UMB Financial Corporation (UMBF) Q3 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the UMB Financial's Third Quarter 2017 Financial Results 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, Director of Investor Relations. 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 Form 10-K and subsequent Form 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 except to the extent required by Securities law. 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. Reconciliations of non-GAAP financial measures have been included in the earnings release, and on pages five through seven of the supporting slides. All earnings per share metrics discussed in the call are on a diluted share basis. Please refer to the tables contained in the earnings release for details about basic and diluted earnings per share. With that, I'll turn the call over to Mariner Kemper.

Thank you, Kay. Welcome everyone. Thank you for joining us. Our third quarter results reflects continued margin expansion, strong positive operating leverage, strong contributions from our private wealth, corporate trust, finance and services businesses and substantial growth in our national lending platforms. On Slide 4, you will see that income from continuing operations was $48.9 million or $0.98 per share. Discontinued operations posted a net loss of $730,000 or $0.01 per share, which included pretax divestiture expense of $6.4 million. On a non-GAAP basis as shown in the reconciliations, net operating income remained at $48.9 million or $0.98 per share and income from discontinued operations was $3.4 million or $0.07 a share, for a combined $1.05 per share. As we've mentioned in prior quarters calls we continue to emphasize improving operating leverage rather than focusing on specific expense goal. Year-to-date 2017 revenue has increased 9.3% and expenses grew 4.7% compared to the same period last year, producing operating leverage of $4.6%. At the same time, we have been and will continue to invest in our business to position us well for long-term revenue growth. Slides 8 and 9 show our balance sheet snapshot and the loan growth history. Average loan balances of $10.9 billion for the third quarter represented year-over-year increase of 7.2% and a linked quarter annualized increase of 3.7% or $99.1 million. By comparison the banks that had reported third quarter results as of October 20, posted mid and year-over-year loan growth of 4.2% and linked quarter annualized growth of 5.4%. There are few reasons why our net average loan growth of just under $100 million for the quarter was slightly lower than our historical rates. First, the $200 million cap we discussed on the last call happened in mid-May. So, we saw only half of the average balance impact last quarter and the rest this quarter. Second, there were some pipeline push from the third quarter into the fourth quarter. And third, we experienced the same softness you've heard about from other vendors related to the business consolidation and line reduction as borrowers are putting more of their own cash to use. Top-line production remained strong at $604 million compared to the average of $597 million in the past four quarters. And slower growth in some commercial verticals was offset by some strong demand in CRE factoring and asset based lending. Mike will discuss further detail on our past and net color on our lending verticals in the bank discussion. As we look to the fourth quarter, the production and the pipeline is similar to what we've seen going into the third quarter, although the variability related the timing of past pay downs and line fluctuations is difficult to predict with precision. Turning to Slide 10, you will see the chart that I share every quarter showing the history of our net charge-off ratio, which has averaged 23 basis points during the past 5 years. Credit trends to inconsistent from one quarter to another and net charge-offs for the third quarter were 0.40% of loans. The commercial charge-offs shown in the press release table were largely related to one credit of approximately $4 million to an agricultural borrower. We have some records with the borrower and while we are pursuing options and renewal to recover at least some portion of the balance, we charged at all loss during the quarter. Excluding this credit, the general portfolio of quality continues to be in line of historical performance. Finally, we continue to make progress towards the divestiture of Scout working through client consensus and practice elicitation and we expect the transaction to close in the fourth quarter. Now, I'll hand it over to Ram for discussion of our drivers behind the results and a further look at our segment disclosures. Ram?

