determination of the ongoing fiscal matters in Washington and the new healthcare laws. Many are still taking a wait and see approach. Unemployment rates in our larger markets continue to improve and most areas are at early 2009 levels. Home prices have increased in several of our markets specifically in Arizona where prices are 20% higher than a year ago and in Colorado which has seen 8% increase in prices. Despite the drought the agricultural economy continues to be strong. Many of our customers are involved in production agriculture and they’re reporting no substantial increase in operating costs in most categories. We continue to have a strong commercial loan pipeline going into the first quarter and are solidly focused on loan growth. 2013 marks our 100th anniversary. We look forward to celebrating this milestone on April 25th, when we’ll officially open the trading day on the NASDAQ. Please save the date to join us, as we will be hosting an Investor Day in New York to share with you all our vision for our Company. Watch for more details soon. We appreciate your interest in UMB and hope that you find value in listening to our quarterly conference call. With that I’ll turn it back to the operator, who will open the line for your questions. Happy New Year and thanks for being with us.

[Operator instructions] Your first question comes from the line of Chris McGratty from KBW.

This is John Barber filling in for Chris. In your prepared remarks you indicated the margin is likely to be under pressure, but I was just wondering given the strong loan growth you have had over the last few quarters if you think you’ll be able to grow NII in ’13?

John, we continue to feel the pressure. I don’t see that pressure alleviating because of loan growth. We’ll certainly be focused on loan growth but you got to run three times as hard in this environment with interest rates being where they are.

This is Mike. I would say clearly our strategy is to replace the growth you’ve seen in the investment portfolio with loans that obviously have a higher yield. I think the thing to watch will be the growth on the liability side, will that outpace ability to do more loans.

Okay, and excluding the $4 million charge this quarter is this a good run rate for expenses going forward?

Yes so there, there is a noisy quarter as it relates noninterest expense, let me kind of go through a couple of items, I think you should be aware of. As we disclosed the $4.2 million for earn out liability there is also $0.5 million in additional profit sharing that we took as a result of record year and full year earnings that we had. There is also $1.3 million related to the first data resources that both Peter and I talked about, that’s the impact of having that from November to December. It's not a full quarter. And then there were some other purchases of computer equipment in the fourth quarter. So if you combine all that there is about $6.8 million of those types of items that are built into the fourth quarter expense base.

Last question I had, the tax rate this quarter is that a good effective rate for ’13?

Yes so as you look forward to ’13, one of the benefits that we’re going to derive from charter collapse is hopefully an effective lower tax rate. Recently you have seen some increases, if you look back at UMB on the tax rate most of that is the effects of state marginal tax rates going up and also a lower amount of municipal revenue compared to the total, but as we look forward with the charter collapse an increased use of tax credits for various projects that we’re involved in. We think the effective tax rate will go down slightly in 2013. Probably be somewhere in the neighborhood of about 27.2%.

Your next question comes from the line of Matt Olney from Stephens.

To start with, Mariner you mentioned the Dallas LPO office. Can you let us know kind of what types of customers you will be focused on and how is that different from other markets and secondly will you be lending directly to energy borrowers in Dallas?

We expect to really expand into Dallas the same way we expanded in any of our other expansion markets with mostly being commercial borrowers and treasury management clients certainly selling any of our other national products that we can. We do intend to lend into the energy market down there. That’s not new for us. You know we’re already in Oklahoma and Colorado where we lend into those markets and it’s in a obviously a very natural slide into the Dallas market with it being highly dominated by energy. But like any large market as Dallas is there is certainly need for all the other services and manufacturing. So there is a pretty broad based diversified market down there and we fully intend to penetrate across all sectors.

Okay, it's helpful and I guess sticking with the bank segment obviously due to loan growth in the fourth quarter. I guess some of your peers Mariner have talked about the significant closings of some of these loans prior to year end, which is obviously good, but the closings were still strong in 4Q ’12. Some of your peers talk about a softer pipeline heading into the first quarter. So how should we think about your pipeline today versus three months’ ago?

I would say that it -- while we did, also like other banks, see year-end special borrowings related to anticipated tax changes, we see a similar pipeline really going into the first quarter. It remains as strong as it was in the fourth quarter.

