UMB Financial Corp (UMBF) 2017 Q3 法說會逐字稿

Good morning, and welcome to the UMB Financial Third Quarter 2017 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, 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 laws.

Our earnings release as well as the supporting slide deck is available on our website at umbfinancial.com, under News & Events in the Investor section.

Reconciliations of non-GAAP financial measures have been included in the earnings release and on Pages 5 through 7 of the supporting slides.

All earnings per share metrics discussed in this 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 reflect continued marginal expansion, strong positive operating leverage, strong contributions from our private wealth, Corporate Trust and Financial Services businesses and substantial growth in our national lending platforms.

On Slide 4, you'll 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 per 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 leveraging 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 represent a 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 median 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 range.

First, the $200 million payout 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 was 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 cash to use.

Top line production remained strong at $604 million compared to the average of $597 million over the past 4 quarters as 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 payoffs 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 to the timing of payoffs, paydowns and line fluctuations is difficult to predict with precision.

Turning to Slide 10, you'll see that the chart that I share every quarter showing the history of our net charge-off ratio, which has averaged 23 basis points over the past 5 years.

Credit trends can be 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 recourse with the borrower and while we are pursuing options and we hope to recover at least some portion of the balance, we charged it all off during the quarter.

Excluding this credit, the general portfolio of quality continues to be in line with historical performance.

Finally, we continue to make progress towards the divestiture of Scout, working through client consents and practiced solicitations 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 the 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 based and factoring loan portfolios was 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 earning assets expanded by 11 basis points to 3.52%, while our cost of interest-bearing liabilities plus DDA increased 7 basis points to the 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 our 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 deposits was driven primarily by the impact of higher short-term rates on some of our index deposits, and to a lesser extent, by a mix-shift within deposit categories.

Slide 14 details the changes in noninterest income, which decreased 5.4% or $6 million on a linked-quarter basis.

$2.8 million of the decrease was related to the changes in Bankcard 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 quarters to reward the expense, reflecting related redemption experience.

These expenses can vary with current and prior quarter's card purchase volumes as well as customer redemption and forfeiture rates.

For the quarter, commercial card spend, which has a 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 was related to the second quarter income from our seed capital held in certain Scout funds.

As I noted 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 revenues also flows into that line, experienced lower linked quarter revenue from municipal and MBS underwriting and trading activities, as volatile market conditions have kept some customers on the sidelines.

However, we've seen impressive results from our newer nonbank 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 around the political and fiscal outlook plus the typical summer slowdown from declining third quarter revenues.

Deposit service charge income for the quarter was negatively impacted by typical seasonal fluctuations in health care deposit charges 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 edge, the rate would increase another 5 basis points at the end of September.

Finally, other noninterest 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 drivers of the year-over-year increase in noninterest income are included on the slide.

For the third quarter, noninterest 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 median of 25.3%.

Slide 16 in the press release contains detailed drivers of the changes in noninterest 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 salaries and wage expense remained flat.

As a reminder, some of our expense line items such as bonuses and commissions, processing fees and Bankcard expenses 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'll 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'll find the details on 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 held-to-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 as purchases made were at accretive yields.

The average yield on the revenue bonds in our HTM portfolio was 3.85%, up 3 basis points from the prior quarter.

Details related to the past quarter's activities and portfolio's 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 as the 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 funds 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 deposits 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, betas continue to be in line with or slower than our simulation modeling.

Moving to segment results.

You'll see the financials for the bank and Asset 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 billion at quarter-end compared to $201.5 billion at the end of second quarter and $186.2 billion a year ago.

The increase in AUM 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.

Noninterest income increased $325,000 on a 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 provides a turnkey cost-effective method for advisers to launch new funds now have $16.7 billion in assets from levels near $2 billion 5 years ago.

Details related to this segment are on Slides 24 through 26.

I'll now hand it to Mike to cover the details and drivers for the bank, and then we'll 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 at the bank decreased 2.9% compared to second quarter, due largely to the reduced salary and benefits expense, Ram discussed earlier, and helped 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 a positive 13 basis points related to increased LIBOR and prime rates as loans repriced; 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'll see the strong growth loan production, Mariner mentioned earlier.