Thanks Mariner and good morning everyone. Similar to last quarter most of my discussion will focus on continuing operations and I'll give an update on Scout results later in the call. Looking first at the income statement. Net interest income of $140.9 million represented linked quarter increase of 2.5%. Mix shift including the growth of our CRE, asset base and factoring loan portfolios were the largest driver of the $3.5 million increase in additional net interest income during the third quarter. Net interest margin for the third quarter was 3.16% versus 3.12% in the second quarter. Our yield on earnings assets expanded by 11 basis points to 3.52%, while our cost of interest bearing liabilities plus DDA increased 7 basis points to 38 basis points. The 4 basis points of improvement over the second quarter was driven by the full quarter benefit to loan yields from the June rate hike and higher purchase yields and a larger portion of munis in our AFS book partially offset by increased liability cost. During the quarter, we had an approximately 2 basis point benefit from loan fees that are recorded as margin. Compared to the third quarter 2016 margin expanded 29 basis points approximately 10 basis points of this expansion was driven by the benefit that are free funds provide in a rising rate environment. Since December 2015 when the fed rate hikes began loan yields have increased 53 basis points to 4.33% while our cost of interest bearing deposits has increased 23 basis points from 18 to 41 basis points. This increase in cost of interest bearing deposit was driven primarily by the impact of higher short-term rate on some of our index deposits and to a lesser extents by a mix shift within deposit categories. Slide 14 details the changes in non-interest income which decreased 5.4% or $6 million on a linked quarter basis. $2.8 million of the decrease was related to changes in bank card fees. As we discussed last quarter we replaced our vendor for our card rewards program to one that offers a better solution and digital experience. We recorded adjustments in both the second and third quarter to reward the expense reflecting related redemption experience. These expenses can vary with card and prior quarter card purchase volumes as well as customer redemption and forfeiture rates. For the quarter, commercial card spend which had the significant impact on reward and rebate expense increased 7.2% and represented 22% of our total debit and credit card purchase volume. The trading and investment banking income line item was $4.5 million for the quarter, a decrease of $1.7 million, $788,000 of which related to the second quarter income from our seed capital held in certain Scout funds. As I noted in last quarter, we liquidated our investments in those Scout funds at the end of the second quarter and as such there were no positive or negative mark-to-market adjustments like in previous quarters. Our institutional banking business whose revenue also flows into that line experienced more linked quarter revenue from municipal and MBS underwriting and trading activities as volatile market conditions have kept some customers on the side lines. However, we're seeing impressive results from our newer non-bank qualified sales teams. On a year-over-year basis income from investment banking activities decreased 10.2% consistent with what we heard from other banks and brokers who also cited lower client activity, uncertainty here on the political and physical outlook plus the typical summer slowdown from declining third quarter revenues. Deposit and service charge income for the quarter was negatively impacted by typical seasonal fluctuations in healthcare deposit charge and to a greater extent recent increases in our earnings credit rate. We increased the ECR by 5 basis points in July reducing commercial and institutional fees during the quarter by approximately 315,000 to maintain our competitive hedge the rate would increase another 5 basis points at the end of September. Finally, other non-interest income in the second quarter included a gain of $1 million from the sale of a branch building driving the negative variance in that line. Further detail on the primary driver, to the year-over-year increase in non-interest income are included on the slide. For the third quarter non-interest income represented 42.5% of revenue from continuing operations compared to 44.5% in the second quarter and significantly better than the second quarter peer medium of 25.3%. Slide 16 in the press release contain detailed drivers of the changes in non-interest expense, which