Okay and then lastly, you know it looks like the issue with the stock price being down this morning, is on the expense side and then you’ve been very active in reinvesting within some of your core businesses. So strategically do you anticipate a similar reinvestment of your core businesses in future years or are you looking at all to slow down some of your reinvestments in those businesses?

Yes this is Mike, I will take that one. We’re going to constantly invest where we think we can get a proper payoff. So I don’t think that you should think of something stopping or slowing down materially. It depends on the opportunity. That said, scout and the Asset Servicing businesses are in pretty good shape. They are going to need investment but they are in pretty good shape. The bank is probably from a core technology perspective. The place where you’ll see the largest investments.

Okay.

Mostly care and feeding investments, we have closed most of the gaps we have. So it’s just really keeping things healthy.

It will be more technology to Mariners point than say brick and motor as an example.

Yes, but don’t underestimate the burdens being imposed upon us with new regulations, both in terms of technology, in terms of people and in terms of just keeping up with the myriad of regulations that are currently being thrust upon us.

Yes, that’s a great point. Most people think about that compliance cost is showing up on the GL line for compliances. It actually shows up in people.

And tech.

Your next question comes from the line of Peyton Green from Sterne, Agee.

I just wondered if you could comment Mike, I think you mentioned this a little bit later in the prepared remarks, but if you could comment on the expense side. You mentioned that there was over $6 million in lumpiness in the fourth quarter.

Yes, that’s…

I heard the $500,000 in profit sharing and $1.3 million related to First Data, but if you could maybe, I did not catch what the other you know 4.5 or so was related to?

That’s here in our liability.

That's [indiscernible] liability, that was in the prepared remarks.

Okay, and I guess is there, I mean the personnel expense verses the revenue growth. I mean when does that slow down, when do you get leverage from having a lot of people on the ground in ’11 and ’12 versus prior years or with this margin environment are we just not going to see it till rates go up?

Well I think, Peyton, this is Mariner. I mean that is mostly the answer which is we are really seeing leverage on an independent business unit level if you look at the investments we have made in those businesses we are seeing leverage. The pain you're seeing is as you mentioned really at the bank level with margin compression and the persistent low interest rate environment and it's really hard to outgrow that and our best ability to do that is to grow loans and to control expenses at the bank level and we are doing everything we can and are very focused on it.

Okay. Is it with regard to loan pricing? I think couple of quarters ago you were hopeful that pricing was starting to stabilize yet bond yields continued to come down. How would you expect that trend to carry out into the first half of '13.

You know, I wish I knew, Peyton, I wish I could tell you for sure the answer to that because I have talked about feeling like it has flowed down in the past. It has continued to come down a bit. I think part of the reason for our anticipation and then that not coming through is how long we have been in this interest rate environment. The longer we stay in the harder the banks compete for the few limited options we have to put our money to work. And so I would like to think that we're coming to the bottom but it's still highly competitive and the options we have for putting our money to work outside the loan portfolio is still very limited as an industry. So there could be more pressure.

Okay. Maybe to answer it another way. Year over year, how much spread compression did you see in the spread over Libor on your C&I loans?

On the spread to Libor. I have to go back -- I don't have that handy. It's come down -- if I were guessing, I'd say we've seen 25 basis points compression there. I don’t have that at my fingertips. We can talk about contraction across the board but specifically related to Libor...

I think Mariner's guesstimate is pretty close because our net interest margin compression from a year ago was 27 basis points. He said 25 so I think that's probably a pretty good number.

Okay. And then on the chart of consolidation how much of expense savings for the pre-tax side do you hope to get ignoring the lower effective tax rate?

Peyton, I think we'll certainly see some at this point. As of January 1 it's just a legal consolidation. So as we sit here today we're talking basically about compliance and regulatory burden relief as we get in towards the end of the year when we're likely to do the system collapse. We'll have more for you on that later. We have some estimates of our own but they're probably premature to share with you. There's certainly savings there but it's probably too early to guesstimate that estimate for you.

So again, there's no substance attached to that?

Not at this point.

Okay. And then the First Data business. How is that going to help your scale in that business and what was the revenue contribution for that given the expenses of about $1.3 million.

For the fourth quarter, I remember it wasn’t a full fourth quarter because that business came over on November 1. We estimate that at about $1.5 million in revenue and there is a revenue share component of that that runs for about 2 years and so we won't realize the full operating leverage on this business at least until 2 years when that revenue share is no longer part of the equation.

