UMB Financial Corp (UMBF) 2015 Q4 法說會逐字稿

Good morning and welcome to the UMB Financial fourth-quarter and year-end 2015 financial results conference call.

All participants will be in listen-only mode.

(Operator Instructions) Please note, this event is being recorded.

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

Please go ahead.

Good morning, everyone, and thank you for joining us for our conference call and webcast regarding our fourth-quarter and year-end 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.

Our earnings press release issued yesterday afternoon 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.

To make the best use of this call, we have updated our slide deck to contain more of the metrics we generally discussed during the call.

While we may not address all of the items in the prepared remarks, we will be happy to answer any questions you may have during the Q&A session.

A link to the slides can be found in the Investors section of umbfinancial.com under News & Events and Presentations.

You will note that this quarter we have introduced non-GAAP financial measures such as net operating income to facilitate the evaluation of our fundamental operating performance.

Reconciliations of non-GAAP financial measures have been included in the earnings release and on page 8 and 9 of the supporting slides.

On the call today our Mariner Kemper, Chief Executive Officer, and Mike Hagedorn, CEO of UMB Bank and interim Chief Financial Officer.

I will now turn the call over to Mariner Kemper.

Thank you, Kay.

Welcome, everyone, and thank you for joining us.

This morning I will share our high level results for the fourth quarter and year and update you on the progress of our efficiency initiatives.

Beginning with slides 4 and 5, you will see that for the fourth-quarter 2015, net income was $29.6 million or $0.60 per diluted share.

On a non-GAAP basis, adjusting for the items shown on slide 8, net operating income was $34.2 million or $0.70 per diluted share.

For the full year 2015, net income was $116.1 million or $2.44 per diluted share.

And on a non-GAAP basis, net operating income was $123.4 million or $2.59 per diluted share.

Looking at the balance sheet summary on slide 6, you will see that we continue to deliver solid loan growth.

As you know, loan growth and high quality credits are a hallmark for UMB.

And I am very pleased with our results, which continue to outpace industry averages.

At December 31, 2015, loans stood at $9.4 billion, an increase of $2 billion or 26.3% compared to year-end 2014.

Mike will provide a more detailed look at our results and the drivers behind our loan growth later in the call.

Our performance during the first half of 2015 put into focus the need for us to deliver higher returns, particularly at the bank segment levels, and we have turned our efforts to operational efficiencies to improve our performance.

In July and October, we announced details of our organizational realignment and efficiency initiatives.

Our corporate-wide efforts are expected to result in the removal of $32.9 million in expenses, fully annualized beginning in 2017.

On slides 11 and 12 is a reminder of some of the actions we took and an update on the progress we have made.

As you can see, we recognized $9.5 million of cost savings in 2015 compared to an expected $6.8 million as some items were accomplished sooner than anticipated.

In addition, as I said last quarter, I expect our leaders across the Company to continue to identify efficiencies in the normal course of business.

This wasn't merely a one-time project for us.

It is an ongoing focus on our growth in the most efficient way possible.

I am pleased with our progress we are making and want to reiterate our commitment to taking the necessary actions to continually improve our Company's performance.

Our 70% efficiency ratio goal is a milestone we can accomplish, but it is not the end game.

We are also focused on improving returns, including return on equity.

As you know, many moving parts go into this equation, while the efficiency initiative focused first on the parts over which we have the most control of expenses, we are, of course, also focusing on the other areas of the Company such as balance sheet optimization, exemplified through increasing the loan and deposit ratio, and the strategic acquisition of Marquette.

These two items combined boost 2015 net interest income by $62 million year over year.

Diversity of revenue streams has long been part of our unique model and core part of our strategy.

Over the past several years, strong growth in our fee-based businesses, primarily Scout Investments, has made up for low interest margins, but that has also enabled some inefficiencies to persist, especially in the bank segment.

Going forward, we expect all of our business units to operate at near peer levels, which should further enhance the overall return to shareholders.

To achieve better results in the bank specifically, we need to do three things.

First, build on last year's initiatives and continue to identify and implement operational efficiencies within the bank segment; second, complete the integration of Marquette and continue to look for additional acquisition opportunities that are a good strategic, financial and cultural fit; and lastly, continue to re-mix our earning assets, leveraging the expertise of our lending teams to grow our loan book while maintaining our credit metrics and capital levels.

