UMB Financial Corp (UMBF) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the UMB Financial Corporation first-quarter 2011 earnings conference call. At this time, all participants will be in a listen-only mode. And following the presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, April 27th of 2011. I would now like to turn the call over to Abby Wendel, Director of Investor Relations. Please go ahead.

Thank you, Craig. Good morning, everyone, and thank you for joining us for our conference call and webcast regarding our first-quarter 2011 financial results. Before we begin, let me remind you that our comments in this conference call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements rely on a number of assumptions concerning future events and are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated in our statements made during this call.

While management of UMB believes our assumptions are reasonable, UMB cautions that material changes in interest rates, the equity markets, general economic conditions as they relate to the Company's loan and fee-based customers, competition in the financial services industry, the ability to integrate acquisitions, and other risks and uncertainties, which are detailed in our filings with the Securities and Exchange Commission, may cause actual results to differ materially from those discussed in this call. UMB has no duty to update such statements and undertakes no obligation to update or supplement forward-looking statements that become untrue because of new information, future events or otherwise.

By now, we hope most of you on the call or listening via webcast have had a chance to review our earnings release, which was issued yesterday. If not, you will find it on our website at umb.com.

On the call today are Mariner Kemper, Chairman and Chief Executive Officer; Peter deSilva, President and Chief Operating Officer; and Mike Hagedorn, our Chief Financial Officer. The agenda for today's call is as follows. Mariner will review or strategies and will provide high-level commentary on our results. Mike will review the details of our first-quarter financials. Then Peter will review key income business drivers -- key fee income business drivers. With that, we'll be happy to answer your questions.

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

Thank you, Abby. Welcome everyone, and thank you for joining us today. For the first quarter we generated $186.2 million in revenue and posted $0.76 per diluted share on net income of $30.9 million. Net income increased 17.9% over the first quarter of 2010 and was largely driven by improvements in noninterest income, which increased 24.5% to $107.8 million and represented 57.9% of total revenue. Net interest income improved slightly to $78.4 million, an increase of 3.5%.

Our businesses are performing well and delivering quality earnings, and when combined with out consistent underwriting practices continue to result in high credit quality, allowing our provision to operate within a narrower, more consistent range. We are proud to deliver quality earnings without a material change in provision as seen throughout the industry. We are pleased with our results this quarter, and to help frame our performance, I would like to take a few minutes to remind you about our growth strategies and give you a few examples of how we are accomplishing our goals in each one.

We've made significant progress towards our strategy to accelerate fee business growth, mainly through acquisitions. Overall, fee revenue is more than 50% of our revenue stream and provides important diversification in our business model. Over the past two years, our most significant acquisitions were in our asset management and asset servicing businesses. These businesses have also grown organically, improving noninterest income and the bottom line.

In our financial statements, the trust and securities processing line item captures revenue for both of these businesses. For the first quarter of 2011, revenue increased 45.4% to $51.7 million versus $35.6 million in the first quarter of 2010. Revenue from institutional and personal investment management services increased 631.1% to $8.1 million. Advisory fee revenue from Scout Funds increased 45.1% to $15.2 million and revenue from our asset servicing business increased 15.8% to $17.4 million. The results from the first quarter of 2010 also included the acquisition of J.D. Clark & Company, and demonstrate that the increase in -- has been primarily driven by organic growth.

Our second strategy is to maximize efficiencies. Comparing first quarter of 2011 to first quarter of 2010, our efficiency ratio increased slightly from 70.58% to 71.06%. On a linked-quarter basis, our efficiency ratio improved from 77.82% to 71.06%. A diversified business model that includes asset management and asset servicing carries a higher expense load, which means that our Company's efficiency ratio will generally be higher than our peers. For the first quarter, expenses increased 15.5% to $135.5 million. Just over 40% of the $18.1 million increase can be attributed to acquisition-related expenses, primarily salary and benefit expense and amortization or intangibles. We expect our efficiency ratio to improve as we see revenue improvement throughout our enhanced asset management platform.

