Kay Gregory – Investor Relations Mariner Kemper – Chief Executive Officer Mike Hagedorn – Chief Executive Officer-UMB Bank and Interim Chief Financial Officer.

Mike Perito – KBW Peyton Green – Piper Jaffray.

Good day and welcome to the UMB Financial Second Quarter 2016 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms.

Kay Gregory, Investor Relations. Please go ahead..

Good morning and thank you for joining us for our conference call and webcast regarding our second quarter 2016 financial results. 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 10-K for 2015 and subsequent 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. Our earnings press release, as well as our supporting slide deck is available on our website at umbfinancial.com, under news and events in the Investor Section.

The slides are also available in the webcast link for your reference. Reconciliations of non-GAAP financial measures have been included in the earnings release and on Pages 5 and 6 of the supporting slides. On the call today are Mariner Kemper, Chief Executive Officer and Mike Hagedorn, CEO of UMB Bank and Interim Chief Financial Officer.

I’ll now turn the call over to Mariner Kemper..

Thank you, Kay. Welcome everyone and thank you for joining us today. This morning, I'll provide commentary on our high-level results, which include continued strong loan growth and progress on our efficiency initiatives.

The first, as you saw in a separate press release, I'm happy to announce that we've named Ram Shankar as our new Chief Financial Officer effective August 8. Ram brings more than 20 years of financial industry experience that includes capital markets, balance sheet strategy, mergers and acquisitions, and financial planning and analysis.

I'm excited to have him join us and expect his background will serve us well as we focus on strategic growth. Turning to second quarter results, on Slide 4 you'll see that net income was $37.3 million or $0.76 per diluted share.

On a non-GAAP basis, adjusting for items shown on Slide 5, net operating income was $39.2 million or $0.80 per diluted share.

On Slide 7, you’ll see that we continue to deliver solid loan growth with balances increasing 13.1% compared to June 30, 2015 and 15.8% on a linked-quarter basis annualized, surpassing the $10 billion mark for the first time in our history.

This growth, along with the changing mix in our loan portfolio, helped drive our net interest margin to 2.86% for the second quarter compared to 2.59% a year ago. Mike will provide more detail later in the call. On Slide 9 and 10 we've included trends on selected performance metrics. While I'm happy to see positive momentum, our work continues.

As I shared at our investor day in May, we've focused on improvements in several metrics; NIM to total assets, we are seeing slight improvements from our strong loan growth and remixing of our balance sheet although we expect our quality to cause some discount to peers; fee income to total assets, where we continue to outperform our peers due to our diversified model; revenue per FTE, which continues to improve and remains comparable to industry trends; and expenses to total assets, which we believe is the metric with the most potential to improve our profitability metrics.

On Slide 11 is an update on our progress we've made on those initiatives we announced in 2015. In the second quarter we recognized an additional $4.1 million in savings, bringing the total to $18.5 million to date. We remain on track to realize the annualized savings of $32.9 million and we'll continue to report on progress made.

As we've mentioned before, we are committed to the execution of our expense initiatives not only as originally outlined in 2015, but also in our day-to-day operations to increase efficiency as we continue to grow our business.

To that end, we continue to identify and put in place other improvements that will begin to impact our results in the coming quarters. Overall, I'm pleased with our results this quarter and the progress we're making. Now, let me turn it over to Mike who will discuss our results in more detail and provide a little more color on segments and drivers.

And then, we'll be happy to take your questions.

Mike?.

Thanks, Mariner, and good morning, everyone. First, I echo Mariner's comments regarding our new CFO. I look forward to welcoming Ram and getting him up to speed, allowing me to fully focus on performance within the bank.

Now, looking at our balance sheet, total loans increased 4% on a linked-quarter basis and 13.1% compared to a year ago to $10.1 billion at June 30. Of that balance, $1 billion was attributed to acquired balances plus loan production through legacy Marquette channels.

Credit quality remained sound with 0.11% net charge-offs and 0.58% non-performing loans both as percent of loans. Total securities available for sale in our investment portfolio stood at $6.8 billion at June 30.

Portfolio balances showed a slight decrease both on a linked-quarter and a year-over-year basis even while we added $1.2 billion in deposits over the past 12 months. This is a result of our ongoing effort to rotate earning assets into loans.

