UMB Financial Corp (UMBF) 2015 Q3 法說會逐字稿

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

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

Good morning, everyone and thank you for joining us for our conference call and webcast regarding our third 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 as of today and we undertake no obligation to update them. By now, we hope most of you on the call or 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 will discuss today. A link to the slides can be found in the Investor Section of umbfinancial.com under News & Events and Presentations, and will be available in the webcast link for your reference during the call.

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.

Following our prepared remarks, we will 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 third quarter and details related to our efficiency initiatives designed to drive future improvements in our results.

Beginning on slide 5, we continue to see improvement in net interest income, driven largely by increased loan volumes. However, non-interest income contracted due primarily to lower income from Scout funds and a reduction in unrealized equity earnings from Alternative Investments. Expenses increased on a year-over-year basis and included $4.5 million in integration costs related to the Marquette acquisition as well as $9.4 million in Marquette salaries, along with other increased expenses in the first full quarter of combined results.

Net income for the quarter was $22.5 million or $0.46 per diluted share. Brian, will provide a more detailed look at our quarterly results later in the call.

While we are facing some headwinds, we've had a lot to be excited about. Our Marquette acquisition is already showing bottom line results and we've had yet another quarter of loan growth and net interest margin expansion. At September 30, acquired balances plus production through the legacy Marquette channels comprised $1 billion of the increase in total balances. The remaining increase of $937.9 million was generated through legacy UMB lenders, for a year-over-year increase of 13.2%, details are shown on slide 7.

Mike and Peter will discuss details on our loan book and other drivers in their segments later in the call. In today's persistent environment of low interest rates and intense competition, nothing is more essential to profitable growth than operating efficiency. As you recall, in July we announced the consolidation of several customer facing lines of business primarily in the bank and reorganization of our technology, operations and related support groups for an estimated savings of $3.6 million fully annualized beginning in 2017. Those details are shown on slide 10.

Over the past quarter, our leadership teams have completed an in-depth review of the entire organization to identify additional efficiency opportunities. This company wide initiative has been thoughtfully designed to simplify our organization and reporting structures, streamline back office functions and take advantage of synergies among various platforms and distribution networks.

On slide 11, you'll see a high level outline of the actions that we're taking to achieve additional annualized efficiencies of an estimated $29.3 million. Combined with the $3.6 million previously announced, we've identified a total of $32.9 million in estimated savings fully annualized beginning in 2017. This total does not include the additional cost savings we expect to recognize related to the Marquette integration or any other ongoing efficiencies identified through the normal course of business.

The following slides detail the $32.9 million, showing the savings expected to be realized in 2015 and 2016 from both salary and benefit reductions and business process improvements. On slide 14, we provided some assumptions that we have included as well as some timing considerations. I want to reiterate that we are committed to taking the proper actions to improve our company's performance metrics. This isn't merely a project for us; it's a continued focus on growing our business in the most efficient, healthy and profitable way as possible. We believe that the actions we've laid out will get us closer to our efficiency goals. But I also want to assure you that we will never compromise our underlying values or make a short-term decision that will negatively impact the long-term value of our franchise or our customers, shareholders or associates. With that, I'll turn the call back over to Brian Walker, who will discuss quarterly results in more detail. Brian?

Thanks Mariner, and good morning everyone. First, as I did last quarter, I'd like to share an update on the progress we're making on the integration of the Marquette acquisition. In the December 2014 acquisition announcement, we discussed estimated transaction costs of $23 million. On slide 16, you'll see the total to-date acquisition costs of $7.9 million, shown by quarter in the four categories we disclosed at the time of the announcement. HR, Technology Integration, Professional Fees and Other Integration Fees, in addition, we're still on track to recognize the estimated $14 million in cost savings related to the acquisition to be baked in over a two-year period following the May 31st closing. We are pleased with the metrics surrounding the acquisition and will continue to update you as we work towards full conversion in 2016.

Looking at the balance sheet, total securities available for sale in our investment portfolio stood at $6.7 billion at September 30th, a decrease of 1.3% from a year ago. As you can see on slide 19, we purchased $114 million in securities with an average yield of 2.17% for our Available for Sale portfolio during the third quarter. You will note that this is the first time in several quarters that the purchase yield has exceeded the roll-off yield. Mike will cover other aspects of our balance sheet in the Bank segment discussion.