on an as stated basis decreased $5.1 million or 2.9% compared to the second quarter. Employee benefit expense and bonus and commission expense each decreased $1.6 million compared to the second quarter, while salary's and wage expense remained flat. As a reminder, some of our expense line items such as bonuses and commissions, processing fees and bank card expense are variable in nature and tend to correlate with volume or revenue based activities. On a year-over-year basis, third quarter salary and benefit expense remained virtually flat posting an increase of just 0.3%. Increases in salary and wage expense and medical costs were largely offset by lower bonuses, commissions and incentives. Finally, our effective year-to-date tax rate of 21.4% resulted largely from a larger portion of income from tax exempt sources and an increase in excess tax benefits associated with stock compensation recorded through the third quarter. We expect the tax rate for the full year 2017 to be approximately 22% for continuing operations. Before we move to the balance sheet, I will comment on the components of income from discontinued operations which are shown on Slide 17. Revenue from Scout Investments was $18.2 million for the third quarter versus $17.9 million for the second quarter. Total expenses for the quarter were $19.2 million which included the $6.4 million in divestiture cost that Mariner mentioned earlier. You will find the details of Scout and the drivers of changes to assets under management in the appendix beginning on Slide 43. At September 30, Scout assets under management stood at $27 billion. Now turning to the balance sheet. Slide 18 shows the composition of our investment portfolio. We continued to shift assets from the available for sale portfolio to fund loan demand and growth in the private placement bond portfolio. For the third quarter, average AFS balances were $6.2 billion a reduction of $422 million from the third quarter last year, while our health and maturity portfolio increased $355 million over the same time. The average yield in our AFS portfolio increased 3 basis points to 2.19% compared to the second quarter and purchases made were of accretive yield. The average yield on the revenue bond in our HTM portfolio was 3.85% up 3 basis points from the prior quarter. Details related to the past quarters activities and portfolio statistics are shown on Slide 19. Turning to liabilities on Slide 20, average deposits for the quarter were essentially flat at $15.7 billion compared to the prior quarter at linked quarter increases in health care and other performance deposits more than offset the declines in institutional DDA balances and the seasonal run-off of public bonds balances. The cost of interest bearing deposits for the third quarter was 41 basis points, an increase of 9 basis points from the prior quarter reflecting the full impact of the June rate increase on our performance and MMDA deposit as well as mixed changes between deposit categories. Including DDA, the cost of our deposit base increased 6 basis points to 26 basis points. Compared to the second quarter, average demand deposits increased $109 million, while interest bearing deposits increased $217 million. While we've seen more movements in institutional and commercial deposits, beta continued to be in line with or slower than our simulation modeling. Moving to segment results, you will see the financials of the bank and assets servicing segments on Slide 23 followed by details on each. In our asset servicing segment, UMB Fund Services, assets under administration stood at $207.9 million at quarter end compared to $201.5 million at the end of second quarter and $186.2 million a year ago. The increase in AUA was driven by new clients who bought on 15 new funds over the past year as well as by market appreciation. The pretax margin for the quarter was 22.5% compared to 17.2% for the second quarter and 19.5% in the third quarter of 2016. Non-interest income increased 325,000 on an linked quarter basis and $1.5 million year-over-year related to new alternative and 40 Act servicing business. In the private equity space, we currently service approximately $17 billion in assets and our Investment Manager Series Trust which provide a turnkey cost effective method for advisors to launch new funds now have $16.7 billion in assets from levels near $2 billion five years ago. Details related to this segment are on Slide 24 through 26. I will now hand it to Mike to cover the details and drivers for the bank, and then, we will be happy to take your questions. Mike?