Details related to the composition of our investment portfolio and the past quarter's activities are shown on Slide 15 Turning to liabilities, total deposits increased 7.9% compared to a year ago and 1.5% on a linked-quarter basis to $15.6 billion at June 30, 2016.

The cost of interest-bearing liabilities for the second quarter was 23 basis points and total cost of funds included non-interest-bearing deposits was 16 basis points. Second quarter 2016 net interest income before provision rose 2.8% on a linked-quarter basis and 24.5% year-over-year to $121.2 million.

Net interest margin for the quarter increased 8 basis points from the first quarter driven largely by the positive asset mix variance. In spite of the adverse impacts of declining long-term rates, the average yield on earning assets increased 9 basis points on a linked-quarter basis to 3.01%, while the total cost of funds rose just 2 basis points.

Loans comprised nearly 55% of average earning assets for the second quarter versus 51% for the same period last year. We continue to expand net interest margin through remixing our balance sheet, both by rotating earning assets into loans and by shifting the mix within the loan and investment portfolios.

Provision expense increased to $7 million for the second quarter and is a reflection of our consistent methodology, which considers the inherent risk in our loan portfolio, as well as other qualitative factors such as the growth of our loan book and macroeconomic conditions.

There is not one specific area or loan category that is driving provision changes. It is merely the combination of a variety of factors. Looking at non-interest income, we saw slight improvements on both a linked-quarter and year-over-year basis. The details and primary drivers of the changes are shown on Slides 19 and 20 and in the press release.

On a linked-quarter basis, trust and securities processing income was flat as increased revenue from Scout and the asset management businesses within the bank offset a slight decline in revenue from asset servicing.

Year-over-year, we saw improvements again in brokerage fees driven by growth in money market balances and the resulting 12b-1 fees following the December 2015 rate increase. Moving to Slide 21, total non-interest expense increased $4.5 million or 2.5% compared to the first quarter 2016.

Higher marketing and business development expense related to the timing of advertising campaigns and travel expenses along with an increase of $1.5 million in non-acquisition related severances were the largest drivers of the linked-quarter increase. On a year-over-year basis, non-interest expense increased $13.3 million or 7.7%.

The largest driver of the increase, salary and benefits expense, rose by $9.3 million and included $8.1 million in Marquette salaries and benefits compared to $3.4 million in the same quarter of 2015 and an increase of $2 million in non-Marquette-related severances. Another driver of non-interest expense continues to be technology spending.

Our efficiency initiatives contain some improvements and savings related to changing how we use technology, but we are also investing in our platforms to make sure our systems are current, resilient, and will support our growth now and in the future.

This expense is included in the equipment expense line on our income statement and for the second quarter totaled $11.5 million, an increase of 3.6% from first quarter 2016 and 13.8% from the second quarter of last year.

On a non-GAAP basis, operating non-interest expense, which excludes the impact of those severances and other items described in the reconciliation, was $182.2 million, an increase of $5.1 million or 2.9% compared to the first quarter 2016 and $9.9 million or 5.7% compared to the second quarter of last year.

Now, turning to the segments, I'll cover just a few highlights. The bank segment results begin on Slide 23 in the deck. Pre-tax profit margin for the bank in the second quarter was 23.1%, improved from 22.2% in the first quarter and 17.1% a year ago. The components along with the quarterly highlights are shown on the slide.

As a reminder, the largest portion of acquisition expense as well as ongoing Marquette salary and benefit expense are recognized in the bank segment. Bank segment includes four lines of business; commercial banking, personal banking, institutional banking, and healthcare services.

On Slides 24 and 25, we've provided a look at the revenue, expense, and resulting net income contributions from each of these businesses. As I mentioned in May, the fee income contributions from institutional banking and healthcare are continuing to grow, providing more diversity in the bank's revenue.

For example, you can see here that healthcare services provided 11.1% of the bank's non-interest income in the second quarter. In the same quarter last year that contribution was 9.4%. Looking at the non-interest expense chart, nearly 40% came from personal banking.

Efficiency is our highest priority in that business and I'll share some detail around progress there in a moment. Also, it's important to remember that revenue and expense from Prairie Capital Management, which can vary greatly each quarter, runs through the personal banking line of business.

