Good morning, and welcome to the UMB Financial First Quarter 2018 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.

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 some assumptions, risks and uncertainties. Actual results and other future events, circumstances or aspirations may differ from those set forth in any forward-looking statement. Information about factors that may cause them to differ is contained in our SEC filings. Forward-looking statements made speak only as of today, and we undertake no obligation to update them, except to the extent required by securities laws. Our earnings release and supporting slides are available on our website at umbfinancial.com in the Investors section. Reconciliations of non-GAAP financial measures have been included in the release and on Slides 32 and 33 of the supporting materials. All earnings per share metrics discussed in this call are on a diluted share basis for continuing operations. Please refer to the tables contained in the press release for details about basic and diluted earnings per share. Now I'll turn the call over to Mariner Kemper.

Thank you, Kay. Welcome, everyone, and thank you for joining us. April marks the anniversary of our first charter in 1913, and we're wrapping up our 105th year. 2018 is off to a good start, with first quarter highlights that include a continued margin expansion, expense control and improved profitability metrics. Beginning on Slide 4, we earned $57.5 million or $1.15 per share for the quarter. On a non-GAAP basis, operating net income was $59.1 million or $1.18 per share. Operating leverage continues to be a focus, and on a non-GAAP operating basis, first quarter leverage was a positive 6.5% year-over-year and a positive 5% linked quarter. As we discussed last quarter, we are investing in 2018 toward building and solidifying our competitive position in the marketplace, and we highlighted plans in various growth businesses. Even as we continue to ramp up these investments, we will maintain a diligent focus on efficiency and expense control. Now I'd like to cover our lending and credit highlights. Average loans balances of $11.3 billion for the first quarter represent a year-over-year increase of 6.9%. Compared to the fourth quarter, average loans increased 1.8% or 7.3% on a linked-quarter annualized basis. According to the Feds H.8 data, total average loans increased 0.7% quarter-over-quarter. Top line production for the quarter remained strong at $520 million, and we have an active pipeline. Our outlook remains positive for loan production even as we continue to watch how excess customer liquidity may impact borrowing activity and pricing in the coming months. Turning to Slide 7. You'll see a chart that I share every quarter showing the history of our net charge-off ratio, which has averaged 23 basis points quarterly over the past 5 years. You will note that the first quarter had net charge-offs of $10.3 million or…

Thanks, Mariner, and good morning, everyone. Looking first at the income statement, net interest income of $147.9 million represented a year-over-year increase of 10.1% and 1.1% above the linked quarter. Rates were the largest driver of the increased net interest income during the first quarter, followed by mix-shift, as higher-yieldings commercial real estate, asset-based and factoring loans continued to grow as a percentage of our loan portfolio. As you know, the tax equal and gross up under the lower corporate tax rate impacts earning asset yield and net interest margin calculations. Under the reduced tax rate, fourth quarter NIM would have been an approximately 11 basis points lower. Net interest margin for the first quarter was 3.19%, which, on an apples-to-apples basis with the statutory tax rate change, represents a linked-quarter increase of about 9 basis points and a year-over-year increase of about 20 basis points. Slide 10 details the changes in noninterest income, which hit $105.5 million, remained relatively flat on a linked-quarter basis, as improved deposit service charges, Bankcard and brokerage revenue was offset by lower revenue from bond trading, driven by continuing negative dynamics in the municipal bond market and a decrease in company-owned life insurance income recorded in the other income line. Slide 12 and the press release contain detailed drivers of the changes in noninterest expense, which, on a non-GAAP operating basis, decreased $8.4 million or 4.6% compared to the fourth quarter. As I mentioned in last quarter, higher expected costs, due to resetting of FICA and other benefits, were offset by lower incentive compensation accruals following strong performance in the fourth quarter. Other drivers of lower linked-quarter operating expense include timing-related decreases in legal and consulting and business development expense and lower regulatory assessment fees. If you followed us, you'll know that the first…

