UMB Financial Corp (UMBF) 2016 Q3 法說會逐字稿

Good day and welcome to the UMB Financial Corporation 3Q 2016 Conference Call. 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 Kay Gregory. Please go ahead.

Good morning and thank you for joining us. On the call today are Mariner Kemper, President and CEO; Ram Shankar, CFO; and Mike Hagedorn, CEO of UMB Bank. 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 2015 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 release, as well as the supporting slide deck is available on our website at umbfinancial.com, under news and events in the Investor Section.

The slides are also available in the webcast link for your reference. Reconciliations of non-GAAP financial measures have been included in the earnings release and on Pages 5 and 6 of the supporting slides. With that, I'll now turn the call over to Mariner Kemper.

Thank you, Kay. Welcome everyone and thanks for joining us this morning to discuss our third quarter results, which reflects continued progress of our efficiency initiatives, along with solid increases in loan balances. Also, I'd like to welcome Ram Shankar, our new CFO who joined us in August. We're happy to have him on board and with us on the call today.

Looking at the third quarter results on slide 4, you'll see that net income was $41.9 million, or $0.85 per diluted share. And on a non-GAAP basis, adjusting for the items shown on slide 5, net operating income was $43 million or $0.87 per diluted share.

On slide 8, you'll see that we once again delivered solid loan growth with average loan balances for the third quarter increasing 13.9% compared to September 30, 2015 and 11.6% on a linked-quarter basis annualized.

Average C&I loans increased 1.9% on a linked-quarter basis. While this increase is slightly below our average C&I growth over the past several quarters, we have a robust pipeline and continue to see opportunities in all our markets supported by a diverse set of industries. Overall growth along with the change in mix in our loan portfolio helped drive our net interest margin to 2.87% for the third quarter compared to 2.73% a year ago and 2.86% in the second quarter. Ram, will provide more color later in the call.

I'd like to touch briefly on credit quality, which has long set us apart favorably from the industry as a whole. On slide 9, we provided a 12-year loss history and I'm incredibly proud of this track record. I mentioned many times that we are a relationship bank, which is important aspect of our credit culture. We know our customers well and have the ability to identify and solve problems early, that shows up in this slide with net charge-offs to loans averaging just 0.29% since 2004.

In the press release, you saw the non-performing loans increase this quarter, largely due to two traditional commercial credits, totaling approximately $17 million. One is a transportation company and the other are traditional CRE borrower. There is no one industry or vertical impacting this level of NPLs.

Moving on with our quarterly results. On slide 11 and slide 12, you'll see trends on selected performance metrics. Compared to the second quarter, our efficiency ratio improved to 70.23% while ROE and ROA increased by 63 basis points and 7 basis points respectively. The comparable non-GAAP ratios are also shown on this page. So I'm happy to report on the positive momentum, our work continues, a year ago when we detailed our $32.9 million efficiency initiative, we told you a first step was an efficiency ratio of 70%, but it's not the end game. We continue to focus on efficiency in our day-to-day operations, which will reduce the pace of expense growth and drive positive operating leverage and overall improvements in our performance metrics over time. While an improvement in the interest rate environment remains uncertain, we are working to improve in areas within our control. Revenue growth from our key businesses, both in the Bank and in our other segments and expense control. Overall, I'm pleased with our results this quarter and the progress we are making.

Now let's turn it over to Ram, who will discuss our results in more detail and provide a little more color on our segments and drivers, Ram?

Thanks, Mariner and good morning everyone. I'm happy to be here today and look forward to meeting many of you in the coming months as I get up to speed in my new role. Looking first at the income statement, third quarter 2016 net interest income rose 2.9% on a linked-quarter basis and 13.5% year-over-year to $124.8 million as shown on slide 14. This increase was driven by loan growth and by the positive asset mix experience. The average yield on earning assets increased 2 basis points on a linked-quarter basis to 3.03%, while the total cost of funds rose 1 basis point.

