UMB Financial's (UMBF) CEO Mariner Kemper on Q1 2015 Results - Earnings Call Transcript

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UMB Financial Corporation (NASDAQ:UMBF)

Q1 2016 Earnings Conference Call

April 27, 2016 09:30 AM ET

Executives

Kay Gregory - Investor Relations

Mariner Kemper - Chief Executive Officer

Mike Hagedorn - Chief Executive Officer of UMB Bank and Interim Chief Financial Officer

Analysts

Chris McGratty - KBW

David Wong - Raymond James

Matt Olney - Stephens

John Rodis - FIG Partners

Peyton Green - Piper Jaffray

Operator

Good morning and welcome to the UMB Financial First Quarter 2016 Earnings 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 Kay Gregory. Please go ahead.

Kay Gregory

Good morning and thank you for joining us for our conference call and webcast regarding our first quarter 2016 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 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 press release, as well as our 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. You’ll notice that we’ve updated the format of the press release this quarter in an effort to streamline the reporting of our results and to provide ready access to the financial information you need. I hope you find this helpful and I’d be happy to receive any feedback you may have.

In addition, we have realigned our reportable segments merging the payment solution segment into the bank segment. Financial results in our healthcare and card businesses now roll-up within the bank segment and previously reported results have been reclassified to confirm to the new structure. On the call today are Mariner Kemper, Chief Executive Officer; and Mike Hagedorn, CEO of UMB Bank and Interim Chief Financial Officer.

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

Mariner Kemper

Thank you, Kay. Welcome everyone and thank you for joining us. This morning I’ll provide commentary on our high level results, which include strong loan growth and ahead of plan progress on our efficiency initiatives. Also in the first quarter, we converted market financial companies to our platform and accreted capital to our total risk based capital ratio for the first time in three quarters. In all, it was a very good quarter. If you turn to Slide 4, you’ll see that for the first quarter 2016, net income was $36.2 million or $0.74 per diluted share.

On a non-GAAP basis, adjusting for items shown Slide 5, net operating income was $38.6 million or $0.79 per diluted share. Looking at the balance sheet summary on Slide 7, you’ll see that we continue to deliver solid loan growth. I’m very pleased with these results, driven by the efforts of our lending teams across our whole footprint. At March 31, loans stood at $9.7 billion or an increase of $2.2 billion or 29.4%, compared to a year ago.

On a linked quarter basis, loan balances increased 2.9% on top of strong loan growth in the fourth quarter of 2015. Increased loan volume and markets higher yielding loans were the primary drives for our 33 basis point NIM expansion in this quarter as Mike will discuss with you later in the call.

On the following slide, we’ve included trends on selected performance metrics. Well, still early in our efforts, I’m happy to see the momentum and it’s going in the right direction in several areas. Our focus on profitable loan growth is an important component to enhancing our performance and so is our emphasis on our efficiency initiatives. On Slide 9, is an update on the progress we’ve made on the initiatives we announced in 2015.

As a reminder, we recognized $9.5 million of cost savings in 2015, compared to an expected $6.8 million as some of our items we accomplished sooner than anticipated. In the first quarter of 2016, we recognized an additional $4.9 million in savings. We remain on track to realize the total annualized savings of $32.9 million beginning with the full-year 2017 and we will continue to report on a progress made.

We also remain committed to looking for ways to operate more efficiently and effectively across the whole organization on an ongoing basis. Our current year priorities remain focused on improving returns and investing in future growth. The action items I outlined last quarter are to build on efficiency initiatives and continue to identify and implement operational improvements, specifically within the bank segment work to grow the combined UMB and market customer base following the full integration completed this quarter.

Continue the progress we’ve made in optimizing our balance sheet by shifting earning assets into loans and by effectively managing capital to enable us to capitalize on profitable business growth and acquisition opportunities. Overall, I’m pleased with our results this quarter and the progress we’re making.

Now, before I turn it over to Mike, I’d like to make a brief comment on an announcement contained in 8-K, we filed yesterday morning. Scott Stengel, our General Counsel has announced that he will be leaving UMB after three years to move his family back to the East course, which is home for him. Scott contributions in UMB are numerous and we wish him well in his new position. John Paul, Corporate Legal Counsel who’s been with UMB for more than 22 years and a close advisor to me will serve in this role on an interim basis, while a research is conducted.