Turning to Slide 26, we saw strong loan production in the second quarter with lenders across all of UMB's lines of business adding $677 million in loans.

Total payoffs and pay-downs for the quarter were $340.1 million, which is slightly higher than the average of $308 million we saw over the prior four quarters, although payoffs and pay-downs as a percentage of our growing loan portfolio has remained fairly steady. The composition of our loan book and a regional view are shown on Slides 27 and 28.

We added $252 million in CRE and construction loans during the second quarter. By property type, industrial project lending remained strong and we are seeing demand in multi-family housing including student apartments. Our Kansas City team led in CRE and construction loan originations this quarter.

In the C&I space, loan balances increased by $97.1 million during the quarter. We had success closing loans with several new relationships and saw additional borrowing by existing clients and varied industries including agriculture, communications, and financial services.

June 1, marked the first full year of our new national lending businesses, asset-based lending and factoring, and both businesses posted balance increases during the second quarter. The factoring business added 17 new borrowers during the quarter and period-end balances increased 14.4%.

As a reminder, in factoring it's important to consider not only the outstanding balances, but the volumes we are seeing, effectively turning those balances several times throughout the quarter.

On the ABL side, customer sentiment is improving both in terms of new business and increased borrowing by existing clients and balances in asset-based loans grew by 5% during the second quarter.

Intercompany referrals are increasing in both of these businesses as we continue to build relationships between commercial bankers and the factoring and ABL teams. Personal banking includes both private wealth and consumer businesses.

In private wealth, total assets under management, as shown on Slide 33, stood at $12.8 billion at the end of the second quarter and AUM within the bank provides a growing contribution to trust and securities processing income.

On the consumer side, work continues to improve efficiency with six branch consolidations completed year-to-date in 2016, bringing our current banking center count to 110. At its height in 2002, the count was 161.

Another four locations are slated for consolidation by year end and we will continue to assess our branch network and how we deliver products and services to our customers.

At the May investor day, we shared progress and plans related to a new delivery model we call 4K that includes changes to staffing, operating hours, and associate incentive structures that align with how customers use our banking centers. We have moved 16 locations onto this model and 18 more are slated to transition in the third quarter.

And initial results are showing banking-center-level efficiency improvements of 20% to 30%. In healthcare services, the number of HSA accounts grew to 826,000 at June 30 for a 35.8% year-over-year growth rate.

And you'll see on Slide 35 that, at quarter end, healthcare deposits stood at $1.4 billion and total HSA investment assets reached $154.2 million. Healthcare deposits continue to be a growing source of funding for us, providing 9.7% of average total deposits. This contribution has grown steadily from just 2.1% of average deposits in 2009.

Now I'll turn to the institutional investment management segment, our Scout Investment business, with details beginning on Slide 38. Assets under management increased $781 million during the second quarter and stood at $28.1 billion as of June 30, 2016.

In the quarter, Scout Investments experienced net outflows of $22.9 million, the lowest level in six quarters. Strong fixed income markets provided a lift of $676 million while equity markets added another $128 million. The components of equity and fixed income AUM changes are shown on Slide 40.

Revenue declines shown for this segment continue to be primarily driven by net outflows in the Scout funds over the past several quarters, largely in the international fund and the resulting shift in AUM mix, which is currently 18% equity and 82% fixed income.

On the expense side, the increases were due to a combination of incentives related to positive fixed income sales and performance along with expenses incurred related to several position eliminations during the second quarter.

Our focus remains on leveraging Scout distribution channels in the institutional, intermediary, and sub-advisory space, and on improving performance. We are in the early stages of improvement with positive equity flows into our separate accounts this quarter and our continued focus should help us capitalize on future opportunities.

The final segment I'll discuss today is our asset servicing segment, UMB Fund Services, which ended the second quarter with $182.3 billion in total assets under administration. The financials for this segment are shown on Slide 42.

While revenue in this segment comes from a variety of sources including number of accounts and transaction fees, the largest driver is average AUA, which is greatly impacted by the health of the equity markets.

Our investment managers' series trusts continue to grow and currently have 86 active funds with assets of $16 billion, representing a 12.7% increase from $14.2 billion at June 30, 2015.