Thanks Ram. The bank segment posted pretax net income of $55.5 million for the quarter an increase of $3.9 million or 7.6% on a linked quarter basis. Expenses of the bank decreased 2.9% compared to second quarter due largely to the reduced salary and benefits expense Ram discussed earlier and help drive a pretax profit margin of 25.6% for the quarter. While average loan balances increased 7.2% year-over-year and 3.7% on a linked quarter annualized basis, average yields on the total loan portfolio rose 15 basis points. Drivers of the increased yield included positive 13 basis points related to increased LIBOR and prime rates as loans reprice; 7 basis points to net loan growth and renewal rate changes in our existing portfolio; and another 5 basis points to loans to new customers booked during the quarter. These increases were partially offset by a reduction of 10 basis points related to loans paid-off during the quarter. Turning to Slide 29, you will see the strong gross loan production Mariner mentioned earlier. Total pay offs and pay downs of $476 million for the quarter represented 4.3% of loans which is in line with average levels over the past four quarters. Pay offs came equally from our construction book as projects were completed and sold and from our C&I book where as Mariner mentioned, we saw a few clients selling their businesses. The composition of our loan book and our regional view are shown on Slide 30 and 31, we are seeing positive trends in several of our markets and lending verticals. Our national lending platforms each had a strong third quarter combining to add $54.1 million in average balances. In our commercial and transportation related factoring verticals, we added 10 new borrowers during the third quarter and increased average balances by 11.8% compared to last quarter. Factoring is a volume business and the receivables are often more importance in outstanding balances. In the 15 year history of market transportation finance approximately $15 billion receivables have been processed. The non-transportation portion of our factoring business, commercial finance has experienced tremendous growth over the last 12 months and now represents 60% of the total portfolio up from 45% year ago. Funding this quarter came from a variety of industries including staffing, oil field services, plastic recycling and commercial cleaning. The climate for receivable financing in the transportation space continues to improve and this portion of our factoring portfolio has grown by 32% during the past year. In asset base lending, new business and retention and growth of existing client relationships combined to drive a quarterly increase of 14.7% in average balances, the best quarter since we have acquired the business in 2015. Year-to-date our AVL team has closed $203 million in new client commitments. CRE and construction, production and pipelines remain strong even as balances are impacted by pay offs. We began on more focused efforts in the commercial real estate space in 2015 building on our quality underwriting and credit standards. We continue to build out our CRE and construction portfolios in the same deliberate manner. The industry tenure and expertise of our CRE team allows opportunities to be vetted early thereby sending only the most qualified deals to loan committee. We have seen a steady supply of deals reviewing more than $4 billion in loans year-to-date. And although, we don't stretch on quality, our average CRE and construction balances have grown 45.3% since the third quarter of 2015, when we launched our dedicated commercial real estate group. Multifamily and industrial projects combined to represent 65% of loans funded during the quarter followed by retail and office. Within our footprint, Arizona, Kansas and Texas with the overall volume leaders in CRE and construction lending. Consistent with prior quarters, multifamily and other investments CRE represents 32% of the average CRE and construction loans on our balance sheet and 12% of our total average loans. For further context, our CRE balances are approximately 120% of our space capital. Our personal banking division, private wealth and consumer continues to provide about a third of our funding with deposits averaging $5.1 billion for the third quarter. In private banking average deposits for the quarter were just under $1 billion and our lending teams added $34 million of loans during the quarter. And our consumer bank continue to make changes to improve efficiency. During the third quarter, we consolidated four branch locations bringing our total to 95 banking centers and three commercial and private wealth facilities. Our efforts to improve operating leverage includes strategic decisions about our property holdings including consolidations, the sale of branch buildings and some prudent investments where it makes sense. We continue to transition branches to our new retail delivery model after banking center level reviews of the staffing operating hours and incentives and we are pleased to report that at the end of September 46 locations were operating under the new model while five additional branches are in the 4k or 7k transition process. Slide 34 shows assets under management in our private health institutional asset management, brokerage and per capital management businesses that was in the bank segment. Combined AUM now stands at $15.5 billion representing a five year CAGR of 13% from third quarter 2012 AUM of $8.4 billion. We have seen AUM levels revenue and client relationships expand as we lead with financial planning, focus on wealth transfer within our trust business and build expertise in areas such as business transition planning. Over the past 12 months our private wealth client base increased 10% and the private world contribution to our total trust and securities processing income as increased 10.7%. Our commitment to asset management for the families and institutions we serve remains the endeavor. In institutional banking, our non-bank channel sales teams continue to build relationships in five clients with results that help both the line and lower municipal and MBS underwriting revenue overall. Our traditional bank qualified bond trading business has been challenged by the rate environment during recent quarters. Building our non-v2 capabilities has been a significant part of our strategy to differentiate revenue streams. I'm pleased with what this team has accomplished given the less and optimal market conditions and I'm excited to see what the coming quarters will bring. Turning to our health care business on Slide 37, HSA deposits increased 32% over the past year to surpass the $2 billion mark for the first time and now represent 12.5% of our total deposits. These deposits are an important part of our funding and in our experience they tend to have similar characteristics to core deposits. Investment assets in our HSA business continue to grow as well increasing 57% year-over-year to stand at $268 million. Investments represented a 11.8% of total HSA deposits and assets at the end of the quarter up from 10.1% a year ago as a result of more account holders making the decision to invest in strong market performance. Slide 38 shows the mid-year 2017 rankings released by Devenir Research and UMB continues to rank 5th in the U.S. in terms of accounts and 7th in terms of deposits and assets. During the quarter, health care services highlighted capabilities related to data analytics and account holder education. These services help our partners better understand trends in consumer behavior and choose marketing programs to build awareness and use of HSA accounts. We continue to follow the rapidly changing discussions in Washington related to healthcare reform including the recent executive order related to potential changes in association health clients. It's too early to determine [indiscernible] but in general we are advocates for consumer directed health care and providing more information access and control over their health care dollars. With that, I will conclude my prepared remarks and turn it back over the operator, who will open up the line for question.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.