Total payoffs and paydowns of $476 million for the quarter, represented 4.3% of loans, which is in line with average levels over the past 4 quarters.

Payoffs 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 growth and a regional view are shown on Slides 30 and 31.

And 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 important than outstanding balances.

In the 15-year history of Marquette Transportation Finance, approximately $15 billion in 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% a year ago.

Funding in this quarter came from a variety of industries, including staffing, oilfield 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-based 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 acquired the business in 2015.

Year-to-date, our ABL team has closed $203 million in new client commitments.

CRE & Construction, production and pipelines remains strong, even as balances are impacted by payoffs.

We began our 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 & 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 won't stretch on quality, our average CRE & 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 were the overall volume leaders in CRE & Construction Lending.

Consistent with prior quarters, multifamily and other investment CRE represents 32% of the average CRE & Construction loans on our balance sheet and 12% of our total average loans.

For further context, our CRE balances are approximately 120% of risk-based capital.

Our Personal Banking division, Private Wealth and Consumer continues to provide about 1/3 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.

In our consumer bank, we continue to make changes to improve efficiency.

During the third quarter, we consolidated 4 branch locations, bringing our total to 95 banking centers and 3 commercial and private wealth facilities.

Our efforts to improve operating leverage include 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 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 5 additional branches are in the 4K or 7K transition process.

Slide 34 shows assets under management and our private wealth, Institutional Asset Management, brokerage and Prairie Capital Management businesses that are within the bank segment.

Combined AUM now stands at $15.5 billion, representing a 5-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, focused 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 wealth contribution to our total Trust and Securities Processing income has increased 10.7%.

Our commitment to Asset Management for the families and institutions we serve remains as strong as ever.

In Institutional Banking, our nonbank channel sales teams continue to build relationships and pipelines with results that help hold the line on 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-BQ 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-than-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 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 and strong market performance.

Slide 38 shows the mid-year 2017 rankings released by Devenir Research, and UMB continues to rank fifth in the U.S. in terms of accounts, and seventh 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 health care reform, including the recent executive order related to potential changes in association health plans.

It's too early to determine possible implications, 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'll conclude my prepared remarks and turn it back over the operator who'll open up the line for questions.

(Operator Instructions) The first question comes from Ebrahim Poonawala with Bank of America Merrill Lynch.

I think if we can just start with expenses.

Just want to make sure we understand the decline we had.

It sounded like the sequential decline had a lot to do with lower book bonus, lower customer activity as opposed to any particular sort of cost-saving efforts that may have led to this reset.

Trying to better understand in terms of as we look out -- looking at the $172 million expense run rate.

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 run rate?

That would be helpful.

Ebrahim, it's Ram.

Yes, as I said in my script, a lot of the decline in expenses was related to variable comp whether it was bonus and commissions or even some health care or benefits expenses.

There's 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 suggested, 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.

Also -- on the -- all right, I'll think about it from a year.

And last year it was essentially flat, down from last year, right?

We were at $178 million last year.

Well, there's no -- obviously, we don't give specific guidance on that.

But, I think, as we've been trying to move your 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 you were to do last year's growth rate, this 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, that 67% should generally trend lower as we think about the next 4 to 6 quarters?

Again, as we've been talking, Ebrahim, we're -- we have a hungry company and we continue to invest.

So we're more focused on the leverage we get out of our investments and 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 term are strong.

Fair enough, understood.

And moving to loan growth, we've seen loan payoffs, paydowns remain 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 growth might look like, absent any sort of big change in the macro backdrop?

Well, I think, 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 paydowns 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 looked at the data from our prepared remarks, as Mike was mentioning, we had our growth reductions actually higher than it has been in the previous 4 quarters and we just had some, what we perceive to be, some anomalies around -- we're still watching it, right?

I mean, there is some paydown activity that the rest of the industry is seeing related to the line utilization.