Now, we’ll here from Mike who will discuss our results in more detail and provide a little more color on our segments and drivers. Then, we’ll be happy to take your questions.

Mike Hagedorn

Thanks, Mariner and good morning everyone. First, I’d like to provide an update on the integration of Marquette. In December 2014, we announced estimated transaction cost of $23 million in conjunction with our acquisition of Marquette. On Slide 11, you’ll see that we have recognized acquisition cost of $14.8 million through March 31, 2016. As we expected, we completed the full conversion during the first quarter. So, a largest portion of the expense has been recognized.

Our latest projections indicate that we expect to comment better than anticipated with total transaction cost of approximately $20.2 million. Our teams have worked hard to make the integration of success and we truly imply their efforts. On the cost savings side, we anticipated acquisition related synergies of approximately $14 million based in over the two year period following the May 31, 2015 closing. Post conversion our updated analysis shows that savings are estimated to be approximately $15.9 million with $14.8 million realized to date.

We expect the remaining $1.1 million in savings to be faced in throughout 2016 and into mid of 2017. Now, turning to our first quarter results on Slide 12, you’ll see our loan growth history. As Mariner mentioned, total loans at quarter end stood at $9.7 billion, an increase of 29.4% or $2.2 billion, compared to a year ago. Acquired balances plus production to the legacy market channels comprised $997.9 million of the increase in total loan balances.

The remaining increase of $1.2 billion was generated through legacy UMB lenders for a year-over-year increase of 16%. Credit quality remains sound with 0.24% net charge-offs and 0.57% nonperforming loans both as a percent of loans. Total securities available for sale and our investment portfolio stood at $6.9 billion at March 31, nearly flat compared to the end of the fourth quarter 2015 and an increase of $96.3 million or 1.4% from a year ago. The fact that we were able to hold our securities book to such a minor increase, while we added $2.3 billion in deposits over the past year is a direct result of our ongoing strategy to rotate earning assets into loans.

The details related to the composition of our investment portfolio in the past quarters activities are shown on Slide 15. Turning to liability side, Slide 16 shows deposits for the first quarter of $15.4 billion, a $2.3 billion increase year-over-year. $744.1 million of which were attributed to the acquisition of market and an increase of $325.6 million, compared to the fourth quarter. The cost of interest bearing liabilities for the first quarter was 22 basis points and included noninterest bearing deposits it was 14 basis points.

Before we leave the balance sheet discussion, I’d like to touch on our asset sensitivity and market risk estimations. The boxes at the bottom of Slide 18 show the percentage of our loans with variable rates, which at March, 31 stood at 48%, as well as the reprising details of our loan portfolio. The projected impact of hypothetical 12-month gradual changes in interest rates as well as the project impact of immediate and sustained changes in rates is represented in the chart on that page.

Turning to the income statement, first quarter net interest income before provision rose 3% on a linked quarter basis and 30.5% year-over-year to $117.9 million. First quarter net interest margin of 2.79% is 33 basis points higher than in the first quarter 2015, driven once again by the growing loan portfolio, the addition of markets higher yielding loans and changes in our earning asset mix. Loans comprised 53% of average earning assets for the first quarter versus 47.4% for the same period last year.

The linked quarter improved in noninterest income was driven by $4.8 million in reduced losses and equity earnings on alternative investments. On a year-over-year basis, the 7.1% reduction in noninterest income was driven, primarily by lower revenue from Scout. Year-over-year improvements in brokerage fees driven by growing money market balances and increased 12b-1 fees and higher bank card fees due to record card purchase volume slightly offset the reductions.

Slides 19 and 20 illustrate the components of the first quarter changes in noninterest income. Looking at first quarter expenses on Slide 21, total noninterest expense increased $16.3 million or 9.9% year-over-year. The largest driver of the increased salary and benefits expense rose $8.6 million and included $8.3 million in market salary and benefits that were not present in the first quarter of 2015, 800,000 in market related severance and 500,000 of nonmarket related severance.