Peyton, this is Peter. In terms of the strategic imperative to do it, we picked up some of the largest broker-dealers in the country. I can't give you their names but trust me, they're the 3, 4, 5 largest broker-dealers in the country. It was a piece of business FDR [ph] had for a long time and it just wasn't strategic to them any longer. For us it is strategic. We're trying to build scale in the payments business in a whole bunch of different ways and this gave us immediate scale or added scale to our already pretty impressive business in providing check and ACH processing. But the real opportunity here isn't about providing check and ACH processing for these large DDs [ph]. It's really about penetrating those households more deeply with our credit card products, with our debit card products, with our new e-play [ph] products and other products that we brought to market recently. And so we really want -- a lot of these broker-dealers are getting rid of their banks. Many of them started to go into banking. They realized the regulatory burdens and the capital requirements were something they didn't want to deal with. So as a consequence, our strategic positioning really is to be their bank partner allowing them to provide banking services while we handle all the real administrative and legal and risk and compliance issues related to banking.

Your next question comes from the line of James Helman [ph] from [indiscernible].

Thanks for taking my question. Actually I have 2. The first one would be if you could just comment on the loan loss provision going forward. You thought the provision has been bleeding down a bit over time. I just note what should we expect the trend to be going forward. Will you be maintaining it or will you be allowing it to continue to bleed down?

This is Mariner. Obviously there are many variables that go into that calculation and so it's hard to answer that directly because as you're well aware from following the industry it ties to credit quality, roll off of certain types of quality, loan growth, etc. So as the year unfolds it has to do with the size of our portfolio, how the portfolio performs and what bad credit history rolls off, our history, etc. So as long as our quality holds up we are likely to be able to maintain levels, I guess, if that's helpful, but it's really hard to give you anything much more concrete.

Alright. Well it's a loan loss reserve to loans having fallen over the course of the year from 145 bps to 130. Should we expect to see that continue to drop?

Well that has dropped mostly because of our quality continues to improve and loan growth. So, whether it drops much more, hard to tell, but as long as credit quality stays strong as it has been, we certainly won’t have to increase at higher levels.

Alright, though, as you open up new loan production offices in new markets doesn't that lead to some requirement to maintain the loan loss reserve at a certain level of loans?

I don’t believe that's the case. No. It's just about totals.

No. I mean GAAP requires us to measure the inherent loss at a point in time and so you can't necessarily say that because you're making loans, for instance in Texas, that it absolutely has to go up. I mean reasonably speaking, probably will, because you're going to increase loan balances but it doesn't necessarily mean that it has to go up.

Yes, it'll be because of totals, not because of markets.

Correct.

Okay. One quick question on the investor portfolio side. With your taxable securities yielding a little more than 150 basis points right now, in this environment do you think you can maintain that? What's the marginal return on your taxable investments going forward?

Yes. I'm going to answer that one. This is Mike. I think you should think about that question differently. We think about that more about the percentage of what asset class we have in the investment portfolio. And so maintaining some level of diversification in the portfolio, assuming that there's availability, and let's be honest. Right now the market has limited availability in some of the classes that are out there. We really like the municipal market. It's been a good class for us. I think you will continue to see us hold a large portion of our investment portfolio in that but it wouldn't make sense for us to have that become say greater than half of portfolio or the vast majority of the portfolio, just from a diversification strategy. So it isn't so much about the yield from a taxable basis as it is about what we have available in the market and keeping a certain mix in the portfolio.

All right. So with that said, since taxable is going to remain a relatively large percentage of the portfolio for just diversification purposes, what would you say is the likelihood that we are going to see that 156 basis points move down going forward in the current interest rate environment?

Tell me what pre-payment fees would be in the MBS portfolio, and I can answer that. The pressure is clearly down, or the bias is down.

Okay, and what sort of tenor do you expect that you would be comfortable with in the taxable portfolio, please.

I'm not going to give you a specific number because we don't give guidance but I would say that we do look at the rates and the yields, based upon our expectation for the likelihood of those securities will be around for a period of time and if we don't feel like we're being paid for that risk, then we won't buy that security. So if that's what you're getting at, that is absolutely part of the equation but I'm not going to give you guidance on where that threshold is.