Our third strategy is to grow loans and deposits. In looking at the data, we are one of the relatively few financial institutions that simultaneously grew loans this quarter and maintained industry-leading credit quality. Of our peer group, that's defined by 20 financial institutions with characteristics similar to UMB, based on asset size and revenue composition, we have had the lowest [MPL] rating since the end of 2007. And this quarter, our MPLs were 0.41% of loans compared to the prior period of 0.59% of total loans. Net charge-offs were $8.3 million for the first quarter or 0.73% of average loans. The increase in NCOs over the last year is due to one large credit. This is the same large syndicated credit that was placed on nonaccrual during the third quarter of 2009.

Overall, the size of our loan portfolio has increased while credit quality has remains excellent. We remain well below the fourth-quarter 2010 industry median of 4.04% for nonperforming loans and the 1.20% for net charge-offs.

Turning back to loan growth, we posted total loan growth of 8.5% compared to the same period a year ago. In fact, nearly all of our loan categories increased this quarter, with the exception of our indirect auto loan portfolio. We continue to run off our indirect auto loan portfolio and the balances are now under $30 million. With an average loan-to-deposit ratio of 48.8%, we have plenty of liquidity for our customers and for new opportunities as they arise, at a time when most banks are experiencing declines in loan balances, we are particularly pleased with these results. Of the 222 banks that had reported first-quarter results as of April 26th, reported a median decrease in loan balances of 0.97% for the first quarter of 2011.

Commercial banking lies at the heart of our bank, and commercial and industrial loan balances at the end of the first quarter increased by 10.6%. Commercial real estate loan balances increased 9.9% to $1.3 billion. The outstanding balances in commercial lines of credit were $1.5 billion at the end of the quarter, an increase of 14.1%. Commitments for working lines of credit increased 10.5% to $5 billion. The resulting utilization rate increased to 30.2% compared to 29.3% in the first quarter of 2010. This modest increase is encouraging, but many of our customers continue to sit on the large cash balances and are reluctant to spend or borrow until they feel more certain about the economy. As a result, commercial utilization remains relatively flat when compared to our historical averages.

Our fourth strategy is to deploy capital effectively. In addition to the acquisitions mentioned earlier on the call, we have continued to repurchase stock. For the first quarter, we repurchased 33,337 shares at an average price of $41.17, for a total purchase price of $1.4 million.

By now, you have probably seen our first-quarter dividend announcement. We are pleased to announce payment of our $0.195 cent per share dividend for shareholders of record as of June 10th, 2011. We remain opportunistic in seeking out ways to effectively deploy capital but our highest priority today is to assimilate our acquisitions. We believe that ac -- the acquisitions completed to date show that we have deployed capital effectively and are now positioned to see our fee business gain leverage and growth.

Finally, our fifth strategy is to deliver on the unparalleled customer experience. We enjoy an enviable position, in that we are known for our high customer touch of service. We go above and beyond for our customers to ensure that we meet their need. As an example of our dedication to providing excellent service, last week it was announced that we were ranked second in the Midwest in the sixth J.D. Powers and Associate 2011 retail banking customer satisfaction study.

We are proud to be named in the top three. This ranking confirms what our own customer satisfaction surveys show, 94% of our retail customers report that they are satisfied with UMB and 68% report that they are very satisfied. We certainly appreciate your interest in our Company and we hope that you have come to expect consistency in the form of financial results, credit quality, balance-sheet growth and dividends. We remain focused on gaining scale through operating leverage to drive greater earnings over the long-term investment horizon.

With that, I'll turn the conference call over to Mike for more detail on our results. Mike?

Thanks Mariner, and welcome everyone. The increase in our balance sheet from the first quarter 2010 to the first quarter 2011 was fueled largely by a 26.2% increase in end-of-period deposits. Loan balances also increased, but as utilization rates remained flat, the remainder of the growth was invested in quality securities.

Average balances in our investment portfolio for the quarter were $5.7 billion, an increase of 19.2% from a year ago. As you know from following our Company, we typically see a seasonal influx of public funds, which are running approximately $200 million higher than last year. Unlike prior years, however, increases in deposits from institutional customers more than offset the gradual decrease in public funds that customarily affects the balance sheet in the first quarter. As a result, our deposits, especially in repurchase agreements and in daily investment accounts have increased substantially this quarter.