On a non-GAAP basis, operating noninterest expense, which include the impact of those severances and other items has described in the reconciliation was $177.1 million, an increase of $2.2 million or 1.3%, compared to the fourth quarter 2015 and $11.6 million or 7%, compared to the first quarter of last year. Again, please see Slides 5 and 6 for additional detail regarding the non-GAAP reconciliations.

Now, turning to the segments, I’ll 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 began on Slide 23 in the deck. Net interest income both on a linked quarter basis and year-over-year basis benefited from increased loan balances, as well as from higher average earning asset yields, which came in at 2.93% for the first quarter, compared to 2.88% for the fourth quarter 2015 and 2.56% for the first quarter of 2015.

As a reminder, the largest portion of acquisition expense, as well as ongoing markets salaries and benefit expense are recognized in the bank segment. Turning to Slide 24, we saw a strong loan production in the first quarter with lenders across all of UMBs lines of business adding $531 million in loans. Total pay-offs and pay downs for the quarter were $283.5 million, which is slightly lower than the average of $318 million we saw over the prior four quarters.

Another metric we pay attention to is payoffs and pay downs as a percent of our loan portfolio, which has remained fairly steady. The composition of our loan book and a regional view are shown on Slides 25 and 26. We added $104.5 million in CRE loans and $80.9 million in construction loans during the quarter. By property type office building and industrial projects were the largest growing categories. Activity in Arizona was strong during the quarter, surpassing Missouri as the leader in new CRE commitments, thanks to strong production by our newly combined UMB and Meridian teams.

In addition, our agriculture lending group continues to have success adding $136 million loans over the last 12 months an increase of 33.8%. Ag loans stood at $538.8 million at quarter end. Finally, we’ve added some additional detail on Slide 27 related to our outstanding oil and gas related loans. At quarter end, these loans stood at $318.2 million and represented 3.3% of our total loan portfolio distributed by sector as shown on the slide.

As of March 31, 2016, we had reserves of approximately 3.1% against our total outstanding oil and gas portfolio. Total company classified loans were $234.6 million at March 31. Of those, $61.9 million or 26.5% were oil and gas related credits. Reserves against those classified oil and gas loans were approximately 11.4%. While overall oil and gas exposure remains relatively low and while we apply the same strong underwriting principles to these loans, we may have increased risk of loss on certain credits, if oil prices do not normalize in the near term and we are closely watching market conditions and our borrower’s financial positions.

Moving on from lending, I’ll turn to healthcare services, which along with our credit and debit card products is now part of the bank segment. The number of HSA accounts grew to 826,000 at March 31, for a 36.7% year-over-year growth rate and you’ll see on Slide 32 at quarter end healthcare deposits stood at $1.4 billion and total HSA investments assets reached $140.4 million.

Following open enrolment period in the fourth quarter of each year, we typically see balances build quickly in the first quarter of those accounts are funded. Total HSA deposits and assets grew 22% or $284.9 million from year end 2015. We remain very enthusiastic about our healthcare business and its future prospects.

Lastly, looking at our total card purchase volumes on Slide 34, you’ll see the components of the $2.7 billion first quarter card spend, the highest volume quarter to date for UMB. Interchange revenue generated in the first quarter was $20.7 million, an increase of 12.6% from the first quarter of 2015.

Now, I’ll turn to the institutional investment management segment, our Scout investment business with details beginning on Slide 35. Assets under management remain steady at $27.3 billion as of March 31, 2016. During the first quarter, Scout experienced net outflows of $701.1 million, a slowdown of 14.1%, compared with the previous quarter. Robust fixed income markets provided a lift of $811 million. The components of equity and fixed income AUM changes are shown on Slide 37.

Revenue declines shown for the segment continue to be primarily driven by net outflows and the Scout funds over the past several quarters, primarily in the international fund and the resulting shift in AUM mix, which is currently 20% equity and 80% fixed income. We are focused on leveraging our Scout distribution channels and the institutional intermediary and sub advisory space and on continuing to improve performance, which is the best way to stem future outflows and ultimately return to net inflows.