Loans comprised 55.4% of average earning assets for the third quarter versus 53% a year ago. We continue to expand net interest margin through room -- remixing our book balance sheet both by rotating earning assets into loans and by mixed shift within the loan and investment portfolios. Provision expense increased to $13 million for the third quarter, consistent with our methodology, which considers the inherent risk in our loan portfolio, as well as other qualitative factors such as macroeconomic conditions. Loan growth, increased impaired loans, increased net charge-offs and the higher level of NPLs driven largely by the two commercial credits Mariner discussed, impacted the reserve this quarter.

Slide 15 and slide 16 show the details and primary drivers of the changes in non-interest income, which on a linked-quarter basis was relatively flat. Trust and securities processing income remained stable as strong revenues from the asset management businesses within the bank offset a slight decline in revenue from fund services and Scout.

The 11.8% year-over-year increase in non-interest income was driven largely by positive movement in equity earnings related to our Prairie Capital Management fund investments along with higher trading and investment banking and brokerage fees driven by growth in money market balances and 12b-1 fees following last December's rate increase.

Slide 17 contains detailed detail drivers related to changes in non-interest expense, which decreased $5.6 million or 3% compared to the second quarter of 2016. Salary and benefit expense remained relatively flat compared to the second quarter. The similar year-over-year decrease of 3% in non-interest expense was driven by reductions in nearly all expense lines, including lower legal and consulting fees, part of which reflected lower acquisition costs, reduced processing fees, paid to distributors of the Scout Funds, equipment expense, and supplies and services expense.

The salaries and benefits line included a year-over-year increase of $3.5 million in deferred comp expense, partially offset by a reduction of $1.8 million in market-related severance.

On a non-GAAP basis, operating non-interest expense for the quarter, which excludes the impact of those severances and other items described in the reconciliation was $178.2 million, a decrease of $5.4 million or 2.3% sequentially and $5 million or just under 1% compared to the third quarter last year.

Slide 18 shows an update on the progress we made on the efficiency initiatives we announced in 2015. In the third quarter of 2016, we recognized an additional $6 million in savings, bringing the life-to-date total to $24.5 million. The recognition of an additional $5.2 million in efficiencies is anticipated in the fourth quarter and the final $3.2 million in cost savings are in process. We remain on track to realize the total annualized savings of $32.9 million related to this particular initiative. Finally, the lower effective tax rate of 22.2% in the third quarter reflects an increase in federal tax credits and a larger portion of income earned from excludable life insurance policy gains. We expect the tax rate for the full year 2016 to approximate 24%.

Now turning to the balance sheet, total loans stood at $10.3 billion at September 30, an increase of 2.1% on a linked quarter basis and 13.8% compared to a year ago. Mike, will provide more color on our loan portfolio in the Bank segment discussion.

Total securities available for sale in our investment portfolio shown on slide 19 stood at $6.3 billion at September 30, a decrease both on a linked quarter and a year-over-year basis. This is the result of our ongoing effort to rotate earning assets into loans, along with the less than optimal pricing environment to reinvest cash flows in July and August.

We've also added additional detail on the composition of our held to maturity portfolio, which stands at just over $1 billion. This portfolio largely comprised of private placement bonds in the healthcare and higher education space have become a more meaningful part of our earning asset mix and is an attractive alternative to the investments in are available-for-sale portfolio. The average yield in the HTM portfolio was 3.64% for the third quarter, compared to 1.91% in the AFS book, bringing the average yield on total securities to 2.08%. The duration of each of the portfolios is shown on the slide and when combined the duration is 42 months. Details related to the past quarter's activities and portfolio statistics are shown on slide 20.

Turning to liabilities, total deposits at September 30 stood at $15.4 billion representing a decrease of 1.7% from June 30 and an increase of 2.1% compared to year ago. The cost of interest bearing liabilities for the third quarter was 25 basis points and the total all-in cost of funds including non-interest bearing deposits was 17 basis points.

Now, turning to the segments, you will see the financials beginning on slide 24 followed by details on each. I'll just cover a few highlights and then turn it over to Mike for more detail on the bank and overall competitive landscape. Institutional investment management, our Scout's investment business had a pre-tax margin of 13.1% in the third quarter reflecting a slight linked-quarter improvement in non-interest income along with reduced expense, largely due to lower salary and fund distribution fees.

