UMB Financial Corporation (NASDAQ:UMBF)
Investor Day Conference Call
April 25, 2013 10:30 am ET
John Mariner Kemper – Chairman and Chief Executive Officer
Michael D. Hagedorn – Chief Financial Officer
Peter J. deSilva – President and Chief Operating Officer
Craig L. Anderson – President Commercial Banking
Andrew J. Iseman – Chief Executive Officer of Scout Investments, Inc
John P. Zader – Chief Executive Officer of UMB Fund Services, Inc
John Mariner Kemper
Great, welcome to, we are all here, my entire management team is here today in New York obviously you all know we are celebrating our 100th anniversary, and so our logo for the year is more than a hundred, because we believe not only are we more than a bank, we are more than 100 years old, and we are sort of looking to the future, so that the concept here, with our 2013 logo is forward-looking, if you will thinking about our future and we did pause, but as we thought about, what we are going to do with our company and how we are going to celebrate it, if you think about all the companies that have been around 130 or 140 years and how many of them are around anymore, so we thought celebrating survival wasn’t the way to go sort of with more thinking about the future.
So that’s what we are doing, we are here, we are opening the market this morning, and this is our first Investor Day, believe it or not. We’ve done group meetings. We’ve done the tours with our analyst et cetera and started doing conferences last year, but it’s our first analyst, it is our first Investor Day, and by the way for those of you who haven’t know me, I’m Mariner Kemper, I’m CEO, I think I’ve met most everybody, but we’re happy to be here, and the other good news about this is why we are doing this is because of our celebration, you’ve got our entire management team. I normally do all this, I’m going to have a relatively short presentation, and you got it hear from the folks who actually do all the things as we get down every day, so that’s a kind of a special opportunity that you are going to have today.
So with that, I also with the speakers have been come to this side when you come up, so we don’t walk to the middle here. Most of you know us, but a few of you don’t. So I’m going to take us down, a little bit of a trip down memory lane and talk a little bit about our history of our company before we get into the meeting with that. So, for those of you know please bear with me.
As we talk about the history, we, in 2000 or 1913, rather, was the founding of our company. The charter was number 1921 from the State of Missouri and it was a group of local investor in Kansas City. And my great grandfather acquired this failing bank, because it didn’t do so well and so was founded and W.T. Kemper acquired this bank for $20,000 in 1918 and this is a picture of that original charter. And that was the beginning of our story. Just prior to that, I must say there was one more generation present with this bank was my great, great grandfather Rufus Crosby founded the bank Valley Falls, Kansas. So we really have one more generation in that.
So we’ve always been a leader and an innovator, pioneers in our business. This is a picture of what we believe to be the first drive-through in America. It’s certainly the first drive-through in Kansas City. Well, believe it, it with the first one in the United States. Unlike everything else, with innovative companies, there is always room for improvement. You’ll notice that this gentleman has skipped out of this card of transactions; it’s really on the other side of the vehicle.
And then continuing that theme in the 1930s, we were one of the first banks to lend into the automotive industry against car loans. Henry Ford himself called my great grandfather and asked him to lend against their vehicles, because nobody else is doing it. And we became one of the premier lenders on a national basis, my grandfather at that point by interstate securities, which became one of the leading national automotive finance companies in country for a period of time.
Our metal has been tested for those of you know that, if you know that we are very principled with company, who believe that we should it alone and make it alone and don’t ever want to rely on the government, and early on in our 10 year and then coming out of the depression, when the reconstruction organization was offering money to banks in exchange preferred shares down familiar in the recent.
We refused that and actually we are able to sell shares to our own customer base at the time. My grandfather wrote to the Missouri Commissioner, if we were to liquidate the bank today, we can pay our deposit – all of our deposits $100 on the dollar and collect our entire surplus and capital account of $700,000 at that time and a large part of our undervalued profits account. So we’ve never had a need for the government and we never will, and we’ve tested this over and over again. Our company has remained through to its values and the results are evident in our shareholder returns.
You see on this slide, we went public in 1978, and if you put $100 in our stock in 1978 it would be were $6808 at the end of March this year. It’s an annualized rate of return of 13.1%. Compared to the S&P over that same period of time, the annualized growth rate for the S&P over that same period of time is 11.7%, so not a bad place to put your money. An interesting note too over that period of time, if you’d say its $1 of savings away in 1978 it will be worth $0.28 today. So the environment in which we have been investing over this period of time has been very complex for all of you.
So we feel very good about our long-term performance. If you think about more recent period of time over the last 10 years our total shareholder return has been 172.4% against the S&P 500 at 103.9% and for our industry one of the measures SNL Bank index at the same period of time was down 7.7%.
Earnings per share over the last five years, 11.4% against the bank industry median of 1.4% negative and we feel strongly about our dividend and I know investors all have different feelings about dividends, but we are committed to the way we manage this company. I am committed to the way we manage with company. We do what we expect of ourselves. We would like to able to increase our dividend every year. So we want our industrial base to expect that from us.
And recently SNL Financial recognizes us one of only 22 public traded banks to increase our dividend 4% or more over the last five years and our rate being 45.6% against the median for all listed banks being down 42.8%.
So big part of the message I would like to leave you is about our management style is that you know what to expect from us and you don’t have to worry about us, saying one thing and doing another or worrying about changes in the way that we do things. So I believe you can take comfort in knowing the way we operate the company is always the same and you come to expect a certain style of management from us.
We truly do have a different style of management and 100 years from now, the way we do things today, we will do the same way we do things then, which is doing things in right way and that’s the popular way and we believe that brings stability over time to our business model. What is our business model?
Well, at the foundation we are rich managers. We believe as a team that we are at the best risk managers in the business and that’s not just credit metrics that’s the way we manage our operations, that’s the way we manage the transactions that go through our organization. We take risk management very seriously. And because we take risk management very seriously, it has a natural tendency to butt heads with growth.
And as a management team, we decided, we have decided as a management team that we always want to be a growth company. And if you think about our business model, what does that mean, where we have to get our growth in other ways and that is through our division in certain cycle and so like business cycle. So that’s why we’ve invested so heavily in a diverse revenue stream through our fee-based businesses. Coupled with a low cost of funding allows us to have pricing power, which allows us to stay competitive on the lending side of our business. And a strong balance sheet allows us to continue to invest in our business and protect our business and protect our business from having partners like the government.
Credit quality real briefly, again a lot of you’re very familiar with this, but as it relates to the first quarter and you’ve seen us have over 15% loan growth while reducing our NPLs. So in the first quarter, NPLs have gone from nearly 50 basis points, down to 0.46. And peer average at 272 and you can see that. I’d like to slide because not only that orange line the peer average, but the band of the high and low for the whole peer group is that grey line. We don’t even make into the band of the low point of the range. So it’s hard to get our non-performing loans even show up on a chart and we’re really proud of that, coupled with loan growth. And I wouldn’t be quite as impressive right, if we had great NPL and great loan quality without loan growth. To have great asset quality and loan growth that is truly I think something to take note of.
Let’s talk about fee based businesses. The percent of total revenues in fees at the industry medium is 19.8% against our first quarter number up from what was before 58% is now standing at 60.4% of total, three times the industry average, which that gives us more stable earnings if you are well aware and more growth opportunities to even out the bumps in our earnings. Non-interest income; we’ve had CAGR rate since first quarter of ‘05 of 8.4% and in just the asset management business alone, combining all of our different asset management businesses, we’ve had a 20.2% CAGR rates since 2005.
If you think about the way that’s broken down, 51.5% in the first quarter of our total non-interest income, concerned trust and securities processing, a total in the first quarter, being $62.3 million primarily coming from three areas and mostly from two of those three. But first thing $28 million in Scout, which we call here Institutional Investment Management, asset servicing at $19.6 million and then personal institute and institutional asset management, which are all the individual asset management opportunities, we have within our bank group.
Low cost of funding, talked about that briefly, 44.6% of our deposit base is non-interest bearing against the industry at 18.7%, two times the industry with our cost of fund sitting at 0.14. So we are right there able to hang very tough with wealth and be with and compete for the very best business in our lending space.
Capital ratios while they are below, the industry median and have come down slightly even within our own organization. We have kept a high level of capital without raising money. And without taking a lot of funds from the government, so we feel very good, we even diluted our shareholders and we’ve maintained a high level of capital. Our liquidity you think about a loan-to-deposit ratio of 47.3% you go what are these guys doing, right? Why don’t they [lend] some money? Well, good news and bad news we’ve had industry leading loan growth, had five quarters year-over-year of double digit loan growth and 12 quarters of loan growth in total consecutive quarters, the real problem here is because of the safety and soundness in our profile, our deposit growth is just outstripping our loan growth.
First quarter actually for the first time in a while now, we did grow the loans faster than deposits, and we hope we can keep that up, but we haven’t seen that over the last few years inside the first quarter this year, so we’re happy to see that, and I hope we can keep that up. It’s hard to do when deposits are growing in 12%, 13% but we’ve been able to do that in the first quarter.
Loan quality and the composition, if you look at 2006 just to kind of show you where we were and where we are, you look at that great section there 21% that was our indirect lending business, which we have since shutdown. Two things; one, it was a big part of what we did and it was mostly what we did on consumer side, had a very low return and we couldn’t cross sell into it. We shut that business down, we’d replace it with home equity loans, mortgage loans, other consumer product all of which carry a higher return, and we can cross sell the products into.
Additionally, we’ve always said we are a commercial bank, but if you combine commercial real estate and C&I back in 2006, 64% in total stocks were at the 2012, and 77% of total. So we’re truly a commercial bank. We have a commercial sales force, and while we have a great consumer product set from a model perspective that hangs off of and connects tightly with what we do with our commercial clients.