An advantage we enjoy is doing business with large institutional money managers, some of whom have decided to hold larger cash balances. The deposit increase is a reflection of the strength and stability of our balance sheet; however, it also creates downward pressure on net interest margin. We are constantly evaluating how best to invest these proceeds in this environment of soft loan demand and lower interest rates. That said, our bias remains focused on staying short in the portfolio in what we anticipate to be a rising-interest-rate environment, while preparing the portfolio for higher interest rates over the next 12 months.

Turning to assets, we ended the quarter with $13.4 billion in total assets, compared to $10.7 billion at the end of the first quarter last year. End-of-period net loan balances were $4.6 billion, an increase of 8.5% compared to the first quarter 2010. Loan demand improved, demonstrated by the increases in our loan categories, as Mariner mentioned earlier in the call.

On a related note, allowance for loan losses is $72.7 million and allowance as a percent of total loans is now 1.56% compared to 1.57% a year ago. Additionally, our allowance for loan losses coverage is more than three times the amount of nonperforming loans, while the industry average allowance at year-end would cover just over half of nonperforming loans.

Activity in the investment portfolio during the quarter included roll-off of $384 million in core portfolio securities at an average yield of 2.9%. In turn, we purchased $1.1 billion of securities at an average yield of 1.87%. Over the next three months, $300 million of core investments with an average yield of 3.16% will mature. Over the next 12 months, $1.2 billion of core investments with an average yield of 2.55% will mature. Additionally, 73% of our total loan portfolio is expected to reprice or mature in the next 12 months.

Looking at our liabilities, average deposits increased 12.9% to $9.5 billion for the first quarter. Noninterest-bearing deposits make up 35% of our total deposits, a significant contribution to our low cost of funds. Equity was $1.1 billion at the end of the first quarter, a 4.8% increase from a year ago. As a result of our acquisitions, the components of our capital have shifted slightly with goodwill and intangibles increasing relative to Tier 1 capital. However, we remain well capitalized with Tier 1, leverage, and total risk-based capital ratios of 11.57%, 6.23% and 12.68% respectively.

Reviewing other financial highlights, return on average assets was 0.99%, an increase from 0.96% in the first quarter of 2010. Return on average equity for the first quarter was 11.63%, an increase from 10.25% a year ago. Turning to the income statement for the first quarter 2011, net income was $30.9 million or $0.76 per diluted share. As Mariner mentioned, total revenue increased 14.8% to $186.2 million for the quarter.

Net interest income for the quarter increased modestly up 3.5% to $78.4 million. Two main drivers contributed to this increase. First, average earning assets increased 14.3% from $10.2 billion to $11.6 billion on a year-over-year basis. And second, cost of funds declined 22 basis points to 0.37% from 0.59% in the first quarter 2010, resulting in a 27.1% decrease in interest expense. Year over year, average net interest margin decreased 29 basis points to 2.9%.

Offsetting these improvements, average earning asset yields fell 44 basis points to 3.16%. Provision expense decreased by $1.2 million or 14.6% when compared to the first quarter 2010 and remained virtually flat on a linked-quarter basis. Our provision expense is a reflection of our consistent methodology, which considers the inherent risk in our loan portfolio as well as some qualitative factors.

As Mariner discussed, noninterest income was up 24.7% for the first quarter compared to the same period in 2010 and was 57.9% of total revenue. The increase in noninterest income was driven largely by a 45.4% increase in trust and securities processing revenue, which ended the quarter at $51.7 million comparing favorably to $35.6 million in the first quarter of 2010.

Another factor contributing to our growth in noninterest income was a 20.2% increase in bank card fees, which Peter will discuss later in the call. The noninterest income improvements just mentioned have helped offset the impact of Reg E changes that went into effect in August of 2010. For the first quarter, net NSF/OD income from retail customers was $3.3 million, which accounts for a $2.8 million or 46.3% decline from the first quarter of 2010.