While we have faced headwinds, some which will persist in 2016, we have a lot to be excited about.

As has been the case throughout our 103-year history, we have a compelling story.

We have industry-leading deposit and loan growth, and our renewed focus on improving metrics within the bank will help us push more of that revenue to the bottom line.

With that, I will turn the call over to Mike who will discuss our results in more detail and provide a little more color on our segments and drivers.

Mike?

Thanks, Mariner, and good morning, everyone.

First, I would like to provide an update on the progress we are making toward the full integration of Marquette.

In the December 2014 acquisition announcement, we discussed estimated transaction costs of $23 million.

On slide 14, you will see recognized acquisition costs of $11.8 million through December 31, 2015, 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 are still on track to recognize the estimated $14 million in cost savings related to the acquisition phased in over the two-year period following the May 31, 2015 closing.

We expect to complete the conversion in the first-quarter 2016.

On slide 15, you will see our history of loan growth.

As Mariner mentioned, total loans at December 31, 2015, stood at $9.4 billion, an increase of 26.3% or $2 billion compared to year-end 2014.

Acquired balances plus production through the legacy Marquette channels comprised $982.1 million of the increase in total loan balances.

The remaining increase of $182.9 million was generated through legacy UMB lenders for a year-over-year increase of 13.2%.

On a linked quarter basis, total loans increased $384.6 million or 4.3%.

Total securities available for sale in our investment portfolio stood at $6.8 billion at December 31, a decrease of 1.5% from a year ago.

The details related to the composition of the portfolio and the past quarter's activities are shown on slide 18.

The effective duration of the portfolio shortened slightly to 36.9 months, and once again the purchase yield exceeded the rollout deal for the past quarter.

As I mentioned last quarter, we continue to have success in adding private placement bonds shown as held to maturity securities on the balance sheet.

These bonds primarily to refinance existing revenue bonds in the healthcare and education space increased 139.9% compared to year-end 2014 and stood at $667.1 million on December 31.

Before we leave the balance sheet discussion, I would like to touch on our asset sensitivity and market risk estimations.

The boxes at the bottom of slide 19 show the percentage of our loans with variable rates, which, at December 31, stood at 48%, as well as the repricing details of our loan portfolio.

The characteristics of our loan book and our ability to manage the timing and amount of deposit rate increases in a rising rate environment contribute to our asset sensitivity.

The projected impact of hypothetical 12-month gradual changes in interest rates, as well as the projected impact of immediate and sustained changes in rates, is represented in the chart on that page.

Turning to the income statement, fourth-quarter net interest income before provision rose 25.9% year over year and 4.1% on a linked quarter basis to $114.5 million.

Fourth-quarter net interest margin of 2.76% is 24 basis points higher than in the fourth-quarter 2014.

On a linked quarter basis, net interest margin increased 3 basis points.

The year-over-year increase was due to the addition of Marquette's higher yielding loans, the primary driver of the 31 basis point increase in average loan yields and changes in our earning asset mix.

In the fourth quarter, noninterest income decreased $2.6 million to $112.6 million compared to the same period a year ago, due largely to an $8.3 million decrease in revenue from Scout Investments.

For the full year 2015, noninterest income decreased $32.2 million compared to 2014, driven primarily by $36.1 million in reduced revenue from Scout Investments and a $16.2 million decrease in equity earnings on alternative investments.

These reductions were slightly offset by $6.3 million of increased gains on the sale of securities and $2 million of higher bank card fees year over year.

Slides 22 through 25 illustrate the components of the fourth-quarter and full-year changes.

Looking at fourth-quarter expenses on slide 26, total noninterest expense increased $15.7 million or 9.4% year over year.

The largest driver of the increase, salary and benefits expense, rose by $13.5 million and included $8.4 million in Marquette salaries and benefits, $600,000 in Marquette-related severance, and $3.3 million of non-Marquette-related severance.

On a non-GAAP basis, operating noninterest expense, which excludes the impact of those severances and other acquisition-related expenses, was $174.9 million, an increase of $9.9 million or 6% compared to the fourth-quarter 2014.