Deposits real briefly, this pie basically shows you that we have diversity of streams, deposit streams and growing on the right hand side where you’ll see, they are all growing areas. And then lastly, I would say in most cases it’s all core. So, we are very focused on making sure we build a core deposit franchise, always have been, always will be with a low cost of funds, very sticky deposit sources for us and we got several new ones that have been developed over the last few years. Healthcare which you’ll hear about later, private banking didn’t exist six years ago, small business banking didn’t exist five years ago, all which have low loan to deposit ratios and/or sticky low cost of funds.
Revenue, non-interest income and CAGR rate over the last five years of 9.6% and net interest income five year CAGR rate of 6.6%. I really point your attention to net interest income. We believe this is pretty impressive given the unprecedented low interest rate environment that we’re living in. So we are able to hold this not only to show 6.6% growth rate but in the more recent periods to hold it steady and even slightly move it forward. Feels pretty good given the environment we are in.
So this slide is my last slide before I turn it over to rest of the gang. As I travelled around and talk to investors, couple of reoccurring themes that have come up over that past many quarters and years. You got a relatively high efficiency ratio and you made all these investments. So, can you bring your expense growth rate down and/or you’re getting leverage? So this slide is meant to speak to that. If you look at the period between 2007 and 2010, we will see central growth going up from 5 to 11.3. During that period of time, we made 20 strategic acquisitions. As we wrapped up our sort of acquisition [dens] if you will to close gap to make, close some strategic gaps, some product gaps, you’ll see that we were able to demonstrate starting to bring down our expense growth rate from a 11.3 and 10 all the way down to 4.9 and 12. We’ve talked on our earnings call about our commitment in 2013 to continue to bring down our expense growth rate and so we continue to say that to you we are committed to doing so.
Turn over to the leverage side. Okay, so you made these 20 acquisitions, how they turn out, are you seeing leverage? And the answer is obviously if you look at the two most important one from a size perspective investment management which would Scout 2010 you’ll see had a pre-tax margins 18% moving over to 2012 a 29.5%, asset servicing moving from 9.9% to a 11.9%.
So, we continue to see this kind of improvement in recent quarters and you’ll hear more about this later, but because of our earn out liabilities changes, you’ll see some compression in margins there on a short-term basis, but that’s all good news based on actual performance, means we’re performing better ultimately, so we feel pretty good about that.
So, normally I would do the rest of the presentation, but fortunately we have with us the rest of the team and so, I would like to bring us the big guy our CFO Mike Hagedorn and he is going to walk you through first quarter results and a lot of the detail behind our financial statements. You were supposed to go around you are not a good listener.
Michael D. Hagedorn
I am supposed to go around?
John Mariner Kemper
Michael D. Hagedorn
John Mariner Kemper
All right and I’ll come up in close out at the end, all right, thanks.
Unidentified Company Representative
I am not much of a podium guy. So I am going to move around a little bit so, sorry. Good morning and thank you everybody for coming. Well, I see a lot of friendly faces that are currently shareholders. So let me first say thank you, especially for those of you that are long-term shareholders, for those of you that are not, I hope that, after we get done today, you become shareholders, and that you don’t hear anything today that would lead you otherwise. As Mariner said, I am going to talk about our financial results and at the end, when everybody finishes, we will have time for questions, so feel free to ask those at the end, once you hear from our various business leaders.
First, I am going to talk real quickly about the balance sheet. One thing that’s currently changed for UMB over time, if you go back to 2008 and compare that now to 2013, is the fact that when you look at net loans inside of the company, they’ve actually shrunk and that’s a function of the growth in the balance sheet that we’ve seen mostly on a liability side relating to the deposits that have come into this franchise post 2008, but also if you think about one of the slides Mariner showed you, he showed you growth in some businesses, healthcare would be a great example of a new source of deposits that’s now over $600 million that didn’t exist when you look back in our – back into our past. With this change, however, post 2008 has been a change in interest rates. And you can notice that the yield on the various earnings assets has changed quite a bit, and we will talk about that as I get into my comments little bit more, but obviously now with an average investment portfolio yield that’s less than 2%, it’s a difficult environment.
As Mariner mentioned though we’ve had consistent loan growth, we are now almost $6 billion in total loans, pretty remarkable given the kind of economy that we’ve had post 2008. However with that has come a reduction in yield. And I would tell you that based upon what we here from our lending staff, you are going to here from pay a little later about commercial. This business has become at least in the commercial side has become more rate sensitive. And so in order to drive volume greatest of the think is really is in play, and I will show in a minute, we can’t look net interest margin, what rate is doing to us and how that’s being offset by volume.
Hard to believe that this investor portfolio at some point has been over all almost to $7 billion and it’s another largest turning asset on the balance sheet and that’s not what we want. We clearly want to have more loans, one all average that, I think it’s unique from an investment fees for UMB is the fact that we do have the ability to take these investments and turn them in to a different kind of earning asset I launched, hopefully in a more robust environment at a higher year, but nevertheless the day-to-day management of the portfolio at $7 million has changed the complexity inside of our company and that’s one of those things that hopefully overtime, we don’t have this, but right now that’s reality in the marketplace.
Portfolio mix; mortgage-backed securities have been highest 51% roughly today they are making up just half of the portfolio. I would tell you that, this is really a function of two things; one, supply in the marketplace, also somewhat yield but I’m going to temper with the comments that yield without too much lengthening in the duration or average life of the portfolio. We have to balance that and that’s been a really difficult thing to do, but we been able to do it. one of the largest bank investment portfolio you will see out there in the United States, just roughly almost a third of our portfolio
In asset class we write a lot, not had any kind of material losses in it. Year had been very good. We have a great underwriting group inside of the company. So it’s not something that we worry about from a risk management perspective, and then the rest you can see they’re all the lower yielding classes, quite honestly.
Portfolio maturity and repricing, interestingly in asset, if you go back to 2005, you’ll notice that we were about 7% of our portfolio maturing longer than five years. Historically, UMB has maintained a very short portfolio.
Now, you know as we came up, at the same time that competitors of the top five banks or the peer banks came up at the same time, and when 2008 comes, and you see people are starting to slide down and at the same time we’re coming back up. The way I think you should think about this is, they’re coming kind of to meet us. There’s not a strategic plan for UMB for instance to try to take this effort the lowest trough and interest rates right now, in fact you’ll know that the curve is actually somewhat down.
Earning asset maturities. Very interesting here, is our maturity and cash flow by timeframe. And one of the thing we look at is just with the investment portfolio we look like on a one, two or three or five year basis. That let us the entire earning asset mix look like because our loans reprice too – it just goes on Tuesday that roughly 70% of the loan portfolio is going to reprice in the next year.
So if you take a look at the composition of the balance sheet, you’ll notice that 87% of our balance sheet reprices in the next five years. And of that 87%, 64% reprices in the first two years. So the point is that we are obviously preparing ourselves for higher interest rates, might be a little early, we could certainly have a great conversation about that over launch or maybe during the Q&A session, but that is clearly our bias as to be on the shorter end of this thing. So when rates come up, we’ll have a lot of earning assets to reprice that.
With that, has become a very asset sensitive balance sheet, probably the most asset sensitive in my years as CFO. To kind of show you this, these are rate ramps, they ramp up and they are sustained once they ramp up. But in a plus 400 rate environment, the company is poised to make about $75 million in a year or two pre-tax more than what we make today in net interest margin.
And this is based upon the repricing characteristics on our liability side especially our indeterminate deposits that don’t have maturity days. But our modelling shows that we are about as asset sensitive as we can get. Deposit growth and free funds Mariner talked about this, so I’ll just quickly make a comment that when you include free funds, our cost of fund is now 13 basis points.
I’m not sure that we can get much more out of that, but if we were to meet, say, six months to a year from now, maybe it will be below 10 who knows, because I’ve been saying for a long time. We are at the bottom and yet now we are at 13 basis points. So this is a real strength of the company, and I would argue that quite honestly, the real value of even being from a balance sheet perspective is on the liability side and not to say that loans are important they are very important for us. But the ability for us to generate deposits and especially lower cost deposits that typically come with the C&I portfolio is a very strong strength for this company.
And you have to combine that also with the fact that we are growing as I said earlier different sources of the deposits that are branch dependent.. So health care is an example doesn’t need a branch network, honestly doesn’t need a lot of FTEs, relative to other businesses to generate some of those deposits.
Shareholder equity, quickly as Mariner mentioned as well, didn’t take TARP took no government assistance and most importantly for us. We’ve been able to invest in a time when other folks were really focused on maybe trying to survive or at least clean up the measures they had on the lending side that we didn’t have. So what did that mean for us? where one of things you have to consider when you look at things like the tangible capital ratios, for that matter, pretty much all the capital ratios is that UMB don’t have post 2008 especially, goodwill and intangibles that didn’t exists before. So the makeup of the capital stake, if you will has changed. And so that’s one of the reasons why the TCE ratio has come down.
Let’s take a look at the income statement. The line in the middle basically shows you neutral net interest margin. So this is what we’re kind of divesting trying to figure out what are components of net interest margin made up a great volume mix and other variance, which is not terribly significant. And you will notice that post 2008 rate variance has been a negative and has been a big drag on the net interest income of the company. However, it’s been offset by the volume variance, positive volume variance that we’ve seen in the balance sheet.
At the very top that is just taking the first quarter annualizing it, comparing into 2012 and saying is that going to continue or not, at least from a growth rate perspective. So I wouldn’t tell you that’s necessarily guidance or forward-looking comment, but I would say that it shows you that once again the growth from the balance sheet has contributed to net interest income to at least offset what we’re losing on the rate side.
