UMB Financial Corp (UMBF) 2015 Q2 法說會逐字稿

Good morning, and welcome to the UMB Financial Corporation's Second Quarter 2015 Financial Results Conference Call. All participants will be in listen-only-mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Kay Gregory. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us on our conference call and webcast regarding our second quarter 2015 financial results.

Before we begin, let me remind you that today's presentation contains forward-looking statements, all of which are subject to assumptions, risks and uncertainties. Actual results and other future events, circumstances or aspirations may differ materially from those set forth in any forward-looking statement.

Information about factors that may cause them to differ is contained in our 10-K for 2014 and subsequent 10-Qs and other SEC filings. Forward-looking statements made in today's presentation speak only of today and we undertake no obligation to update them.

By now, we hope, most of you on the call are listening via webcast have had a chance to review our earnings press release that was issued yesterday afternoon. If not, the release is available on our website at umbfinancial.com.

Also, on our website, we've provided supporting slides that contain additional details on some of the drivers and metrics we'll discuss today. A link to the slides can be found in the Investor section of umbfinancial.com under News & Events and Presentations. These will also be available after the call for your reference. Reconciliations of non-GAAP financial measures discussed today have been included in the earnings release and on page 34 of the supporting slides.

On the call today are Mariner Kemper, Chairman and Chief Executive Officer; Brian Walker, Chief Financial Officer; Peter deSilva, President and Chief Operating Officer; and Mike Hagedorn, President and Chief Executive Officer of UMB Bank.

The agenda for today's call is as follows. Mariner will provide high-level commentary and Brian will review details on our financial results. Then Mike and Peter will review our four business segments. Following that, we'll be happy to answer your questions.

I'll now turn the call over to Mariner Kemper.

Thank you, Kay. Welcome everyone and thank you for joining us. I'd like to cover two major points with you this morning. Our high level results for the second quarter in relation to our long-term strategy, and recent and near-term actions that are designed to drive future improvements in our results. The highlight of the quarter was closing on our Marquette acquisition on May 31. Throughout our presentation this morning, we will mention several ways in which this combination with Marquette and UMB is already producing positive results.

The supplemental slide deck details the results for the quarter and we will refer to it as we share our prepared remarks.

While net interest income grew nicely, non-interest income contracted due primarily to lower income from Scout funds compared to the second quarter of 2014. Expenses were held to a 3.5% increase year-over-year for the quarter, but the bottom line result was $30.2 million, a $4.5 million reduction in net income for the quarter year-over-year.

Even with current headwinds, we have a lot to be excited about, including yet another quarter of strong loan growth. As you can see on slide 7, loans increased 28.8% year-over-year to $8.9 billion at June 30, 2015. One of the significant drivers of increased loan balances was the acquisition of Marquette loan portfolio, which on May 31 had an acquired value of $980.3 million.

Sine this is the first quarter with combined results, I'll provide a little more color on loan growth origination, which is detailed on slide 8. At June 30, acquired loan plus loan production through the legacy Marquette channel comprise $1 billion of the increase in total loan balances. The remaining increase of $1 billion was generated through legacy UMB lenders for a year-over-year increase of 14.4% and a linked quarter increase of 5.6%. Higher yielding loans in the asset base and factoring categories coupled with UMB's lower costs of funds, among other factors, drove a 6 basis point improvement in our net interest margin, which was 2.59% for the second quarter.

Also, net interest income increased 13% from the second quarter of 2014 to second quarter of 2015. Later in the call, Mike will provide additional detail on our loan growth.

Turning to Scout, we've talked recently about the headwinds we are facing and this quarter is no exception. As you see in our press release, advisory fee income from the Scout Funds decreased $8.5 million from the second quarter of 2014 to the second quarter of 2015. This decrease was partially offset by $3.8 million in reduced expenses in the institutional investment management segment year-over-year and the pre-tax profit margin remained strong at 28.8%.

However, we saw continued outflows in the second quarter as 2013 performance on the international fund continued to impact flows. Overall, we're focused on improving performance, which is the best way to stem future outflows and ultimately return to net inflows. Peter will discuss the segment in greater detail later in the call. But now let me turn to how our results and the continued headwinds relate to our long-term strategy and future plans.