For the full year 2015, as shown on slide 27, noninterest expense was $703.7 million, an increase of $38.1 million or 5.7% compared to 2014.

Again, the largest driver of the increase was salary and benefit expense, which increased $47.9 million year over year.

Included in this increase was $20.8 million in Marquette salaries and benefits, $2.4 million in Marquette-related severance, and $4.6 million of non-Marquette-related severance.

On a non-GAAP basis, operating noninterest expense for the year was $692.4 million, an increase of $56.3 million or 8.8% compared to 2014.

Please see slides 8 and 9 for additional detail regarding the non-GAAP reconciliations.

Now turning to the segments, I will cover just a few highlights.

The financials and drivers of performance for each segment are in the slides and press release.

The bank segment results begin on slide 29 in the deck.

The $20.8 million increase in year-over-year net interest income for the fourth-quarter 2015 was primarily driven by improved average loan yields, which rose to 3.8% from 3.49% a year ago and improved loan volumes, including the addition of Marquette's loan book.

We saw our strongest quarter of production to date with lenders across all of UMB's lines of business adding $697 million in loans.

Total payoffs and pay downs for the quarter were $345 million, which is slightly higher than the average of $288 million we have seen over the prior four quarters.

However, payoffs and pay downs have kept a relatively steady pace as a percent of our growing commercial loan portfolio.

The detailed pay down totals and line changes for the quarter are shown on slide 30.

The composition of our loan book and a regional view are shown on slides 31 and 32.

We added $170.9 million in CRE loans and $49.5 million in construction during the quarter.

Once again, multifamily and senior housing projects were the top categories.

CRE activity in our Texas region continues to grow and was second behind Missouri in closed loans for the fourth quarter.

Our agriculture lending group posted 7.1% growth during the fourth quarter and nearly 32% growth compared to year-end 2014.

Ag loans stood at $528 million at December 31 and are classified as follows: $183 million in loans to finance ag products and $345 million of loans secured by farmland.

Finally, I will update you on our energy lending exposure, which has changed very little from last quarter.

At December 31, our outstanding energy-related loans represented 3.5% of our loan portfolio, largely in the midstream and service sectors.

While overall oil and gas exposure remains relatively low and while we applied the same strong underwriting principles to these loans, we may have increased the risk of loss on certain credits if oil prices do not normalize in the near term.

Before I move on from the bank segment, I would like to touch on credit quality.

On slide 33, we provided a 10-year loss history by category.

Of note, credit card losses represented an average of 57.2% of net charge-offs over that time period.

You also saw on our press release that nonperforming loans have increased a bit from our typical levels.

This is largely attributed to three credits of approximately $10 million each that were removed to the nonperforming category during 2015: a manufacturer, a distribution firm, and an E&P company.

Two of the three credits are well secured while the third is less so.

Based on current market conditions and the facts associated with each borrower, we believe we have appropriately evaluated the assets per impairment and recorded the necessary level of reserves.

We will continue to evaluate each borrower's financial position together with related market conditions, and we will continue to make adjustments to our reserves as needed going forward.

We have included a chart on slide 34, depicting loan classification trends, which are disclosed in our 10-Q and 10-K filings.

You can see that, while nonperforming loans have ticked up slightly, overall classified loans have been trending down over the past five years.

And, finally, looking at NPLs industrywide, SNL financial reported median nonperforming loans to total loans of 1.25% for the third-quarter 2015 compared to our .65% for the fourth quarter.

Now I will turn to the institutional investment management segment, our Scout Investment business, which with details beginning on slide 37.

Assets under management stood at $27.2 billion at December 31 of 2015.

The revenue declines shown for the segment continue to be driven by net outflows over the past several quarters, primarily in the international funds and the resulting shift in AUM mix, which is currently 22% equity and 78% fixed income.

For the fourth quarter, the Scout complex saw net outflows of $816.5 million and had a negative market impact of $14.4 million.

The components of equity and fixed income AUM changes are shown on slide 39.

I will note that flows during the quarter were impacted by some redemptions in advance of capital gains distributions and the decision of some investors not to reinvest those gains.

We are focused on leveraging our Scout distribution channels and improving performance, which is the best way to stem future outflows and ultimately return to net inflows.