Turning to the income statement, net interest income before provision rose 25.6% year-over-year and 12.9% on a linked quarter basis to $109.9 million. Third quarter net interest margin of 2.73% is 20 basis points higher than in the third quarter 2014. On a linked quarter basis, net interest margin increased 14 basis points. The year-over-year increase was due to the addition of Marquette's higher yielding loans, a primary driver of the 26 basis point increase in average loan yield as well as our continued focus to shift earning assets into loan. For the third quarter, loans comprised 53% of average earning assets compared to 48% in the same quarter last year and 50.5% for the second quarter of 2015.

Non-interest income decreased $17.4 million compared to the third quarter of 2014. Slide 22 and 23 illustrates the components of the year-over-year reduction.

One driver of the year-over-year decrease in non-interest income was a $7.5 million reduction in unrealized earnings on Prairie Capital Management equity method investments compared to the same period in 2014. The unrealized gains or losses drove the two components of contingent consideration expense, you see on slide 24. After the earn out period, which ended in the third quarter we will no longer see acquisition expenses related to PCM. The unrealized gains or losses will drive accrued performance payment and will be absorbed into PCM's compensation expense.

Looking at third quarter expenses on slide 25, total non-interest expense increased $24.1 million or 15% year-over-year. As you know, this is the first full quarter of combined UMB and Marquette Financial. Detail related to expenses is shown on the slide, and in the press release. The largest driver of the increased salary and benefits expense rose by $14.7 million and included approximately $9.4 million in Marquette salaries, $1.4 million in acquisition related severance, and $930,000 of non-acquisition related severance.

Embedded in equipment expense of $17.2 million is $4.2 million of software amortization expense for various technology products that we have completed and put into production. This is an increase of $1.5 million, compared to the third quarter of 2014. As we've discussed, we continue to make strategic investments to modernize our systems and technology to provide efficient productive delivery and to meet regulatory and cyber security requirements. With that, I'll turn the call over to Mike and Peter for more detail regarding the drivers behind the segment results.

Thanks, Brian, and good morning, Bank's segments financials and business drivers can be found starting on slide 27. A 28.9% lift in year-over-year net interest income in this segment was primarily driven by improved average loan yields, which increased to 3.76% from 3.5% a year ago and improved loan volumes including the addition of Marquette's loan book. Our continued strategy to add higher yielding loans to replace lower yielding investments has resulted in an improved average loan-to-deposit ratio of 62.3% for the third quarter compared to 55.9% a year ago. Over the past several quarters, we've been discussing various loan verticals we are building as part of our strategy to further diversify our portfolio, while adding exposure to higher-yielding loan categories.

Seasoned lenders with expertise in areas such as agriculture and commercial real estate, and more recently aviation and healthcare lending have built strong teams to meet the needs of customers in these areas. UMB has always been in the agricultural lending business given that our footprint contains some of the most concentrated areas of Ag resources in both the US and the world.

In late 2012, we expanded our focus, adding relationship officers with specific expertise in dairy, food processing, grow crop and seed production. Since that time, we've seen a 75% increase in Ag loan balances, which recently stand at $493.1 million and are classified as follows: $165 million in loans to finance Ag products and $328 million of loans secured by farmland.

On the CRE side, most new loans were the multifamily housing, senior living, and office complex space. In the third quarter, we continue to see interest in CRE refinancing, a business we like as those loans are fully funded right away.

Kansas City continues to be our largest region in terms of CRE originations. However, we are also seeing strong interest in activity coming from the Colorado and Texas regions. Of course, the most recent additions to our varied industry focused lending verticals are the factoring in asset-based lending businesses acquired from Marquette. Our factoring business is experiencing strong demand serving transportation in other industries.

Our non-transportation business is seeing activity in the service sector, including manufacturers, importers and wholesalers. Both our factoring and asset-based lending teams are building strong relationships with legacy UMB lenders, expanding markets and providing cross referrals. In fact, Marquette commercial finance completed a $20 million account receivable Line of Credit, the largest transaction in its history during the third quarter as a result of an internal referral. Combined with UMB's lower cost of funds, these national lending businesses are becoming more competitive and they provide additional options for UMB's commercial clients.

Total loan production across all of UMB's lines of business during the third quarter was $525 million. Total pay-offs and pay-downs were $289.2 million which is in line with past four quarter average of $288 million. The detailed payoff pay-down totals in line changes for the quarter were $105.8 million decrease in existing revolving loan balances, $82.8 million in loan payoffs and $206.4 million in turn pay downs. While we can't predict exactly when all loans will close, we continue to see strong sales activity across our footprint.