Our growth strategy as a diversified financial services company remain sound. In addition to being challenged by Scout revenues, we also continue to operate in a period of persistently low interest rates and a difficult regulatory environment. To address the former, we are focused on improved performance, as I mentioned. To address the latter, we've executed an excellent bank acquisition and we plan to do more of these.

In our other businesses, such as our fast growing healthcare services, we are making prudent investments for the future growth. Equally important, on the other side of the ledger, we are taking steps to address expense growth. As a starting point, in June we restructured several customer facing lines of business, primarily in the bank, to more efficiently deliver our customer service strategy.

Specifically, we combine consumer and private wealth into one division that we now call personal banking and we combined institutional asset management and institutional banking and investor services into a single line of business called Institutional Banking, Coupled with the reorganization of our technology operation within related support groups. This is a strategic step towards rightsizing our expense levels and improving the efficiency ratio. These initial and related actions are expected to provide an annualized cost savings of approximately $3.6 million.

In addition to the reorganization I just described, I've challenged our management team to further improve efficiencies, looking at all aspects of our business. We intend to complete this process within the next 60 days and to share detail about our plans later this year.

With that I'll turn the call over to Brian Walker. Brian?

Thanks, Mariner and good morning, everyone. My comments will focus on our financial results for the second quarter 2015 compared to the second quarter 2014 with some color describing the linked quarter changes as well. I'd like to start off with a financial update on the closing of the Marquette acquisition. The market value of the shares of UMB common stock issued to the Pohlad family when the merger became effective was approximately $179.7 million based on a closing price of $51.79 per share on May 29, 2015.

In the December 2014 announcement of the deal, we estimated that the transaction was priced at 1.6 times Marquette's tangible book value. Using our stock price at the time of closing, the price of Marquette's tangible book value was 1.5 time subject to post-closing adjustment. Please see our earnings release and slide 34 in the deck for further explanation and reconciliations of non-GAAP financial measures. The calculation of the credit mark on acquired loans came in at 1.25%. Additional detail will be in our 10-Q when it is filed next week.

Because the transaction was accounted for using the purchase method of accounting, the purchase price was allocated based on the estimated fair market value of the assets and liabilities acquired. On May 31, we acquired assets with an acquired value of $1.3 billion and assume total liabilities with an acquired value of $1.2 billion.

Finally, you'll see in the press release that we incurred expenses of $709,000 this quarter related to the acquisition. Total acquisition related expenses for the fourth quarter 2014 and year-to-date 2015 are $3.4 million. As we get further into integration in the third quarter and beyond, we will discuss how these expenses are tracking against the $23 million in estimated transaction cost that we discussed in the December announcement.

All in all, we are pleased with the metrics surrounding the acquisition and look forward to updating you as we work toward full conversion in 2016.

Now, picking up where Mariner left off on the balance sheet. End of period loans increased 28.8% year-over-year with legacy UMB channels posting an increase of 14.4% compared to June 30, 2014. Compared to the industry, we are once again leaders in loan growth, which as of July 23, had reported a median increase of 5.5% and in the period loan balances for the second quarter compared to a year ago, according to S&L Financial. Allowance for loan losses was $77.7 million and allowance as a percentage of total loans was 0.87% compared to 1.11% a year ago.

As we've shared in several prior quarters' calls, the calculation of provision as a prescribed accounting process, there are several components that go into applying the same consistent methodology, including historic loses and portfolio size, along with changes in the economy, interest rate, the regulatory environment, and specific to this quarter, the impact of purchase accounting. We believe this level of allowance is appropriate given the high quality of our loan portfolio and history of charge-off.

Our coverage is more than two times the amount of non-performing loans, while the median industry allowance reported for the first quarter would have covered just 85% of non-performing loans according to S&L Financial. In our investment portfolio, total securities available for sale stood at $6.9 billion at June 30, an increase of 3.4% from a year ago. As you can see on slide 10, we purchased securities with an average yield of 1.9% for our available sale portfolio during the second quarter. That yield has steadily increased over the past four quarters. Based on our internal interest rate forecast, we anticipate that trend will continue, but wouldn't expect a more pronounced uptick until later in the year at the earliest.

Turning to liabilities, slide 11 shows end of period deposits for the second quarter of $14.5 billion, a $2.3 billion increase year-over-year. As a reminder, deposits with an acquired value of $944.1 million were acquired from Marquette on May 31. The cost of interest bearing liabilities for the second quarter was 19 basis points and when including non-interest bearing deposits, the cost was 12 basis points.