These series trusts provide a simple, cost-efficient means of starting and operating mutual funds where UMB Fund Services provides fund oversight, compliance, and board duties, in addition to serving as fund accountant, transfer agent, and custodian.

Slide 42 and 43 of the supporting materials shows some additional metrics for our various products within Fund Services. With that, I'll conclude our prepared remarks and turn it back over to the operator, who will open up the line for questions..

Before the Q&A session begins, I would like to apologize for Chorus Call's technical issues that caused today's call to be delayed. We apologize for this inconvenience. We will now begin our question-and-answer session. [Operator Instructions] Our first question comes from Chris McGratty of KBW. Please go ahead, sir..

Hey, good afternoon. This is actually Mike Perito stepping in for Chris..

Hey Mike..

Hey Mike..

So I thought maybe just a quick question to start on the securities portfolio and kind of some of the yields. I mean it looks like you guys have quite a bit of some lower-yielding stuff coming up in third quarter.

And if we kind of just think about it, I remember a couple quarters ago at the end of 2015 you guys were talking about how you were purchasing more mortgaged-backs. And then, more recently, I think a lot of the talk has been about purchasing private-placement bonds and it seems like you guys have been picking up pretty decent yield as you reinvest.

Can you maybe discuss a bit of what you are looking to repurchase and kind of refill the bucket with? And then, maybe also just give some color on these private-placement bonds you've been purchasing in terms of yield and duration..

Yes, Mike. This is Mike Hagedorn. You're right about the private-placement bonds. They show up as HTM. So, when you look at Slide 15 remember that's just the AFS portfolio; it doesn't include those held to maturity.

They tend to refinances of previously-issued bond issuances and they're generally in two categories; higher-ed and healthcare or hospital-related bonds.

As far as the opportunity goes to reinvest, you're right, it shows on the slide that the roll-off yield in the third quarter is 1.27% and then, clearly, we've been buying yields – in the AFS portfolio I'm talking about now exclusively – yields higher than that. And we've been talking about that for several quarters prior to this quarter.

So, that continues, even with the slight interruption that Brexit caused in the yield curve. So, we do expect that will incrementally add to interest income and NIM, at least in the next couple quarters..

The level of that improvement in the next six months is your guess is as good as ours, based upon what our investment opportunity is..

Yes. So, if I look at – the held-to-maturity book has grown.

I mean do you have any data on how the duration of the total securities portfolio has kind of fared over the last few quarters?.

Sure. So, the AFS portfolio has come down. So, we've tried to keep it, and in previous quarters you probably heard us talk about 38 months to 39 months, we're now at 33 months. But the nice thing about the held-to-maturity portfolio, and the strategy and the reason we did that, was we anticipated that was potentially an issue.

And so, that portfolio is at 77 months and at very nice yields..

Okay. And then, maybe – thanks for that color. And then, switching maybe to the loan growth. I mean the momentum has been pretty obvious, but I noticed the one slide that showed kind of the Marquette loans have been about $1 billion and haven't really moved much.

I mean can you maybe just speak to what kind of momentum you're seeing there or what kind of has held that back? And then, how the pipelines are looking today and what the kind of spread over the various segments you guys have is..

Sure. This is Mariner. You know, the Marquette piece, there are several components to it, right? We've got Arizona, we've got Texas, and then we have the two specialty lending businesses.

We have seen some nice progress in certain areas of that portfolio and we're still waiting for kind of the assimilation of kind of the energy, the momentum to build there. We still feel very confident that we're going to see really nice things from that overall portfolio.

But, at the end of the day, what you should really focus on is the fact that we continue, at the company level, to post a very nice loan growth and really don't expect to see that moderate. Looking into the next quarter, we have a very strong pipeline yet again..

Okay. And then, sorry, if I could just sneak one more in on the topic of loans. I noticed the comment that you guys were expecting about 55% of your loan portfolio to reprice, if I read it correctly, in the third quarter.

Can you just speak to what kind of impact you expect that to have, I guess, on loan yields and the margin in general?.

Yes. So, while I won't make a specific comment, I guess I'll make more of a reminder that a portion of that, probably a large portion of that, is commercial lines of credit.