Slide 28 in the deck shows the full composition of our loan book and slide 29 provides the regional view. Our top markets for loan growth on a percentage basis, continue to be Dallas Fort Worth and Phoenix. On a dollar basis, our top market for loan production in the quarter were Kansas City and Phoenix. We look forward to continued collaboration between the legacy Marquette and UMB lending teams with expanded capabilities and increased presence in our markets.

Our institutional bankers are also seeing success in bringing on additional earning assets, primarily in the form of private placement revenue bonds. In the past 12 months, these bonds shown us held-to-maturity securities on our balance sheet, have increased 147.3% to $588.5 million. The majority of these represent refinancings of existing revenue bonds, largely in the healthcare and education space. These bonds provide an attractive alternative to the investments in our Available for Sale portfolio.

The percentage of our loans with variable rates is an important component of our market risk estimations. As of September 30, 2015, variable-rate loans comprised 48% of our total loan book; of those, 49% are tied to prime for the next quarter and 50% are tied to LIBOR for the next quarter. Overall, 56% of our loan portfolio will reprice, mature or amortize next quarter and 66% will reprice, mature or amortize in the next 12 months.

The characteristics of our loan book 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. This quarter, we've added a bit more disclosure around our asset sensitivity, including the impact of hypothetical 12-month gradual changes in interest rates, as well as the impact of immediate and sustained changes in interest rates.

The resulting increases in net interest income in both scenarios are shown on slide 30. While we can't predict exactly when interest rates will increase, we continue to have confidence that our balance sheet is well positioned for that time.

Turning to deposits, slide 31 shows end-of-period deposits for the third quarter increased $2.3 billion or 18.1% year-over-year to $15.1 billion. Deposits from legacy Marquette channels totaled $881.9 million at September 30, 2015. The percentage of non-interest bearing deposits to total deposits was 41.5% at quarter end and our cost of funds increased just 4 basis points from 0.09% to 0.13% year-over-year. 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 Scout our institutional investment management segment. Details on this segment begin on slide 33. In the third quarter Scout's net income was $3.5 million, a decrease of $6.1 million compared to the third quarter of 2014. Revenue for this segment declined $12.5 million or 36.8% year-over-year. This was driven by net outflows over the past several quarters, primarily in the international fund and the resulting shift in AUM mix as fixed-income assets continue to comprise a greater percentage of Scout's overall AUM.

Expenses in this segment were $16.5 million for the quarter, a decrease of 21% compared to the third quarter of 2014, driven largely by lower processing fees, resulting pretax profit margin for this segment was 23%. This business with its fixed expense base is highly leverageable as assets under management rise. However, it takes time to reset that fixed expense base during periods of contracting AUM. As shown on slide 34, assets under management stood at $28 billion on September 30, 2015 which is a decrease of 8.5% compared to AUM a year ago. You'll see a breakdown of our assets on that slide, which as of September 30, were 24% equity and 76% fixed income compared to a 41% and 59% equity fixed income mix at September 30, 2014.

As of September 30, 2015, assets and Scout equity strategies decreased $2.1 billion compared to June 30, driven again by net outflows of $1.4 billion and a negative market impact. Assets under management in Scout's fixed income strategies increased $72.2 million on a linked quarter basis, due to the net inflows of $37.7 million and a $34.5 million positive market impact.

Slide 35 of the supporting materials shows the various components of these changes. Our focus in Scout continues to be on improved performance and we're pleased to see that year-to-date 6 out of 10 scout funds are ahead of their respective benchmarks. Two funds recently reached their important three-year anniversary, one within the last two weeks and are expected to become more saleable in the marketplace.

While we can't predict exact timing, we would expect improved performance over time to impact net flow and ultimately lead to increased revenue. Again this sequence will be impacted by the timing of inflows as average assets under management drive revenues.

Next, I will discuss the Payment Solutions segment, with details beginning on slide 37. Net income for the third quarter was $6.1 million versus $8.2 million in the third quarter of 2014. This result was primarily driven by increased expenses related to higher depreciation cost for technology projects put into production and increased [fraud] losses, a problem plaguing the entire industry. The pre-tax profit margin for the segment was 23%; the revenue drivers in this segment include credit and debit card purchase volume and the related interchange revenue.

Slide 38 shows the components of the $2.3 billion third quarter purchase volume that generated $19.5 million in interchange revenue; 50% of that revenue is attributable to commercial credit spending, while 18% is attributable to healthcare card payments.