Turning to the income statement, net interest income before provision rose 13% year-over-year to $97.4 million. Despite competitive forces, second quarter net interest margin of 2.59% was 6 basis points higher than in the second quarter of 2014. On a linked quarter basis, net interest margin increased 13 basis points.

In addition to the acquisition of Marquette's higher yielding loans and our low cost of funds, this increase was driven by a larger percentage of earning assets and loans combined with lower balances at the Federal Reserve as seasonal balance of the public funds continue to run off.

Non-interest income decreased $14.5 million compared to the second quarter of 2014.

Slide 13 and 14 illustrate the components of the year-over-year reduction. The biggest driver of the changed revenue from Scout Investments decreased $8.3 million or 24.5% compared to the second quarter of 2014, primarily because assets under management at Scout decreased 7.3% over that same time.

As we've discussed, the timing of revenue decrease lag, the timing of AUM reduction, which in turn lags underperformance in the fund. The second quarter non-interest income for Scout reflects the impact of equity fund outflow and the resulting mix shift that occurred throughout 2014 and the first quarter of 2015.

Looking at second quarter expenses on slide 15, total non-interest expense increased 3.5% year-over-year. Although the year-over-year increase is less than in other quarters, I'll reiterate that what Mariner said earlier. We are not pleased with our efficiency ratio and are committed to taking action to achieve improved performance.

The detail related to expenses is shown on the slide and in the press release, but I'd like to briefly discuss our income tax expense. Year-to-date, we booked $24.1 million resulting in an effective tax rate of 27.4%. In 2014, the June year-to-date effective tax rate was 28.2%. Looking ahead, we expect the effective tax rate to be around 27.1% for 2015.

With that, I'll turn the call over to Mike and Peter for more detail regarding the drivers behind the segment results.

Thanks, Brian. I'm happy to talk with you this morning about the bank segment's financials and business drivers, which can be found starting on slide 18. As you can see, the bank's net income for the second quarter was $15.5 million and the pre-tax profit margin was 15.7%. A 14.2% lift in net interest income in this segment was primarily driven by loan volume, including acquired balances and new loan production from legacy Marquette channels. This volume contributed to an improved loan to deposit ratio, which stood at 61.5% at June 30, 2015, an increase from 56.8% a year ago.

Total commercial and industrial loans stood at $4.1 billion, an increase of $593.3 million or 16.8% compared to June 30, 2014. Included the increase were $105.7 million in loans acquired from Marquette and new loans originated by legacy Marquette businesses. Commercial real estate loans increased $658.2 million or 38.1% to $2.4 billion compared to balances a year ago. $343.4 million of the increase was attributed to acquired and new loans from legacy Marquette. Our commercial lending teams are finding opportunities in all of our markets and across several industries. We've experienced strong ag related demand, as well as closed several large C&I loans and we've been able to take a few big deals from our competition. On the CRE side, most new loans were in the multifamily housing and office complex space.

Additionally, we are seeing interest in CRE refinancing, a business we like as those loans are fully funded right away.

Total loan production across all of UMB's lines of business during the second quarter was a new high of $573.9 million, while total pay downs and total pay ups were $315.3 million. The pay down and pay up totals and line changes were $156.6 million increase in existing revolving loan balances, $77.3 million in loan pay ups and $238 million in term pay downs.

Our loan pipeline for third quarter, especially in the C&I and CRE categories remain strong. While we can't predict what will close, we are very pleased with the sales activities we are seeing that resulted in this pipeline.

Slide 19 in the deck shows the full composition of our loan book including balances in the new national specialty lending businesses. At June 30, 2015, asset based loans stood at $211.3 million and factoring loans stood at $109.2 million.

In the factoring business, it's important to consider not only the outstanding balances, but the volumes we are seeing, affectively turning those balances several times throughout the quarter. While these new lending businesses are a small percentage of our portfolio, we are very excited about the prospects of offering these new products to nationwide customers.

As you'll see on slide 20 in the deck, our top market for loan growth on a percentage basis continue to be Dallas-Fort Worth and Phoenix even when excluding the legacy Marquette amounts you see footnoted. On a dollar basis, our top markets for loan production in the quarter were Kansas City, St Louis and Phoenix. We look forward to continuing the increased market share in the Dallas-Fort Worth and Phoenix, Scottsdale regions with the combined efforts of the legacy UMB and Marquette lending teams.