Thanks, Ram. The segment disclosures begin on Slide 21, and I'll start with the Commercial Banking segment, which serves the commercial lending, leasing, capital markets and treasury management needs of middle-market businesses and some governmental clients. In the first quarter, this segment provided 63% of the company's pretax income. Commercial real estate and construction lending once again led in terms of loan production for the quarter, although average balances were impacted by the payoff Ram mentioned. CRE fundamentals and development activity continue to be strong in our markets. Our pipeline remains active and we continue to pursue opportunities that meet our credit standards. Our national lending platforms, factoring and asset-based lending, provided 10% of our average loan growth for the quarter and more than 25% of the growth compared to first quarter 2017 averages. In our factoring business, we have an active pipeline in both the commercial finance and transportation finance portfolios. Economists are generally bullish on the transportation industry for the next 12 to 18 months as increased demand, coupled with an ongoing driver shortage, has resulted in improved freight rates. We are optimistic for more opportunities to finance growth and acquisition activity for clients in the coming quarters. Our ABL team continue to add new commitments, growing average outstanding balances to $336 million. This represents an increase of 2.8% for the quarter and nearly 49% on a year-over-year basis. Business activity has increased in 2018, providing many quality opportunities. Institutional Banking serves the entire institutional marketplace from smaller correspondent banks and municipalities to the largest broker-dealers, mutual fund companies and alternative investment managers in the country. The segment consists of Investor Solutions, Asset Servicing, Corporate Trust, Distressed Debt, Investment Banking and Public Finance. These fee businesses combined to make Institutional Banking the largest provider of our noninterest income.…

[Operator Instructions]. Our first question comes from Chris McGratty with KBW.

Ram, maybe a question to start with you. Your costs were really well controlled in the quarter, and I appreciate the color about the Q1-to-Q2 movements. In the deck, I think you talked about some delay of some timing of some projects in the legal line. How should we be thinking about the trajectory of cost on a dollar basis over the next couple quarters, obviously, keeping the focus on operating leverage?

Yes. Sure, Chris. So without giving specific guidance, I would say, first quarter expenses were about $3 million to $4 million lighter because of the timing issues that we presented in the press release and in the slide deck. So these are typically bonuses and commissions related to bond trading, which, as you know, had some headwinds from the muni market. So I would go back to my prepared comments, 2Q expenses will be a tad higher. It's always been historically higher for us. Our annual comps cycle gets in -- goes into effect in April, so that will drive the cost a little bit higher. And then, the other factors are $3 million to $4 million of lighter expenses in the first quarter.

Okay. That's great. In terms of the growth by markets, obviously, in the slide, you talked about -- you referenced, like, the 50% growth rate that's occurring in some of your national businesses. I'm interested if there's any -- have any of those -- have you seen any deterioration in credit in any of the national businesses? Obviously, started off a little high this quarter. Any color if that was in those segments? And if so, any kind of -- any market color on the charge-offs?

Chris, it's Mariner. I'd say that there's nothing really to note. No energy there in any particular direction that's unusual. The national business growth is really just those businesses kind of hitting stride, really, after our acquisition of Marquette. They're just really just trying to coming into their own and hitting the stride. So that's really where that growth is coming from. And as far as the credit metrics go, we've mentioned in the prepared remarks that it's largely due to 1 credit, and we do have from one quarter to another a little ups and downs in the activity. But long-term trends we feel pretty good about.

Great. And Mariner, if I could sneak one last one in on capital. With Scout now behind you, the closing, how are you thinking about capital deployment? I saw yesterday's press release about the buyback, which I think you do every year. But any comments on whether you might use it or M&A acquisition opportunities? Any comments there?

My comments in that regard will be similar to previous quarters, which is, we do have an active M&A group reaching out, doing analysis on targets, maintaining relationships, et cetera. And so we continue to look for opportunities. And we would like to put some of that capital to work in that -- in M&A. And well, the share repurchase deal is something that we just -- have been renewing every year. So that just gives us the opportunity more than anything.

Okay. And size of acquisitions. I think you guys aren't afraid of something a little bit sizable if it came well?

I mean, we've gotten better and stronger and are capable of doing a larger deal but willing to do whatever makes sense.

Our next question comes from Nathan Race with Piper Jaffray.

Just going back to the loan growth discussion. It looks like revolving balances were up nice in the quarter. So I imagine line utilization is picking up a little bit. Just curious, if that trend is persisting here into 2Q. And just kind of any early thoughts on what you're seeing on the payoff front? I think you alluded to the possibility of payoffs may continue to occur in elevated pace going through this year, but just any updated thoughts on those 2 fronts would be appreciated.

So our payoff paydown number is running as it has, so it's around 4% of -- and so that hasn't really changed much. As far as the look into the second quarter, the pipeline remains strong looking into the second quarter.

Okay. And then in terms of new loan pricing. Just kind of any updated thoughts on kind of where you're seeing loan pricing come in relative to the portfolio yield around 4.30% or 4.5% or so at this point?

Well, I mean, there's a few variables I would note. Obviously, rates are coming up. The short-term rates have been coming up. So we benefit from that as we bring on new credits and credit's repriced. So we're seeing that benefit. Outside of that, I would say that the market remains very competitive, and so we're kind of looking at that deal-by-deal. Most of the rate expansion is really just coming from short-term rates coming up.