Assets under management held steady, standing at $28.1 billion at September 30 as Scout experienced total net outflows of $406 million during the quarter with positive market impact of $404 million largely offsetting the decline.

As shown on Slide 27, net outflows from the Scout Funds were $84 million, while outflows from separately managed accounts were $322 million. Several of our funds including international, Small Cap and unconstrained have experienced strong relative performance on a one-year basis and on a three-year basis, six out of the 10 Scout Funds are ahead of their respective benchmarks.

As you can see it on Slide 29, four Scout Funds have a four-star rating from Morningstar. The Scout International Fund was recently reclassified into the Foreign Large Blend category and is ranked in the top decile on a one and 10-year basis.

The Scout Unconstrained Bond Fund markets fifth anniversary at the end of September and achieved a four star Morningstar rating, while the Scout Mid Cap Fund will reach its tenth anniversary next week on October 31.

Slides 29 through 32 contain important disclosures related to performance and ratings. Our focus in this business remains on improving performance as well as leveraging Scout distributional channels in the institutional, intermediary and sub-advisory space.

The improvements we've seen in several strategies are encouraging. While we cannot predict future revenue in Scout Investments, positive performance versus both benchmarks in peers is the first step. It is important to note that the potential revenue improvements will be impacted by timing as inflows typically follow performance and AUM levels drive revenue in the following periods.

Turning to asset servicing segment, UMB Fund Services saw improvement from the prior quarter with a pre-tax profit margin of 19.3% compared to 17% in the second quarter and 18.4% a year ago. Revenues in this segment come from a variety of sources, including number of accounts and transaction fees and average assets under administration, which is greatly impacted by the health of the equity markets. At September 30, total AUA stood at $186.2 billion. Our Investment Management Series Trust, which provide turnkey administrative and governance solutions for fund managers, continue to grow. At September 30th, we had 87 active funds in the trust with $17 billion in assets, AUA in this product has more than tripled in the last three years.

Slide 33 and slide 34 contain some additional highlights and metrics for the segment. With that, I'll now hand it over to Mike to cover the details and drivers for the Bank.

Thanks, Ram and welcome to the team. In the Bank segment pretax profit margin for the third quarter was 23% compared to 23.1% in the second quarter and 12.6% a year ago as the impact of improved net interest income and reduced expenses combined to offset the increased provision expense. As a reminder, the largest portion of acquisition expense, as well as ongoing market salaries and benefit expenses, gains on the sales of securities, and equity earnings and alternative investments are recognized in the Bank segment. The Bank includes four lines of business, commercial banking, personal banking, institutional banking and healthcare services.

On slides 35 and 36, we provided a look at the revenue, expense and resulting net income contributions for each of these businesses. Revenue diversity is important for UMB as a whole, but also within the Bank segment where non-interest income represented 39.7% of third quarter revenue. Growing fee income contributions from institutional banking, healthcare and investment management businesses within the Bank along with continued expense control are important part of improving our profitability metrics.

Turning to slide 37, we saw strong loan production of $552 million in the third quarter. Total pay-offs and pay-downs for the quarter were $368 million, which is slightly higher than the average of $314 million we saw over the prior four quarters. Pay-offs and pay-downs as a percentage of our growing loan portfolio have remained fairly steady.

The composition of our loan book and a regional view are shown on slides 38 and 39 followed by a more detailed look at our CRE and construction portfolio. We've added $176 million in those two categories during third quarter. Demand for multi-family and student housing financing continues, particularly in our Texas and Arizona markets along with industrial and office projects. We monitor our portfolio concentrations and continue to apply the same disciplined underwriting standards to Investment CRE as we do with all lending activity. Currently multi-family and other Investment CRE represents approximately 30% of the total CRE in construction loans on our balance sheet. Both of our national lending businesses ended the quarter with increased balances. In factoring, we added 10 new borrowers during the quarter and increased period-end balances by 6.4%. With our current client mix of approximately 55% transportation and 45% commercial, our teams have been able to grow the total factoring portfolio by 17% year-to-date, despite continued difficulty in the trucking industry with high inventories and weak manufacturing.