Consumer-related net NSF/OD income amounts to 17.7% of total deposit service charges of $18.6 million. Total noninterest expense increased 15.5% to $135.5 million compared to the first quarter 2010. As Mariner mentioned earlier in the call, just over 40% of this increase can be attributed to acquisition-related expenses comprised primarily of salary and benefit expense of $3.5 million and intangible amortization expense of $1.9 million.

With that, I'll turn the call over to Peter to discuss the business drivers behind this quarter's results.

Thanks Mike, and good morning everyone. As you've seen in our press release, we continue to successfully execute in our diversified financial services company strategies. Our results demonstrate that -- the long-term value of having a multifaceted business model. Throughout this morning's discussion, we've emphasized how our fee businesses and our recently completed acquisitions delivered sound results during the first quarter.

This morning, I'll provide details about the sources and drivers of our fee income, beginning with our asset management and asset servicing businesses. As noted in previous calls, revenue in these areas is largely dependent on three key drivers; one, new business; two, mutual fund and separate account flows; and three, equal and fixed income market performance.

Our asset management businesses have grown substantially over the past year, both organically and with the acquisition of Reams Asset Management and Prairie Capital Management. We ended the quarter with total company-wide assets under management of $28.2 billion, an increase of 107.4% over the first quarter of 2010. On the institutional side, total assets in Scout Investments, bond and equity funds, and separately managed accounts reached $9.7 billion in the first quarter, net of the $800 million we liquidated as a result of closing our money market funds.

Reams Asset Management, a division of Scout Investments, managed $10.2 billion in fixed income assets at quarter end. Net flows into the Scout Equity and Fixed Income Funds for the quarter were $495.7 million compared with $588.5 million in the first quarter of 2010. And market appreciation added $1.1 billion to assets under management. For the second year in a row, Lipper recognized the Scout International Fund for outstanding performance in its categories. It's rare for a fund manager to achieve such recognition in back-to-back years. We are so very proud to have Jim Moffett and the team at Scout delivering strong results for our investors.

First-quarter sales of Scout separately managed account business were $134 million, and the pipeline is strong. Reams delivered first-quarter sales of $432.8 million and also has an active pipeline. Continuing with our asset management businesses for individuals, total assets under management stood at $8.3 billion for the first quarter, an increase of 79.8% or $3.7 billion from a year ago. Comprising the $8.3 billion is $5.6 billion in assets under management within our traditional trust and personal wealth management group and $2.7 billion in assets managed by Prairie Capital.

Turning to asset servicing, UMB Fund Services ended the quarter with $203.2 billion in assets under administration, an increase of 21.2% over first quarter of 2010. Fund administration and custody revenue for the quarter increased $2.4 million or 15.8%. In our corporate trust business, assets under administration finished the quarter at $11.5 billion, virtually flat when compared to the same period a year ago. This business continues to be challenged from low money market yields and a low volume of new municipal offerings coming to market. To combat these pressures, we continue to diversify the business and strengthen the existing client relations while building new ones.

Our model includes several other more traditional fee-based businesses as well. These focus areas within UMB Bank have also grown quickly and continue to perform strongly, providing a strategic source of core funding and revenue growth. At the end of the first quarter, healthcare service deposits stood at $281.3 million, an increase of 48.2% compared to the first quarter of 2010. A feature of these accounts is to sweep funds into a mutual fund above a preset balance and at the end of the quarter we had $24.9 million in customer mutual fund assets. FSA and HSA accounts total $1.8 million, representing a 37.4% increase from just one year ago. As we discussed last quarter, the growth in these accounts tends to be cyclical, tracking with the timing of company open enrollment periods, the majority of which take place in the fourth quarter. While currently a relatively small percentage of deposits in revenue, we remain excited about the opportunities in this business and continue to invest in its capabilities.

We have found that HSAs have become a very popular solution to mitigating the increasing costs borne by companies in providing employer-sponsored healthcare. We are very pleased with the level of deposits and interchange revenue this product provides. Our healthcare debit product, which is tied to our health savings account and flexible spending account, comprised 39% of total debit and credit card purchase volume for first quarter, an increase of 34.6% compared to the same period a year ago.

