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UMB Financial Corp (NASDAQ:UMBF)
Q4 2020 Earnings Call
Jan 27, 2021, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the UMB Financial Fourth Quarter and Full Year End 2020 Financial Results Conference Call. [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 -- Investor Relations

Good morning, and welcome to our fourth quarter and year end 2020 call. Mariner Kemper, President and CEO, and Ram Shankar, CFO, will share a few comments about our results. Jim Rine, CEO of UMB Bank, and Tom Terry, Chief Credit Officer, will also be available for the question-and-answer session.

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, including the currently unknown potential impacts of the COVID-19 crisis. These risks are included in our SEC filings and are summarized on Page 2 of our presentation. Actual results and other future circumstances or aspirations may differ from those set forth in any forward-looking statements. Forward-looking statements speak only as of today and we undertake no obligation to update them except to the extent required by securities laws. All earnings per share metrics discussed on this call are on a diluted share basis. Our presentation materials and press release are available online at investorrelations.umb.com.

Now, I'll turn the call over to Mariner Kemper.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Thank you, Kay, and thanks to everyone for joining us today. I hope you and your families are safe and healthy. 2020 was certainly a year unlike any we've experienced. For banks, we saw the perfect storm. The timing of the implementation of CECL combined with the economic impact of the pandemic, including 150 basis point cut in short-term interest rates and uncharacteristically low long-term interest rates created additional uncertainty and variability across our industry. Initially, we were hopeful that we would see faster resolution, but almost a year later, the pandemic, along with the political and social concerns, persist. Despite all this turmoil, the strength of our diversified business model comes to the forefront as evidenced with our strong pre-provision results.

We have posted solid asset growth, helping drive higher net interest income even as the industry data shows weaker trends in most categories. And our strategy to strengthen and build out our varied sources of fee income is paying off.

Operationally, it's status quo, as our systems continue to perform well and most of our associate base remains remote. Even through the extended period of missing much of the face-to-face interaction that is so important to our business, our teams are working together and producing solid results. I'm extremely proud of how our associates have adapted during this pandemic.

I'll repeat, because it's so important, doing what's right to support our workforce is a top priority. This in turn allows us to maintain our customer relationships and our commitment to high-quality underwriting standards and solid capital and liquidity levels. We do see some bright spots heading into 2021 as our customer sentiment remains cautiously optimistic. Modified loan balances have dropped significantly and our strong credit metrics are holding steady. As you've seen in our press release, we had a great fourth quarter with net income of $156.3 million or $3.24 per share.

On Page 4 in the deck, we've included a highlights table with some key points on several line items. Pre-tax pre-provision income was $196.1 million for the fourth quarter. And a quick side note about the metrics. While it helps in comparing industry trends and highlighting earnings power, we don't want to lose sight of the tax advantage we enjoy because of the composition of our securities portfolio and the strategic use of municipal securities. Pre-tax pre-provision income on a fully tax equivalent basis was $202.9 million, showing that tax benefit of $6.8 million. The biggest driver of our outperformance for the quarter was the $108.8 million gain on our investment in Tattooed Chef that we discussed last quarter. This investment is a testament to the variety of capabilities that we have in our capital finance division. And we look forward to partnering with our other clients as opportunities arise in the future.

Growing fee income, including opportunistically adding income sources, remains a key part of our strategy. A couple of competitive advantages we have are our lack of reliance on consumer service charges or on mortgage gain on sale income, where margins have likely peaked in 2020. No one knows for sure how long the refinance wave will last for the industry. However, we have capitalized on an opportunity we saw to add new customers through our mortgage platform, particularly in our private banking business. We've shared in prior quarters about our investment in the retail business, which includes ramping up our mortgage capabilities. We've had a great success in the early stages of our growth, building out our retail and private wealth offering as evidenced by our 70% increase in average residential mortgage loans from the year ago quarter, which are included in our consumer real estate line on the balance sheet. On-balance-sheet mortgages contributed 33% of the year-over-year growth in average loans, excluding PPP.