Several of our funds we experienced strong relative performance on a one and three year basis as you can see on Slide 39. Five of the nine Scout funds created by Morning Star have overall ratings of four stars and one our Scout core plus bond fund has an overall rating five stars. On that slide and the following slide it’s an important disclosures related to those rating. Final segment I’ll discuss today is our asset servicing segment, UMB fund services, which ended the first quarter with the $180.7 billion in total asset under administration.

The financials for the segment are shown on Slide 41. While revenue in the 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 Investment Managers Series Trust continues to grain ground with assets of $13.1 billion, 83 active funds and a strong pipeline. Slides 41 and 42 of this reporting materials show some additional metrics for our various products within fund services.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Chris McGratty of KBW. Please go ahead.

Chris McGratty

Hi, good morning everybody.

Mariner Kemper

Good morning.

Mike Hagedorn

Good morning, Chris.

Chris McGratty

Mike, the color on the energy was really helpful. Just had a couple questions about where those numbers might have been last quarter? I think you said in your remarks that about 62 of the classified were in energy, where was that number I guess last quarter?

Mike Hagedorn

The classified number was about the same number, the percentage of total was slightly down actually of energy I think went from 35 to 33.

Mariner Kemper

Correct.

Chris McGratty

Okay. And then, maybe on that portfolio, many of the banks that we’ve talked this quarter, talked about the [indiscernible] I guess number one, can you remind us of your energy exposure what’s kind of stop originated versus syndicated and if you went through the exam maybe what you may have learned and any kind of changes quarter-on-quarter?

Mike Hagedorn

Yes. So the vast majority of – we’ll talk about the unfunded commitments before we talk about the share of international credit portion of it. The vast majority of our unfunded commitments are actually with large publically traded non-credit size borrower. So we know that in listening to other folks calls and in concerns by the self side, if there is at least some concern around how much more can your classified loans borrow or how much is available to them. And so, one of the things we are going to make sure that we are being clear with everybody is the majority of that right now is with these large publically traded non-credit size borrowers.

We don’t believe there is going to be a significant amount of borrowing because there is not much of variability left for those classified credits. On the shared national credit portion of it, about $197 million is shared international credit.

Chris McGratty

And if I could follow-up Mike, of this quarter’s provision, I guess you talked about Ag exposure when you talked about energy on your prepared remarks. How much of the provision this quarter was to fund what was really loan growth versus to address some of these minor issues with these two portfolios?

Mike Hagedorn

Yeah. I wish it was really that simple, unfortunately it is not that easy as just funding growth, I mean both the quantitative and qualitative aspects we use to come up with our provision taking to account everything in the portfolio. So improving credit quality as an example could mute any affect that you would have in growth of the portfolio. So it’s really not either one of those.

Mariner Kemper

It’s a complicated algorithm that includes just about everything. And the better of the history, obviously the history is a big part of that algorithm and so the better the history, the less you put against it.

Chris McGratty

Okay .thank you for that. Just one of the pack. On the [indiscernible] last quarter or last year you kind of reduced this $2 million share, I’m interested if any of it was - it didn’t look like there was much movement in the share count in the first quarter. Did you guys buy stock in the first quarter and if so could tell us about what that is and maybe how you’re thinking about the buyback at these levels with the stock about 20% a share? Thanks.

Mike Hagedorn

We did buy stock back, as Mariner said we did buy stock back in the first quarter, approximately $13 million and $10 million of that would have been a specific effort to buyback our stock in the first quarter. The reminder would have been what we do on a regular reframe basis out of our employee stock plans.

Chris McGratty

And given the stock movement is, should we be assuming that this $2 million shares will be used kind of consistently through the year or is it less of a priority given whether stock is?

Mike Hagedorn

I like to really tell you is that we certainly think, we are very thoughtful about how we think about how to deploy our capital and based on where the stock price is and what are options are around M&A activity and other uses of our capital we certainly look at repurchasing our stock as one of those uses. I know you want more, but that’s about all I can give you.

Chris McGratty

No, that’s all. Thank you.