Moving on to other aspects of our card businesses, purchase volume across all of our card products increased 26.6% to $1.3 billion in the first quarter when compared to the same period last year. Commercial credit card purchase volume increased 30.7% and reached $236.8 million this quarter, another record for us. Commercial cards comprised just over 18% of total credit and debit card purchase volume during the first quarter. Consumer credit and debit card purchase volume made up 41.8% of total purchase volume this quarter. This record purchase volume drove the 20.2% increase in bank card fees when compared to the first quarter 2010.

Revenue from bank card fees is comprised primarily of debit and credit card interchange, which was $14.7 million for the first quarter. Approximately 29% or $4.2 million of that is derived from non-healthcare debit cards. About 12% or $1.8 million of total interchange revenue is attributed to healthcare debit cards. Debit interchange revenue, excluding healthcare debit, represented just 2.3% of our first-quarter total Company revenues.

As you know, the Durbin Amendment and the Dodd-Frank Act is threatening debit interchange revenue at financial institutions across the country. If the Fed's proposal is adopted as written today, we risk losing an estimated $18 million in interchange revenue on an annual basis. This figure includes healthcare-related debit interchange. As you know, it remains to be seen as to what the Fed's final proposal will include, so our estimates are just that.

Credit card quality remains superior to industry average and has improved over the past several quarters with delinquency rates dropping to 1.99% from 2.49% a year ago. Total credit card charge-offs were 2.9% of card balances for the first quarter versus 4.4% in the first quarter of 2010. According to Fitch Rating Services, fourth quarter of 2010 industry credit card charge-offs averaged 10.6% or more than triple our credit card charge-off rate.

Turning to consumer real estate lending, HELOC balances were $479.4 million, an increase of 5.9% over the first quarter of 2010. The utilization rate on home equity lines of credit was 48% for the quarter, relatively unchanged from the prior quarter. Credit quality of this portfolio remains excellent with a delinquency rate of just 0.14%, down from 0.20% at year-end. The industry-wide delinquency rate for HELOCs was 2.65% for the fourth quarter of 2010.

Our private banking and wealth advisory teams continue to grow new relationships and deepen existing relationships. Private banking deposits increased 38.1% and private banking loans increased 15.4% compared to the first quarter of 2010. The deposits attributed to consumer and private banking stood at $4.3 billion at March 31, and represented 41.6% of the Company's total deposit base. The penetration rate for our consumer-related businesses continues to improve year over year.

With that, let me hand the call back to Mariner, who will close our prepared remarks and open the line for your questions. Mariner?

Thank you, Peter. To revisit my earlier comments, we appreciate your interest in UMB and hope that you find value listening to our quarterly conference call to discuss earnings. We are pleased with our results and continue to believe that our diversified business model has a unique proposition in today's marketplace. We remain cautious and concerned, however, about the developments in Washington. We have actively engaged in the debate on interchange and hope that Congress recognizes the need to conduct additional studies and reviews to fully understand how price controls on interchange will impact consumers, small business and the industry. The changes currently proposed would have long-term negative impact on many facets of our economy and deserve a full review prior to implementation.

We appreciate your interest in UMB and I would like to thank you for being on the call today. With that, I'll turn it over to the conference call operator for your questions.

Thank you very much. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). Our first question does come from the line of Chris McGratty with KBW.

Yes, good morning guys.

Hey, Chris.

Hey, Mike, on the margin, I ask every quarter, what's the -- obviously, the limited loan growth and the deposit flows, is there a point where you guys say enough is enough on the securities book or how are you guys thinking about managing the balance sheet's size. Is there -- I assume there's a pretty healthy unrealized gain position from your investments, which you've done very well with. I'm just wondering if it makes sense given that rates are moving up eventually that you would take big gains and just kind of shrink the balance sheet?

Well, keep in mind we did harvest gains in the first quarter on a pre-tax basis equal to $7.5 million, so I think we're doing some of what you're talking about. As far as manage -- managing the size of the balance sheet, it's something we're clearly aware of, but I do want everybody to be aware of the fact that these are customers. And so because they're customers, we have to be sensitive to their needs as well, and obviously we have to be sensitive to our balance sheet needs as well. It's a give and take. And we're currently evaluating how best to do that.