We're 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 with that big paydown we had in the second quarter, we only had half that impact, so that rolled into third quarter as well.

So, I think, we still think gross loan production can outperform what you're seeing in general from the peer group, and our paydown and payoff production is still relevant and running in the general same range, I mean, 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?

Do they continue to run off or...?

Sure, Ebrahim.

If you look at our total funding, right, nonequity funding, about 27% of our total funding is hard index to some kind of short-term interest rate, mostly Fed funds effective.

So to the extent that we see any more fed fund increases, though, should go one-for-one.

But then if you look at the rest of the funding mix that we have, approximately 31% of our total funding is DDAs.

And then we have another 11% in health care savings accounts that have been fairly resilient that way.

So that's the -- 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 will be the math, right?

So 27% of 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 to start seeing more pressure as we get another rate hike move into early '18?

So, Ebrahim, as we've talked about for years, one of the advantages that UMB has is -- 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 upon the rate that we pay.

They are fairly sensitive to that.

But I don't want you to think that, okay, rates go up, those are going to go up, and they're just going to keep adding to that portfolio.

We can 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.

The next question comes from Chris McGratty with KBW.

Ram, I want to follow up on the prior question about the index deposits, the 27% of funding.

I guess, given your favorable loan-to-deposit ratio, and I understand the kind of other synergies that these deposits may bring to the bank.

But what would it take for kind of a more substantial kind of remixing on the liability structure to kind of unlock a bit more asset sensitivity that, I think, that your loan portfolio provides for you?

As Mike said, Chris, I'll just repeat what Mike said, right?

So there is a synergy in having those deposit relationship with our institutional customers as well as opposed to just going to the Fed window doing that.

So I think you should expect similar trends.

If you look at the last 3 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 edge we talked about, we increased our ECR rates.

Obviously, we want to protect our turf from 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 that's been at the end of the third quarter.

Okay, thanks for that.

Maybe on the card fees, you talked about the reward expense and the change in vendor kind of impacting the last 2 quarters.

As we kind of go into the fourth quarter into the next year, is that adjustment, if you will, largely behind you?

And do you expect kind of this level of revenue is going forward?

Or is it kind of a catch-up given kind of these adjustments in the past 6 months?

There's about a $0.5 million of benefit in the third quarter from the liability adjustment, Chris.

And then if you look at seasonal trends, especially in our health care business related to FSAs, you'll see some headwinds in the fourth quarter on that particular line item.

But to answer your question, yes, the -- after the third quarter, all these accrual adjustments up and down for rewards will be done and behind us.

And the only thing to keep your eye on, Chris, is if our client behavior changes as a result of having this new vendor.

In other words, what I'm saying is that redemption has increased because the offering is more robust.

So it could change over time, but that'd be a good thing.

That'd be because there is more volume.

Understood.

Right, maybe I could just sneak one more 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're seeing generally is in terms of trends given where commodity prices are?

Yes.

So our total ag portfolio is in the neighborhood of $650 million.

The one credit that Mariner mentioned in his prepared remarks was $6.5 million.

There was $4 million that was charged off.

We expect the remainder in the fourth quarter to be paid off.

And as we said, we think there's some recovery on the $4 million.

And as it relates to ag lending, it's not a new business for us.

It's actually in our roots, being a Kansas, Missouri Bank.

But that where we started as a company.

So we've been ag lenders for 105 years.

I appreciate that.

And then Mariner -- or Ram for the tax rate in the fourth quarter, you guided to kind of a grossing up given the year-to-date trends.

Is it -- is my math right, 23% for the fourth quarter?

Slightly higher than that, I would say 24% to 25% for the fourth quarter, Chris.

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

Correct.

The next question comes from Matt Olney with Stephens Inc.

I guess, first question for Mariner.

Mariner, when you think about driving the positive operating leverage that you're focused on right now?

What are some of the key financial metrics you think about?

Is it just simply revenue outstripping expense growth?

Is it efficiency ratio?

Is it a ROA?

I'm just curious kind of how it's viewed there internally?