Turning to slide 40, you can see that healthcare services generated $1.3 billion in total deposits and assets. In September, we launched a new investment tool called HSA Saver, which is designed to provide HSA account holders with a simplified approach to managing investment choices. The response has been positive and after just one month of production, more than $2 million in assets have been invested through this product. This quarter, we've added more detail about our healthcare services model and the opportunities that exist in this business.

Slide 41, highlights are one-to-many approach, we are confident that this multi-channel approach gives us a competitive advantage in the marketplace. The final segment I'll discuss today is our asset servicing segment. UMB Fund Services, which ended the third quarter with $192 billion in total assets under administration. While revenue in this segment comes from a variety of sources, including number of accounts in transaction fees, the largest driver is average assets under administration, which is greatly impacted by the health of equity markets. Net income for Fund Services was $3.1 million for the quarter compared to $3.4 million for the third quarter in 2014 and its pretax profit margin was 18.3%.

Our investment management series trust, which provide turnkey administrative and governance solutions for fund managers continue to grow. At September 30, we had 81 active funds in the trust with $12.6 billion in assets, an increase of 41.6% from September 30, 2014 levels. Our Alternative Servicing business have continued to see traction adding 42 net new funds and increasing assets under administration by 22.2% over the past 12 months.

Slide 42 and 43 of the supporting materials shows some additional metrics for our various products within Fund Services. 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.

(Operator Instructions) Chris McGratty, KBW.

Good morning everybody. Looking at slide 12, I'm interested in the allocations roughly 70% of the salaries line, could you -- maybe take that as a further and can you remind me how much of that is coming from the bank versus, any changes that might be going on at Scout?

Yeah, so you know these remark first -- Royals. This had a roll those on the phone and where -- just won the first game of World Series. The page 12, I must keep this high level and as you can see through our financial statements, the bank represents three quarters of our company's earnings revenue at this point. So I would say, largely most of this is coming from the bank, every part of the organization contributed including Scout, but the large majority of these savings are coming from the bank, as you might expect.

Maybe just kind of following up on the efficiencies 70%. How should we, given -- moving around quite a bit lately? How should we, it's a kind of investors in the sell side be thinking about this target? Would you describe this is kind of a near to intermediate term kind of one to two year goal or is this kind of the three to five year moving a little bit of a structural change in kind of efficiency?

Well, I would definitely say it's structural. We absolutely are committed 100% to getting more efficient, much faster and without giving you an exact time line, now which is hard to do giving, given how much dependency we have on getting there through what the fed does and what interest rates do. So it's hard to give you an exact target on the timeline. However, I think it's really important to note about this and try to say something about in my remarks as well, is the tone. You know it's a way for you to understand for all of our investors understand that we are operating in a new level with a deeper commitment and a greater sense for urgency around operating more efficiently.

Thanks. Just wanted to -- capital for a minute. Your stocks lagged quite a bit this year, I'm wondering, can you remind us what the buyback authorization is? Is there a level that the Board would consider utilizing it or is it still organic growth in select M&A?

So we look at all of our users wasted to use our capital -- share buybacks was really a part of that, we analyzed against acquisitions, we analyze against growth and our share buy-back program authorization is 2 million shares and we analyze it just as we do everything else and I would say, we're always looking for the best long-term alternative for use of our capital, long-term returns.

Great. And maybe last question, I'll hop out. The one-time charges, can you remind us -- it seems like $50 million still coming from Marquette, can you remind us the timing of that? And then from this plan, I think there are some charges in the quarter, how much should we be putting in for the fourth quarter?

This is Brian, specifically for the Prairie Capital transaction, we did settle that transaction during the quarter and there were $5 million in unrealized losses, associated with the underlying funds of that organization.

I appreciate that. Brian, I'm looking for the Marquette and the --

I'm sorry. On the Marquette, during the quarter it was $4.5 million in acquisition expense and year-to-date we've accomplished $7.9 million.

Okay. And then the rest will come ratably over the next few quarters, is that fair?

That's right. Yes.

Okay. So the adjustments for the quarter, would you -- just so I'm clear to be 4.5% from Marquette and the $5 million from Prairie, there's no -- you would call out one-time charges in the quarter?

There is severance component specifically related with this operating efficiencies of 0.7% after tax.

Okay, got it thanks.

David Long, Raymond James.

Good morning, guys. Looking at the Scout funds. At this point, I thought maybe the outflows were a little bit better under control; they seem to accelerate this quarter, was there a single large movement in the quarter or what can we expect from that going forward or do you feel comfortable that you've stemmed some of the outflows there?