Good morning guys.

Good morning Ebrahim.

Good morning.

I think if you can just talk a bit of expenses, just want to make sure we understand the decline the we had, it sounded like the sequential decline had a lot to do with lower book bonus, slower customer activity and the post to any particular sort of cost saving efforts that may have led to this recent, trying to better understand in terms of as we look out, looking at the $172 million expense, does it sort of go back into the high 170s and grow from there or what's the best way to think about that expense on it that would be helpful?

Hey Ebrahim its Ram, yes as I said in my script lot of the decline in expenses was related to variable comp with bonus and commissions or even some healthcare or benefits expenses, there is a lot of variability in our expense run rate typically especially going into the fourth quarter it can depend on medical claims, a lot of different factors. So the best way to think about it is what you suggest it right, so if you look at on a year-over-year basis we should see the same kind of growth that we saw last year on the expense line item.

Understood, okay. So, all right I'll think about it from here. And last year just, see it was essentially flat down from last year, 78%...

Obviously we don't give specific guidance on that, but I think as we've been trying to move you're thinking towards operating leverage, we're more focused on that overall. But I think to drift your thinking towards kind of what we were seeing if we were to do last year's growth rate is a general way to think about it.

Fair enough. And just to your point Mariner, the efficiency ratio 67 is the and I understand quarter-to-quarter volatility but, is it reasonable to assume that 67% should general turned lower have you think about the next 4 to 6 quarters?

Again as we, as we've been talking Ebrahim, we have a 100 company and we continue to invest, so we're more focused on the leverage we get out of our investments in the absolute expense run rate or efficiency ratio. So we're going to continue to file back into the business if we think that's the growth prospects for any one area of our company over the long-term return are strong.

Fair enough, understood. And moving to loan growth we've seen loan payoffs, pay downs elevated for a few quarters, is sort of that 7% year-over-year rate high single digits the best way to think about what loan growths might look like absent any sort of big change in the macro backdrop?

Well I think is, this is Mike, good morning. As Mariner said in his prepared remarks and mine as well, we feel very good about the gross production that you've seen and honestly the pay downs and payoffs aren't that different than really what we've averaged. So, absent some kind of change in the economy, we feel good about the prospects for loan growth.

There was a little bit of noise in the quarter, I mean if you look at the data from our prepared remarks, as Mike was mentioning we had our gross production is actually higher than the spend in previous fourth quarter, so we just have to, well we perceived to be some anomalies around, we're still watching it right I mean there is pay down activity that's the rest of the industry is seeing related to the line utilization where all trying to figure out whether that's any kind of indication, I think it's too early to tell. But then we also noted in the prepared remarks that big pay down we had in the second quarter we only had half that impact, so that rolled into the third quarter as well. So, I think we still think gross owned production can outperform what you're seeing in general from the peer growth. And our pay down payoff production, still we're running in the general stream range and we think longer term.

Understood. And one last question just on deposits, if you could, what's the amount of institutional deposits at the end of the third quarter and what's your outlook on those particular deposits over the next few quarters, will they continue to run-off?

Sure Ebrahim. So if you look at our total funding right now and equity funding about 27% of our total funding is hard index to some kind of short-term interest rate mostly fed funds effective. So, to that extent that we see anymore fed fund increases though should go one for one, but then if you look at the rest of funding mix that we have approximately 31% of our total funding is DDAs, then we have another 11% in healthcare savings account that have been fairly resilient that way. So, that's what I would say in terms of our deposit and funding mix.

Understood. And we saw about 8 to 9 basis points of increase in interest bearing deposits Ram, if you think about another rate hike coming up is that kind of a reasonable rate of increase in cost of interest bearing deposits, do you see that getting worse or better either ways?

So yes, if you think about 27% of our funding resetting immediately that would be the math right so, 27% as 25 basis points gets to about 6 or 7 basis points.

But you're not seeing anything outside of that, like you don't expect anything beyond that precise seeing pressure as we get another rate hike move into early 2018?

So, Ebrahim as we've talked about for years one of the advantages that UMB has from a funding viewpoint, is that we do have access to a lot of different institutional clients just in other businesses that we have. And they can bring us deposits, so it isn't as simple as what they have today, is just going to reprice. We can move those deposits up or down, obviously based on the rate that we pay they are very sensitive to that, I don't want you to think that, okay rates go up those are going to go up and they are just going to keep adding to that portfolio. We could choose for instance to borrow overnight funds and reduce our reliance on that. Right now we think it's better given all the other business relationships that we have to use some of that funding.

Understood, I'll hop off. Thanks for taking my questions.

Thanks Ebrahim.

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

Hey good morning everybody.

Good morning Chris.

Good morning Chris.

Hey Ram, I want to follow up on the prior question about the index deposits that 27% of funding. I guess given your favorable loan deposit ratio and I understand that kind of other synergies that these deposits they bring to the bank, but wouldn't, what it would take for kind of a more substantial kind of remixing of the liability structure to kind of unlock a bit more of asset sensitivity to I think, that your loan portfolio provides for you?