This just shows you the trend clearly 251 in net interest margin is not a target for the Company, but it’s a realistic view of what’s out there in the marketplace. I would say that if you go back in time and look at the net interest margin of UMB. That rate in a normal environment can easily be in the high 3s. We have that historically in the past hopefully we get back to that especially as you see over time UMB add loans and not grow the investment portfolio all things being equal that’s clear one of the strategic drivers that we’re trying to execute on.
Non-interest income, I want to point out that spike at $132 million, when you are looking at that please take into account that we had $8.2 million in the first quarter of 2012 attributable to our contingent liability changes on our earn out payments for our various acquisitions, so that’s why you have that jump.
One other thing you need to know about, you will see down here trust and securities processing, I will show in a minute. How that breaks out between the various business units, and you’ll hear from Andy and Clyde a little later, they will talk about their business units, but those are very important to us, and in fact securities and processing income CAGR from 7 to 12 is more than 14%.
Very important part of our business, mostly driven by Scout Fund services, John Zader is here, so you’ll hear from him as well in our asset management business.
One other things we’ve been doing through the trend here of the various gains on security sales that we’ve had, love to have this conversation over launch. But I think one of the benefits that UMB has with the portfolio today it has an unrealized gain, which more than $100 million is our ability to harvest gains in this interest rate environment to offset what we have lost in net interest income through the margin compression that we just talked about.
This has done – this has been done up to this point with no erosion in the yield, the overall yield in the portfolio. That’s getting much more difficult to do in this environment quite honestly, but up to this point, we have not had to erode the yield on our portfolio as we’ve made sales. So one of the benefits to us is this ability to reactive managers of our portfolio and obviously harvests those gains.
I know you guys I want to read about ASU 2011-04 which report and you want to know all about it. So here the schedule that shows you all of the adjustment that we’ve read about in this script, and I’m sure you are trying to write down those and you listen to it [feverishly], okay you not to do that anymore, we are learning it out for you to show you exactly what the impact of our earn-out has done.
And as we mentioned on Tuesday during the teleconference, it’s actually Wednesday times get away from the Wednesday morning, the last earn-out payment for J.D. Clark was made – will be made in April. And so that’s one piece of variability that you shouldn’t, that you won’t expect, because obviously it’s in paid out, we’re still have earn-out liability changes potentially on both PCM and Reams. It’s come to our attention that a lot of folks are paying attention to this non-interest expense coverage ratio. And the reason, we think, this is important is as Mariner mentioned earlier, our acquisitions have brought revenue and we know you want to see operating leverage. Now sometimes operating leverage can get on the total basis, I’m talking about the total income statement they can get kind of muted, because there is so much going on net interest margin compression, we are acquiring new businesses, we picked up the FDR business for instance in the fourth quarter of last year, and that caused the change in our expenses, once again it’s something that we have to explain, you’ve to back it out your numbers to get the true run rate.
But this is a very good number for us. One of the things we want to make sure is that since most of our acquisitions are fee income businesses, but the fee income growth at least is more than the growth in our non-interest expense. And in fact, last 12 months it was 74% for UMB, traditional peers are at 45%, and we do compare ourselves to large trust banks, the State Streets, Northern Trust, bank in New York of the world. Because some of our businesses are similar granted, they have much larger platforms on a scale basis than we do. But I think the comparison is valid at least at some level. And so you can get a good feel for it. Yeah, we’ve been getting some operating leverage at least as it relates to fee income more than offsetting the growth and expenses.
Let’s talk a little bit about the capital of the company. As I mentioned earlier, you can see the makeup of the capital stake of the company. One of the things that has changed is the unrealized gain change period-over-period is smaller might expect that as rates have come up the gain in the portfolio has decreased you’ll see that in the OCI adjustment for capital. But the good news is, we have been able to grow organic capital at least nearly 7% or right on 7% at the same time, the balance sheet has been growing, without any diluted capital ratios.
That’s contributed to a much higher return on average equity that you probably used to see, quite honestly. But the flip side of that is return on average asset has been depressed because the balance sheet continues to grow with various deposits. But the use of equity and the effectiveness of our equity, I think it’s clearly been demonstrated when you look at return on equity numbers.
As I said in the call, we are well capitalize no matter how you look at it for various ratios but the most important thing on this slide, 6.6% leverage ratio. So one things that we did in the last part of last year, last quarter was we collapsed all of our bank charges, we had four bank charges, we went down to one, that help the leverage ratio in total be quite a bit higher than it was with Lead Bank, which is UMB Bank n.a.
What about Basel? If you look at all the Basel requirements at least of their proposed today and you look at your capital ratios, we are kind of in the middle there UMBF, we meet all the requirements.
We’ve done some announces inside the company using the C-COR assumptions to try to take a look at Basel as well and that would indicate that at least under the reasonable assumptions under the cash burn in great shape. Doesn’t mean that we necessarily believe this is going to be approved for instance I will tell you, we are on public record a thing that we disagree quite a bit with the OCI adjustment that is being mentioned on Basel but honestly we talk more about it at lunch. My position on that is this. I don’t know why you want the variability in the capital structure of banks when they demonstrate the ability to hold the maturity. The credit quality of those assets probably hasn’t changed at all, only the interest rate environment. So we get the balance there. When you balance the balance sheets dynamic, but to say that overnight because of changes in interest rates but bank is somehow more risky but less attractive, we have a problem with that to be quite honest.
Last real quickly on credit quality. 116 is our current allowance for total loan ratio. As Mariner said in his prepared remarks, at Wednesday during the call, we’re fast getting to the kind of bottom of that. I can’t give you a number, but it’s close to where we’re at today. But I’m not really fixated on this as much. This is the number that you should be fixated on. What is the allowance as a percent of non-performing loans and we’re at 250%, whereas our competitors are somewhere between 50% and 75%, 0.5%, 0.5%, 0.75%. So no matter how you cut it, our allowance is more than adequate to cover any of our future expense and losses.
I appreciate the time today and I’m going to introduce Peter. Peter is our Chief Operating Officer and he is going to talk about our business segments.
Peter J. deSilva
Good morning. we’re going to wake you up anyway for sure. We talk about the businesses a little bit and what’s we’re doing on here at UMB. I know many of you in the room, but I have to admit I don’t know everyone in the room and so just a very, very brief introduction. I am Peter deSilva. I’ve been with UMB since January of 2004 after kind of long – long period at Fidelity Investments about 17 years. I didn’t use the word illustrious and I won’t use the word illustrious, but I did spend quite a bit of time there and delighted to be here at UMB. It’s an awesome company as you’ve seen this morning and hopefully we’ll continue to convince you of that with our performance over time. Coming to New York is always fun. It took us longer to get in the city than it took us to fly to the city yesterday, but I guess, that is New York and with the FAA doing what they’re doing or not doing or they should be doing that it could be interesting getting home. So we’ll try to move this along if we can.
I want to talk a little bit about the four operating segments within which we – within which we live here at UMB. And those four segments of course are the banks, the primary assets that we have, our Institutional Investment Management team, primarily Scout Investments and Reams Asset Management, we’ll talk a little bit about UMB Fund Services and their subsidiary company JD Clark. And we’ll talk about our payments business, which sometimes doesn’t get as much coverage as some of the top line businesses. Then we’ll get a chance today to introduce you in a little more formal way to what we’re doing in the payments spaces as well.
All of this is part of our long-term diversification strategy, right. So when we talk about, talk about UMB, you will notice very deliberately we talk about UMB as a diversified financial services company. The bank is the core, has been the core and probably always will be, but we continue to build out other services, so that we can continue to be a high quality lender and also have really, really terrific returns on an overall basis. It also we think gives us a much better and better, more predictable growth profile than otherwise might be the case.
If you think about the four segments that we operate in, you think about what those drives those segments then, what are the kind of big things that you guys focus on not surprisingly for the bank, interest rates are the primary driver, there’s no doubt about that. Assets under management and assets under administration are major drivers as we look at the asset management and asset servicing business. And then on the payment side, it’s not just the volume of payments but it’s a mix of payments that we like to look at because certain payment types have different financial return profiles and so volume and mix of our payments, assets under management, assets under custody, assets under administration and then certainly inter trade to a primary driver of all toward the segment in some way or not.
If you think about these segments overtime, let me go back a little bit and give you some texture in terms of how they’ve evolved over the last few years. Back in Q1 of 2010, the bank was about 70.4% of the overall revenue of the company and about 73% of the net income after tax. Today, as we look at it the bank is roughly 60% of revenue and 52% of our net income after tax with about 2,800 associates so the preponderance of our associates are in one form or another, one way or another inside the bank.
Institutional investment management or Scout few years ago back in Q1 ’10 was about 8%. The revenue of the corporation today it’s up to 14% of the revenue of the company, it was 8% net income after tax and today its about19% of net income after tax. There are about 110 associates in the institutional investment business. Asset servicing or we call it UMB fund servicing, the cash was about 10% of revenue and 7% of earnings and to-date that runs about 10% of revenue and 10% of net income after tax. And lastly the payment businesses historically gone back again to Q1 10% or 12% of revenue and 12% of net income, today that’s going to be roughly 16% of revenue and 20% of net income after tax. So the mix of our revenue has changed a little bit, the mix of our earnings has changed
a little bit, the mix of our earnings has changed a little bit, we think that’s all good, its more predictable, its more reliable, its certainly more diverse, then it was just a few years ago and certainly most reliant on net interest margin for the all of the growth that we’ve been able to enjoy in the company.