I'm not sure whether you're asking whether we're -- how comfortable we are holding munis, at what level, if that's part of your question. We're very comfortable with the municipal market, if that's part of your question.

It's MBS.

Yes, he was talking about taxable, non-taxable and so.

[Operator instructions] Your next question comes from the line of John Rudith [ph] from Think Partners.

Just quick question on the -- you mentioned, I guess so far in January, you had -- you won one large mandate and did you say whether that was on the equity side or fixed income side or?

It's a mid-cap mandate, it's on the equity side -- it's a separately managed account that was funded early in 2013.

Okay, okay. And then Mike, back -- just a little follow-up again, I guess on expenses, the First Data expenses, where did those expenses primarily go through -- the $1.3 million?

I was waiting for that question. The vast majority of First Data expenses are people. We acquired 73 people and while there may be a little bit of technology, obviously because you have to run the shop and a little bit of properties related expenses. The vast majority is in the personnel pass line.

It's all in the Payment Solutions segment.

Yes.

Okay, so I mean this -- sort of this -- I guess, because I think the focus for a lot of people and maybe to say it a different way, is really the quarter-over-quarter increase in salary expense. So if you sort of started at $83 million where you came in for the quarter. If you back out the profit sharing of $0.5 million and then you back out the $1.3 million of First Data, that kind of gets you down to $81 million. And that's sort of like an $81 million over $78.8 million in the third quarter. Is that sort of the right way to look at it?

That's the right way to do it. We'll let you do the math, but yes, that's the right way to do it.

Okay. And then I guess just my one additional question would be that, call it $2 million increase. Is there anything in there that would be non-reoccurring or should I assume, that that's just added cost going forward.

Given the things I've already talked about that were in the fourth quarter, I think there are some parts of that, obviously. But in the personnel cost line, specifically, no I think you should think about that as your run rate.

Because I think in the press release you've mentioned higher benefits expense, was there anything sort of elevated this quarter as it relates to benefits?

Well, we talked about profit sharing, the other thing is, we're a self-insured insurance program here at UMB and so, our ability to increase our accrual for that self-insured insurance program is really based upon loss rates and claims and so it can ebb and flow any quarter.

Okay. I'm sorry I didn't mean insurance, so okay that helps.

Next we have a follow-up question from the line of Peyton Green from Sterne Agee.

Yes. I was just wondering of the timing and the nature of the contingent payments on the acquisitions that you've done and did JD Clark roll off in '12?

Yes. So the last payment that we will make for earn outs for JD Clark will be in April of this year, 2013. And I can actually tell you the other ones too, if I can find the right page, I knew it's there, there we go. The last payment related to PCM will be in 20, will be in the third quarter of 2015. And the last payment related to Reams, the payment is actually -- will be calculated 2015, but will most likely occur in the first quarter of 2016.

Okay. And we'd be done with the accruals by the end of '15.

Yes. Correct. The accrual adjustments, yes.

And I would tell this much, Peyton, the way the accounting works on this, as you get closer to the last date that you make the payment the certainty of those payments would become more certain than they are today.

Okay. And how much of that was cash flow change versus discount rate change.

Well, most of the discount rate was taken in the first quarter of 2012. So not so much discount rate, more of a factor. Now we're really going to get complicated here, I could go really deep into this and then Mariner will give me the hook. When you're calculating the fair value on a discounted cash flow model and you're dropping off the last year that you just paid, the remaining years tend to be higher based upon the modeling that was done at the time we purchased, assuming that these businesses are still doing really well. And all three of them are doing very well, especially on a bottom line basis. We will continue to see larger cash flow projections and that will drive higher earn-out liabilities.

Okay. I guess, maybe my memory's still unclear but I thought there was a cap to the contingent liabilities, is there not, on the earn out?

No, no.

Okay, all right.

The good news is they are obviously based on performance. You know, I mean so that this bodes well for the future, theoretically, right?

Sure.

We get that it feels bad that there's a hit to the income statement but that means that obviously the expectations for these businesses is better and that's good for shareholders.

There are no further questions at this time, please continue.

Thank you, very much for your interest in UMB today, this call can be accessed, via a replay at our website beginning in about two hours, and it will run through February 6th. As always you can contact UMB Investor Relations with any follow-up questions by calling 816-860-7106. Again we appreciate your interest and time, thank you.

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