On the ABL side, customer sentiment is improving both in terms of new business and increased borrowing by existing clients and balances in asset-based loans rose 5.9% during the third quarter. Lenders continue to leverage our legacy UMB capabilities, taking advantage of the commercial network to broaden our reach.

Moving to personal banking on Slide 42, we saw an increase of 4.4% in assets under management during the quarter, bringing the total to $13.3 billion at September 30. Strong revenue from private wealth, corporate trust and Prairie Capital Management provide a growing contribution to trust and securities processing income. On the consumers side, work continues to improve efficiency with 10 branch consolidations completed year-to-date in 2016, bringing our current banking center count to 106. One additional location is slated for consolidation by year-end, as we continue to assess our network and how we deliver products and services to our customers, we will also make prudent investments, and plan to open one location later this year in Olathe, Kansas part of the Kansas City metro area.

We continue to make progress on the new 4K delivery model, an efficiency program that includes changes to staffing, operating hours and associate incentive structures. By the end of October, we expect that 40 locations will have transitioned to this model. Initial results are showing efficiency improvements of 20% to 30% at the banking center level. In healthcare services, the number of HSA accounts grew to 829,000 at September 30 for a 30.4% year-over-year growth rate.

And you'll see on Slide 44 that at quarter end healthcare deposits stood at $1.5 billion and total HSA investment assets reached $170.8 million. Healthcare deposits continue to be a growing source of funding for us, providing 9.9% of total deposits at September 30. This contribution has grown steadily from just 3.4% of average deposits in 2012.

Finally, as you'll notice on Slide 45, Devenir Research has ranked UMB as number six in the industry in terms of HSA accounts and number 7 in terms of deposits and assets.

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

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

Good morning, guys. I just think first question I guess in terms of -- if you can talk about expenses, sort of when I look at your expense run rate for the quarter at $178.2 million, it sounds like it included about $3.5 million in deferred comp tied to the insurance income on the fee revenue side?

Ebrahim, how are you? This is Ram. The $3.5 million the year-over-year swing in the deferred comp line item, so let me just give you a little bit more detail. The actual gross amount of deferred comp expense that we incurred in the third quarter was about $1.4 million and then last year -- year ago quarter was about negative $2.1 million, so it was a credit. So that's the $3.5 million swing on a year-over-year basis, but what's embedded in our $178 million is $1.4 million related to deferred comp. And if you can realize that can be really volatile depending on equity markets and as we noted in the press release there's equal offset sometimes in the other fee income line item.

So then I guess as we look at some of the additional cost savings which is still outstanding and look at the expense run rate, Ram, like is $178 million kind of place from where we should expect sort of expenses to grow as obviously you're growing the bank but the efficiency ratio to continue to stay put and stand lower. Like if you can help us think -- just given all the ins and outs and fee and expenses, it will be helpful to sort of get some framework in terms of how we should think about that moving forward into 4Q and more importantly into 2017.

Ebrahim, this is Mariner. I think as we've been saying our intention is to get our efficiency ratio to 70. And as you can see in this quarter, we hit that number. At this point with the work that we're putting into this -- there is some ins and outs and some noise as we affect change and we're not sure at this point whether you should take that as a run rate at this point. However, directionally we will continue to reduce the expense growth rate.

This is Mike. Ebrahim, I'll just draw your attention to slide 18 and the remaining estimate that we have, it's not been recognized through year-to-date 2016. We're still committing to the $32.9 million, but there is some work still to be done that will spill over into 2017.

Well not just on that project as we said many, many times that was just a statement about the work we're doing. So we continue to reduce expenses across the company in addition to that announced project last year.

Understood. And I guess just on a separate topic, it sounded like you felt the increase in the NPLs were more one-offs of two separate sort of large credits and nothing really in terms of a turn in the credit trends that you're seeing. If that's the case, how should we think about in terms of as we move forward? Are we at a point where we should anticipate that the reserves build from here, both from a dollar and the ratio basis?