And you think about ROA, and ROE and efficiency ratio that won’t surprise anybody, I am not going to tell you the numbers but I was having a conversion one of the analyst this morning who predicted correctly that highest ROA that we have and actually – highest ROA, ROE, efficiency ratio and after tax margins, come out of the institutional investment management business, payments business is far behind that fund services. And then currently the bank but that will change, because any question the bank will come and then occupy more of the overall revenue, net income of the company, as well as improve their margins as interest rates come up here sometime, sometime in the future.
So let me take through, so this is the bank and then talk first about the bank and then I’ll introduce the other leaders of the other business segments. But think about the bank we break into three primary segments we have commercial banking, our consumer banking, our private and institutional wealth management, wealth management businesses and asset management businesses.
Craig Anderson, will come up in a moment leads our commercial banking effort, and he has been doing that for the last 24 months or so, and he is long-term veteran of UMB, understand our credit quality, understands our markets and he has done phenomenal job for us. Christine Pierson a relative new addition almost two years with our company will come up and talk about our consumer banking businesses. And then Clyde Wendel who is been with us about six years will come up talk about private wealth management and institutional asset management.
Before I turn it over to them just a couple of comments on the financials for the bank over the last term, for a last couple of months and that’s gets you a five quarter view rather and you will see that overall the bank is still the biggest parts again of our corporation, no question about that, and I really suspect that always probably will be, if you look at the margin over here at 23% there are couple of things obviously that are sort of depressing that right now certainly rates for sure as we’ve talked about already the regulatory burdens, we had absorbed in the bank obviously having an impact on that as well. If you think about what drive the bank kind of the headwinds and tailwinds that we have right now low interest rates obviously make for a pretty steady headwind at the present time, the competition for quality loans that Craig will talk about and the pricing in that environment is a clear headwind I believe.
The regulatory landscape, some of that is behind us, some of that is yet in front of us, if you think about Durbin amendment and what it cost us, OD/NSF income has really been heard over the last couple of years the card act has made changes to our credit card platform that not just ours but the industries credit card platform that’s taken that business down just a little bit. So that’s something but it’s a reality that we continue to deal with the changing consumer demands and preferences for sure and Christine will hit on this, as we talk about the migration away from paper to digital and the kind of implications that has on us.
Obviously, the ongoing sluggishness in the U.S. economy, volatility in the equity and fixed income market, although that volatility has been helpful to us in the last 36 months or so. And consumer deleveraging continues as we think it’s over it’s really not, we’re seeing it particularly in the credit card area where if you look at nationally the outstanding credit card debt has moved from about $800 billion to $600 billion over the last year or almost a 25% decline in outstanding consumer credit card debt nationally and so that deleveraging process obviously still continues.
So what’s been our response to those headwinds, it’s not okay to say there are headwinds and not have the response to it that’s for sure, well first has been the grow loans to offset net interest margin compression and you saw that this quarter with 15% loan growth and you’ve seen steady loan growth over the last two years for sure. Grow assets and you’ve seen there, the asset growth in the bank-to-banks so just about $10 billion now and assets under management between the banks investment platform along with Prairie Capital Management and that’s a first time and a long time we’ve been over $10 billion. So that’s helping to offset some of these challenges.
Our diversifications I mentioned buying Prairie Capital Management over the last couple of years was great addition to our core asset management that offering that Clyde will talk about a little later. Managing the constant delivery, which expenses particularly in the consumer space to manage, manage that constant delivery and Christine will give into a little bit more how we’ve been doing that the last few years.
Keep in the best challenge, we make you sure we have the best talent on board for sure and opening new markets we’re in the Dallas here a little bit ago. We are still small, but growing rapidly in Phoenix and we didn’t go to Phoenix to make a bunch of real estate loans for get into do our core C&I and with had a lot of success out there and that business is doing very well for us that market doing very well for us.
So, let’s move on and talked about how we go to market as a company, if you work even be in the one thing, everything as a wheel and the name of the every wheel of the company is called the Peter wheel. Because peter being the somewhat of the visual personnel. Either put things in charts and graphs and such, it is always a Peter wheel. And as we think about how we go to market, we try to go the market as one company organized around one customer with a variety of products and services that we can sell into that client relationship. So how do work in practice, but you think about commercial banking, commercial banking has two primary partners as I’ve already noted the private wealth management team as well as our commercial banking team.
So what is commercial banking, I am sorry the consumer banking team. Towards it commercial banking bring to the rest of the party will obviously will bring to commercial banking competency. But they all took group banking, which is a consumer product based on our New York program, which is consumer product to sell our cards they sell our mortgages, and so there is a great partnership between commercial and consumer to make sure that they are working together in a symbiotic way. Through the commercial banking bring the wealth management, wealth brings trust, it brings the state planning, it bring investment, it brings private banking, it brings brokerage, we have a lots of our customers who sell their businesses over time and they are great prospects for our asset management businesses.
We have a lot of example of customers who sold and end up with their assets in a pretty capital world, end up with their assets in some other part of the bank. So we have this approach where we really do try to while we go to market in somewhat of the segmented way, we go to market with the vascular products and services, that try to complete with entire needs that a client has.
To think about asset management, how did it help commercial that’s pretty clear to me, I mean it sends over lot of loans, it sends over lots of business banking, you will be surprised, how many of our private banking customers own their own businesses.
And so we get the idea, but we really do try to go to market with an integrated offering and I thing by and large we are very, very successful in that regards.
With that let me ask Craig Anderson to come on up, he’s going to talk a little bit about our commercial banking business, which really is the core in many respects of our banking business overall. Craig?
Craig L. Anderson
Thank you, Peter. As Mariner stated earlier his comments, we are a commercial bank. We have a long history of relationship banking or niche is middle market lending primarily to manufacturing, distribution, construction retail. Those are four largest segments today and we sell a wide array of service as Peter mentioned like treasury management, credit cards, international banking et cetera. We are trying to move our loan portfolio from variable pricing model to a fixed rate, try to get more of that. As Mike stated, we have 7% of our loans that we priced on a yearly basis. So we’re focused on trying to grow hardware business, energy, commercial real estate, owner-occupied, apartment lending et cetera and trying to get more fixed rate on the books over the next 12 months to 24 months.
Our top three initiatives this year in commercial, really in our treasury management function. They are refreshing our online business banking product. We have a multi-million dollar investment. We are moving our platform to a different window. We really are in progress now, executing on that particular issue and expect to start building customers in 2014.
We’re also trying to expand our capabilities in international banking. in capital markets, we have just hired a new person to run our international banking team from JPMorgan Chase, 15 years in the business. We’re very excited to get him on board and we have to add product suite to it. We’re also trying to expand our capabilities in capital markets and have all of our customers during the lifecycle of their business. We want to find partners for our customers and asset base lending, mezzanine financing, private placements, interest rate swaps et cetera and very excited about both of those moving forward.
We still have commercial loans over the last five years and saw very significant growth on going from $3.1 billion to $4.68 billion over the last five years with a table of 6.1%. We are very pleased to see that. Pricing is very, very competitive, but we are able to compete against the large money centered banks, because as Mike mentioned earlier a very low cost of funds, which reflects our growth across the footprint. My role a number of years ago was diversify of our loan base outside of Kansas City with number one market share in Kansas City. Five years ago as you can see by this slide at the bottom, we had 55% of our loans based in Kansas City and 45% out. Over the last five years, we’ve moved that needle, we are now 55% in the regions and 45% in Kansas City. And you can see the growth rates that we’ve seen year-over-year in some of our key markets.
Arizona is coming off a very small base, but we’ve had 63% loan growth in that particular market and have one of our best teams down in the Phoenix t territory. Oklahoma, Nebraska has shown 46% loan growth. We are benefiting from the nice demographic trends in the economy out in Denver and Colorado Springs with 21% loan growth.
At St. Louis, I’m continuing to see really nice loan growth across our 20 plus banking centers there in that particular sector. Oklahoma is benefiting from a good economy and their oil and gas sector. And in Kansas City, even though, it’s our largest loan base, still it has nice growth of 14%. And this just kind of reflects our line utilization over the last five years or so. I think it was in December of 2008, we had 35.6% utilization on our lines of credit. The drop was in December of 2011 at 26% and we have now increased that by about 3% at the end of the first quarter to 29.8%.
So to recap, we have seen, as you’ve seen very strong loan growth, we’re focused on that, continue to grow in the key markets that I mentioned earlier, Denver, St. Louis, Phoenix. We just open up a commercial loan production office in Dallas and booked the first deal there about a month ago and adding to our team there and then executing on our treasury management initiatives on the online business making platform and expanding capital markets and international banking.
At this time, I’ll turn it over to Clyde Wendel.
Clyde F. Wendel
Thank you, Craig. If one looks at the embedded asset management business sort of exist within the bank itself, it’s really a two channel delivery proposal. One, our private wealth management which focuses on high network, ultra high networks and family office business, combining the resources of Prairie Capital Management which is a firm we acquired in 2010.
And in addition then looking at what we consider really our institutional businesses, which drive our institutional asset management business and this is a kind of bifurcated program that we went to market with in the first quarter, that really driving private wealth management on your traditional businesses and private banking, personal trusts and those are very, very important businesses as we have been very successful in growing our asset classes.
We got over a 120 outside managers, when I came to the firm in 2006 it was really individual issue in Scout, today we are a much more open architecture approach to the business and certainly with the acquisition of Prairie Capital as Peter mentioned earlier, it’s probably sent to an alternative space that was required and the one that our clients were looking for. Again leveraging the balance sheet, looking at the mortgage products in the private banking area, it’s been a good growth area for us as well. On the institutional business one has to look at what are the components of that. We are a very, very large provider of corporate trust and paying agency business. And that’s important to us for a lot of reasons. One, it gives us transparency into a lot of the institutional clients when we look at the debt underwriting that we do -- the municipal securities underwriting that we do.