Well, I'll just try to keep this high level.

But as a business, that is centered around a lot of technology platforms, software, hardware in delivering our product and the diversity that we have as a company.

All of our business lines come to us every year with plans to keep invested 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 as we approve that spending, that there is profitable growth from the back end of that, that appropriately pays for the spending level.

So that's you may think about the absolute expense and the absolute revenue, it's just a simplicity of making sure that the jaws are widening and that we get the revenue with the spend.

Okay.

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 deals?

Or any kind of nonaccrual and just reversals or anything unusual that may have benefited the yield in 3Q?

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 one-time fees.

These are -- 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 that I'd add to that is, we said this last quarter too that the full impact of the changes in the variable rate loans had not been reflected in the second quarter results.

And so the 13 basis points related to LIBOR and prime changes are something that we expected and, obviously, you're seeing that in the fourth quarter and is the biggest driver.

And then you mentioned the ABL and the factoring.

Can you give us an idea of what the overall yields are on that business versus the overall loan portfolio?

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 just 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.

And just lastly from me as far as the capital, what the additional capital from the sale of Scout, any updated thoughts on 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 group.

As we've talked in the past, we would, over the next couple of years, like to do a decent sized bank transaction, if we can find one that fits.

And then, obviously, behind building the business, there'd be other uses of capital.

There's buying back our stock or whatever the other uses be, we look at all those options.

But we would, obviously, prefer the capital to work in loans and/or a larger bank transaction, if we can find...

Yes and I'll just add that we were opportunistic even in the third quarter, Matt.

We bought about 150,000 shares back when -- during the third quarter.

Got it.

And 1 year or so ago, Mariner, it seemed like the pricing expectations on some of the traditional bank M&A was a little bit too high.

And given we've seen over the last year, is that still what you're seeing from your end?

Or there are some increased opportunities on the bank M&A side right now?

I'd say the same case.

It's still -- I guess, our peers are still proud.

Our friends are still proud.

So -- but that doesn't mean for various different reasons, there won't be opportunities, but I think the conditions are the same.

Yes, I'll just add to that as we've said before, we are a quality buyer and for someone to fit culturally in here and do we want, we're not going to be buying kind of fixer-uppers.

So the multiple is going to be strong, we know that.

The next question comes from Nathan Race with Piper Jaffray.

Ram, just a question on the balance sheet dynamics from here.

I appreciate the commentary around the shrinkage in the securities portfolio.

But can you guys just help us think about the progression from here in terms of the absolute, relative size of the securities focused in, and we get a little pick-up in loan growth as payoffs come down near term and it's, obviously, dependent on deposit flows.

But can you help us in terms of the absolute and relative size of the securities book going forward?

That would be helpful.

Yes, sure, Nate.

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're 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, our HTM portfolio grew up by about $350 million.

Our AFS portfolio shrank by a little more than that.

So we've 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 ag 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 really the commodity prices.

It was related to the value of collateral overall.

And then -- and that's about all I can say right now.

But it's not an arbitrage or a head situation on commodity prices if that's what you're getting at.

(Operator Instructions) The next question comes from John Rodis with FIG Partners.

Ram, just 2 quick -- just 2 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 when you talked about just look at the year-over-year trend.

I just want to make sure we're on the same page.

So year-over-year expenses are up roughly 4%.

Is that sort of what you guys are looking at too?

That's sounds fair -- that's fair, John.

Fair, as a place to start, we're not giving any guidance, so that's not a -- that's not guidance.

It's within the range.

And, again, it depends on the revenue environment, right?

So if Investment Banking income picks up, the variable comp associated with that will pick up.

Medical claims can swing salary and benefits 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 were the most important.

The simple answer is all of the above.

We care about all of them.

And you've seen us to 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're 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 3 quarters or 4, or whatever, somewhere in the future, then we're going to have to do that and we will do that.

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 website and it will run through November 8. As always, you can contact UMB Investor Relations at (816)860-7106 with any follow-up questions.

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The conference is now concluded.

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