Well, as you know, there's a lot of things that go into how our provisioning is determined. It's a big metrics of things to go into that from loan quality to loan size of the book to qualitative factors about the economy, et cetera. So a great deal that goes into that metric. So actually, we can't give any indication direct straight up about where that, what will end up, because there are lots of variables. What I would say about, what you should focus on I think is really our history. So we mentioned in the call, the activity in the third quarter is largely related to credits, both of them are traditional. I would kind of take you back to page 9 in our deck, which really talks to the way you should think about our book, which is our migration history from NPLs to charge-offs and we have a long history of having a very, very low ratio of conversion of NPLs to net charge-offs, since 2004 that's gone from 0.22% to -- and 13.23% and then on down to the third quarter 2016 maybe 0.28%. And that's not, a very significant growth. So we've been able to manage growth and keep our charge-offs down and that's our continued expectation.

And were both these credits on your internal watch list for a while or did this issue sort of come up this quarter?

You want to do that again, I'm sorry.

Both the commercial credits, have they been on your internal watch list for a few quarters or did something happen in the third quarter, which led to sort of them going non performing?

It is nothing unusual about the activity, just normal course of business.

Chris McGratty with KBW.

Okay, if I could ask a follow-up on the credit. The [$13 million] provision, how much of that was an estimate related to those two credits because your provisioning rate was obviously quite a bit higher than it has previously been, I'm wondering, what it would have been kind of excluding these two credits?

Chris, this is Mike, well I can't give you an exact number because as Mariner just said to Ebrahim's question, things like migration the actual risk rating itself all play and many other factors play into exactly how that provision number is derived. However, it stands to reason that 13 is high relative to what you've seen the last couple quarters and is directly related to those two credits.

Okay. If I might, on the efficiency ratio just come back, just to make sure, I'm kind of on the same page. The [70] Mariner you talked about, obviously, I think you guys have made ten points of progress in the year or 1.5 year, that's obviously lot of progress but well from here given what's remaining in terms of the savings is without rates, is it fair to assume we kind of hangout around 70%.

Well, as we've talked that's a stopping off place, we want to -- it kind of takes a lot of hard work to get there in the first place and we'll reassess what we think we can do from there when we get there.

Chris, I'm just going to add to that, remember this was, while there was rather was a stated number and obviously we've been tracking to that this isn't really about that, this is really about attitudinally how we change, how we go to business and challenging our associates to think differently and so this isn't one and done thing, this should continue now isn't going to continue at the same rates that we did, who knows, but don't think if it is being done.

Understood. I got it. Maybe just last one. The guidance on the tax rate was I think 24 for the full year on, what's the -- how should we think about the fourth quarter, I'll just put out back into it kind of quickly and then how should we think about 2017? It would be Great. Thanks.

Yeah, we don't give forward guidance, Chris. But on the fourth quarter I would say consistent with what -- I would say in between the third and the full-year guidance. So you can just do the average on that. So, low [20] handle.

Matt Olney with Stephens.

Hi, thanks, good morning guys. I want to start on loan yields, showed some nice improvement this quarter, can you drill down on the higher loan yields. How much of this was from the LIBOR move versus other changes during the quarter?

So it's led mostly by mixed change. So going from variable to fixed rate type debt, which we've been talking about our project to gain benefit by remixing. We've talked about that for a while, so that is led by that. We've had some great success remixing the book. And then, rates which is directly related to going from variable to fixed in the first place. So those two are things are really leading that change.

The LIBOR movement had very little impact on the loan yields this quarter.

Okay. And Mariner, there's been some nice remix over the last few quarters, anything that you could think of that would slow that momentum down going forward from here?

Nothing other than what anybody would tell you about economic activity, what happens to the election et cetera. Our pipeline remains strong, so the activity in the pipeline on the gross basis, the activity is very strong, continue to be very strong as we look at into the next quarter. So I guess the only thing I could say that would still that down would be just sentiment at the customer and consumer level around economic data. So we feel good about our pipeline.

Okay. So it sounds like nothing specific to you at the -- just general economic issues.

Yes, I know. Exactly. We feel pretty good about the activity levels.