Several of our funds, including global equity and mid-cap, have experienced strong relative performance on a one- and three-year basis.

And, as you can see on slide 41, six of the nine Scout funds rated by Morningstar have four stars.

On that slide and the following slide are some important disclosures related to those ratings.

Next, I will discuss payment solutions with segment financials beginning on slide 43.

Increased card purchase volumes, along with growing numbers of accounts and deposits, drive the processing fees, bank card expense and other service costs, which contributed to the $12.1 million increase in annual noninterest expense compared to 2014.

Slide 43 shows the component of the $2.3 billion fourth-quarter purchase volume that generated $19.9 million in interchange revenue.

For the full year, total card purchase volume increased 10.2% to $9.3 billion compared to 2014, driving total interchange revenue of $77.4 million.

In UMB healthcare services, the number of HSA accounts grew to 805,000 at year-end, for a 36.8% year-over-year growth rate.

And you will see on slide 44 that healthcare deposits stood at $1.2 billion on December 31, an increase of nearly 40% year over year.

Total HSA investment assets reached $118.3 million at year-end.

The number of accounts is impacted by open enrollment periods in the fourth quarter, and we typically see balances built further in first quarter as those accounts are funded.

We remain very enthusiastic about our healthcare business and its future prospects.

The final segment I will discuss today is our asset servicing segment, UMB Fund Services, which ended the fourth quarter with $185.6 billion in total assets under administration.

The financials for this segment are shown on slide 48.

While revenue in this segment comes from a variety of sources, including number of accounts and transaction fees, the largest driver is average AUA, which is greatly impacted by the health of the equity markets.

Our alternative servicing business has continued to see traction adding 31 net new funds and increasing assets under administration by 20.6% over the past 12 months.

Slide 49 of the supporting materials shows some additional metrics for our various products within fund services.

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

(Operator Instructions) [Abraham Monwallah], Bank of America Merrill Lynch.

First question on expenses and you can decide how you want to answer this.

But as we look at 74% operating efficiency in the $174 million expense run rate, how should we think about how these cost savings translate either into the bottom line, and if you could give any clarity on how that $174 million is likely to change as 2016 progresses, or how we should expect the efficiency ratio to progress from 74% in 4Q?

This is Mike.

I would draw your attention to slide 11 in the investor presentation.

So keep in mind, when you reference the efficiency ratio, which is on slide 9, at $74 million on a non-GAAP basis, we have also disclosed on slide 11 the timing of the efficiency related initiative saves.

And so 2016, we still have more than half of the number that we experienced in 2015, which wasn't even a full year still to go, and we're going to get the full year impact of the 2015 year saves as well.

So we still have quite a bit of traction to go on this.

Well, I was going to say, of course, the efforts are ongoing as well.

Right.

I guess what I was trying to get to is how much of this will be offset by continued investment in the franchise?

All I can say to that is, we have, as we said, disclosed and said very clearly, I think, is that we are committed to bringing down our efficiency ratio.

So obviously, we will be managing those investments so that they don't -- that we are certainly investing in the business, but that they don't negatively impact our improvement.

Okay.

That's fair.

Understood.

And then, separately on loan growth, we have been focused on CRE over the last few years and just because of some of your mix of the loan book coming into poor cycle.

How is the regulatory guidance around CRE lending impacting how you are thinking about CRE growth?

I am going to try to answer.

I am not sure I totally heard everything you said, but maybe I will repeat the question to you.

You are asking about the CRE environment and the economy and how does that -- how do we think about CRE lending related to what's happening in the world around us?

Is that the question?

That last in light of the inter-agency guidelines that came out in December talking about higher scrutiny for CRE loans.

Yes.

That is an easy one for me, which is, nothing has ever changed with the way we lend.

We evolve and mature the way we market into verticals and have added expertise in the particular verticals, including our CRE expertise.

I would say that nothing has changed about the way we underwrite.

We don't wait for the regulators to tell us to be smart, so we are out there doing the same thing we always do.

So we are concerned -- have been concerned, really, in general, about some of the areas that have heated up, i.e.

multi-family, student housing, some of that.

And so, while we have grown that part of our book of business, we do it the way we do everything else, depending on global cash flow, sponsor support, things like that.