On the expense side, we had a few items in the fourth quarter that are not expected to repeat, including approximately $15 million in operating losses and other expenses from a few unrelated matters, such as litigation, settlements and some fraud losses. After the initial low during the early days of the pandemic, we took a proactive approach in the fourth quarter to opportunistically resolve some outstanding matters that otherwise might have taken place in future quarters, resulting in favorable and expeditious outcomes. While most of these matters are typical to our business, the timing and impact of these were outsized in the fourth quarter. In addition, salary and benefit expense increased from the third quarter, driven by higher incentive compensation accruals based on Company and line of business performance, as well as a $1 million increase in deferred compensation expense. As we shared in prior quarters, this was offset by a similar increase in income from Company-owned life insurance, designed as a hedge to the market fluctuation. Finally, we made $1.2 million in additional charitable contributions in the fourth quarter. Excluding items that we do not expect to reoccur in the normal course of business, our quarterly expenses were consistent with prior fourth quarter levels.

On the credit front, nonperforming loans improved from the third quarter to 0.55% of loans. Net charge-offs were just 4 basis points for the fourth quarter and 13 basis points for the full year of 2020, better than our long-term averages. I continue to be very proud of our credit performance, in fact, since 2000, annual net charge-offs to loans have averaged 31 basis points. 2020 was our best year since 2015 when average loan balances were roughly half of what they are today.

The loan risk profile table on Slide 27 in the asset quality section shows the quality of our portfolio and contains the detail on the remaining modified loans by category. On the following slide, you'll see that we've seen a reduction of 95% in those balances compared to June 30. At December 31, loan modification balances had dropped to $68 million, or 0.5% of loans, down from 9.6% and 4.8% in the prior two quarters, respectively. We took a prudent and conservative approach to our reserve build in the prior quarters of 2020. And our fourth quarter provision was $5 million, reflecting the quality of our loan book, with nearly $400 million increase in non-PPP loan balances and the reduction in modified loans.

Our quarterly provision represents 2.8 times net charge-offs of just $1.8 million. We believe a negative provision may be imprudent given the still uncertain operating environment. However, the impact of more stimulus improved macroeconomic forecast and the continued improvement in asset quality within our portfolio may make it untenable for us to leave our reserve coverage at current levels in the near future. The modest addition in the fourth quarter brings our total allowance for credit losses on loans to $216 million at year-end, with an allowance to loan coverage of 1.34%. Excluding PPP loans, that coverage is 1.45% or nearly 2 times where it was at year-end 2019 prior to the adoption of CECL.

Average loans, excluding PPP balances, increased 11% on a linked-quarter annualized basis, led by consumer real estate which was boosted by the low interest rate environment and the work we've done to build our business that I mentioned earlier.

Loan production is typically strong in the fourth quarter and that continued in 2020 with new originations of $1.1 billion, outside of PPP balance changes with pay off and pay-downs of 3.8% of loans.

Looking ahead into the first quarter, we see a solid pipeline of list to continue this growth. Given what we know today and if history is any guide, it's reasonable to expect that our strong momentum and market opportunities should drive relative outperformance in loan growth and differentiated net interest income growth in the current low interest rate environment. Commercial line utilization was 29%, returning to its historical levels after the spike earlier in the year.

Our loan portfolio remains diverse and well balanced across several product lines, geographies and industries. The total composition is shown on Slide 21, followed by loan activity during the quarter and breakdowns of our commercial portfolios by asset class. I'd like to point out that the Minneapolis area, one of our 2019 expansion markets, now represents 1% of total loans, with just over $200 million in balances. We look forward to continued penetration there.

On slide 25, we updated our exposure to sensitive industries. As you'll see, we removed multifamily from this list based on the operating environment and characteristics of our portfolio at UMB, which is comprised largely of Class A properties with solid payment trends. Loans in the remaining five categories totaled $2 billion, or 13.4% of loans. However, after our own analysis, we feel that approximately $975 million, or 6.6%, could possibly carry more risk if the crisis is prolonged. We are closely monitoring these relationships and have regular communication with these borrowers.

To wrap up, 2020 was a challenging year for everyone. But for UMB, it was a testament to our resilience and to our priorities, providing unwavering customer service, caring for our communities and managing consistently in all operating environments. My sincerest gratitude goes out to all the frontline workers across all of the essential industries, including the UMB bankers that have risen to the occasion and the challenge to deliver the unparalleled customer experience, which we are known for.

Now, I will turn it over to Ram for a few additional comments. Ram?