Okay, that's helpful. I mean, going back to the credit, the two non-accrual additions in the quarter, can you just clarify were those two credits tested for impairment this quarter, and if so, were there any charges?

Well, yes, I mean, we have marked and impaired all of our credits as data is presented to us to do so. So I'm not sure if that answers your question, but if they weren't surprises. I guess if that's your question, they've been worked -- both of them have been worked through our regular cycle and migration.

Okay. I'm just trying to figure out if there are any specific charges on these two credits in this quarter. I think we're all trying to figure out the provision expense question and do you know anything specific to these two credits this quarter?

To answer it directly, there one of the credits had a specific impairment and the other one had a direct charge-off. But I'm not going to tell you what the (inaudible) unfortunately, but that's what all I should say.

Okay. Yes, thanks for that.

And again, just to reiterate, these are, there is nothing unusual about this activity, they're both traditional credits, there's nothing to do with the growth in our CRE in construction or anything, these are both seasoned credits sort of have been around a while.

Understood and then on the deposit side, want to ask you about the mix shift going on there. Looks like the HSA is seeing some really nice momentum continue. But what we are seeing a lower overall dollar amount of the non-interest bearing deposits in the quarter. Can you just kind of walk through the mixed shift in the deposits and what's going on there?

Yeah. So, keep in mind that as you look at the mix, obviously as other things grow the portion that is growing less quickly, it's going to obviously become a smaller percentage just math, so yes, healthcare has been a very nice addition to the portfolio and we have great expectations for that in the future, but there is nothing specific around non-interest bearing, all things being equal, as we grow some of our sources that are interest bearing in our Institutional Banking segment and healthcare, that percentage is likely to come down something we want and we're going to try to continue to push hard on non-interest-bearing as a C&I lender, but all things being equal, it's kind of a mix of the business that we have today.

We are redoubling our efforts around the sort of deposit generation in general at this point, as you know about how we think about things. We're looking down the road quite a bit and want to make sure we're building franchise value as certain deposits (inaudible) raw materials. So we are ever focused, but particularly focused as we look down the runway here about making sure we're generating core deposits and so we've got a pretty strong effort going on at the Bank to make sure we're doing that at this point.

Okay, that's helpful. And then last question from me is on M&A. You guys have fully integrated market now, what's the attitude towards M&A at this point, and what are sellers saying right now.

This is going to echo our second quarter comments. So, sorry about that but we're basically in the same place we were which is we would like, we have an active outreach program and have for some time. We, the sentiment in the -- are sentiment in the reaction from the sellers side as everybody seems to be doing pretty well and beating estimates and having recovery in the credits, feeling pretty good about the companies and so a bit of a mismatch related to timing, this being a good time to create real value for our shareholders in the transaction. So we're, from a timing perspective, feel like this is probably unlikely for us to get a deal done that adds value to U.S. shareholders. So we keep the calling efforts out looking for the right deal, but I don't feel particularly bullish that there is a deal to be done at this point.

Thank you, guys.

John Rodis, FIG Partners.

Good morning, guys. Mike, you made a comment about the branch count, I think you said it's down to 106 branches. Can you maybe just give us your thoughts as far as where do you think that branch count ultimately goes, have you reviewed the whole network or are you still in the process of doing that?

As you might guess, I won't give you a number. But in my prepared remarks, I said that 40% of our branches now have gone through the 4K analysis, so that tells you that we have some yet to look at. It is in a race to zero. And I've said this in many of the bank conferences. This distribution network serves a purpose, it can be and has been in the past profitable. It just need to be re-looked at as far as the cost structure and how rewarded our employees that work there. So, I can't give you a number, John, unfortunately. But we're looking at things like obviously teller counts, teller transactions, opportunity in the marketplace, our own distribution within a town or city, or a suburb to make sure that our coverage is right. We don't have too much or too little. As I said, we're actually opening a new one in (inaudible). So obviously, it isn't just about having too much. That's a new addition to Kansas City Metro. So it's an ongoing analysis.

You're not going to hear anything different from us and you would from anybody else really about branches. The size of the branch is going to get smaller, the activity in the branch is going to change, we're going to do more advice plus transactions, same kind of thing you're hearing from everybody else. So the share number of our branches is probably not as important as what we're doing with them.