And so, to the extent that those customers are borrowing and they have not already had a repricing event as a result of the Federal Reserve increase in December, you would see an uptick. But if they have, because they're tied to an index, let's say, you're not going to see a lift related to that.

So, it's going to take an index change to see marked increases. And a lot of them, if they're term debt and they're coming due, they're either going to be renewed at rates, I would guess, that are close to what we have today..

I think the key to what we've been able to accomplish so far, really, is the remixing and adding more term debt and such; the work we've been doing over the last many quarters to remix the earning asset base and we've been seeing improvements from that. Along with, obviously, the Marquette book has added some nice benefit to overall loan yields..

Right. Alright. Appreciate the color, guys. Thank you.

Thanks..

[Operator Instructions] Our next question comes from Peyton Green of Piper Jaffray. Please go ahead..

Yes. Good morning. I just wondered maybe, Mariner, you mentioned progress, potentially, on the non-interest expense to total assets on Slide 10. And I guess if we look at the Marquette cost savings that were realized and the efficiency initiative that had been realized, we really haven't seen any movement lower in that expense to asset number.

When would you expect the other items that you're having to spend money to taper off and really start to benefit that expense to asset number, given the growth outlook?.

Well, you know, Peyton, you know we're obviously not giving guidance on that specifically. But I think the best I can do for you is just to tell you that that expense initiative was really designed – by announcing that expense initiative that we gave you was really designed to demonstrate commitment.

So, we are continuing to do the same type of activities and continue to feel very positive that we will continue to see benefit. So, I can't really give you what will that be and what will the run rate be, but we still expect to see all $32 million and we still expect to see additional benefits..

And let me add to that, Peyton. Just as a reminder, on Slide 10 where it shows 3.76%, that that does include severance related to both the expense initiative and any remaining severance in Marquette. And so, to kind of be fair to that, you have to exclude those numbers to come up with a different number..

Right. If you were to do your own modeling to back out the impact of Marquette, in total, really, I think you'd see that our expense growth rate at the legacy level was pretty strong. I mean it's a positive picture..

Okay.

And then, where do the bond gains get allocated to in the segments?.

They go to the bank. Anybody that has a deposit balance will get a piece. So, a small portion would go to asset servicing, but the lion's share is in the bank.

Okay. Alright, great.

And then, Mariner, I think you referenced this a little bit earlier, but how would you characterize the pipeline today versus where it was a quarter ago or six months ago?.

I would say that it's as strong and possibly stronger for the next quarter..

Okay.

And then, with regard to pricing, how are you seeing pricing hold up, given a lower-for-longer kind of context about the interest rate environment?.

Well, as it relates to our overall NIM and net interest income, I would say that it remains to be a positive story because we are, again, remixing. So, we're getting some better exposure to term debt and real estate debt, which is all lifting overall yields. And so, we're seeing that, I would say.

We don't, this is anecdotal, we don't see much more downward pressure on the pricing, but, in general, on working capital and such, we're not seeing any lift from that either..

And as a reminder, we've talked about, in prior quarters, about a model that we've put in place to be more disciplined in our pricing on loans and that clearly has helped us moving forward..

Okay. And then, last question for me. With regard to the efficiency initiative, I think there's $9.4 million of pre-tax benefit left for 2016.

Mike, I mean would you expect there to be any particular lumpiness about that $9.4 million?.

Sure, it will be. And, obviously, we've had this question in prior quarters as well and, while I can't tell you which quarter it will come in, we're confident that we're going to get all of the $32.9 million when we're done..

Okay, great. Thank you very much..

And, Peyton, I just might add, again, it's a cultural change to UMB. We're very focused on continuing to gain that type of operating leverage. So, the project, again, was designed to share with our shareholder base that we are committed and serious. So, you shouldn't expect us to announce more initiatives. It's more of a cultural shift.

You should expect us to continue to operate it that way..

Okay, great. Thank you for taking my questions..

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

Thank you for joining us today. This call can be accessed via replay at our website beginning in about two hours and will run through August 10th. And, as always, you can contact UMB Investor Relations with any follow-up questions by calling 816-860-7106. Again, we appreciate your interest and time. Thank you..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..