Good morning, it's Peter. Couple of comments. Number one, the fund is 65% smaller today than it was just about a year, year and a half ago. So we have seen a significant amount of outflow there, it's about a $3.1 billion fund at the end of the third quarter. It's hard to know how the funds are going to perform from a flow standpoint on a go-forward basis. We don't generally single out one large client or another, so I won't comment really on that. But I also want to spend a moment and talk about some of the really good things that are going on at Scout, in addition to the challenges that we're having in the international front.

Number one, if you look at our performance in our other strategies, our mid cap fund is now in the 9th percentile on a year-to-date basis and 19th percentile on a year to-date -- on a one-on-one year basis, our three bond funds are all in the top decile and the International Fund does continue to lag, but those are the funds that are doing extraordinarily well. In the quarter, the mid cap fund earned back its fourth Morningstar star, it had fallen to a three star fund, we got that back to a fourth star. And we also had as I noted in my comments, we had two new - two funds that reached their three-year duration. So there's a lot of good things going on in Scout, we continue to focus on improving performance of all of our strategies and leveraging our distribution channels.

Excellent. Thanks for your additional color on that, Peter. And then second question changing subjects here, looking at C&I loans in the quarter, we're down on a linked quarter basis using period-end numbers. Just curious what was going on there, if you had maybe some pay downs, it seems like most banks are reporting some growth there and just want to see -- I know it can be choppy in the individual bank but want to see what's going on there?

Yeah. This is Mike. So as we disclosed in the comments between pay downs and pay offs we're at $288 million for the quarter, so in my comments I talked about how that's fairly normal compared to the last four quarters looking backwards, I think our production was very strong, production was over $500 million. So obviously those pay downs and -- pay downs and pay offs reduce that number. But I think actually our overall growth has been pretty strong, remember the growth in quarter-over-quarter numbers was 27% including Marquette. But if you back Marquette out, our legacy UMB portfolio was up 13%. So I think we have pretty good growth, I don't think that our pay down or pay offs are unusual.

Got it. Thank you for taking my questions.

Ebrahim Poonawala, Bank of America.

Good morning.

Good morning.

I just had a quick follow-up question on loan growth, is it fair to assume that going forward you still think you can get, given what you talked about your markets double-digit annualized loan growth, understanding some lumpiness from a quarter-to-quarter, but overall low double-digit kind of loan growth, is that reasonable to assume?

Yes. So Ebrahim, all I can really give you is some history and then tell you a little bit about -- little color on the coming quarter. So from a historic perspective, we've been doing on average the last four quarters about $497 million in production, on the commercial, that's total -- that's -- $497 million is the total and that's for the last four quarters. And then Mike mentioned what our pay downs and pay offs have been about $288 million over that four year period of time also on a quarterly average the pay down, pay off of our alliance, utilization has been a positive $22 million over those four quarters. So if you look back, we've been doing somewhere between $200 million and $250 million in net production on a quarterly basis over the last four quarters. So that's the history, we -- as we think of the next quarter, our production, we feel pretty good about kind of being in line, we expect to see the same kind of production. What we can't predict for you is what pay down, pay off activity will be or what activity will happen on pay downs and pay offs for our line activity. So I hope that helps production pretty well in line and we give you a little history on what pay downs and pay off's have been over the last four quarters.

Got it. That's helpful, thank you. And I think switching back to expenses in the efficiency target and you've talked about this previously, I think as we think and then Mariner you mentioned about some of that depends on what -- when rates move higher, but if rates don't move much higher, is that 70% just an aspirational target or can we still get there assuming, maybe we get a couple of rate hikes next year and that's about it?

Well, so again without being able to give you any time, when we get there, obviously if you look at our rate chart, you can make your own assumptions on what happens to our earnings in an up $100 million, up $200 million, up $300 million and then you can kind of probably back-in to how quickly we can get there. But we're not giving that direct guidance. So if you look at page 30, you can sort of see what the impact on net interest income would be in up $100 million, $200 million and $300 million range up, I can't give you much more that. I'm sorry.

Yeah. This is Mike. I'll add that's new disclosure, so we think that - well at least we're trying to ask and answer this question on asset sensitivity, that's why we included this page.

Yeah. You got year two in there now, showing you how sensitive we are. So if it does happen I guess, soon rather than later the impact is greater sooner, right?

Right. And I guess my question more was, if that doesn't happen, then where do we go?

Well, you tell me, that's an industry question, right. If you think flat longer, we're all going to be reassessing all sorts of things, right. But I think - so -- we'll reassess along the way, it's depending on how long we stay flat, right?