Makes sense. Mike, just to make sure I heard you correctly, you said you've reviewed 40% of the network is that right?

No, 40 locations, so 40 on -- 106 which is roughly 40%.

Okay, fair enough. One other thing, can you give us an update on where energy loans currently stand?

Almost exactly where it was last quarter.

Okay. And any shift as far as I guess criticized and stuff like that to a meaningful extent?

No, we've actually brought our coverage down slightly on criticized, but all-in-all relatively unchanged.

Okay. And then one final question for me and whoever wants to take it, just turn to you guys had some pretty strong construction growth during the quarter. Any bigger credits in there that drove the growth, or can you just comment on that?

No, I think the activity in that space is pretty consistent. These are, I mean there's certainly largerly deals in the other categories we've had historically, but that's been the same case since we started this effort. So I don't think, we don't have quarter-over-quarter size creep if that's the question.

On construction loans. John, as you know there's a usual drawdown periods, so this could be a commitment that was made earlier in the year that people are drawing on as well. So it's not just size of the loans.

Right. Okay, makes sense. Thanks guys.

(Operator Instructions) Peyton Green with Piper Jaffray.

Hi guys, good morning. Maybe Mike, if you could touch this one. You mentioned that 40 branches have gone through the 4K process, leaving 60 some odd to go through it again are to go through it. And I think you referenced the 20% to 30% efficiency improvement. Once they go through it kind of have their new roadmap planned. What time how long does it take to go through the whole branch network, do you think is this a two or three year process or is it gaining more momentum that?

Okay. I want to make sure we're clear about this, so in that everybody is going to go through 4K. So we have some branches because of their teller counts that are very traditional and because of the foot traffic and the level of activity, they're probably just fine. I can say what that number is, but don't think about it as everybody has to go through 4K. The ones that have gone through have typically taken about three months to go totally through, three maybe four months, five months, So it'll take a while, we just took a little bit of a pause to digest what we just did and we'll crank this back up here in about a month. So mostly it's been driven by lower teller accounts, don't think that we're just putting everybody into the 4K model.

That's exactly what 4K means 4,000 transactions. So these are smaller branches.

Okay. And then maybe a second question, as you look at the $8.4 million in additional expenses through the efficiency initiatives that are going to be rolled out, should we think that as a full run rate 2017 or is it a full run rate at the end of 1Q17.

So I know it's hard to kind of get this everyone know exactly when it's going to hit, that was my comment earlier, little bit of that is going to spill over into 2017. So it's likely you're not going to get the full 2017 run rate for a portion of that.

Okay. But we should have the $5 million or so that you've targeted for the fourth quarter should be a full run rate, not for the fourth quarter, but it will be from 1Q17. Is that fair?

Yes. You got it.

And then, I know Ram, you gave guidance on the tax rate for 4Q 2016 and 2016. How should we think about the municipal activity that you've done on the lending side and the corporate-owned life insurance, is that going to keep the tax rate maybe lower than it had been pre-third quarter or last year when some of these strategies really start to gain momentum?

I want to make sure I understood the question. You asked about corporate-owned life insurance and then the muni book in HTM or the muni book in AFS?

Well, I think the muni lending activity as well. That's in loans.

We've always liked the muni asset class and I don't think that our interest and desire for that is weighing one bit, I think that's more about risk management of how much we should have --.

It's a front end supply.

Yes. Great asset class for us. To the extent in HTM that some of those customers had the ability to refinance, that could affect the balances in the HTM portfolio. In the AFS book, I would say right now we should expect -- we expect that to stay where it's been historically. So I don't see a big change there.

And the tax rate, actually depends also on the level of income that we make. These are the same credits, but if the income goes up, the tax rate can creep up a little too big.

Okay. So it's fair to assume that the tax rate may migrate up in 2017 to where it was in 2015 versus 2016, is that the right way to think about it?

We're not sure.

Both in the -- point in time.