Mike Hagedorn

Yeah.

Operator

Our next question comes from David Wong of Raymond James. Please go ahead.

David Wong

Good morning guys.

Mike Hagedorn

Good morning.

Mariner Kemper

Good morning, David.

David Wong

I want to follow-up with Chris’s question on the energy portfolio and I think you said that $197 million of your outstanding is shared that’s 67% and when I look at your peers, I see reserve levels at the low end at 6%, high end 10% and you guys are at 3%. I just want to understand why you may still be at 3% when most of the things that have energy exposure have perhaps 6% to 10% reserve levels at this point?

Mike Hagedorn

There are two different numbers we gave you. The 3% number was against the entire oil and gas portfolio. We are reserved that on the credit size level over 11% classified level.

David Wong

Right. But the 3% level compares to 6% to 10% on the books reappears, I’m just trying to figure out why you can run with the reserve level of half of your peers and especially when you have such a large number of that is shared.

Mike Hagedorn

David, I think - we look at this all the time just like you do and I think people use different banks are using different metrics to quote what they are reserving, whether its credit size or whether its credit card or whether it’s against the total portfolio. I’m not sure and we may be talking, we may be talking apples and oranges, 3.3% as I understand it looking at the whole industry against the portfolio itself not against credit size is actually a pretty good number as we look at the peer group. So, we’re more focused on what we have reserved against credit size, which is over 11%.

David Wong

Got it. Okay and then, just one other question shifting gear share on the securities portfolio, pretty nice increase in the yields there. I’m just, maybe talk about what you’re buying in this quarter and maybe what the yields you’re putting on versus what was rolling off?

Mike Hagedorn

Yeah. So the mix hasn’t changed all that much, maybe a little of a bias towards municipal securities, but we obviously have always held a lot of municipals relative to the total portfolio and total peers. We’re still buying CMOs and tools as well. So probably those are the two largest categories and obviously the buy yield on those is slightly over 2% and as we’ve said before, the roll-off yields are considerably less and changes in any one quarter. But for this quarter, a lot of what’s rolling off is less than 1.5%. So obviously we’re going to pick up some nice spread just to the normal reinvestment activities.

David Wong

Got it. Thanks for the color guys.

Mike Hagedorn

Dave, I’d like to point you just in case we have any more oil and gas questions. I’d like to point everybody back to page 27 and 28, but particularly 28 just for perspective, you think about potential losses and our overall charge off and nonperforming numbers. Sockets, keep in mind I think it’s important to note that even in 11, which was our peak of loses and sort of the peak of the crises. Our charge offs on the commercial side reached $11.8 million and on a 200 basis net charge offs never got over 0.51 of total loans. And if you fast forward to the first quarter, we took some whatever charges we took in the first quarter of 2016 amounted to 0.24. So, I think it’s good to know really keep in perspective also to think about the fact that of our, on an as stated basis $9.7 billion in balances to have exposure of $318 million in oil and gas is a pretty small number. So I think it is important to keep in perspective.

Operator

And our next question comes from Matt Olney of Stephens. Please go ahead.

Matt Olney

Hi, thanks good morning guys. I want to good back to the discussion on capital, you already addressed the stock buyback question, but at this point what about M&A? I mean it sounds like you’ve been very pleased with the market acquisition that the stock is trading at more capable levels now. What’s the update on the M&A after appetite from here?

Mike Hagedorn

Yeah, this is Mike. As we’ve said earlier, we’re thrilled with the way market has gone, picked up a lot of great people, integration has been done very well, the system conversions are over with, so we learned a lot through that process. And as we’ve said in the prior quarter calls, we are an active buyer; we’re out looking in the marketplace.

We’re interested in whole bank transactions, but we look at specialty lending operations, things within the healthcare space. Strategic areas that we’ve talked about before that we’d like to grow. And so we’re absolutely out looking and we will continue to do so. We’re looking for good financial fit, strategy fits, geographically balance sheet fits and then culture and we found all of that with Marquette.

Mariner Kemper

It’s an active effort. We’ve been talking about it for some time and so we have concerted effort around it and we’ll keep looking.