We are often asked about the percentage of our loan portfolio that are variable-rate loans, which is an important component of our market risk estimations. At June 30, 2015, variable-rate loans comprised 48.3% of our total loan book. Of those, 49% are tied to prime for the next quarter and 48% are tied to LIBOR for the next quarter. Overall, 56% of our loan portfolio will reprice, mature or amortized next quarter and 66% will reprice, mature or amortize in the next 12 months.

The relatively short tenure of our loan book and the large percentage of loans that are tied to indices at the short end of the curve along with our historical ability to manage the timing and amount of deposit rate increases in a rising rate environment contribute to our increasing asset sensitivity. Our market risk calculations, which will be detailed in our 10-Q, and which depends significantly on a number of assumptions in the model, estimates that increases in interest rates of 100 basis points, 200 basis points and 300 basis points would provide an additional $9.8 million, $18.5 million and $27.3 million in net interest income respectively. These dollar increases reflect gradual rate increases over a 12-month period.

Looking at the asset management businesses within the bank segment, where we focus on institutions and high net worth individuals, I'm pleased to announce assets under management reached a new high of $12.5 billion at the end of June 2015. AUM and personal banking and institutional banking stood at $8.4 billion which includes $736.4 million in assets from Marquette asset management. Assets managed by Prairie Capital stood at $3.7 billion and brokerage AUM was $431.7 million.

With that, I'll turn the call over to Peter to finish up our prepared remarks with a discussion on the performance of our fee-based business segments.

Thank you, Mike and good morning. Let me begin with the institutional investment management segment, which is comprised of Scout Investments, equity and fixed income mutual funds and separately managed investment accounts. Details on this segment begin on slide 23. For the second quarter, Scout's net income was $5.6 million, a decrease of $2.9 million compared to the second quarter of 2014. Revenue for this segment declined $8.3 million due to net outflows primarily in the International Fund and the resulting shift in assets under management mix.

As Mariner mentioned, the revenue reduction was partially offset by an expense decrease in the segment of $3.8 million, driven largely by lower processing fees due to lower AUM and equity mutual funds and a $6,500 reduction in contingent liability expense related to the Reams Asset Management earn out. Despite the revenue reduction this quarter, the business maintained a pre-tax profit margin of 28.8%.

As showed on slide 24, assets under management stood at $30 billion on June 30, 2015, which is a decrease of 7.3% compared to assets under management a year ago. You'll see a breakdown of our assets on that slide, which as of June 30 were 29% equity and 71% fixed income compared to a 45% and 55% equity, fixed income mix at June 30, 2014.

For the past several quarters, we have reported net outflows from the Scout equity funds, driven by significant underperformance from the Scout international fund, particularly in 2013. As of June 30, 2015 assets in Scout equity strategy decreased $733.1 million compared to March 31, 2015, driven primarily by net equity outflows of $682.1 million. Page 25 of the supporting material shows the various components of this change by both net flows and market impact. Assets under management in Scout's fixed income strategies increased to $165.4 million on a linked quarter basis (inaudible) by net inflows of $262.6 million, partially offset by a negative market impact. Again, the detailed drivers of the change in AUM are shown on page 25.

While we can't predict when revenues in Scout investments will return to and hopefully surpass recent levels, we would expect to see the following steps in that process. First, improved investment performance versus both benchmarks and peers, and second, better performance should positively impact net flows and of course, third, as a result, revenues will increase over time. It is important to note that this sequence will be impacted by the timing of inflows as average assets under management drive revenues.

Overall, we remain enthusiastic about Scout despite the near-term challenges facing the business. We continue to invest in the platform and have launched six new funds in the past five years. Two of those, the emerging markets and low duration bond funds, are nearing the three-year mark and as a result, are expected to become more saleable in the marketplace. Additionally, the newer equity opportunity fund has experienced strong absolute performance. Scout continues to be an important part of our diversified long-term strategy going forward.

Next, I will discuss the Payment Solutions segment. Turn now to slide 27, net income was $6.1 million for the second quarter and the pre-tax profit margin was 22%. The revenue drivers in this segment include credit and debit card purchase volume and the related interchange revenue. Slide 28 shows the components of the $2.3 billion second quarter purchase volume that generated %19.6 million in interchange revenue. 20% of that revenue is attributable to healthcare card payments.