Alright, we'll stay tuned. Thanks for taking my questions.

Matthew Olney, Stephens Inc.

Hey, thanks, good morning guys. On the expense side, I guess there's two separate initiatives, the $32.9 million on the legacy business, and I believe Marquette that expense initiative is $14 million. And I'm dealing those two things separately. Were there any cost saves associated with either one of those two recognized in the third quarter or is that all incremental?

Well, we disclosed what happened in the third quarter for Marquette, I think that's what it is a four --

Is that on the expense side?

You know what is he asking? (Multiple speakers)

He is asking if there were expense -- ongoing expense saves related to Marquette, that they are going to see in the run rate and I don't know that we've disclosed that. We've not broken that out.

(Multiple speakers) certainly will be.

We'll have the word and then we'll continue to be. I would say this Matt, right now the expense saves we've disclosed at the time we did Marquette and the related synergies are absolutely right in line. So we feel very good about the numbers we originally put out there.

And what about the $32.9 million? How much of that's been recognized so far in the third quarter numbers if any?

Well, we break that out in the deck there, so what's happening in 2015 and what's happening in 2016, Page 13 -- Page 12 and 13 show you when those impacts and then it's obviously fully annualized in 2017. The actions taken in 2015 and 2016 are - you show the full saves as an annualized number in 2017.

And that was the 0.9 or 0.7 after tax severance that I quoted a little bit earlier.

Would have been related to the severance (Multiple speakers) just not the Marquette piece but rather the other piece, I guess that's the total.

And as far as the $32.9 million, that's a pretty sizable chunk of the overall expense base. Can you give us some additional comfort that revenues won't be affected at all?

Absolutely. 5.9% or 4.9% and absolutely dead on with not doing harm to the organization, we start ranked all the -- through the exercise, all the opportunities and executed on all of the items that would not impact revenue and revenue growth. You know, customer making sure, we take care of our customers, etcetera and it did not execute against things that would do harm to both value of the organization or customer relationships etcetera.

Okay, thanks for that Mariner. And then lastly, I'm curious if there is still any ongoing strategic reviews within the businesses to help to get to that 70% Efficiency ratio and specifically, would you consider the sale of any businesses or segments that are less profitable?

So we consider everything, all the time, and I think I will just hit on three things. Again I said a moment ago about tone, so three things for you to pick up on. One is, we did execute on an initiative, but alongside the initiatives, a new operating environment in which the entire management team is very focused on operating lean and mean. And then secondly, I would say that on top of the initiative through the way we operate, you will continue to see through the normal course of business ways to either reduce or eliminate or avoid expense, it does not impact revenue.

And then lastly back to your business review question, it's kind of in line with everything, we're always doing that, we're reviewing the plans with all of our business units and business leaders all the time and this again is a operating environment. It's the way UMB operates and we are laser focused on being lean and mean.

All right, thank you.

John Rodis, FIG Partners.

Good morning, guys.

Good morning, John.

I guess back to the expense question and maybe just a follow-up on that, Brian, maybe this is for you. But -- so the $0.7 million in severance after tax you said that's during the quarter, you also say in the press release that there's $6.8 million in expense saves in 2015. So am I looking at it right that the $6.8 million minus the $0.7 million after-tax. So, the difference there is what's in the fourth quarter is that the right way to look at it?

Part and parcel, the severance would be excluded from that $6.8 million total, that $6.8 million would be the component of the salaries and process improvements, that won't be fully appreciated for a rolling 12 months if you will. And so the different activities occur in the period but we won't get much savings within the financial statements, until we quarter-by-quarter achieve those full-year run rate.

So, the $6.8 million in 2015, that's sort of like an annualized number, is that what you're saying?

If that's a component that we will achieve before the end of the year, another [$22.6] million for that full annualized run rate of $32.9 million.

To be recognized fully in 2017.

Yeah.

Okay. And just when we're looking at expenses guys, is the goal still before the expense saves to - there's still going to be some normal growth and I guess obviously the goal would to be keep that growth below 5% before the savings?

Well, we're not giving out any targets for that, but it is definitely to your point, our goal to reduce that expense growth rate at a - from a tonal perspective at a new level of focus.

Okay that makes sense, Mariner. And maybe just one other question guys on credit quality, I know NPLs on a relative basis still very low, but non-accruals were up $12 million linked quarter, can you provide any detail on that?