Got it. Makes sense. And then, Ram, if I could sneak one last one in on deposits. I think you mentioned that index deposits were back up to 25%. I think they were around 23% last quarter. So just any updated thoughts on what you're seeing on the deposit pricing spread across your various verticals? And then also, just any updated thoughts on the appetite to allow some index deposits relationships that went off of the course of this year?

I'll take the first one, Nate. So yes, as we said, it's 25% of our funding. It's hard-indexed. And it moves from one quarter to another quarter, especially fourth to first because of our Public Funds business. So obviously, fourth quarter is a low point for Public Funds and first quarter tends to be a high point. So that number [indiscernible], it's a little bit between the 23%, 25%. But largely, it's been the same. Just on the betas, I think that if you want to focus on interest-bearing deposits, just -- since this cycle, it's been about 17% beta. If you just look at the last year, it's 24%. So there's some pressure on deposit cost. And we're testing and learning and we're launching deposit campaigns. There's also a mix-shift that's happening within our portfolio and with other banks as well. So that will continue. But everything said, our betas are better than our simulations, what we do for interest rate risk management.

Nate, this is Michael. I'll add to that. The first thing that's going to drive whether or not we have a reduction in index deposits is going to be the success we have in raising funds other ways. And we did a campaign in the first quarter. We had some good success there. So that's the first thing to look at. The second thing to look at, especially for us, is where we're borrowing credit funds out on an overnight basis. And to the extent that those index funds are cheaper, we will continue to do that.

And I might also point you back to the assets. More than 60% of our loans repriced within 12 months. And so while we do monitor closely what's happening on the deposit-liability side, we have some flexibilities that some of our peers don't have on the asset side.

Our next question comes from Matt Olney with Stephens.

I want to go back to the discussion on the ABL and the factoring businesses. It sounds like that's been a pretty material part of your growth of last year. And it sounds like that you expect that to continue to be a pretty good driver for your growth over the next year. Is that a fair assumption? And then can you give us an idea of what the yields are -- the loan yields are in that business compared to the overall loan book?

Well, first, I might say that you have to recognize that they as a percentage of their own base are up significantly. But as a percentage of our total, they're still pretty small. So they are having success within their own right. But as a percent of total, really the loan volume is driven in the first quarter by commercial real estate. It's a majority of that growth. So that's the first play side. I paused there. So we do expect continued success and growth out of those two. But as you look at the share volume of our growth, it still remain to be a pretty small part of the total.

So I'll put some dimensions around it just to follow up. So the ABL loan balances were about $330 million. That's up about $100 million on a year-over-year basis. The yields on those are about 6.5%. And the factoring business is about $225 million, and it's up from $150 million last year. And the yields on those are about 11.5%.

Okay. That's helpful. And then just going back to the loan growth details on Slide 14. I appreciate that paydowns and payoffs can be pretty lumpy and tough to predict. But I want to talk on some of that growth loan production that was down both sequentially and year-over-year. Any more color you can provide as far as why that production is down? Any attrition or anything that could help us explain why that would be down?

Yes. That's pretty much as simple as a pipeline push, that's what I would call it. It's some stuff moving from one quarter to the next, not closing. As I said, with no assurances, but the pipeline looks pretty strong as we look into the next quarter. So sometimes, the gross number will push around a little bit from quarter-to-quarter as projects are delayed.

Okay. And then going back to credit quality as far as the elevated commercial net charge-off. Can you tell us what geography this company was in? And was this more of an operational issue? Or what was the issue as far -- that led to the charge-off?

I'm not going to -- so the geography, I think, is not important because it's not a trend. So I'll just leave it at that related to the geography because it's irrelevant. But what I'd say about the deal is that it's -- like I said, it's down the middle fairway credit for us. It's been with us since 2013, nothing unusual about it. And so I said, I think, in our prepared remarks, just from one quarter to the next, we'll have a periodic spike. If you reflect on our numbers, the fourth quarter was a pretty light quarter, as an example. So we're going to have a quarter now and then where we take a lump on a creditor too.

Our next question comes from David Long with Raymond James.

Most of my questions have been asked already. But the -- we talked a little bit about capital. And obviously, you guys, since the Scout deal closed, have some excess capital. When we're looking at your numbers, is there a ratio that you guys are looking at? We can look at the regulatory numbers and we know what minimums you have to keep. But in your mind, are there some regulatory or maybe a tangible common equity level that you want to maintain or you will -- you are not willing to go below?