It is important to note that healthcare interchange is a net revenue number reflecting the various sharing arrangements between our business and third-party administrators we work with to distribute our products. Within healthcare's $1.4 billion of purchase volume, $473 million is attributable to healthcare virtual cards, a single use payment mechanism used to pay medical providers. As you can see on the next slide, this product continues to represent approximately a third of healthcare-related purchase volume.

Turning to slide 30, you can see that healthcare services generate nearly $1.2 billion in total deposits and assets, which is the portion of deposit accounts swapped into investment accounts. HSA deposits as of June 30, 2015 increased 41.8% to $1.1 billion compared to a year ago. HSA investment assets increased 58% and are now nearing the $100 million mark.

A number of HSA accounts reached $621,000 or nearly 35% year-over-year growth rate. Flexible spending arrangement benefit cards stood at $3.6 million issued compared to $3.2 million just a year ago.

The final segment I'll discuss today is our asset servicing segment, comprised of UMB Fund Services, which ended the second quarter with $203.1 billion in total assets under administration.

Net income for this segment decreased $672,000 to $3.1 million for the second quarter of 2015 compared to the same quarter in 2014 and its pre-tax profit margin was 16.8%. This reduction was driven largely by increased salary and benefit expense related to staffing for new funds added during the last 12 months. The fundamental drivers of the asset servicing segment remains sound. Pages 31 and 32 of the supporting material show metrics for some of our various products within UMB Fund Services.

Pointing out a few highlights, over the past 12 months, Fund Services added 12 net new alternative investment funds and increased assets under administration in that category by 18.3%. Additionally, 52 new funds were added to our transfer agent book of business.

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

Once again, the conference has ended, you may disconnect your line.

We will now begin the question-and-answer session. (Operator Instructions) Ebrahim Poonawala, Bank of America Merrill Lynch.

I think as we can start, Mariner, in terms of just getting a little more detail. I know you've said we'll get more info on the efficiency initiatives within this next 60 days. But when I look at sort of the second quarter expense growth outside of market also was higher than expected and I'm just trying to understand what, just to level set expectations, what should we expect in terms of the magnitude of these improvements when we look for more detail 60 days from now either from the standpoint of the improvement in the efficiency ratio or if you can give some color on dollar expense numbers, that could be very helpful.

Sure, Ebrahim, thanks for the question. What I'm able to give you is mostly directional until we have a chance to revisit again in October. But let me try to give a little color. So we've talked for some time to those who've been following the Company about our desire to operate closer to 70% efficiency ratio. That remains the case. And in the past, we've had the good fortune of some really strong tailwinds and performance from things like Scout that have allowed us to take a more measured approach to how we get to that 70% efficiency ratio.

Given the current environment and the headwinds and such, they have highlighted our inefficiencies and therefore waiting is not a strategy and we are committed to getting there more quickly than we have in the past. We will complete a process we're working on and share that with the investor community in our October call. And that will conclude all that we will be doing on the expense side to get the 70%. However, the time it takes to get to 70% will be somewhat dependent on the other side of the equation, which is revenue and mostly around how soon and how fast interest rates come up. So we will conclude an exercise on the expense side in October and share with you those conclusions in that plan in October, but how quickly we get down to 70% will depend on the other side of the equation and the impact of interest rates.

And just so that I'm clear, when you update in October, you would have gone through the expense side of the equation in terms of what you want to do from an efficiency standpoint and then it's all about revenue improvement, am I understanding that correctly?

Yes. So we will conclude an exercise and share with you what those expense reductions will be and their associated ongoing run rate for 2016 when the October conference call comes around.

And separately, so I guess, I'll ask question to Peter, just in terms of Scout institutional. Can we touch upon in terms of what we're doing from a product strategy standpoint in terms of introducing new equity products and from a sales standpoint to sort of shift this negative guide in that business?

Sure, Ebrahim. Good morning. So over the last five years, we've actually launched six new funds. I'm pleased that two of them are very close to their three-year mark and I think as you know, it gets a little easier to sell products, even products with terrific near-term performance after they have the three-year credentials. So we're very excited about that. We continued to look at new products that we can launch where we have a reason to believe we can outperform passive strategies and where we can deliver output to our shareholders. So we continue to look for new ways to offer products, we continue to look at lifting out teams so we can add more bench strength, if you will, to our product lineup. But as you know, you know the business very well, it is basically a performance business and it does ebb and flow a little bit as performance tends to -- as it tends to move around a little bit.