Sure. So on the NPLs, it's two things I'd have you know, one is to make sure that, as you kind of analyze this against peers in the industry, while we had a slight increase, the industry NPLs in the second quarter were 130 and peers were 80 basis points against our 55 basis points. So we did have for us an unusual jump there, but it's still very low at the industry and peer level and so I'll just take you to our -- specifically now, that's really specifically largely related to one credit. And it's well secured and we're not particularly worried about it.

Can you say what industry that's in?

I don't think that's probably appropriate at this point, but it doesn't relate to any concentration that we have. I will tell you that much. How is that?

Fair enough. Okay, guys. Thank you.

Peyton Green, Piper Jaffray.

Yes, good morning. I was just wondering why there wasn't a revenue component to the efficiency initiative, particularly on the interest income side?

Well, Peyton, this is Mariner. I guess, because of really making sure that whatever we share with you we can hold ourselves to. There's certainly plenty of things we're doing on the revenue side, but you can't -- we can't give you any assurances, right, to what might happen through the revenue side of the income statement. So what we've given you is stuff that is happening, that we have done, that you can count on. There is certainly plenty going on the revenue side and then obviously the biggest thing that can happen to us and the thing that will really driving any of that is going to be interest rates. And you tell me when and what's going to happen on the interest rates, I will turn around tell you what the impact is going to be.

Well, not for a while, but I mean let's just take the interest rate discussion away. And if you look at the business that you're putting in place or have in place and what you want to do over the course of the next year and you look that on a marginal basis. I mean over the past couple of years, the marginal efficiency ratio has been higher than your underlying efficiency ratio for the company. But I think that's lead to the inefficiency problem. But what would you expect that marginal efficiency ratio to be? Meaning, what dollar of expense, would you expect to generate a dollar and revenue going forward, is that the right way to think about kind of the underlying business?

Well, we try to drill down and look at each business and make sure that their efficiency ratio is where it needs to be. As we talked about it little earlier, clearly the bank as it represents the lion share of both the expense and the revenue at this point, the marginal impact is going to come from the bank. Certainly, we need to get more revenue, more juice out of our non-bank businesses, we are still committed to those businesses, which should then in turn gives you comfort that we think we can get revenue -- appropriate revenue production out of them to continue to improve the overall efficiency of the organization.

Peyton, I might add one thing, this is Mike. While clearly not part of this efficiency initiative that we're talking about, I want to make that very clear to everybody on the revenue side, we have been talking about for quite some time changes to the earning asset mix of the company and I think in our prepared remarks, we talked about the higher CRE totals that we have, the lending verticals and hopefully not lost. And all of the discussion this morning is that, we now have a little under $600 million in industry revenue bonds and are held-to-maturity portfolio that are yielding much higher than the current AFS portfolio. So, I think we have done some of the things.

It's happening.

Yes, it's just not part of the initiative.

But I mean, I guess if I look at the numbers, expenses up $19 million and revenues up $13 million. I mean, it's not adding up to what you wanted to add up to it, I guess at the margin, when does it flip? And I guess that's kind of the underlying problem, as you still got some underperforming segments and unprofitable business lines, that keep being given rope and they're not allowing the good businesses to get more resources, maybe I'm thinking about it wrong. But that just seems like some of the underlying problem. And I was just wondering, is there anymore beyond what you've outlined, which seems great. I mean there's certainly a lot of process improvement and certainly a big step in the right direction, but it's a little less than one year's expense growth on average for the past few years. I'm just trying to see, is there any more I guess accountability towards return goals going forward, to get towards more industry level ROA and ROE goals?

I mean the answer is yes. I can't give you all of the details around what we're doing at each one of business levels to get where we need to be. We agree with you, and it is part of all -- part and parts of all this is to make sure that all of our actions drive profitability at all four of our businesses. So back to the tone, the message to all of our business leaders is all of our spending has to relate back to profitability and lean operations.

Okay. So if the fed doesn't raise rates through next year, how would you view a reasonable, I mean, will there be more responses than adjust as initiative?

We're still going through all those, -- we're not even done with our own budget cycle to give you enough feedback on that. But I mean we're always reacting, we're always going to keep looking and making sure we're doing what we need to continue to build value here.

Okay. And just last one, I'll ask you but this set of actions taken to account that the Fed would raise fed funds target rate?

We are taking actions, we can't be running this company as waiting for its rates to rise. So we're operating this company as if rates are not rising.

Okay. Thank you. Appreciate the color.

Matthew Olney, Stephens Inc.