Matt Olney

Okay. Thanks, that’s helpful. And then shifting over towards the trust and securities line item that line has been under pressure for a while now, I’m trying to get a better idea of when you expect trust and securities to stabilize and can you just remind us kind of what the big drivers that are and your expectations at when we will see stabilization?

Mariner Kemper

Right, so the biggest driver obviously is going to be institutional, which is Scout. And in Mike’s prepared remarks, he mentioned that on a linked quarter basis, we’re down 14% and on a linked quarter basis on outflows and I would say additionally our one and three year performance numbers pretty much across the family are much improved and in most cases either top quartile or top decile. Those are referenced also in the accompanying debt.

It’s hard to give you much more than – we have directional positive changes, as a matter of fact for the first time in five quarters in Scout, we saw a net improvement in assets under management, up about $108 million. Mostly from market actions, so I’m going to make sure you understand that, that’s mostly market action with a little bit of reduction in outflow momentum.

So, again, good performance particularly on the fixed income side and a turnaround on most of the equity products, it’ll take some time I think the real answer to your question is it’s likely to take some times for it to be a meaningful contributor again, but at the detraction side, we feel good about the fact that it might be moderating and coming to – it’s close to a bottom, hard to totally predict that because we can’t control the markets, et cetera. But we feel good about the direction, feel good about the momentum. Pipeline activity, sales activity looks strong and so we’re – we remain positive about the outlook for Scout.

Matt Olney

Thanks, Mariner. And as follow-up any color on the equity flows throughout the year so far just in the first few months? Has it been slowing or still relatively steady in terms of the equity flows year-to-date?

Mariner Kemper

No. So, we had net outflows in the first quarter. So maybe I didn’t – I miss spoke, but we’re not seeing yet positive flows pretty much across – well ,we’re seeing some on the fixed income side, but as a family we saw net outflows of over $700 million in the first quarter. So we’re still in a net outflow mode. We’re able to grow assets under management in the first quarter to market action of over $800 million. So, a little over $100 million in positive AUM trajectory in the first quarter mostly through the market action. And I think it’s important to note the whole industry is in sort of net outflow mode and passive products seem to be garnering the positive asset flows at this point for the industry.

Mike Hagedorn

This is Mike. In my prepared remarks; I made the comment that we had a slowdown on a linked quarter basis of 14%.

Mariner Kemper

Right.

Mike Hagedorn

So, Mariner is exactly right that, we don’t want to lead you believe there was inflows; it was net outflows.

Mariner Kemper

Right. But it was slowing, slowed outflows. So that’s my point at momentum. The momentum seems to be changing. We are feeling good about the momentum.

Matt Olney

Thank you.

Operator

[Operator Instructions] Our next question comes from John Rodis of FIG Partners. Please go ahead.

John Rodis

Good morning, guys.

Mike Hagedorn

Hi, John.

Mariner Kemper

Good morning, John.

John Rodis

Mike a question for you, maybe I missed this, but just on the energy portfolio, what were unfunded commitments at the end of the quarter?

Mike Hagedorn

Yeah. So within the oil and gas category, we have $545 million in commitments of which $318 are outstanding. So $227 million are unfunded and the vast majority of that $227 million are concentrated in non-problem credits. So they’re not ranked.

John Rodis

Okay. And what sort of the redetermination process for those unfunded commitments, is that sort of a monthly review or semi-annual review or how does that work?

Mike Hagedorn

That really depends on --

Mariner Kemper

A lot of information mainly.

Mike Hagedorn

Yeah.

Mariner Kemper

Availability and flow of information and as soon as the information is made available to us, we – it’s incompetent upon us to take action.

John Rodis

Okay. So its sounds like it’s pretty on a [indiscernible]?

Mariner Kemper

Again, whenever the information is available.

John Rodis

Okay. Make sense. Mike, a question for you on the margin, obviously it was up 3 basis points linked quarter, you know you talked about the Marquette acquisition and so forth. Given – I’m assuming this quarter that you see the full benefit of the December rate hike and then assuming no other change by the Fed going forward. Do you think you can sort of keep this margin around this level, or do you think we see some modest compression just given continued competitive pricing and so forth?