Chris McGratty, KBW.

Brian, maybe I'll start with you. Your securities brokers is pretty short and a yield about 1.5. Can you talk about the ability to lengthen duration and improve the yields over time, and also in the context of, and I believe, (inaudible) the pretty large proportion of the funds are being pledged? Thank you.

I'm going to ask you to repeat specifically your question. I got a little lost in there, the 1.5 related to what?

Yes, no problem. The security yields are about 1.5%. And my question is as higher rates approach, how do you view extended duration in approving the yield with the context of the securities booked as fairly pledged?

Yes. And maybe just as a reminder, we continue to evaluate the earning asset mix as a whole, and so our strategy is to grow within our loan portfolio while maintaining the investment portfolio. We are seeing that rate start to trough and look for that trajectory to improve here in the latter part of the year with even minimal low end of the curve rate improvements from the Fed.

From a duration perspective, yes, as we move up that rate profile or that curve profile, we will look to take advantage of improvements in rate.

On the margin. Don't expect us to lengthen duration in any material way right now.

Okay, thank you. Maybe one for Peter. There's been a lot of M&A activity in the healthcare space recently. I'm interested kind of your high level thought both potentially as an opportunity and as a risk to the business with some -- with a lot of consolidation the HSA businesses?

Sure. So (inaudible) we're definitely seeing a lot of the big guys trying to get together and build scale in the industry for sure. Keep in mind that our strategy is a multi-channel strategy and we are not over-reliant on any single channel for the business that comes into our healthcare vertical. We do have a wholesale distribution approach through third-party administrators, certainly through health plans, although that is not the only way we distribute, we go through technology companies, direct to employers, direct to consumers through 401(k) platforms, et cetera. So it's a multi-channel strategy for us in terms of how we go to market. We're very closely paying attention to the consolidation going in that -- going on in the healthcare industry, but don't see it as a major detriment to our growth profile because in fact we have this multi-channel approach.

Matt Olney, Stephens, Inc.

First off, congrats on getting the Marquette deal closed into the numbers, partially in 2Q. I'm trying to understand the core trends better in 2Q ex-Marquette, it's kind of legacy UMBF. So are there any more details you can give us as far as the core expenses, net income and margin from the legacy UMBF in 2Q ex-Marquette?

Well, I think the best way to think about that is, we've given you the overall numbers across the board and you only have one month impact of Marquette in there, so you're largely seeing the legacy improvements in there to margin and loan growth.

Yes, Matt. This is Mike. So as a reminder, when we announced the deal, we provided details around the expected integration cost and those are around $23 million. We have $3 million of that through the pipeline, we have $20 million yet to go. And so you're going to see that in our non-interest expense and we'll give you visibility to that in the coming quarters.

As Mariner said though, one of the important things about this deal was our ability to leverage our much lower cost of funds and you're starting to see that in the expansion in net interest margin on the holding company's balance sheet and income statement. And the thing that's important about that as you mentioned is, we only have one month of the second quarter in the numbers and you've already seen an uptick in both earning asset yields and margin due to Marquette.

We're modeling, we're coming in very close to model on expenses and integration.

And so far it's gone very well, we feel very good about where we're at this point, both the impact on our financial statements and just generally how the integration's gone.

Loan quality looks better than we expected to do through due diligence, everything looks really fantastic, teams are working very well together, seeing loan growth, it's great, very pleased.

So that's helpful. And then as far as the outlook for organic loan growth, I'm curious if the Marquette deal changes your overall outlook for loan growth from here?

Sure. So in the past I've given you a look into the next 90 days around pipelines. I would say that our pipeline for the third quarter looks as good to slightly better than it did going down -- going into the second quarter and about 10% of our expected pipeline is coming from Marquette legacy and Marquette sales synergy.

Thanks, Mariner, that's great color. And then as far as the goal for the efficiency ratio to get down to 17%, did I hear you correctly that you expect interest rates would need to help you out in order to get there?

Can you ask that again? I'm sorry.

Did that 70% efficiency ratio goal assume higher interest rates?