Ram Shankar -- Chief Financial Officer and Executive Vice President

Good morning. As Mariner noted, our pre-tax pre-provision results were impacted this quarter by elevated expenses due to operational losses, deferred compensation expenses, charitable contributions, timing of certain invoices and higher incentive accruals tied to company in line of business results. Those items, plus the impact of two additional salary days, drove the 14.6% linked-quarter increase in non-interest expense. Sequentially, net interest income increased 5.6%, driven by earning asset growth in both loans and the securities portfolio, along with $6 million from the acceleration of PPP loan fees. Total earning asset yields increased 4 basis points to 2.95% from the linked quarter due largely to PPP origination fees, which helped drive loan yields to 3.78% for the quarter.

Average total deposits increased 3.5% on a linked-quarter basis and 22.5% year-over-year to $25 billion. DDA balances grew by $687 million due to the typical year-end buildup of cash in corporate trust for municipal payments, the ramp up of public funds and by commercial banking as low rates have more customers leaving balances in DDA. The total cost of deposits, including free funds, was 13 basis points, down from 15 basis points in the third quarter.

Both net interest spread and net interest margin expanded by 5 basis points from the third quarter. Fourth quarter margin benefited 8 basis points from the acceleration of PPP origination fees and 2 basis points from deposit mix and rate changes. These were offset by the continued impacts of excess liquidity and lower reinvestment rates on cash flows from our bond portfolio. Excluding the benefit of PPP acceleration this quarter, core net interest margin would have compressed approximately 3 basis points.

Looking forward, the actual trajectory of our net interest margin will depend on multiple factors, including short-term and long-term interest rates, prepayment speeds on agency mortgage-backed securities, excess liquidity in the economy and the pace of PPP forgiveness. Given what we know now, we expect some additional margin compression relative to the 2.81% reported net interest margin in calendar year 2020 roughly in line with the current consensus outlook of 2.70%.

Non-interest income was $228.3 million for the quarter, an increase of $115.3 million, of which $108.8 million was the gain on our Tattooed Chef investment. Because these and other market value adjustments will flow through our income statement in future quarters, we added a new line item called investment security gains and losses. Included in that category are also gains or losses on the sale of AFS securities, as well as on some other equity investments as you will see called out in our slides.

Trading and investment banking income improved on a year-over-year basis as excess liquidity in the markets and economic uncertainty has driven more funds into bonds. Additionally, you may recall that we've been building out our bond sales team over the past few years, adding offices in New York and Texas and we are starting to see those investments pay off. The tax rate was 18.2% for the quarter and 15.5% for the full year 2020. For 2021, we anticipate it will be approximately 15% to 17%.

We continue to maintain strong capital ratios with our total risk-based capital at 14.26%, CET1 ratio at 12.10%, and leverage ratio at 8.37%. Tangible common equity to assets was 8.5%. Trends in our capital ratios are shown on Slide 16. Our tangible book value per share increased more than 20% during the year to $58.64 at December 31st. For comparison, our peers that have reported so far have shown a median increase of 8.1%.

That concludes our prepared remarks. And I'll now turn it back over to the operator to begin the Q&A portion of the call.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question will come from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala -- Bank of America -- Analyst

Okay. Good morning

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Good morning.

Ram Shankar -- Chief Financial Officer and Executive Vice President

Good morning, Ebrahim.

Ebrahim Poonawala -- Bank of America -- Analyst

I guess, just, first, Mariner, if you could just touch upon just the growth outlook, I think, you had one of the better loan growth performance both for the fourth quarter and full year. Just talk to us in terms of -- what we heard from other banks is relatively slow first half to half of the year and then some pickup in the back half. Just talk to us in terms of what your expectations are on loan growth? And also tied to that, as you think what business development on the fee income side, is there anything in particular that you see exciting from a growth opportunity standpoint?

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Yeah. Thanks, Ebrahim. As I said in my prepared comments and as we have historically done, we've given a bit of a look into the first quarter, which -- so on the first quarter basis, we expect to have the same kind of loan growth via the pipeline that we had -- have had and had in the fourth quarter. As it relates to the remainder of the year, what I would say is, all things remain true, they have been true before, which is we're under penetrated across our geographic footprint. And we're under penetrated vertically on an asset class basis related to the maturity and getting our share within the markets that we do business. And so -- and then we have, again, deep pipelines, uninterrupted sales activity, no reason to expect anything different than what we've been able to produce for many, many years related to the under penetration and really exceptional sales force.