Mike Hagedorn

Yeah. So, let’s take the first part. In the commercial space to the extent that we have lines of credits that are tied to Fed funds as an index, I’m sure you’re going to get that lift right away and its going to show up to the extent [indiscernible] or two. Now you have other loans that maybe tied to the index, but have to go through a reprising, so as an example let’s move over to the investment side of the house on an earning asset side. As we buy additional securities with that 25 basis points, we would expect that we’d buying yields that are higher as a result of the Fed increase. So, is it all through, not it’s not all through because you’ve got to get through the whole year or you’re buying at those higher yields on the loan book to the extent that they are indexed, they will reprise right away.

John Rodis

And I guess, so do you think you can serve with all that in mind, do you think you can sort of keep the margin in this 279, 280 ranges or do you see some modest compression going forward?

Mike Hagedorn

As far as headwinds that – on the lending side, that’s going to be about competition right. So, if new loans become more competitive or maybe a better way to think about this is that the mix changes from variable rate loans, which we said were 48% of portfolio to fixed rate and we have more success in fixed rate loans, commercial real estate is an example, you’d see a margin expansion. On the funding side, I think we’ve done an excellent job, a 22 basis point and 14 with prefunds. So I don’t see a lot of compression there.

Mariner Kemper

I mean to be honest I think directionally you should see improvement. Where we are – every month we’ve been able to successfully price up on the margin and on our loans. We are very definitely doing a better job, putting more term and real-estate debt on as a percentage of the total; our Marquette acquisition is definitely driving higher yields there. And as we expand our book on the asset based lending side and on the factoring side, those carry much higher yields in our current book. The fixed income portfolio of course also is rolling off into 140s and rolling back on over 2% currently. So I would say directionally you should – on the margin continue to see actual improvement in margin.

Mike Hagedorn

And just to add to that, remember strategically we’ve been talking about for years rotating assets out of the fixed income book into loans. We’ve had success with that. Unfortunately, doesn’t show up in the loan to deposit ratio because of the strong growth we’ve had in deposits generally, but Mariner is exactly right, the trend should be up with all things that we have going on.

Mariner Kemper

Yeah. I think we have some tailwinds on margin expansion.

John Rodis

Okay. Thanks guys. And then just one other quick question on fees and I know these are smaller line items, but insurance fees and then the brokerage fees were both a little higher this quarter than they typically are? Can you just sort of – anything one time in there or what sort of drove the increase?

Mariner Kemper

There is nothing really there rather than just regular activity.

John Rodis

Okay, super. Thanks, guys.

Operator

Our next question comes from Peyton Green of Piper Jaffray. Please go-ahead.

Peyton Green

Yes, good morning. Mariner, I was wondered if you could comment maybe about the loan pipeline and how it looks? And where you are seeing relative opportunity maybe compared to past quarters?

Mariner Kemper

Sure. As we’ve done in the past given you some look into the next quarter based on what we know about our pipeline and fortunately I’ve got the same news I’ve had in the past where it will be. Second quarter pipeline looks as good as it has been and again it’s the pipeline of course but the pipeline looks as good as it has been. And where is it coming from? I would say it’s coming from really across the board regionally. We are seeing nice activity all across our traditional book of business, across the footprint. Our Agar [ph] business pipeline remains very, very strong component of our overall loan growth. That team is doing a really great job. There seems to be a really interesting void from a competitor standpoint there for us and we’ve got a really nice pipeline in that particular business. And otherwise it says really the most part is coming from everywhere, a good sales activity, we’ve got an exceptional team.

Peyton Green

And then to the extent you can gage this, I mean how do you feel about pay-offs. I know pay-offs were generally little lower in the first quarter versus the prior quarter average. How do you feel about it in the second quarter?

Mariner Kemper

Yes. Mike mentioned that in his prepared comments that they seem to be in line and I would say I don’t really have anything else to add to that either relatively in line at 2.9% for the first quarter, that’s pay down to the percent of loans. And if I look across previous quarters, it’s pretty well right there, right in line. And looking forward, don’t see any reason why it wouldn’t be maintained being in line if you will.