Well, so maybe I'll rephrase that. So we expect ourselves to get to 70% and what our plan is, we will conclude our efforts on the expense side and share those with you in October. Getting the 70% won't only come through expense reductions. We need revenue improvement also. And so what I was saying is, how quickly we get to 70% isn't just dependent on all the expense improvements that we make, it will require -- the rate at which we get there will require some sort of analysis around how long it takes interest rates to come up. Does that help?

Yes. That's helpful. And then lastly from me, as far as M&A, now that Marquette's closed, what are your updated thoughts on M&A from here and strategically what types of franchises are you thinking about this point?

Yes. So we love all the deals, we love all four of our businesses and we've shared with you before sort of the margin and momentum. So you have a good sense for the margin, profit margin in all of our businesses and we're sort of stack rank our M&A activities around where the momentum is coming from or where the best profit margins are. So that continues to be the case.

We clearly are good at finding quality banks and integrating them and we would like to continue to find those. They are more quickly accretive and have a lower risk profile, I suppose, but we're continuing to really look across all four business lines for quality opportunities as we've said in the past that meet cultural, financial and strategic thresholds, of course cultural being at the top of the list, got to fit into our very unique organization.

John Rodis, FIG Partners.

I guess maybe just let me ask another question on the Marquette. I guess, operating expenses, you guys put in the press release that $3.4 million in the quarter was from salary and benefits expense related to Marquette. Was there any other expenses in operating expenses related to Marquette for the quarter?

Well, yes. You have things like brick and mortar related costs, anything that you have an ongoing cost, outside folks like, you may use legal departments et cetera that are not related specifically to the acquisition. So yes, certainly, it's more than just salary and benefits.

Outsourced technology providers we do business with, et cetera.

Okay. So just to be clear, the $3.4 million was just salary and benefits, that wasn't total operating expenses for them for the quarter?

Correct.

Correct.

Correct? Okay. May be, Brian, just make sure I heard you correctly too, you said the full-year effective tax rate should be around 27.1%, is that correct?

That's correct.

Okay. Question on asset quality, guys and again asset quality for you guys has always been strong, but NPAs were up during the quarter, was that related to Marquette or was it something else?

Certainly Marquette has an impact, but no, it's just typical regular stuff in and out. From one quarter to the next, we'll have an uptick here or there. What I think you should take away is there is no trend of lower quality in our loans.

No, I mean NPAs obviously are still very low relative to peers, but just wanted to make sure, okay. Can you guys talk a little bit about or can you give us an update on your energy exposure, the portfolio there at the end of the quarter?

Relatively unchanged from where it was last quarter. Very nominal.

Yes. So as a reminder, as it relates specifically to Marquette, their total exposure all in their Texas Bank was somewhere around 4%, and the legacy of their total book and of our total legacy when be book that number was slightly below 3%. So, not material.

Any trends in that portfolio during the quarter or is it performing as expected so for?

Yes. I mean, we are a high quality lender, we don't -- they're all solid companies by the -- we're not out drilling dry holes, so these are seasoned companies with big balance sheets.

Okay. And maybe just a final question for you, Mike. Did you say, I think, assets or the assets under management of the bank, I think you said roughly $700 million of the increase was related to Marquette. Is that correct?

That's correct.

Okay.

Yes, that entity is based in Minneapolis, it's called the Marquette Asset Management.

Okay. And will you consolidate that into yours or I guess on the conversion?

Not currently right now, we're evaluating the best way to go to market, but no, right now that operates as a separate entity.

(Operator Instructions) Peyton Green, Piper Jaffray.

Yes, good morning. I was wondering maybe if you could comment a little bit on deposit growth. I think normally, or at least historically, 2Q has been a relatively weak quarter for deposits but it was particularly strong even after backing out the Marquette acquisition. Maybe if you could speak to a little bit about the outlook for solid deposit growth?

Yes. I mean, I think we haven't -- given the strength of it and Peyton, how are you this morning? Given the strength of our deposit franchise, and what we're trying to do to optimize the balance sheet and we don't really -- we can turn on all sorts of levers over time to increase deposit growth. But right now we're not contemplating a need to have a higher rate of deposit growth.

Yes. And may be just more color to add to that, remember the healthcare related deposits now exceed $1 billion. And so if you're looking at Q2 to Q2, you have to factor that in. That's a significant move in the total.

Well, I think Peyton's saying our deposits -- I think you're saying our deposit growth is slower without Marquette has now entered, slower than --?