So I would say we are not worried about the interagency guidance at all because we would have been out in front of it anyway, and we feel very good about the quality of our CRE book.

Chris McGratty, KBW.

Mike, maybe a question on the energy.

If you kind of back into the numbers, it is about -- correct me if I am wrong, about $330 million of exposure.

Again, a small number on a percentage basis.

A lot of the attention this quarter has been given to where reserves stand, and I know in your comments you talked about kind of reserve levels being potentially upward biased.

What is the reserve on that portfolio?

So each bank, as I can gather, it sort of calculates the way they do that a little differently, whether it is against the whole portfolio or just against criticized credits, etc.

What I can tell you about ours is it is 3.5%, and of our [6] and [7], which is our higher criticized credits, we have about 5% -- approximately 5% or greater reserves against our criticized energy credits.

Okay.

So if I am thinking -- I think a lot of people look at it just on an aggregate basis.

Right.

Do you have the dollar -- the total dollars set aside against the $330 million?

Not committed to memory, but, again, we gave you the number of the total.

I would say about the book, it is evenly -- so it is 3.5% of total.

We have upstream, downstream, midstream, service kind of split -- we don't have any real concentration in any one of those areas.

And buried within that total are a lot of great strong credits, and so we have everything from small, little service companies all the way up to strong Fortune 500 companies.

And, really, it is immaterial.

We believe it is immaterial.

And I am sorry if I missed this.

The total dollars of the classified or criticized on that $330 million, did you provide that?

I may have missed it, Mariner.

No.

We did not.

I just want to remind you that, based on that call -- or based on your question, Chris, our nonperforming loans, we are more than double what the industry average is as far as our reserve levels overall for the portfolio.

So we feel very good about our overall reserve levels.

No, I get it.

I am just trying to make an apples to apples comparison to your peers.

Maybe a question on the originations.

The new slide was helpful -- the new production.

The $700 million or so that you had in the quarter, how much of that is legacy UMB and how much of that is Marquette, and is there any -- was there any of the fourth quarter's growth that was pulled forward, perhaps, from the first quarter?

Thank you.

He is on slide 30 of the deck.

And so we didn't disclose how much of the -- we will round up $700 million is Marquette new production.

Remember, this is only for the fourth quarter.

So all of the existing balances that we acquired are already in the totals.

This is just new production.

It is kind of evenly split.

There is part of this coming out of Arizona, Texas.

We talked about the CRE portions coming out of Missouri.

It is not heavily weighted towards one area.

We have good, solid geographic expansion and vertical expansion, production from Marquette, production from our book, solid across the board and, to Mike's point, it is all in there.

So Marquette (inaudible).

Okay.

Just the last one.

The pipelines today, do we feel like we exhausted any of the pipeline with the really strong fourth quarter, or is the organic growth outlook -- is the message on organic growth that it is sustainable?

So, as we have done in the past, we have given you the next quarter -- visibility into the next quarter, which is that the pipeline remains strong.

John Rodis, FIG Partners.

Mike, maybe just a couple questions for you.

In other -- or, I'm sorry, in noninterest income, the other line item was up a little bit linked quarter.

Anything unusual in there?

Nothing unusual.

Okay.

The tax rate was down.

What sort of tax rate should we use going forward?

That is a good question.

So the rate that we are going to provide going forward -- because we have done this for you in the past -- is, we believe, 2016 will be around 25.7%.

Now, that is quite a bit lower than the 27% -- and you can fill in the decimal place -- that we have been at in 2015.

The majority of that driving -- or the majority of the reason that is driving that is we have a much higher percentage of tax exempt income, mostly related to the HTN bonds that I mentioned in my prepared remarks and then, also, higher BOLI and COLI, which both have tax-exempt income.

Okay.

Just two other questions.

And I will just -- and then I will step back.

First would be your thoughts on a share buyback given the pullback in the shares in here.

And then, back to the energy portfolio, what percent is -- are in [SNICs], I guess?

I will take that.

Thanks for your question.

On share repurchase, unfortunately, I am not going to be able to give you much more than it is an option, right?

We were continually, as we have talked in the past, looking at all of our options for use of our capital.

It is certainly one of our options, and we want to provide the best shareholder return we can long-term and it is certainly one of our options.