As Mike said Chris, I would just repeat what Mike said, right. So there is a synergy in having those deposit relationship with our institutional customers as well, as suppose to just going to the fed window doing that. So, I think we should expect similar trends if you look at the last three quarters it stayed in the 25% to 27% level in terms of index funding. So we expect that to continue as Mike said, we've done to maintain our competitive hedges we talked about, we increased our ECR rates obviously, we want to protect our turf on the DDA side. So we want to grow that part of the business as well. But, institutional money will remain or the index money will remain at the level it's been at the end of the third quarter.

Okay. Thanks for that. May be on the card fees, you talked about the reward expense in the change of vendor it's kind of impacting in the last two quarters. As we kind of go into the fourth quarter into next year, is that adjustment if you will largely behind you and do you expect kind of this level of revenues going forward or is there is kind of a catch-up given kind of these adjustments for the past six months?

There is about $0.5 million benefit in the third quarter from the liability adjustment Chris and then if you look at seasonal trends especially in our healthcare business related to FSAs you will see some headwinds in the fourth quarter on that particular line item. But to answer your question, yes the third quarter all these accrual adjustments up and down for rewards will be down and behind us.

Now the only thing to keep your eye on Chris if our client behavior changes as a result of having this new thing, in response saying is that redemptions increase, because the offering is more robust. So, it could change over time that would be a good thing, because there is more volume.

Understood. Maybe if I could just sneak one in, you cited the ag credit in the quarter in your prepared remarks. Could you just remind us how big this portfolio is, what you are seeing generally is in terms of trends given where commodity prices are?

Yes so our total ag portfolio is in the neighborhood $650 million, the one credit that Mariner mentioned in his prepared remarks was 6.5 there was $4 million it was charged-off, we expect the remainder in the fourth quarter to be paid off and as we said we think there is some recovery on the $4 million.

Okay.

And I would say that, as relates to ag's lending it's not a new business for us, it's actually in our roots in Kansas Missouri Bank but that where we started as a company. So, we've been ag lenders for 105 years.

All right, I appreciate that. Thank you. And then Mariner or Ram for the tax rate in the fourth quarter, you got into kind of a grossing up given the year-to-date trends, is my math around 23 for the fourth quarter is that?

Slightly higher than that, they are 24 to 25 for the fourth quarter Chris.

And then that's a fair rate for next year as well?

Correct.

Thanks a lot, I appreciate it.

Thanks Chris.

The next question comes from Matt Olney with Stephens, Incorporated. Please go ahead.

Hi great, thanks good morning guys.

Good morning, Matt.

Good morning, Matt.

I guess first question for Mariner. Mariner when you think about driving the positive operating leverage that you are focused on right now, what are some of the key financial metrics do you think about is it just simply revenue actually been expense growth, is it efficiency ratio, is it a ROA, I'm so curious kind of how its viewed there internally?

Well I just try to keep this high level, but, a business that is sending around lot of technology platforms, software, hardware and deliver our product and a diversity that we have as a company. All of our business lines come to us every year with plans to keep impacted in their businesses which keeps our product lines mature and competitive. And the key to that analytic and that strategic planning process is to make sure that has we approve that spending that the there is profitable growth from the back-end of that appropriately pays for the spending levels. So that, you know you think about the actual expense and the actual revenue is just the simplicity of making sure that the jaws are widening and then we get the revenue to spend.

Okay. Thanks for that. I appreciate the detail. And then Mike, I believe you gave us some details on the loan yields, just to clarify as far as the loan yields improvements from 2Q to 3Q, was there any impact from accretable yield from previous yields or any kind of non-accrual and its reversals or anything usual that may have benefited be in 3Q?

Hey Matt, this is Ram. I talked about close to 2 basis points of margin benefit from higher fees again these are not prepayment fees or onetime fees, these are fees that we get from our ABL and factoring businesses from time to time. As Mike mentioned in his prepared comments, we had a pretty good quarter for ABL and factoring businesses that led to these fees.

And the only thing I would add to that is, we said this last quarter to that, the full impact of the changes in the variable rate loans had not been reflected in second quarter results. And so the 13 basis points related to LIBOR and prime changes is something that we expected and obviously you're seeing that in the fourth quarter is the biggest driver.

And then you mentioned the ABL and the factoring, can you give us an idea of what the overall yield are on that business versus the overall loan portfolio?

Hold on Ram is going to look for the specifics, I can give you my general from memory, but go ahead.

So on the ABL balances which is about $280 million Matt, it's about 6.5% on factoring is because of how the business works that has an effective yield of just north of 11% and we have about $175 million in balances there.