On the fee income side, there are several things that continue to look good for us. Our trading and underwriting business, both on the public/private side and just the pure public side, continues to look strong as we've built out offices in Dallas and New York. We expect to continue to see benefit from expanding that business over the last couple of years.

Corporate Trust, one of the most exciting opportunities and yet -- to be seen yet, but it looks as the way that Biden is moving pretty quickly, an infrastructure bill would be very meaningful to our Corporate Trust in public -- in our public underwriting business as we are one of the major players on a national basis in that space. So we're excited about seeing that come to fruition. We stand ready to be a pretty major player when that does happen.

Fund services continues to be well positioned as there's been a lot of consolidation in that business. And with consolidation that puts the players that have consolidated kind of on the sideline for a while as potential targets for business development wait to see how that plays out. So we've -- our pipeline continues to grow there. We've had on a year-over-year basis, our businesses grow nicely.

On the back half of the year, as things progress, if the economy continues to go as we all expected to, we expect to see our card business, particularly because it's -- a lot of it's related to commercial spend, we expect that to perform when that -- when and if that happens. And we agree with -- most other banks have said the back half of the year and that should be the time we would see that.

Our Investor Solutions business continues to be strong as we continue to see opportunities with fintechs and our wire house and brokerage business remained strong and those -- and with the market being strong the way they are, the activity is good there.

And we're investing in our wealth management business. We've just invested in a brand new reporting and trading system, and are doing some hiring there. Pretty excited about that.

And back to the lending front, we also do have two expansion markets, which I noted in the conference call. Minneapolis now represents 1% of our total loans, and we just expanded into that market just a year ago. So prospects for that are pretty great. And we've also moved into Salt Lake City and have high hopes for that.

Ebrahim Poonawala -- Bank of America -- Analyst

That was helpful, Mariner. Thank you. And just, Ram, so you talked about margin pressure. I was wondering if you could help us just in terms of your thought process around core NII outlook? And remind us how much of PPP fees are left that you expect to accrete as these loans are forgiven? I'm sorry if I missed it. I joined the call late. Thank you.

Ram Shankar -- Chief Financial Officer and Executive Vice President

Yes. So what I said, Ebrahim, on the margin was, if you exclude the PPP acceleration that we had in the months of November and December in the fourth quarter, our margin would have been down about 3 basis points on a core basis, excluding PPP acceleration. Now just over half of our PPP fees were recognized in 2020. So we call it 45% of those fees from Round 1 of PPP still remaining to be recognized in our income statement.

And then the core margin, as I said in my prepared comments, a lot of these will depend on what's happening with excess liquidity with more stimulus coming our way and more programs we know the industry might be in for longer periods of excess liquidity, which will obviously impact net interest margin. The other thing is, obviously, long-term rates as well. Now, with the tenure having crept up a little bit, the mortgage rates haven't reacted. So prepayment speeds and what happens with the reinvestment rates on our mortgage-backed securities book or totally our bond book will also determine the path of margin. So that's kind of my thought process.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

And I would just add that we also do have Round 2 on PPP. So we have to determine how much more we end up doing with that as that -- the doors have opened for that business, we've been sending application for SBA starting last week.

Ebrahim Poonawala -- Bank of America -- Analyst

Any sense how big that could be?

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Not yet, but highly likely to be a lot smaller.

Ebrahim Poonawala -- Bank of America -- Analyst

Okay. And just to follow up, I get what you said on the margin. In terms of the core net interest income, do you think you bottomed out or do you still see more pressure on the NII?

Ram Shankar -- Chief Financial Officer and Executive Vice President

No. Mariner said in his prepared comments, the same comments that he said on loan growth in terms of outperforming -- relative outperformance that still expected to be true for the net interest income side. So, we will certainly grow through the current rate environment, which is obviously not very conducive through our balance sheet growth opportunities. So those comments that Mariner talked about just now also are prudent into NII.

Ebrahim Poonawala -- Bank of America -- Analyst

Understood. Thank you for taking my questions.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Thanks, Ebrahim.

Operator

Our next question comes from Chris McGratty with KBW. Please go ahead.

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. Mariner...

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Good morning, Chris.