So that is probably not what you were looking for, but that is about all I can give you on that one.

On the other, we don't really disclose the percentages that are coming from which category at this point.

Maybe we can do that in the future if everyone continues to be that interested in something, we believe, is pretty immaterial.

But at this point, there certainly is some exposure in there.

On the SNIC side, but what I would tell you is, of our SNIC portfolio in total, I can't even remember the last time we even had a ranked loan on our SNIC book.

So we don't often have much trouble with our SNIC portfolio in general because they are big exposures, right?

So we are extra careful with our super large exposures.

Okay.

Mariner, I get it.

Just back to the buyback, no, I appreciate what you are saying.

But just to clarify, you do have, what is it $2 million currently authorized?

Yes.

We do have that.

We have been renewing that for years at that level, yes.

Okay.

So in theory, you do have the flexibility to do something.

If the stock were to fall or something, you could move fairly quickly.

Absolutely.

Peyton Green, Piper Jaffray.

I was just wondering, maybe, if you could comment on the amount of cost saves from Marquette.

I know you referenced it is about $14 million in total cost savings that were announced when you announced the deal.

How much of that has been recognized or was evident in the fourth-quarter run rate?

Yes.

So I think I am going to draw your attention, Peyton, to slide 14 where we talk about the integration costs and we give you the transaction costs that we have experienced so far.

When we originally disclosed the acquisition, we talked about total cost savings in the neighborhood of $14 million and the acquisition related costs of about $23 million.

And you can see, we are now through about, we will say, half, roughly, of the acquisition costs.

We did say in our prepared remarks, or I did, that we would convert in the first quarter of this year.

All of those expenses should be pretty much through the income statement by the end of the year.

Probably a majority of them will be through by the middle of the year.

On the cost savings side, we have not given a percentage of where we are at.

So unfortunately, I won't be able to answer that directly other than to say we are still on track with the original numbers that we put out when we announced the deal.

Okay.

All right.

And then, in looking at the slide on the securities portfolio, there is a reference to about $1.7 billion in securities that are expected to mature with a yield of about 1.37% over the course of this year.

Purchases in 2015 were about $2 billion and carried a yield close to 2%.

What kind of reinvestment would you expect to get yield on that $1.7 billion at 1.37% that rolls off?

Yes.

So I might address that by telling everybody on the phone, in case you are trying to follow along, that is on slide 18 in our investor presentation.

We have said that we feel like we are unique in the bank space and particularly in the midsize bank space because we do have such a large investment portfolio as part of our earning assets.

And the large portion of that that we are now able to reinvest at rates higher than the rolloff rate, and that is a nice driver for us to expand revenue in 2016.

To answer it directly, Peyton, it is going to depend upon what we buy and our expectation of future interest rates.

At the end of 2015, we were buying a lot of mortgage-backed securities, and so the yield was fairly high on the buybacks.

It really is going to depend upon what comes due in a given month and what we actually buy.

Over the whole year, right now, about the only guidance I think we can give is that we expect our portfolio holdings in total to be roughly the same that they have been in the past.

Okay.

But you wouldn't expect to replace it with as low a yield as that, would you?

Not at this point, no.

No.

You tell us what happened to rates and we will tell you what we are going to be able to reinvest in.

That is I would say lower for longer, but I have been saying it.

Yes.

Okay.

You have been consistent, Peyton, that is for sure.

And then, maybe, Marriner, as you look out at Marquette at the integration in getting Marquette operating as a part of UMB and UMB as a part of Marquette, where do you see the opportunities to drive revenue?

I know the loan balances were roughly flat in the fourth quarter versus the third quarter and really since the acquisition.

What is the opportunity to drive balances in 2016?

We remain incredibly excited.

I will give you a little color, and you are going to get me on my soapbox here.

We are pretty jazzed about that acquisition.

The real reason -- the main reasons that hasn't really moved yet is we have been careful to protect what is there and careful through the integration process.

As you know, we won't have fully integrated and brought the teams together fully until the end of this quarter.

So we are really aiming for this, the last three quarters of this year to see the benefit from that acquisition, and we are more focused on doing no harm from acquisition day through integration.

So that is what we have been focused on, is do no harm, which we very successfully have done.