Peyton Green

Okay. And then with the seasonal deposit flows that you will normally see, those seem to be – I mean you had net deposit growth in the first quarter. How would you expect that volatility to shape out into the second quarter?

Mike Hagedorn

Just like it always has, we are talking about the public fund deposits come on the balance sheet maybe as early as late November certainly ramping up in December and January, and they will be out here like they always are in early May. So that’s a clock work. The thing that’s really changed that I highlighted in my prepared remarks was the healthcare deposits now being at $1.4 billion and that’s a nice growth engine.

Mariner Kemper

And it continues to grow at 34%, 35% every year.

Peyton Green

Okay great. And then, Mike, I think you referenced the salary component of the market expenses, but if you look at the first quarter of 2016, how much of the overall expense was related to market?

Mike Hagedorn

So you are talking about just total expenses at just market that are on the income statement?

Peyton Green

Yes.

Mike Hagedorn

Yes, I don’t think we’ve made that public. I think the best way to think about that Peyton is, as we disclosed what we expected to be the savings there and those are in line. And then you can refer back to those, don’t have them in front of me but I would say that they are in line to slightly better than expected.

Peyton Green

Okay. Alright, great. Thank you.

Operator

Our next question is a follow-up from Chris McGratty of KBW. Please go ahead.

Chris McGratty

Thanks for the follow-up. I missed it in your prepared remarks. Mike, could you provide an outlook for the tax rate, looks a little light this quarter?

Mike Hagedorn

Yes, so the reason that it’s light is really two reasons. One is greater share of our revenue now is coming from municipal securities and our fixed income book. And then we do have [indiscernible] now on our books. So those gains in our life insurance policies are tax free as well. So our projection for the year mostly based on those two items is 24.5%.

Chris McGratty

For the year, okay. And then I just wanted to make sure I get my notes right, going back to the classified to 61.9%, is 11.4% reserve on that 61% or is that on the total classified, the 234%?

Mike Hagedorn

61%.

Chris McGratty

61%?

Mike Hagedorn

That’s the total classified for oil and gas and the 11% is again just that classified number.

Chris McGratty

Got it. Thanks.

Operator

And our next question is a follow-up from Matt Olney of Stephens. Please go ahead.

Matt Olney

Hey, thanks guys. Just wanted to ask a follow-up on the asset servicing business, not a business we talk about too much on the call over the last few times, but you gave us some great slides on slide 41 and 42. It seems like you had some good momentum in this business few years ago, somewhat slowdown, it looks like the assets are down. I’m showing a better idea is this business still in growth mode or is this now an opportunity to make this business more profitable at this stage of the cycle? Thanks.

Mariner Kemper

Yes. Obviously there is new business and then there is market action, so I would say our new business remains very strong and the number is coming down really or mostly impacted by assets under management related to market action. So this is a business that comes out as really nice steady growth every year. It has been very predictable on the growth side for us, our new business and it’s just hopefully temporarily suffering from market action broadly. As you know, the split on the business, the real growth here is on the alternative side for us and some of that, so little color on the prospect for the business. We are very excited about some of the things we are doing on the private equity side, building our platform out with a strong private equity platform that we’ve recently build and are having some success there.

Similarly with our ETF platform, we’ve recently build a ETF platform and are having some good success there. So as you know, as everyone on the phone is probably aware, there is a current trend with a lot of momentum behind passive products. And so we’re excited about building our platform out to support passive products and so we are pretty bullish on the prospects, really the focus for this business is there – like I said the growth is steady. They are focused on making sure they can continue to do it more efficiently.

Matt Olney

Thank you.

Operator

And this concludes our question-and-answer session. I would now like to turn the call back over to Kay Gregory for any closing remarks.

Kay Gregory

Thank you. Before we end the call, I’d like to again remind you that we will host an Investor Day in New York on May 19. Please watch for our press release in the coming days. Today’s call can be accessed via replay at our website beginning in about two hours and it will run through May 12. As always, you can contact UMB Investor Relations with any follow-up questions by calling 816-860-7106. Again, we appreciate your interest and time. Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.

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