Okay that's helpful Ram, thank you for that. And just lastly from me as far as the capital, what the additional capital from the sales curve, any better thoughts on and how you guys are looking to deploy that?

These comments will sound familiar as well to you, we are absolutely looking at all of our options to use our capital effectively and we have an active M&A grew as we've talked in the past, we would over the next, couple of years like to do a decent size bank transaction if we find one of it. And then obviously behind building the business there is the other uses of capital or buying back of stock or whatever, the other uses. We look at all those options. But, we would obviously prefer but the capital work in loans and/or a larger bank transaction with new client.

Yes. I will just add that we are opportunistic even in the third quarter. We bought about 150,000 shares back when -- during the third quarter.

Got it. And a year or so ago Mariner, it seemed like the pricing expectations on some traditional bank M&A was a little bit too high. And given we've seen over the last year. Is that still what you are seeing from your end or are there some increased opportunities on the bank [indiscernible] right now?

I say the same case still, I guess our peers are still proud, our friends are still proud, so that doesn't mean for various different reasons there won't be opportunities, but I think the condition is the same.

Yes. And I will just add to that that as we've said before we are a quality buyer and for someone to fit culturally in here and do. We are not going to be buying kind of fixed wrappers. The multiple is going to be strong we know that.

Understood. Thank you, guys.

Thanks Matt.

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

Hey, guys. Good morning.

Good morning.

Good morning, Nath.

Ram just a question on the balance sheet dynamics from here, I appreciate the commentary around the shrinkage and the securities portfolio. But, can you guys just help us think about the progression from here in terms of the absolute relative sizes of securities, let's assume we get a little pick of the loan growth as pay offs come down near term and it's obviously depending on deposit flows. But, can you help in terms of the absolute relative size of the securities going forward would be helpful?

Yes. Sure, Nath. I don't think it's going to materially increase from here probably not decrease from here materially on the other side too. So, we are close to about $6.2 billion. So, if you look at just what happened as I said in my prepared comments, right, if you look at what's happened in our balance sheet on a year-over-year basis or HTM portfolio grew up by about 350 million, our AFS portfolio shrank by a little more than that. So, we have been on this balance sheet rotation strategy for a while now and I think that will continue maybe not at the same scale.

Okay. Got it. And then, just going back to the credit, can you guys kind of just speak to how much of the stress in that one deal was impacted by just where commodity prices are versus perhaps just some operational issues at that relationship?

Yes. So, it's not related to commodity prices. It was related to the value of collateral overall. And that's about all I can right now. But, it's not an arbitrage or head situation on commodity prices that's what you are getting at.

Appreciate the color guys.

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

Good morning everybody.

Good morning, John.

Ram just two things I wanted to clarify. Regarding the tax rate I think you said for the fourth quarter roughly 24% to 25%, for the full year 22% then you said, is it the 24% to 25% we should be using for 2018?

Yes. I did.

Okay. And then, just back to the discussion on operating expenses and I appreciate the color and you talked about just look at the year-over-year trend. I just want to make sure Ram we are at the same page, so year-over-year expenses were up roughly 4%. Is that sort of what you guys are looking at to?

That's fair John.

Fair is the place to start. We will not give any guidance, so that's not within a range.

And again, it depends on the revenue environment, right? So, investment banking income picks up the variable comp associated with that will pick up. Medical claims can swing salary and benefit expense one way or the other. So there are a lot of factors that go into it. And again, I think said in my prepared remarks we have a lot of variable expenses that are built into our expense run rate which is why the focus on positive operating leverage that we talk about.

And Mariner was asked earlier which financial metrics was the most important, the simple answer is all of the above. We care about all of them. And you have seen us make I think over the last roughly 24 months fairly significant progress across the board. But, at the end of the day -- so, to answer the question, I think you are really trying to get at -- at the end of the day what really matters to us, if we need to invest in some of our businesses and we have some fast growing businesses, health care would be a great example of that. And that means that we get paid off maybe not in the next quarter but in the next three quarters or four or whatever somewhere in the future then we are going to have to do that and we will do that.

I understand that Mike. That makes total sense. Thank you. Thanks guys.

Thanks John.

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

Thank you for joining us today. This call can be accessed via replay at our Web site and it will run through November 8th. As always you can contact UMB Investor Relations at 816-860-7106 with any follow-up questions. We appreciate your interest and time. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.