And we’re ranked consistently in the top four or five as trusties and paying agencies in the municipal space. Clearly, one of the leaders certainly in the Mid West in the bank qualified paper and why is that important? We have over 900 correspondent bank relationships and you’ll see in a later slide why that’s important because it gives us a window into the balance sheet in AML business that exists within those banks.
How we’re measured? Growth and assets under management for the big business for us over the period of time and you can see both through the acquisition of Prairie Capital; we’ve got a very nice five year CAGR of almost 21% in the growth of AUM. And that continued into the first quarter of 2013. Mature about business; perhaps it is similar than some of the other trust banks with an older book of business and with the low interest rates that we’ve been experiencing, you’ve actually seeing an invasion in some of the corpus of some of our trust accounts. But hopefully we’ll see normalization in rates going forward. But there’s a real success story and I think Mike talked to this a little bit as a mariner in the private banking space. I think this is a home run for us in 2005, ‘06, we really didn’t have any private banking. Today, this is almost $1 billion in deposits. It’s also a great source of lending. And what’s nice about this is 18 individuals across our franchise are aligned to private banking. They are deployable, they are expandable and it’s a lot more efficient to be looking at that type of model than building more branches. If you put a branch on a corner, you got it for 20 years. These people can move from market to market and it’s been a big driver for deposit growth in our space.
The institutional asset management piece that I talked about, a very important piece made up of five different other businesses, corporate trust, bond trading, correspondent banking, securities custody and safe keeping, very, very important. You can see on the right hand side there assets under administration. Another acquisition we made in 2010, American National Bank’s corporate trust portfolio is allowing us to grow not only the corporate trust portfolio itself, but also the safe keeping of assets. Why is that important? I mentioned earlier, it’s lent into the businesses, and then we have the opportunity to cross sell additional products into those accounts. So we’re doing a lot of that examination of existing books of business, where are those other opportunities that we can continue to find opportunity to sell into.
On the right hand side here, sources of additional liquidity, we sweep a tremendous amount of liquidity off balance sheet every night, and while we are highly liquid today, deposits are not an issue you. You can see first quarter over $7.5 billion of additional client funds of individual as well as commercial that we sweep off that could actually be accessed if we want to increase some of our own balance sheet pricing.
So it gives us great flexibility, great liquidity embedded into the company, but an important piece of our business going forward as we really own our skill set in this institutional base.
So now I’d like to turn it over to our consumer executive Christine Pierson .
Christine L. Pierson
Thank you, Clyde. Good morning everyone. The consumer bank includes servicing or retail consumer customers as well as our small business customers. Across over seven state footprint, we have 1100 associates sprinkled across 113 branches. Our network include 330 ATMs, our digital bank online and mobile banking as well as our call center.
And as you know, the consumer bank have a faced a new normal in the aftermath of the financial crises. Our cost of sale to be increased towards the heightened regulatory environment. It is also stripped out much of our historical revenues and consumer behaviors have changed, non-traditional competitors have come into the market as well as the ever changing technological advancements that have allowed consumers can direct their banking in a way of using technology.
And so as a result, it caused us to change our business model and that business model has been focused on really three primary areas; one, is to really change how we are approaching our customers, moving and shifting from a mass market approach to a very targeted approach time on high value customer segment, two, elevating our value proposition, which is service and specifically here in an advisory fashion and third really leveraging our channels in a more ubiquitous fashion to drive a better customer experience while taking out cost. And one of the things we found as we looked at our new strategy is, we have a tremendous opportunity to leverage our existing customer base. We have over 250,000 consumer retail customers and over 20,000 small business customers of which only 70% of those customers have one product.
So there is a great opportunity for us to really expand share of wallet and bring additional lift back to the bank and to counter some of the revenue losses that we had from the financial changes and regulations.
So as we have rolled out that new strategy, some of key tenants of that strategy include really totally renovating our branch staffing model from how we select our associates to the roles, the specific roles that they have, their compensation plans and introducing world-class coaching to be able to sustain the change.
Second of all, we have provided them with the business, the specific books as I mentioned with the high value customers, specifically embedded in that and asking them to proactively take the bank to the customer in a conservative fashion to elevate that relationship and uncover needs and wants, so that we can expand that share of wallet.
We have additionally tried to leverage our other channels. We introduced our mobile banking platform at the outset of the strategy, we’ve introduced video banking into the branches to get some of our customers who are not as comfortable with technology are more comfortable with that and we are taking our call center and shifting it from a cost base asset to a revenue generating asset and really trying to leverage that with our customers to drive sale.
And finally we have looked at all of our processes with an eye on business process innovation and with the idea of improving our associates and our customer experience while taking out inefficiencies. One of the great examples that we have in this space is our small business customer application process, we were able to drive that process down in the turnaround time to one fourth of what it was about one year ago and we've done a number of those things both in the front office as well as in the back office.
And then finally we’ve introduced a teeny model that allows us really to leverage our specialty roles like the mortgage loan officer role, our small business banking officer role as well as our partners in the private bank and in the commercial bank to really expand that sheer wall across the organization. Some of the early wins that we’ve seen about four times the lift in referral in our pilot branches that we have rolled out versus our controlled group. We dropped our turnover and our staffing 4 percentage points over the last two years by having a better selection process and having a better development process. And then finally we've done a full blown rollout in January on our small business side and our customer satisfaction scores have improved nearly 10%.
So we're pretty excited about some of those early indicators. As you can see that's translated into results particularly in our most prominent product, our home equity line. You can see continued growth here with double-digit CAGR, one that again we teamed with our private banking and commercial partners on and so we're pretty excited about those results, we know those are leading across our competitors and have really done a great job in terms of performing and similarly on our small business side you can see our results have been outstanding, we have better than 40% CAGR in the last four years and have been able to grow the business five times since it’s inception just five years ago. And then finally, we’ve taken a look as I mentioned to you very carefully at our branch network. and looking at our consumer transaction behaviors and we’ve been successful and point out 25% of our branch network, while maintaining about 95% plus retention with our customers as well as really growing and maintaining our deposits. So we are very excited about the results there. And at this point, I’ll turn it back over to Peter.
Peter J. deSilva
All right, well, thanks Christine, thanks Clyde, thanks Craig, we appreciate you guys coming up and sparing a few minutes with the group.
Peter J. deSilva
There’s one thing we believe it’s having the right people on the box, it’s making sure we have the right leaders inside UMB who can beat the organization that they’ve been charged to lead, and I’ll tell you that we have the best management team we’ve ever had at this company. I mean you’ve seen three of them here just a few minutes ago, you are about to see three more. We look for leaders who of course understand their business segment, who are driven, who are innovative, who are collaborative and willing to work together and hopefully you saw a little bit of that up here, I talked about the [Peter Weil] and it takes people like the three you just saw that execute that successfully.
The Next person, I’d like to introduce is Andy Iseman. Andy and I get to know each other in 2010, we were seeking as CEO for Scout and quite honestly to that point Scout didn’t have a CEO, Scout we were running it a little bit more or like a bank asset management business and not like an institutional money management shop. And so we saw Andy out and I got a chance to visit with each other I immediately gravitated to him, because of his knowledge of the business is intelligent and the cultural fit that I thought he would be for UMB, and he is proving to be every bit of that. And so Andy come on up here and give everybody an update on Scout Investments.
Andrew J. Iseman
Thank you, Peter. Still morning and I still got 10 minutes I guess there. Real quickly some highlights on the financial, if you look back over the last five quarters and I’m not going to delve into a lot of this, I think it was primarily covered in the earnings call yesterday and we can certainly answer any questions at lunch or after these presentations in the Q&A.
I really wanted to spend a few minutes here on the highlights and looking down through the few things I’ll just pullout. As Peter mentioned I’m the first dedicated CEO for Scout. The Scout has been around for a number of years, and so while we’ve got very good long-term track record, we’ve got one of the best international funds in the business, it’s going to be celebrating its 20th anniversary this year. A lot of areas and the asset management is basically we had the scratch of surface. So while we realized significant growth and we’ve done some good things over the last years, I think the opportunity set remains quite strong for Scout.
A couple of things I’ll point out. So Peter mentioned that prior to my arrival Scout was managed like a bank-affiliated asset management firm. And those of you who follow the business closely know that bank-affiliated asset management firm to generally don’t get the [best not] there is the idea that the banks are in or out of the business, there are not committed to it. They have a difficult time delivering performance for their investors. They have a difficult time retaining the top talent. And I would say I think we’re swimming against the current on that and Scout in a good way.
In terms of the affiliation with the UMB, I’ll give you just a couple of points that I generally like to use when meeting with prospects, consultants, and gatekeepers out there. And that is that we’ve realized a very good relationship with a strong parent. You’ve heard this come through many times with a lot of the folks up here.
In terms of – UMB does not need TARP, but don’t need to govern. We didn’t have to have our hand out. And at a time when a lot of other banks that had affiliated asset management firms those surprise us, wrapping to show up their balance sheet and they were our asset management, operations.
UMB stepped up and we made an acquisition through Scout and picking up Reams which is really transformational. So in terms of the commitment to the asset management space number one, and the ability to really go out and get the best of breed and deliver those investment products to our investors, I think you can see the commitment there from a parent company. So I don’t view it as a knock or a negative that we’re affiliate with the bank. How you would like to view it as a positive. We’ve got a very stable parent behind us, who is very committed to this business.