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Ram, maybe I'll start with you on the expenses you call out in the deck. I think you called out some items not expected to recur and you talked about a little bit in your prepared remarks. I'm interested kind of what you view is kind of the right jumping-off point for 2021 for expenses? Thanks.

Ram Shankar -- Chief Financial Officer and Executive Vice President

Yeah. Sure, Chris. We don't give any forward guidance like that, but I'll go back to what Mariner said in his prepared comments, right. If you exclude some of the noise that we talked about in our script, the fourth quarter 2020 run rate would have been similar to the $202 million or so that we had in the fourth quarter of '19. And so that's a good comparison. So a lot of the -- if you exclude again the noise, I would say, that would be probably the run rate that we would jump off from.

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. And the operational expenses, what exactly is that, the operational losses?

Mariner Kemper -- Chairman, President, and Chief Executive Officer

We were not prepared to kind of get into the nuance of it, but there're expenses that would happen normally anyway and we took advantage of 2020 to get them behind us. And so, things expeditiously in our favor.

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. And you have the gain to do that in this quarter. In terms of kind of use of capital going forward, I hear you on the organic growth, I am interested in comments about resuming the buyback, which a lot of banks have done, and also thoughts on M&A? Thanks.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Sure. These comments I feel a little stale, because they're similar to what we've said for a long time. Obviously, the first place we want to use our capital is to build our business. So that would be through the investment in people and technology and then M&A, right. M&A, we continue to look. We're spending a lot of energy and time. So that we would sure like to be able to find something, but -- so the energy is being spent there.

As far as buybacks and dividend increases outside of what we've historically demonstrated that will just depend on whether we're successful investing -- having opportunities to invest in the business first, and then kind of where our stock is trading and how we feeling about that related to market dynamics, etc. So we're -- I mean to answer, obviously, you've seen our history, we have done buybacks. So we're not opposed to them. We just -- it's lower down on the ranking.

Ram Shankar -- Chief Financial Officer and Executive Vice President

Just to add to that, in the fourth quarter, we did buyback about 67,000 shares when our stock was down, lower than where it's trading now. So we will be opportunistic about buybacks and have commenced the resumption or resume buybacks.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Yeah.

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. And Ram, if I could, just on the PPP, do you have the total accelerated fees or the fees in the quarter and then what's that 45% representing on dollar is as going forward?

Ram Shankar -- Chief Financial Officer and Executive Vice President

That's -- we disclosed at the fees, the acceleration part is about $6 million incremental to -- through fourth quarter and most of it happened in the month of November and December. Previously, we disclosed on the $1.5 billion of PPP loans based on the size of loans and the number of loans we had, the average revenue that we expected was about, call it, 2.3%. So you kind of can do the math based on that.

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

All right. So 45% of that. Okay. Got it. Thanks.

Operator

Our next question comes from Nathan Race with Piper Jaffray. Please go ahead.

Nathan Race -- Piper Jaffray -- Analyst

Yeah. Hi, guys.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Good morning, Nate.

Nathan Race -- Piper Jaffray -- Analyst

Question on credit, it looks like most of the items improved in the quarter. NPLs were down, charge-offs were very low, deferrals came down to less than 1%. For -- the ACL increased a little bit, it looks like that was due to portfolio changes. So, is that just increases in criticized loans, and if so, kind of what portfolios are driving those increases in criticized?

Ram Shankar -- Chief Financial Officer and Executive Vice President

Hey, Nate. I'll take this first. I mean part of it is the balance sheet growth. If you look at a point-to-point basis, our balances were up about $400 million. So when you look at our allowance coverage ratio, it actually came down a couple of basis points. So that's the primary driver of why we had a reserve build if you will.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Yeah. And as far as criticize, obviously, you want to see that -- see the 10-Q, there's nothing you -- nothing will be unusual there. And really the most important thing to think about when Qs come out is we have very little migration in our criticized from the first category watch down to doubtful, which has been the same case as long as I've been around 25 years.

Nathan Race -- Piper Jaffray -- Analyst

Yeah. That's helpful. And then just changing gears a little bit and going back to a growth in deposits in 2020. Just curious if you guys have any updated thoughts in just in terms of the stickiness of that deposit growth entering 2021? And was the plan just from a reinvestment perspective within the securities were just to continue to reinvest cash flows or do you guys kind of see yourselves some of that excess liquidity to work in the bond book absent where the growth opportunities are across loans?