No, I think -- I mean the deposit growth (inaudible) backing up Marquette, it was actually a little stronger than the normal 1Q to 2Q seasonality would suggest.

I thought that you were saying you expected it to be faster. And I was explaining why we weren't doing a faster growth rate. So I didn't --.

No, I thought it was pretty good. I mean --.

Yes. We're saying the same thing, I'm happy with our deposit growth rate. I thought I heard you say you expected it to be better.

No, not at all, quite the contrary. Maybe secondly, in terms of the expense initiative, I mean you mentioned that you hope to get $3.6 million out of expenses from the initiatives already announced. But I mean, to what degree are you comfortable with expense growth continuing to exceed revenue growth because --?

So I think (inaudible) that was -- reading that not the intended way. So the $3.6 million is from initiatives we've already taken. So you have not seen the results from the efforts that I'm discussing that we're doing over the next 60 days.

Okay. So would that be fully phased in -- would the $3.6 million be fully phased in by the third quarter or later?

Yes.

Yes. The run rate will change for a full quarter. Yes.

Think of it as a rolling 12 full-year run rate.

Yes.

That was just kind of a first step, an initial step just to sort of set the stage for the actual planning process.

Okay. And I may have misunderstood this, but your referenced $3.4 million in personnel expenses that were included, in your personnel expenses from (inaudible). And then with regard to the integration expenses of $23 million, when would you expect those to fallout and remind us kind of the expense cost saves you would expect from Marquette and the realization timeframe of that?

Yes. So, as a reminder the integration-related costs and I think we've made it public that the integrated or the integration timeline is expected to occur in the first quarter preferably probably in the middle of February for next year. By the time we get there, assuming that all of our costs are through the income statement that would be $23 million. So, we estimated the time we announced the deal and that still looks like the right target for us. And the related expense savings, we expect to be around $13 million.

In that fund. So as I was saying earlier, we're on target (inaudible) modeled and shared with you kind of upfront. So we're on target with that modeling.

And that's on. So, as I was saying earlier we're on target throughout the model and shared with you kind of upfront. So, we're on target with that model.

Okay. And that would be fully phased in by the second quarter or third quarter?

Well, it may dribble a little, some of it's going to dribble (inaudible) so it's over the next -- between now and -- between this year and next year.

That's right. Yes.

So as we've talked about during our initial discussion about the deal last year, it's phased in over two years to total -- closer to $14 million for ongoing cost saves.

And one thing I'll add just to make sure that we're clear and maybe you understand this, but the expense initiative around efficiencies has nothing to do with Marquette. These cost -- cost associated with the acquisition are completely separate.

Absolutely, that's a good distinction.

And then may be Peter, can you talk about Scouts -- at least on the mutual fund side and maybe about separate account side, how is the traction so far through July?

Well, interestingly, the second quarter of this past year of 2015 was the lowest net outflows we'd experienced since Q1 of 2014. So in fact, and this is on the equity side. So in fact, we did see a deceleration in outflows in Q2 versus the prior four or five quarters, so that's a good news. Look, our sales guys are out telling the Scout story every day. We are in all of our channels ensuring that our clients understand that the performance (inaudible) in midcap and others has stabilized considerably and we're still getting a lot of works, we're still getting a lot of opportunities on the equity side. But net-net performance needs to stabilize and improve in order to really turn the tide there.

On the separate account side, that's primarily fixed income and that pipeline has been good and continues to be good. As you saw, we had negative -- I'm sorry, we had positive inflows of $262 million in fixed income in the second quarter and that momentum continues to be strong.

Okay, great. And maybe this is a house keeping question, but for -- in terms of Perry, I guess flips over in terms of their five-year anniversary in the third quarter. Is there anything we should be mindful of in terms of the expense movement from one category to another?

No, not necessarily. Well, let me think of your question. We do go through the process of doing the fair value adjustments, as you know, and we've discussed for five years. As we enter the future, those expenses will start to show up in the normal course of compensation for the performance on those funds.

Okay. So you see it go from other geographies to personnel? Is that the right way?

Yes.

We were shifting from an earn out obviously to compensation program to incent the principles to continue performing.

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

Thank you for your interest in UMB today. This call can be accessed via a replay on our website beginning in about two hours and will run through August 12. As always, you can contact UMB Investor Relations with any follow-up questions by calling 816-860-7106. Again, we appreciate your interest and time. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.