A couple of things I’ll point out here to in terms of the opportunities that I put some industry stacks up here real quickly. And you can see that we’re really a very small percentage of the overall market share for the funds and these are actively managed. So in this space, it’s about 8 trillion as I indicated up there, only 0.2%.
So I would like to think that we’ve got the opportunity to take some market share and grow. One of the step that I would mention – that’s not up here, but I would like to mention is that, if you look back over the last four years, so 209, 2010, 2011 and 2012, if you look this is just for the mutual fund flow, this is not a non-fund flow. So as just from the mutual fund flows as calculated by strategic insights which attracts industry flows. There is roughly 750 fund firms out there, fund families. And those four years, there was only 35 fund families they had at least 750 million in net flows coming in, and Scout was one of those, I’m very proud to say. So, it’s one of those situations where we like to think that we’re growing in a very prudent manner, we’ve had good growth, but I do not want to have the roller coaster rides, we had net flows of $3 billion or $4 billion in one year, and we were down $2 billion or $3 billion in the next year. So, we’re having the slow steady growth and continuing to grow on an organic basis which is good.
In terms of the distribution, Clyde mention I believe on the wealth management side and Peter alluded to it too. In terms of the affiliation between Scout and UMB, we certainly are providing products to the parent company to the different process, but we’re not reliant upon our parent company for the success of Scout, less than 5% of our total assets are coming from this, I think it’s another different from what you see in traditional bank affiliated asset management firms with a highly dependent upon their parent company to drive the asset. We want to continue to get more assets, we feel like we have very credible products and strategies out there, but our success is not depended upon the parent company delivering those assets to us, we are going out there and getting the wins ourselves.
And on the intermediary side, just to give you a couple highlights if you are not real familiar with it, so it’s that the usual suspects that we’re dealing with on the platforms and they have various ways to drive assets, but [at the swaps] fidelity through national financial, Edward Jones purging on the intermediary side. And then institutional, which is more of a – more recent effort on our part to drive assets, that’s dealing with a good traditional consultants that are in the industry, so SIS, Hewitt EnnisKnupp, R.V. Kuhns, Callan, Wilshire, et cetera. And then you can see outlook for the few of our competitors out here and again, we feel like that we compete depending upon the product to the strategy quite well with some of the bigger names that you are probably familiar within the industry.
Flipping over to the assets under management, I just point out couple things on here, as I mentioned we’ve had very strong organic growth. And we’re consistently growing on a year-over-year basis. So if you look at 2010, 2011, 2012 and then even year-to-date till the first quarter of 2013, we’ve realized in total an excess of a $1 billion in net new flows coming in, so good consistent growth.
A couple of other things I highlight and see the orange or dark yellow, I am not sure which color is shown up on the screen. The money market we made a decision that that was not a core competency of ours, to stay in the money market business. So we basically [Judson] close to a $1 billion in asset. So and I would saying the fact that we were remove those assets from our total AUM figure, we’re continuing to grow at a very nice trajectory, looking back on and it looks like it was a pretty smart move, as the interest rates, continue to stay down and a business where a lot of other folks if seen if you follow this start of the business are really exiting because if they cannot make money, they’re continuingly in rebate in order to keep doing a lead a dollar.
A couple of other things that I would just touch on, in terms of the flows here, I mentioned the institutional side is more recent development for us in the first quarter, I believe Peter highlighted this on the earnings call, yesterday, we picked up a to very few nice mandates in the first quarter from specific for its sub-advising want a variable annuity and want a mutual fund and that was an excess of a $1 billion.
So that’s a very nice win for us and it just speaks to the fact that we’re going after channels that we have not traditionally trade in. The big spike there between 2009 and 2010, I think a couple of folks has mentioned that was due to the rather transformational acquisition that we made with Reams Asset Management which was roughly $10 billion. So that’s that accounts for that but notwithstanding that increase in assets, we still had over $1.2 billion in net new flows in 2010.
Flipping over to the next slide here, this is gives you a breakdown on traditionally Scout was equity and within that equity, traditionally to our international equity, which still remains a very large percentage, you can see 71%, which I will notice the piece of the pie I am looking at the top right here, the 24.1% which is our mid cap strategy and that is the strategy that we picked up with specific life. That strategy is now in excess of $3 billion. It’s done very well for us and something that we have started from scratch in 2006, a very nice growth rate there.
It’s also on the fixed income side I’d point out and it’s actually the orange slice of the pie, there is 16.2% that’s our unconstrained strategy, which is managed by our Reams Asset Management division. That’s far away our fastest growing strategy currently and now exceeds $2 billion and the market is quite huge for that.
We continue to see a shift not only from our existing book of business from core and core plus mandates, but even more importantly, we are taking market share from other folks in the industry and so we feel like we have got one of the best fixed income teams with the Reams folks and we are going to continue to see good opportunities there.
So going back again to the international, so roughly 71% of our equity assets and then in total 37%, so we become a much more diversified firm over the last two or three years which is again what we are looking to do, we don’t want to be highly dependent on any singular strategy.
This last slide here just touches on our client assets by type and so not only is UMBF a diversified financial services company we are trying to certainly strive for that scalp too. Again we don’t want to be depended on one particular strategy or one client type. So we are roughly 50-50 between fixed income and equities and we are roughly 50-50 between mutual funds and traditional institutional separate accounts and we want to continue to grow both classes of that business.
At this point, I will turn it back over to Peter. I think he is going to introduce Mr. Zader.
Peter J. deSilva
Hi. Well, thanks, Andy. I appreciate that. Updates on Scout; very exciting. There is a lot of growth and as Andy said, with the kind of markets here we have, the sky is the limit. We have a lot of opportunities yet to go within Scout.
Let me explain in just a minute and introduce John Zader. John joined us in 2007, although, we’re just debating it might have been in the end of 2006 after a long career at U.S. Bank in Jefferson Wells. He’s known around the industry as one of the innovative guys in the fund servicing business, the asset servicing segment, and he’s been a great partner of mine and a great joy to work with over the last few years. He is responsible for the segment, and he resides in Milwaukee, Wisconsin with a preponderance of our associates. We have about 350 associates in this segment, with the majority of them in Milwaukee with some at Ogden, Utah where we picked up as a result of the J.D. Clark acquisition and we have some associates in the Philadelphia metropolitan area.
If you look at the numbers for asset servicing, there’s been a little volatility here and you’ll see the role margin in the first quarter of 2013. Mike referenced earlier the earn-out liability adjustments that we’ve been undergoing primarily for J.D. Clark in this case, and those were positive in terms of the long-term growth potential of the business, but they are negative in the short-term on the earnings.
That said, we’re done with J.D. Clark at this point. The earn-out is complete. So any volatility resulting from that should abate and this business should be able to run in the very teens, low to mid 20s from a margin standpoint as we go forward.
With that, I’ll turn it over to John.
John P. Zader
Thank you, Peter. Well, I guess it is officially noon and I know lunch time is coming. So I’ll try to make this as brief as possible
To start, it would make sense talk a little bit about what we are seeing in the marketplace within our target markets, even if the equity flows change course in the first quarter of 2013 to positives. There is still lot of market uncertainty out there. And asset managers are still focused on costs. They are hesitant to rebuild their market, their infrastructure.
We are still seeing a fair amount of consolidations in the asset management business, but at the same time start up activity remains very strong. The regulatory environment is still very active and uncertain, making the asset management business more complex and expensive. On the service provider front, service providers are expanding their product lines to win more business. This is especially true in the AI space. We are seeing a lot of M&A activity in the AI provider space, and we expect to see a significant amount of consolidation in the next couple of years. And with all the pressure seeing about the growth in the ETF markets still three firms control 80% of the assets.
On the mutual fund side, two things worth mentioning; we are seeing an increase review of service providers due to the late fall activity from M&A activity that happened in the late 2000. At that same time, a number of service providers to get their revenue to make up the revenue for the shortfall of the market collapse, they were operating a below market fees and they are starting to increase those fees for the current clients and they are very unhappy about that.
In the AI space, service providers can deliver online access on data and they are in demand. And we are seeing a lot of interest from the higher players, are expanding the relationships to our service providers to expand into middle office, lending and AI custody.
So the result of all this, we are having more and more conversations with asset managers. They are looking for a partner that can take care of the operational and compliance matters, and they can focus on what they do best, which is manage money and grow assets. So it brings us to our value proposition.
We catered to asset managers seek a nibble partner, they can flexibly respond and support the growth. The keyword here is partner. Some of our most successful and profitable relationships are as where we are viewed as a partner and then we add value to the relationship. And how do we become that partner? Start from people, process and technology. And first and foremost, it’s our people. We are a service provider, we sell on service and our people, we believe, are most important assets.
We believe that if you want to serve your customers best, you have to put your people first. So to maintain a highly educated, highly motivated workforce, our leadership team spends significant amount of their time on developing people practices, they create a positive challenging environment for our associates and gives them opportunity to grow and learn.
We believe it maintain a best place to work mentality and living it. We don’t necessarily do this for external recognition, we do it because it’s the right thing to do. But we have been recognized by the Milwaukee Journal Sentinel, Best Places to Work for the three years in a row. As a result of all this, our channel remains in a low single digits and that’s very important in the financial services industry when you are selling them service and you are selling your people that the people are there from here to service the client.
As far as process goes, we want to make it easier for asset managers to do business with us. Our business model is the first whole service business model, so we want to offer as many turnkey packages as we can to the asset managers. Such as our Series Trust IMST and mutual fund space, our registered hedge solutions in the AI space and we also have a collective trust These processes make it very efficient and cost effective for managers to launch products. Our technology for our suites remain fairly with that competitors, who have differentiate ourselves and how we hire and deliver that technology, really best in proprietary technology when it makes sense, in our software shop we don’t want to become a software shop. But there are instances where it makes sense to invest in proprietary technology.