Yeah. Thanks for taking my follow up. Just want to revisit fee income and obviously in the third quarter, the fee income was affected by the market conditions, especially in the Trust and Securities processing, but other fee income items were also down the quarter bankcard fees, trade investment banking, what's your sense that how much fee income could snap back in the fourth quarter versus these 3Q numbers?

Yeah, let me take - this is Mike. Let me bankcard and I'll have Peter add to the end. Bankcard is mostly being impacted by two things; one, lower fuel prices which actually lower the ticket price on our credit cards, that's a big driver of outstanding balances. And the second is, this is substantiated by some of the research that Visa does. Folks are just using revolving credit a lot less, I mean the utilization rates are down. So you have tickets and utilization those are both the biggest drivers of it - other than rate obviously. And that systemic thing it's industry, it's not specific to you and me, I don't think it's going to change until - kind of people sentiment becomes more positive and they feel better about their own personal financial situation.

And just a little color maybe on both Fund Services and Scout. Fund services did have lower AUA as you saw, and about 60% of fund services revenue is indexed to AUA. So if AUA moves around, either because of new business, lost business or equity markets.

We will see changes in that regard, So if the market were to snap back, for example, in the fourth quarter, we've had higher AUA and we would see some improvement in earnings there. We also have one large client in fund services that's having some significant outflows right now, that's something that we're wrestling with -- we're wrestling with as well.

On the scout side, you know the story there it's all about assets under management, and we're working hard to try to raise those in every one of our categories as we can.

And what about the outlook in the trading and investment banking line item?

Actually in the third quarter, they are pretty good, pretty good quarter. it's interesting, this one I think is going to be predicated on rates staying lower or longer. I think that a lot of the bonds that we sell are on the correspondent bank side and if people can't get loan growth and the economy does slow down, rates stay lower, bonds are an attractive alternative. So we feel pretty good about what's going on in that space right now. And by the way, we're also trying to sell fixed income securities to more than just banks too.

We're in the middle of expanding that business and broadening out the -- both the offering in the different verticals. So you might see some positive impact in numbers.

And then another follow-up on loan growth, Mike, I believe you mentioned the Marquette loan book was relatively flat, what are your expectations within this book of the next year or so.

It is relatively flat, that's correct. We have the same expectations for Maequette that we do for our existing portfolio, at least in the Meridian bank space. There are high-growth areas as I said in my prepared remarks, they are the two fastest growing regions that we have on a percentage basis in Arizona and Dallas Fort Worth, and for the other two national lending platforms, ABL and factoring businesses, we have higher growth projections for those businesses, because they present a national platform and we brought 150 of our current legacy UMB sale people, they can sell into that platform as well.

The indications there are pretty strong. Just maybe some assimilation and getting to know each other is possibly what has slowed some of that down. The other thing on the factoring sectors, particularly that business has been largely dependent on the transportation sector and Mike has mentioned fuel prices for the card business. Fuel prices also impact the transportation industry and the clients in that business with lower fuel prices have been doing better themselves and using more of their cash and borrowing less. So, that's driven a little bit of the activity on that front.

Great, thank you.

Chris McGratty, KBW.

Sure. Thanks. Can you help us with the tax rate outlook? It looked a little high in the quarter.

The quarter was 27.6%, the effective tax rate and and were expecting a 27.3% on the year.

Great. And then a follow-up on a previous question about growth in Texas. You grew the portfolio a little bit in the quarter, can you remind us what you're doing there, given the kind of developments that are happening in Texas and maybe was that increase in non-performers related to Energy?

Well, as a whole Energy still is 3% of our total, you shouldn't expect it to be much more than 3% of our total, might slightly tick up or probably not because rest of balance sheet will grow too. And Texas much like Arizona, when we went in Arizona, everybody thought all we were going to do was development loans and because it's a real estate town, everybody thought if you go to Texas, all you can do is Energy. What I would tell you about that, is we're in both of those cities and states to take advantage of what we've always done really well.

In both markets, there are millions-and-millions of people, they're larger, both those places are larger than our headquarters town and on a population basis which means, there's lots of toilet paper, lot's of sheet metal, lots of light bulbs, lot's heating and air conditioning, you name it, to support all of those lives and that's why we're there, certainly Energy is part of that economy and we want to take our piece of that. But we did not go to Texas to be in the Energy lending business, we went to Texas to be in all lines of business including Energy.

Thank you.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Gregory for closing remarks.

Thank you for your interest in UMB today. This call can be accessed via a replay at our website beginning in about two hours and it will run through November, 11. 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.