So obviously, we look at both tangible capital but focus more on total -- the regulatory capital ratios from a constraint perspective. The total risk-based capital is more constraining one. So we're at 14%, close to 14% now. It depends on the M&A opportunity and what Mariner talked about, right? If there's a good way for us to redeploy some of this capital, the excess capital that we have, we can certainly support the loan growth that we have or look after deals like we've been doing. So there is -- we haven't communicated a minimum, what we're shooting for, but it will depend on the opportunity that we see to deploy this capital.

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

This is actually Timur Braziler filling in for Jared. Just want to circle back one more on the expenses. Just looking at some of the timing change that occurred during that first quarter, is that full $3 million to $4 million of timing-related impact going to flow through into the second quarter as those projects kind of ramp up and get funded? Or is some of that going to be lost and we're going to get into a more normalized run rate starting in the second quarter?

I would say more normalized run rate getting into the second quarter.

Okay. Okay. Maybe switching back to deposits, looking at HSA. Do you have the year-over-year growth in accounts?

I'm sure we do. Not that we have disclosed that I'm aware of.

So it isn't in?

No. We have balances. Accounts is -- so accounts.

[Indiscernible] could explain 9% on HSA.

That's HSA. And our FSA is growing 2.4% on a year-over-year basis. And as I might remind everybody, the HSA account growth is just one aspect to look at. It's important, but it's not the only aspect. Obviously, the balance growth is important too as you add balances to existing clients. The reason HSA accounts matters is, as you go through the open enrollment period, especially with our large insurance providers, you'll see more and more adoption rates. And obviously, changes in the laws, some of the things that the President's talked about to make HSAs more attractive, which certainly helped the adoption of hypothetical plans and, hence, in HSA account.

Okay. And I'm sorry, I missed. What was that? Growth percentage for HSA?

26.9% for HSA, which is the driver, year-on-year.

Okay. And as we're having more of these accounts get funded up and more of the accounts moving into the investment bucket, is there anything being done behind the scenes to monopolize or monetize that move into the investments? I love to hear any more color on that.

Yes. This is Mike. So when you look at the vantage analysis, you really are going to see a tale of two cities. You still see, on the lower end, the average account balances. While they have ticked up from around $1,700 in account to around $1,900 account, that's not a material move. So what that tells you is, on the average, most people are using their balance throughout the year. The adoption rates for the investment part of the business tend to be on the higher dollar accounts. And that continues -- now keep in mind, we have an exceptional, phenomenal growth, as I said in my prepared remarks, on the investment side, which are also coming off a small base.

The business model would suggest that it will continue over time. We have a business model that allows us to capitalize on that. As it does grow, we have an open-architecture business model, with the strong investment vehicle. And we are prepared to take advantage of that trend. We believe that trend will accelerate. Very excited about that. And this whole business is about education. So as you look forward, and the education levels increase and people understand the value of an HSA account, and the fact that it's triple tax advantaged and is actually better than the 401(k) as it relates to a savings vehicle. As that education takes place and more and more people understand that, the investment side of this business model will pick up and we will benefit from that.

Yes. This is Mike again. One of the -- to Mariner's point, one of the least-known things about HSAs is that once you have a qualified retirement, you can use that money in that account for retirement-related expenses. It does not have to be used for medical like you did prior to retirement. And that's a huge advantage.

Great. Okay. And then one more if I can. Just looking at the linked-quarter swing in AOCI, given what we've seen on the rates front, any actions behind-the-scene to kind of mitigate AOCI impact going forward, maybe moving some of the longer-dated paper to help the maturity or anything taking place to kind of mitigate that impact as rates continue to go up here?

Not really. I think it's still very manageable. Obviously, we are watching it. This is what happens in the bond market when rates go up. We're comfortable with where the AOCI level is. Obviously, to my earlier point, we focus a lot on the regulatory capital ratios. And as you are aware, this doesn't impact our regulatory capital ratios. And we're at 9.5% TCE today.

[Operator Instructions]. Our next question comes from John Rodis with FIG Partners.

Ram, the tax rate going forward is 16% to 17%. Still a good number or?

Yes. I would use that. 16% to 17% is still good.

Okay. And then just one follow-up, Ram. Other noninterest income, $10.6 million for the quarter. I know you talked about company-owned life insurance being down a little bit. Anything else in there that was maybe unusual or the like?

Nothing unusual, I would say, in the other income line item. Obviously, that was down on a quarter-over-quarter basis. Last quarter, we talked about a bully payout that was about $1.5 million or so. Obviously, we didn't have that this quarter. So that's the reason for the quarter-over-quarter decline.

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. And thank you for joining us today. As always, if you have follow-up questions, you can reach UMB Investor Relations at 816-860-7106. Thank you and have a great day.

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