Well, and to his point -- this is Mariner -- we're obviously about the customers, we're always managing the Company for the long-term and want to continue to build franchise value by making sure we don't do anything to jeopardize our core deposit franchise.

Okay. So with securities kind of pushing these levels, should we expect incremental -- obviously, there's some seasonality to this quarter, should be expect incremental growth in the securities book going forward or -- and then maybe you could speak to -- Mike, the margin kind of dipping below 3%.

Well, I think the incremental growth in the deposits will depend upon how sticky these institutional deposits I mentioned in my prepared remarks turn out to be. Obviously, the public-fund deposits are higher, as I said, about $200 million, so we're going to have more of that hanging around. But some of these institutional customers as well, depending on their behavior and their needs, could keep deposits with us longer.

We don't know.

Yes.

Okay.

And as far as the margin goes, I don't think there's anything magic about crossing the 3% threshold. I think it is what it is. And I believe that -- and I know that we make sure that we always have a positive spread between the deposits we bring on and the ensuing investments or assets that we purchase.

And you mentioned our loan growth, we actually have had industry leading loan growth. While light compared to the past, it's pretty good compared to the industry.

Yes.

Okay. And then, Mike, what's the duration of the securities book?

About 36 months now.

Okay.

So slightly longer than it was about a year ago.

Okay. Just lastly, and your comments on Durbin were helpful, I just wanted to make sure I heard you correctly. So there's $18 million -- is $18 million the number that's kind of at risk if this goes through as is, and is that a -- is that a complete wipe-out of those fees or that the incremental hair-cutter, maybe just --

That would -- that was based on the analysis that's out there today, that would -- that would assume that the healthcare impact goes through fully and there is a likelihood -- there is a possibility that there is some improvement to what's out there right now by not including healthcare or including less of a decrease on healthcare. We don't know where that's going to come out.

This is Peter. About $6 million of the $18 million is related to our healthcare debit card business. As you may recall, there was a intent, we believe, by Congress to exclude healthcare debit from the Durbin Amendment; however, that remains to be seen, as we said in our prepared remarks.

Okay. And then the remaining $12 million is just the traditional Durbin, okay.

Correct.

Thanks a lot, guys.

And I just want to make one clarifying comment, the duration on the portfolio is 30 months. The average life, six.

And our next question does come from the line of Peyton Green with Stearne, Agee.

Yes. Good morning. Congratulations on a good quarter. I was just wondering if you could comment a little bit, over the past couple years, if we step back from one quarter versus another, the deposit balances have grown a little over $2 billion to $9.5 billion on average of the -- in the first quarter. I was just wondering, that should consider comparable seasonality. How much of this do you think is because there was a credit cycle and people are valuing their bank and their relationship with their bank and how much longer would this have to stick around for you to take maybe a little bit different approach with the bond portfolio?

I think it remains to be seen how much of this really sticks around. So in other words, have things changed? There has been a sea change essentially, and people would hold more deposits regardless of what the economy does. I think that remains to be seen, so that -- that's point one. Point two, as far as doing something different with the investment portfolio, as I said in my remarks, we are clearly preparing the portfolio for a higher interest rate environment. So for us to do something in the short run based upon that expectation really doesn't make a lot of sense in my mind. So we're going to continue, unless we see something different, right now our belief is rates are going to go up and that's what we're preparing the portfolio for.

However, we have been, right along, been making changes to the portfolio.

Yes.

And moving more from our noncore to our core over the last --

Yes.

-- over the last 12 months. Quarter by quarter, we've been making pretty major changes to that just because of this issue, so money has been sticking around longer. We do monitor it pretty regularly and is -- as we feel more comfortable that it is sticking around, we will take action with the portfolio.

Okay, and then to clarify, in terms of the public-funds flows were positive and were $200 million more than what you expected, I guess. And then how much of the growth and deposits was related to the institutional customers versus your normal banking business?