So as it relates to the opportunity, people talk about energy when they think about Texas.

But, remember, we are in Dallas and Fort Worth, and they are broadly diversified markets with less energy exposure than most people think.

So we are pretty excited by the big population, lots of -- the rooftop numbers are pretty good down there, and so we are pretty excited about Texas.

We have got an exceptional team down there between the team we had on the ground and the team that we have picked up -- our new team members.

Really jazzed about that.

Arizona is really, really exciting as well because we already had a pretty decent presence and some really strong momentum on the ground before we picked up the Meridian acquisition in Arizona.

That one is already demonstrating some strength within the totals.

We have picked up a team of real estate lenders down there with some expertise, and so we have been able to see some momentum down there as Arizona has recovered.

And so very, very excited about Arizona.

And then the two national lending platforms, again, back to the do no harm, we are really excited.

We are starting to see some of that potential develop now and pipelines -- they are part of my comments about the pipeline.

And if you think about the two pieces, you have the factoring piece, which has been largely transportation related.

So the pickup there has been a little slow because of what has happened with energy prices and such because of the low cost of energy, the borrowers and the activity in there, the companies have been able to use their own cash.

So that is part of the story there.

So we expect as that company diversifies and uses our leverage opportunity of our low cost to funds and our capital, both diversifying away from transportation and then also being able to look at larger deals, we expect both of those organizations to do very, very well.

Really like the integration of, culturally, things look really, really good, and I couldn't be more excited about both the Meridian teams and the Marquette specialty lending teams.

So it is probably more than what you wanted to hear, but we're pretty excited about it.

Okay.

No.

I guess last question is -- maybe I'll ask the credit quality question a different way.

I mean, almost anything you read from an industrial or manufacturing perspective seems to suggest a recession in that broad sector.

And maybe that is strong, but certainly a very strong slowdown.

What are you all see seeing in your core customer base, and would you expect that to suggest a slowdown in lending in 2016 or an uptick in credit?

I mean how do you view that?

I would say that we get our growth in several different ways.

I think, to your point, I don't know that we should expect a lot of growth from economic activity.

I think the whole industry is protecting something like GDP loan growth.

So the industry is projecting something like 2.5% to 3% loan growth.

So if we were just dependent on economic activity for loan growth, I would say we would be bringing down our expectations, too.

But that is not -- so we have -- as we have talked in the past, we have low penetration in some very large markets.

So we expect to get a lot of our loan growth from getting our share of market.

So capturing market share, as well as vertical expansion.

That is where we think we will get more of our loan growth than through economic activity.

So we expect, like everyone else does, relatively slow economic growth and, therefore, don't expect a lot of our loan growth to come from that particular driver.

Okay.

And then just from a credit perspective, have you seen any change in the classified or criticized with regard to industrial mix versus other segments over the past two or three quarters.

No.

And I would just -- I would take this opportunity to point you back, really, to 33 and 34 and just speak for a moment about that.

I know everybody is -- we hear this from the analyst community.

People are starting to worry about, particularly, obviously, energy and then just in general the slowdown for the criticized credit stuff.

So I just -- a couple of comments about that as it relates to us.

If you look at 33, I might just comment that the average tenure of our lending -- senior lending team is 23 years.

Our Chief Lending Officer is 30 years.

I have been sitting on our lending process for 12 years and a part of it for 22.

And if you look at our charge-offs, they have gone from 2006, from .20 to .12 at the end of 2015, and we have gone from average loans of $3.5 billion to average loans of $8.5 billion in that timeframe.

We have a very, very low historic percentage of conversion from nonperforming loans to charge-offs.

And what I would say is, the same people in charge, same lending practices, same style of lending, and we don't expect anything different over the next 10 years as it relates to the conversion of nonperformings to charge-offs or increases in charge-offs in general.

If you look at the commercial loans in general, specifically to your question, commercial loans, which is the top line on that page, I mean, effectively, with whatever it is, the $7 billion commercial loan portfolio, we charge off a loan a year a loan from a percentage standpoint.

So we are very, very proud and very, very serious about our credit quality, take it very seriously.

It is top of my list.

The thing I am most proud about at UMB.

So you shouldn't expect -- we don't expect and you shouldn't expect anything different.