Ram Shankar -- Chief Financial Officer and Executive Vice President

Nate, I would say, all of the above, right. Obviously, we are trying to invest it in the market. Obviously, as you heard comments from Mariner about the loan pipeline that we see in the first quarter and maybe even into 2021, obviously, the first choice is to deploy those deposits into loans. So we'll continue to do that. And then on the bond portfolio too, subject to all the due diligence that we do on municipal securities and what we buy on the mortgage back side, we continue to see the portfolio grow and then the rest of it is sitting on our balance sheet of the Fed account basically as excess liquidity. So it's going to be a combination of those. And I think that will continue into 2021 just because of, as I mentioned, all the stimulus programs and excess liquidity in the economy.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

And just as far as the stickiness goes, we monitor that pretty closely. I think the diversity of our deposit base really makes up for any nuance to whether there is excess liquidity on -- in particular balance sheets, whether it'd be institutional corporate or within the personal categories. We feel pretty comfortable that the diversity of our deposit base really cushions us against whatever excess liquidity might be in the system.

Nathan Race -- Piper Jaffray -- Analyst

Okay. I appreciate the color. Thank you.

Ram Shankar -- Chief Financial Officer and Executive Vice President

Thanks, Nate.

Operator

Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi. Good morning.

Ram Shankar -- Chief Financial Officer and Executive Vice President

Good morning, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

Just looking at the ACL, you have great info in there in terms of how you built that out and a lot of third of the ACL is due to sort of macroeconomic conditions. How should we be thinking about that going forward as we're starting to see some modest improvement there? Are you so heavily depending on holding under qualitative overlay a little bit longer or should we think like maybe second half of the year, you'll start reevaluating that excess and we could see that flee back into earnings or absorb the growth?

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Well, I'll take the first stab at this, and team wants to jump in and help out here add to it as they can. It's -- at the top of the house related to my comments I already made, our thought on that is it -- with the original purpose of the additional provision that we did in the first quarter of last year was tied to the pandemic. And as far as I'm concerned, we're still smack in the middle of that. So it's premature to think that we would do some of the releases that others have announced. I don't -- we don't think that's prudent. However, related to your question about when that would change, that stuff, that will relate to what happens with the vaccine delivery and how quickly everybody gets it, whether there is -- what the stimulus and all the extra government programs do.

And to your point, whether the back half of the year, we really feel like we're out of this thing or not, what I'd say about just our -- so the algorithm that is tied to that is complex and it includes things like loan growth, old years rolling off and whatever performance, good or bad, within those years, macroeconomics, you've got the whole thing in there. And we have to kind of live by that algorithm. And so if the news gets better in a material way, we'll be hard-pressed not to do some sort of release of provision at some point in the year. But we have to watch the data and we're going to let the data dictate what we do there and make sure we feel real comfortable with it.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. Thanks. And then on expenses, if we use sort of $202 million as a base for first quarter and then some of the growth you're talking about, should we really -- is 2021 going to be a year of good positive operating leverage where we should expect to see some decline in the efficiency ratio, how should we be thinking about operating leverage?

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Well, improvement for sure. But where we come out on operating leverage, there are some headwinds related to the operating environment, the interest rate environment, in particular. And -- so any meaningful improvement in operating leverage will be hard to get to. We'll be working at it all year long. But I think the interest rate environment is a pretty -- it's a pretty heavy wind for all of us as an industry. So we'll be working hard at operating leverage and we may have some nominal improvement in operating leverage, but I wouldn't expect in this year to see any meaningful improvement in operating leverage.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. Thank you.

Operator

Our next question comes from David Long with Raymond James. Please go ahead.

David Long -- Raymond James -- Analyst

Good morning, everyone.

Ram Shankar -- Chief Financial Officer and Executive Vice President

Good morning.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Good morning.

David Long -- Raymond James -- Analyst

Hey, Ram, the period ending deposits were well above the average in the quarter. Now, I know there is some seasonal impact that you have, but looking at the first quarter here, how much of that growth that you had in deposits, here it looks like at the end of the quarter is seasonal versus sticky, and how do you expect to defend your NIM if you have this excess liquidity?