Yes, it's going to be in the billion number. We have at least $1 billion for sure, and again it's somewhere between $1 billion and probably $2 billion, when you look at the whole cycle. Now I'm going back into 2008.

Most categories were up though, but it does remain the majority of the increase.

Okay, so just the institutional piece is up a billion over the last two or three years?

Yes, and I want to clarify your question. You asked about the public funds. The $200 million -- the jumping-off point, if you will, is $200 million higher. The attrition rate that we would normally experience, the slope of the line, is pretty much identical to previous periods. But the jumping-off point is $200 million higher.

Okay. And then on the loan-growth side, the period-end balances were up a good bit more than the average balances. Was there any change in customer behavior? I know that customers have been pretty cautious and careful in drawing down lines --

Um, I --

-- but have you seen any change?

This is -- this is Mariner. I would say that there is some slight improvement in behavior. I would say very slight. The -- there -- our comments on the commercial side, I would say that our book seems to be performing slightly better, sales seem to be improving, but it's all very slight and -- however, I -- we feel pretty good about our pipeline and I think a lot of that has to do with continued effect of picking up market share.

Okay.

It's a take-away. It's a take-away game right now. And on that score, we're performing quite well.

Good, good. And then on the charge-offs, the charge-offs ticked up in the quarter, was that any one issue or (multiple speakers)?

Yes, I mentioned in my remarks, Peyton, that it was literally -- almost 100% of it is one syndicated credit that has been sitting on our books for -- since 2009. We finally took -- decided to charge it off and move on from it. So our overall performance of the portfolio has actually improved significantly and this is a one-time event with one credit.

Okay. So the reduction and nonaccrual is primarily related to that, this --

Yes.

Absolutely.

-- one credit as well? Okay.

Very much -- very much so.

And then, I know that you all are focused on getting operating leverage this year maybe more than last the last two or three years where you've been adding to scale and improving the functional capacity of a lot of your business lines, how much of the way do you think you got there in the first quarter, is that just the beginning?

It's a great question. We're focused on it. I would say just look at the percentage growth that we just quoted for you in the first quarter, they all look very strong and we have no reason to expect that they won't continue, all things con -- being equal.

Okay. And then to ask -- this will be my last question, but on the -- the Reams side of the equation, their money flows have been relatively flat over the last two or three years and it seems like you all went out of the gate with some pretty good traction there. Is there anything in particular going on now that they're under your banner, that's new that gives you optimism?

Well, as you saw, we brought in over $400 million in new flows and that was a mix of some existing customers that added to their positions, some net new customers that were also brought in during the -- during the quarter. We very much like the way Reams matches up with Scout. We're beginning to leverage the sales teams and the distribution opportunities, just as we thought we would when we made the acquisition, and we're very positive about Reams and how it will mesh with Scout over the coming year. So it's pretty much working just the way we had intended, Peyton.

Okay. And then how big are the two little funds that, I guess, closed earlier this week?

Yes, we picked up $470 million in assets. Now remember, Reams was the subadvisor already for these funds, so those assets are really in the house already in one form or another. There are two funds, the core-plus fund is $407 million roughly, and the core fund was $63 million. So those two have been rebranded Scout as of last week. They are now on our platform and we are out selling those to each of our customers every day.

Yes, the real benefit of that was -- is to -- was to maintain control and also to put them onto our mutual fund platform so that we can sell them the same way we sell our other funds.

Yes.

And is there any improvement to the fee-income stream now that you're not the subadvisor but the advisor?

No.

Okay.

No, it's the exact same fee structure.

Okay, great. Thank you very much.

Thank you.

(Operator Instructions). And at this time I'm not showing any further questions in the queue. I'd like to turn the call back over to Abby Wendel for any closing comments.

Thank -- excuse me, thank you very much for your interest in UMB. This call can be accessed via replay at our website beginning in about two hours and it will run through May 12th. And, as always, you can contact UMB investor relations with any follow-up questions by calling 816-860-1685. Again, we appreciate your interest and time.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We do thank you for your participation. You may now disconnect your lines at this time.