If you look at the next page, you just see the five-year trend of our classified loans.

While certainly on a linked quarter basis, they have ticked up slightly.

Just look at the five-year trend.

And across the five year, you can see peaks and valleys.

This is one of those peaks.

We expect to bring in about -- a valley sometime in the near future and continue to keep classified loans at low as a percentage of total because we are damn good at lending.

And Peyton, I will add -- if you look at slide 33, those are the lowest absolute dollar charge-offs, all in, in eight years, and the lowest charge-off on an average to loan basis in 10 years.

And that includes the great recession.

So I think the numbers kind of speak for themselves to substantiate what Mariner is saying, that you could argue that looking back isn't the best indicator of looking forward.

But having the great recession in the middle of that and looking at those numbers, it tells an incredibly strong story.

With the same leadership team, which is the point I was trying to make.

We have been here -- we have been through it with the same people making decisions.

We haven't changed the way we do it.

(Operator Instructions) Matt Olney, Stephens, Inc.

I want to start on the fee income, and I missed the first part of the call so I apologize if I repeat something.

But, in the fee income, within the trading and investment banking line, it was pretty strong this quarter.

Anything unusual in the fourth quarter, or is that a number rate -- a run rate off of an entire base?

Yes.

So the majority of that is the fees related to the held to maturity securities that we talked about.

So we are now at around $660 million, I think, at the end of the fourth quarter.

We will continue to add to that.

I won't give you guidance on when we think we have had enough, but we continue to see some traction in that.

But that specific line is being bolstered by the activities that we've talked about.

It is a market opportunity that we have been able to see is based on refunding opportunities in the schools, universities, hospitals.

So it has been a neat opportunity we've been able to seize in the marketplace.

Okay.

And then, Mike, you referenced the BOLI discussion earlier.

And just to clarify, it sounds like you guys did purchase some BOLI recently and that fourth-quarter number for BOLI is a good run rate.

Is that correct?

It is, at least at this point.

We still have the capacity to add more BOLI if we want to, but as of right now, that is the run rate.

Okay.

That's helpful.

And then, going back to the legacy expense initiatives, so ex Marquette, would you expect to get all the initiatives implemented over the next few months?

I mean, would that give us a clean 2Q 2016 run rate?

Well, I am going to point you back to the way we described it, which is you should be thinking about it as -- it shows you it is less than 2016, so we can't tell you when that will happen in 2016.

We are trying to get everybody focused on full impact annualized in 2017.

So that is -- sorry not to be able to give you more than that, but that is what we can do for you.

So you will have to just take what is there in that 2016 column and just know it is going to be happen throughout 2016.

And then, I wanted to remind you that this is not the end game.

We are focused on making decisions on making us more lean and more profitable with every decision we make.

So that is an ongoing exercise.

This is not the end game for us managing our expenses.

Okay.

Thanks, Mariner.

And then, last question from me, as far as the overall allowance ratio, I am curious what your thoughts on that ratio are going forward.

And as some of the acquired loans renew over the next few years and those will require a loan-loss provision on those, would you expect the stated allowance ratio to continue to migrate up from here?

Yes.

So as a reminder to everybody, when we acquired the Marquette portfolio, the loads come over at fair value, and so they have been marked at that time.

So our allowance as a percent of total loans was less than 1% and continues to be so in the fourth quarter as a result of that adjustment.

As those loans mature and the fair value adjustment, if you will, is accreted through the yield or the interest income, and they renew, yes, you would start to see a need to account for them in our normal model.

Now, however, saying that, remember the model is not complete completely and utterly dependent upon just total loan volumes.

It is dependent upon how those loans are ranked, their likelihood to migrate from unacceptable ranking today to something in the ranked category.

So there is a lot of factors that play into that.

We feel like our allowance right now is completely appropriate.

Even though the numbers do look a little weird because of Marquette, I don't expect any material changes, at least right now.

Okay.

Thanks for the update.

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.

Before we end our call today, I would like to announce that we plan to host an Investor Day in New York on May 19.

Details will be coming out soon, and I hope many of you will be able to join us.

And, as usual, today's call can be accessed via replay at our website, beginning in about two hours, and will run through February 10.

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 has now concluded.

Thank you for attending today's presentation.

You may now disconnect.