Okay. All right. And then, maybe Mariner if you can comment and this goes towards the credit, but not really credit that was addressed in your prepared comments. Are you all seeing any pockets of weakness throughout the footprint or business segment focus. For example, have you seen any weakness in ag credit quality?

Well, we see the same things that the top of the house everybody else does around trends and activity in the industry at the industry level. As you've followed us for a very long time, we do business with companies and individuals whose balance sheets are prepared for tough years. So we have on the ag -- so, yes, there is stress and ag. We got about $600 million book there, but we're doing business with multi-generational ranchers and farmers who have not levered up their land, because of interest rates being low et cetera. They've managed their businesses for multiple cycles. So while -- yes, there is some stress of commodity level, particularly maybe even in the dairy milk prices. We don't feel that there's anything unusual at the book level for us, because of the way we lend and the people we lend to. But yes, I think there's a little bit of stress at the commodity level. The gentleman that runs our agri business, we would tell you that [he thinks] we're in the third inning and this is kind of at the industry level, rather than in our book. And ag multi-family, and if you were to listen to our regulators as they look across either entire book and their entire complex in our peers, they're worried about multi-family, over supply there I think on the market. We too are monitoring that closely. But again when we do a deal, not only are we looking in the project, we're also looking at the sponsor and global cash flow and other things. So we're picking people with long-term track records, rather than somebody who is taking advantage of the interest rate environment to try to find new ways to make money. So again, I think you've track this a long time, so really it's our book where we were managed well against some of these economic cycles by the way we lend.

And then last question, maybe looking out over the next year as you kind of plan improvements to the company and growth strategies for the company. Is there any catch up that needs to be done that maybe wasn't done in 2016, because of the efficiency initiative? Is there any lumpiness that we should kind of expect for new systems things like that?

So you're talking about along with all other improvement efforts are there any investment things we need to be doing. I mean ongoing, and yes, I guess the commitment from us at this point right now as we were on the (inaudible) these days is that inclusive of the investments we make. We are committing to you that we will continue to bring down our overall expense growth rate.

Okay, great. Thank you for taking my questions.

Chris McGratty, KBW.

Thanks for taking the follow-up. The billion dollars or so of the private placement bonds you guys point out in the release. Can you just let me know the yield and duration on that piece of the portfolio and also the comfort of taking it even larger? Thanks.

Chris, the yield on that is [3.64%] in the third quarter, it went above one of about 3 basis points on a sequential basis. And the duration, I think we have it on one of our slides, it's 77 months on that. So if you add up the -- blend the duration on the AFS book and the HTM bond book averages to about 42 months.

And you find that on slide 19.

That's very helpful. And then the billion dollars, how should we think about just concentration in that specific type of security. Are you comfortable taking that higher given the yields?

Well there aren't concentrations, and we're typically are higher at a lot of apartments, but student housing and there's some health care, hospital related those are the two most predominant, but they're not concentrated in a certain geography or with a certain issuer. As far as taking it higher, that's about interest rate risk and expectations for interest rates, I think as we talked about before, this was originally put on the balance sheet for protection for a lower longer interest rate environment and to the extent that rates go up if you believe that. I think this becomes less attractive honestly.

From a quality standpoint, it's some of the highest quality stuff we have in our balance sheet.

From a balance sheet perspective versus the (inaudible) portfolio there is a customer at the other end of the HTM portfolio as well. So that's important as well.

Next question again is a follow-up and it's from John Rodis with FIG Partners.

Mariner. Just a follow-up on your question about expense growth going forward you said you keep it lower going forward, in the past you've said you've sort of committed of growing expenses 4% to 5% a year, is that right or how should we look at that?

Well that just a level set that's in the category of old news and old format. So we have not been using that kind of conversation for some time now that's long before we set the stage for our expense efforts last --- last fall so we are not using that kind of conversation at this point.

So okay. So the growth rate would be below that. I realize that effectively it would be below that, but -- Okay, so you're committed to a lower level than that.

Lower level of growth is not absolute necessarily.

Okay, makes sense, thanks.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Kay Gregory for closing remarks.

Thank you for joining us today. This call can be accessed via replay at our website beginning in about two hours and it will run through November 9 and 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.