Our target markets, the mutual fund space you have to existing and startup funds for assets managers between $500 million and $10 billion assets under management. In the hedge fund space, we target all products hedge funds, public funds, registered funds, private equity funds, divestments of $50 million to $10 billion assets under management.
We are very will in started market, because there is a value place on service and what we sell, we sell high plus service quality. And there is premium still in this marketplace on that. So, we’re not competing on price, we are competing on service in the margins a lot better.
This is my product to keep, I feel happy. So we are in there. And it is part of our full service model, we want to be able to after services no matter how investors measure offers the investment management expertise.
So, Enterprise Money Manager, the products of surrounding the money manager and our services are wrapping around that. We want our sales people to be able doing it office and going and talking and to get calling AI manager, the AI manager does well. Our AI business is slowing down, we want to talk about preferred stock, because we have a lot of risk of money coming in.
We want to be able to service them, we want to have two stable services no matter which way they are going. The next slide is this breakdown of assets under administration by our product line. As you can see our transferring fee is the biggest with $7.2 billion assets under administration and the AI business is small and that’s consistent with the marketplace. If you look mutual funds have a lot more scale there. Size of their funds are lot bigger on the AI side. One that we have note, in our release yesterday, we announced that we had $165.4 billion assets under administration. If you add all these up together you will get more than $165.4 billion due to the fact that we offer multiple services to clients while we count individual products lines, we don’t really count ones in the total.
Next slide is the sample client list. Two new clients that were added to list are worth mentioning. We were recently awarded in 2012 the Bank of America private equity business and FPA for specific advisors, so for us to view transfer and distribution service.
So where are our key strategies of growth? We have been spending a lot of time in the last five years on our brand awareness and those efforts have paid off. Now we’re in business such that, but also we are recognized in the marketplace as a high quality service provider with efficiency of process.
We are looking to extend our sales force and add to depth when it makes sense and we have just recently hired someone with over 18 years of experience in business.
Our people; we couldn’t grow without our people and that’s what we sell on. And all of our people understand that they’re part of the sales process. They understand that the way to deliver growth is at service at quality and that’s a high component to our success.
On the client side, we want to make sure that we are selling to both capital prospects which are our clients. So more importantly, we want to make sure we service them the way they need to be serviced so they could be used for us. Our clients are currently in and have been in the past a significant referral source of new business for us. And one of our goals is always to have 100% client referenceability. This is a very powerful tool on our safety that we’re willing to talking to a prospects and we get into the point where they can move forward with us, and they say okay, give us your reference list and we just give client list and say you pick whoever you want off those list, we’re comfortably talking to anybody. That’s a very powerful message that really helps in closing our business.
To wrap up our products we want to make sure we continue to enhance our products set. We’re always looking what products are out there in demand, sometimes it will be that has a pre-package product for the AI business and price. We don’t sell them price. We’re never going to be the world-cost provider, but we already want to make sure that pricing keeps us in the business we want to make sure that with the price competitively or again we never saw in price and because we have this conversation over time. We saw and serve this.
With that being said I would like to turn it back over to Peter. Thank you.
Peter J. deSilva
Okay, we’re approaching the finish line. We want to give you guys some time for questions, I am going to try to move through the next section very rapidly and leave time for Dennis Triplett to talk about healthcare. I mentioned earlier we have a very, very important segment called payments solutions inside the company; we’ve actually broken that into 3-dimensions. Our card services business which is headed by Terry D'Amore who is back in Kansas City watching the shop. Dennis Triplett runs our healthcare business, they will up in just a second and then our institutional banking businesses run by gentlemen by the name of and he also back to make sure things that still running in Kansas City. This is a very profitable segment and I think that’s what you need to take away from this, not a lot of equity required, not a lot of absence necessarily directed against it but it is a very profitable segment that we’ve seen nice growth in the segment on primarily driven by the healthcare platform that you’ll hear more about in just a second and our card platform which has been very, very exciting over the last few years. 11% of our deposits, corporate deposits are housed in this group in one form or other by $425 million of loans, primarily credit card loans are in this segment. There are about 114 people in the segment. As I said, it has great margins and incredibly strong growth potential think in the future.
We have some macro trends here. We talked about the pressure on the credit business. We talked about the codec, we talked about Durban, you know about Durban and all the challenges that has created for sure. There was a shift going in payments in the United States, no got about it. We’re certainly seeing checks coming out. We’re seeing [ACHS] come out. We’re seeing digital rise. We’re seeing credit card rise et cetera. And so we’re trying to adjust of those changes as they occur.
And in our institutional banking business which I’ll talk about more in just a little second, it’s all about penetration in growth and I’ll come back to that in just a second. So look at our credit card business just for second. You hear us talk on the calls about purchase volume and how important purchase volume is and in fact, you’ve seen that it’s been growing very, very, very nicely and we announced $1.8 billion in purchase volume across all of our card types the last quarter. That’s a record and no reasonably we won’t continue to see those kinds of growth.
The blue line is interchange. Those are the dollars that -- we get paid for every dollar of purchase volume that takes effect and you’ll see that was roughly $16.5 million during the quarter. Now there is a difference. When we talk about purchase volume, you’re going to hear for example that healthcare debit is the largest purchase volume we have and in fact, of that $1.8 billion, $881 million last quarter was healthcare debit. However, when you think about interchange and how we get paid, actually our commercial credit cards pay us the best. And in many cases, we have arrangements with various partners -- distribution partners that might cause the gross interchange
and the net interchange to be lower, to be different rather, but in every case commercial cards provide the best absolute return, while healthcare debt is driving the bus in terms of overall volume.
Card utilization with the exception of that anomaly in 2010 when we did some acquisitions, runs in the 16%, 17%, 18% range. And so we’ve got commitments of $2.6 billion out to our credit card customers across all those categories consumer credit, commercial credit et cetera, and on average, it’s about 16% utilized, a little lower than the industry average, but not terribly lower than the industry average.
Just want to spend one second on a business we never really talk about, and it’s called Institutional Banking & Investor Services. This is a business that we’ve been for 30 years, started many, many years ago, when UMB started processing checks for Fidelity Investments and that has actually led to a business segment today that runs about $30 million in revenue and is increasingly important to us.
We’re processing business for 60% of the top broker dealers in the United States of America. What does that mean? Why do you care? It means we have tremendous access to those households. So if you think about this for a second, this is an intermediary business, where we’re selling our check in ACH and card products and digital products, through a new distribution channel, and it’s called Broker Dealers across the United States and mutual fund companies across the United States.
Today, we have 8% to 9% penetration rate of broker dealers our customers. we have access to this business to about 30 million American households. There is not another regional bank they can tell you that, they have access to 30 million American households, but we do, because we have relationships with the biggest VDs in the country, and we offer our cash management products primarily to those VDs and they sell them downstream to their customers.
So this is a tremendously exciting segment for us, the reason we did the FDR account and customer acquisition wasn’t to process checks and ACA just quite candidly. It was to do two things; one, to get into more broker dealers, large broker dealers across America. And then two, probably most important is to convert those payments from traditional paper based payments to card based payments and electronic payment. And so that’s a takeaway here, and we built another business that’s a national platform business, the assets and intermediary business sold to our friends, our broker dealers, and mutual fund companies, but we have tremendous opportunity to grow it with our card products, digital products and other cash management strategies that we try to offer through that distribution channel.
With that, I want to introduce Dennis Triplett, who I think is the longest veteran of UMB that you hear from this morning with over 30 years of experience. Dennis has pretty much done at all inside our company. I tapped him on the shoulder a few years back and said hey there is a thing called Healthcare and HSAs and FSAs. I’m not quite sure what to do with it, but you’ll figure it out. Anyhow she’s done a remarkable job not only figuring that out, but really helping us to grow our business. So without further ado Dennis come on up.
Thank you, Peter and I’m very pleased this morning to be able to talk to you about something that’s so near and dear to my heart and that’s healthcare services and what we do in this business. I like to cover three topics with you today. First of all to identify the segmentation approach we have in healthcare. Secondly, to define how we make money in this business. And then lastly, talk about the sustainability of the growth trends that we’re seeing in this business.
We have three segments that we look at – when we look at Healthcare. And the first is what we do as an HSA custodian. Secondly, in the benefit card business and I’ll talk a bit about all of these in just a moment. And finally healthcare payments.
In the HSA space, we provide no deal services. We do so on a wholesale basis and work with a number of business partners where we embed our solution into their product offering. We also have a distribution strategy where go direct to employers and we work with brokers across the country. This is every much a national business and this is not our business, and our card holders are reflective of where the population in this country. So it’s not defined as a mid-west segment and certainly on a national basis.
And second segment is where we take a multi-purpose debit card, and I would say we are probably first in United States offer a multi-purpose debit card. And we work with business partners and that card is attached to a flexible spending arrangement in FSA or in HRA, a three reimbursement arrangement of depended care transit accounts and it becomes the access device to those benefits accounts.
We also started something very recently this last year and that is to do some prepaid cards in health care, kind of riding the trend that we’re beginning to see a more of defined contribution model where employers don’t want to be subjected to the growth rate in the insurance costs and so they define that and they can do that with a prepaid card.
Last segment that we serve and look at this business is in the healthcare payment space. We have a couple of things that we do in that space and it’s an expanding area of what we do. First is to do payor to provider our payments, think of that is a insurance company where medical TPA making payments to the hospital or physician practice, that is something we do and have had good success in also in the payor to consumer business and in that model we work with a medical payor, again I think of it the insurance TPA or a medical TPA or an insurance company and paying individuals consumers and printing the explanation of benefit or the explanation of payment, you’ll be the real piece providing a portal then back to those payers.