Ram Shankar -- Chief Financial Officer and Executive Vice President

So, it's really tough to look at our quarter-end deposit balances, particularly as you enter public funds business. Obviously, we have a lot of -- as Mariner just talked about, we have a lot of diverse businesses that have different seasonal aspects associated with it. Obviously, there's growth as well, organic growth that we're seeing in and then that the impact of all the excess liquidity in the economy. So it's really hard to parse it out, especially this year. But the balance sheet was higher because of public funds season, which usually ramps up in November and goes through the February timeline. So that happens every year. And then in the asset servicing or fund services business, there's always some volatility depending on what clients are doing with cash balances in there as well. But as Mariner said, we feel pretty good that all our lines of businesses are provider of funds for us and all the initiatives that we put in place will help us grow those core deposits. So they will be pretty sticky from that standpoint.

David Long -- Raymond James -- Analyst

Got it. And then reinvestment rates in the securities, what are you looking at right now? I think you said that the roll-off in the quarter was in the one -- mid 180 range?

Ram Shankar -- Chief Financial Officer and Executive Vice President

That's right. And the new mortgage-backs and municipal depending on the mix can be anywhere from 125 to 140.

David Long -- Raymond James -- Analyst

Got it. Okay. And then the second question I had is related to your deferrals. And obviously, real nice to see those numbers come down there. But the current deferrals if you're still on deferral, have those been downgraded and where do they stand in the risk spectrum at this point?

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Tom, you want to take that?

Tom Terry -- Chief Credit Officer

Yeah. As case by case, some of those deferrals have been downgraded, and typically those have been downgraded to a watch. And those would be, as you would expect, in the hospitality space. Other ones that maybe are on a second deferral. We haven't necessarily downgraded if we're of the opinion that it's totally pandemic related and the belief that once we come out of this and the economy gets back to a more normal state that the particular borrower gets back into the position they were in prior to that. So it's a case by case is the broad answer.

David Long -- Raymond James -- Analyst

Got it. Thanks. Appreciate the color. Thanks, guys.

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Thanks, Dave.

Operator

[Operator Instructions] Our next question is a follow-up from Chris McGratty with KBW. Please go ahead.

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. Thanks for the follow-up. Just want to make sure I got a couple of things written down right. Ram, the tax rate guide, is that a GAAP or is that FTE guide?

Ram Shankar -- Chief Financial Officer and Executive Vice President

That's a GAAP tax rate of 15% to 17%.

David Long -- Raymond James -- Analyst

Okay. And then the -- I think you referenced that 2.70% margin in your prepared remarks, I was interested nor one I catch that right, and was that a GAAP NIM or is that excluding the PPP?

Ram Shankar -- Chief Financial Officer and Executive Vice President

That is on a reported basis. So it's fully taxable equivalent of 2.70%-ish. This is -- which is where your models -- your consensus models are at. So that's on a reported basis. That assumes a straight-line amortization of the PPP fee. So to the extent, forgiveness accelerates, then you could see some outperformance to that, but that's just on a steady state normal amortization of the PPP balances.

David Long -- Raymond James -- Analyst

Okay. And that was the kind of you blocking the 2.70% for the 20 -- the full year '21, but -- the right way to hear you that?

Ram Shankar -- Chief Financial Officer and Executive Vice President

Correct.

David Long -- Raymond James -- Analyst

Got it. Thank you.

Operator

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

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Hey, Kay. I might -- I'm going to add something at the end, because nobody asked about this. And -- I was going to add something real quick, which is just that on the TTCF front, nobody really asked about that. It is a line of business. We do expect to continue to see opportunities and gains in that line of business. So anyway, nobody really asked about that. We don't expect that to be a one-time opportunity.

With that, I'll turn it over to Kay.

Kay Gregory -- Investor Relations

Thanks, Mariner, and thanks everyone for joining us today. This call can be accessed via replay at our website. And as always, if you have further questions, you can reach us at 816-860-7106. Thank you.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Kay Gregory -- Investor Relations

Mariner Kemper -- Chairman, President, and Chief Executive Officer

Ram Shankar -- Chief Financial Officer and Executive Vice President

Tom Terry -- Chief Credit Officer

Ebrahim Poonawala -- Bank of America -- Analyst

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

David Long -- Raymond James -- Analyst

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