How we make money in those of the four sources, I’d like to identify for you first, there is an account transaction fee, generally we describe that as per employee per month fee. Secondly card interchange Peter spoke about that and that’s a big part of our revenue source. Also net interest margin on the deposits that are gathered principally in the HSA space and lastly management fees associated with those account holders and choose to make investments in funds as the part of their FSA or HSA investment strategy.
Little bit about our growth, this highlight what it happened in the industry in the HSA space last year the number of accounts went up about 25% deposits about 32% on an industry basis as you can see hours increased, the account base 45% last year, and the deposits grew 55%. Talked you a little bit about market share and our strategy and as you can see here in the HSA space, just made there about 1,600 banks across the country that have some sort of an HSA offering, kind of all the 20 rule about the top 20 control 74% of the market as was mentioned in January our total assets hits $620 million. We have about 5% market share in this space and growing.
Looking at the benefit cards and FSA space, you kind of look at the entire national market, and there is a 150 million employees, about 20 million are eligible and have selected health flexible spending account. There are about 14 million of those that are carded across the country, and we have about a 19 million a 19% share in the space. Let me get some growth trends. This is our three-year growth trend. For HSA as you can see a CAGR of 32.6% and the number of accounts growing to 320,000 accounts, and the HSA assets over that period of time, with CAGR of 44%, 615 million at the end of January.
On the benefit card side, CAGR is slightly less, 34%, and we ended the year at 2.85 million accounts in the spending and again, Peter talked about the interchange and the spend that we have in this segment, and it was a little over $2 billion, $2.14 billion and that’s a 33% increase or 33% CAGR I should say.
Lastly, talk a little bit about why we feel we’ll have a growth and continued trajectory in this space. And if you are familiar with the employee benefit space, there’s a couple of items I would point out to you. The very first one is that bears a Cadillac tax, a part of the Affordable Care Act, that would be levied on employers that offer Cadillac benefits. And so think of that as something that all employers have this cap and they are looking at in the future. On the bottom, creating this pressure is the CPI, the medical component of that and the cost pressure that we’re seeing and that’s continuing to grow. There is a cap and no one wants a non-deductible excise tax to effect them. And so what does the employer do? They look at ways to save money in their benefit area. And one way to do that clearly is with account based health plans. We can talk in – perhaps over launch, we can talk about how these really work? What is it mean for the consumer visibility and all of these things and in fact they behave differently. So we’re seeing a continued up tick in the use of HSAs and HRA specifically and that obviously is our benefit.
So with that, I would turn it back over to Mariner.
John Mariner Kemper
All right, so you’ve heard from all of our leaders and in the spirit of keeping focused on our purpose here. I’m just going to just spend the rest of my sights and we’ve got about 10 minutes before launch and which certainly those of you who sticking around, we can expand on any of these areas and have conversation after launch. But we do have about 10 minutes. Any of you want to ask us some questions about what you’ve heard today. We’re happy to answer myself or point to one of our business leaders. Is there any question?
John Mariner Kemper
John Mariner Kemper
Sure. So the question was Craig had mentioned that we are attempting to expand our fixed rate lending? So a couple of obvious reasons and a couple of that’s obvious reasons, so the most obvious would be unlike most things half of our assets are fixed income. And as you think about a persistent low interest rate environment and as securities roll off, we have the opportunity to reinvest. So it’s at 80 basis points or in a loan asset. That is really the reason. So that is trying to exchange some of our fixed income opportunity for a fixed rate opportunity or like fixed rate opportunity, but on a loan side. The less obvious reasons would be there are less complications from a capital implication perspective. They don’t have to be mark-to-market. And so, given the situation that their whole industry is faced with that as a benefit, we get by exchanging that. Also it’s mentioned that 70% of our loans re-price within one year. If you look at the loan book and the investment book together, we can get shorter and safer, if you will the fixed income book and fix some of that term risk on a loan side. That’s really what we’re attempting to do and having some success.
And the discussion of all the businesses particularly on the payment side, it still seems like you have a lot of asset sensitivity naturally within your business units, not just the balance sheet, then it would seem like, I mean, certainly the net interest income discussion that Mike shared with us could be a lot better when rates go up for all of your businesses in the pre-tax margins. I mean, do you view that this is the right way to think about?
J. Mariner Kemper
Yeah, we are definitely asset sensitive across the whole organization and arising right environment. So it’s whole (inaudible) for sure. And Mike, I don’t know if you want to add to that
Mike D. Hagedorn
No, I think that’s right, keep in mind to that assets and liabilities for each of these business units get funds transfer priced as well and so well some of our business units today clearly don’t like the funds transfer price.
Mike D. Hagedorn
They are going to like it in an upward environment and that’s going to definitely make the optics of the businesses look much better the profit margin increase.
Thanks to you, talk about expenses and maybe give us some levers in term of what you think kind of normalize expense may be took these, in terms of that coverage ratio that you look at, could be should be for traditional efficiency ratio over time?
Unidentified Company Representative
Are you asking about out coverage ratio expenses in non-interest income?
Unidentified Company Representative
We do believe that we should continue to see leverage on that grow against our expenses, expenses in general and you guys can add to this Peter and Mike, I think we are demonstrating the ability to bring that down, there are a lot of variables in that.
So Scouts business for example there is a lot of fees that come on as we bring business on, so this business leverages over time as the fees to bring that business on in previous years though way for the new business still in several areas where we have had fees tied to new business which historic current year performance but should get leverage as time goes on and I don’t know – which we are seeing leverage, it is about lot of it against our fee based businesses and probably for scale right, so we have in John Zader’s business in particular, he does have to add people against new business, but it’s only tide a new business, the most scalable business we really have and we’re starting to see that leverages is in Andy’s business Scout, the most scalable business against our fixed based cost structure, the commercial banking organization obviously is hindered by the industry environment but it’s got tremendous rate and earnings power and it’s a efficient part of our organization, the consumer part of the bank is what do you say that there is a suffering through the Washington assault on the business and we have gotten very efficient because of that and continue to look for ways to get more efficient to branch strategies and closing branches and consolidating branches using technology, the wealth management business is it was in the bank it’s people intensive, so but we think with our focus on private banking versus really the wealth management piece so much, we can get Garner a lot more to that angle and let it, let the wealth management piece follow them. I hope that answers your question or if you think you just want to add to it.
Yeah I think that Scout as Mariner mentioned is the biggest example of leverage where as assets go up and new businesses brought on and he doesn’t really have to add much, as it relates to FDE expense, I mean he’s really not a very large user of technology as well, John Zader’s business on services would increase as well, but like Mariner said it will add people, it doesn’t use technology in the scheme of UMB much as well. Payments would be the one you need probably should keep your eyes on, payments uses a lot of technology but not necessarily a lot of people as new business comes on, it is the scale business in the card space. So that ratio should go up for those reasons all other things being equal.
Great, thanks. One other question I had, it was on capital. Just talk about your use of excess capital deployment priorities? Do you have an estimate on Basel I at the tier?
Unidentified Company Representative
Yeah, the capital questions are complicated one, because we are not in that game by ourselves, right. So there is a whole lot of regulatory pressure around capital and I think over time, you will see the regulators force us as an industry to carry more capital. And so when you use the term excess capital, I’m not sure that’s particularly fair way to think about our capital at this point.
We have an adequate level of capital, but I would not describe it as excess. I don’t know if you want to add to that. I mean, and what we will do with the capital that goes up, an order of things that we think about is, we would like to make acquisitions, strategic acquisitions is the highest priority for us. We’ve demonstrated that we know how to do them and they are giving us tremendous leverage. And so we are focused probably most primarily on using our capital as it does build and it will build over time for acquisitions.
Unidentified Company Representative
Yeah. And as your question was specifically about Basel I, what the impacts are? I would say two things; one, we have a very long runway, right. So it’s not till 2019, or I get along 2019. And second it’s not completely clear where they are going to go with some of the items that entering about being, OCI being probably the top of the list, which is what I was opening with the part. So because of the kind of company we are and being focused on being independent and risk managers, our focus right now given on what all is going on in Washington and with the global team is to be flexible and prepared for any scenario.
So we don’t want to get out in front of any of this and make dramatic changes one way or the others is how we apply our capital. So we want to be flexible the other way we look at that right now. One more maybe then continue this on too much. So quick question.
On the series portfolio I think I heard you guys had a $100 million of unrealized gains and there you would used to help offset some of the NOI compression. I guess the question is, do you need too, like why would you want to, like you feel you are again rewarded for talking security gains in the market or is there other reasons?
Peter J. deSilva
While again like as Mike said earlier until last couple of quarters, it didn’t benefit us and it did make sense because as we would sell securities and take gains and lot of that in bottom line, we were able to reinvest at levels that kept we are and keeping with the portfolio yields. That opportunity is stating a way and so therefore it does make less sense today, but up through the last couple of quarters, we could improve our bottom line and maintain our yield profile and therefore it make sense to us.
Mike D. Hagedorn
And the one think I want to add to that is, for us if we had the opportunity to take those gains and reduce the optionality risk measured by convexity in the portfolio, we would clearly do that, so we did it at each of those trades to at least get back the yield that we are giving up and in most cases, reduce convexity, right. And next let me got a burning one, we’re all be in the other room to ask, answer your questions and as good to know you a little bit better over the launch. Is that work? All right, great, we’ll see you across the (inaudible). Again I think it’s a best place at least setting ways to have launch in New York, sitting right on top of the Square.
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