UMB Financial Corporation (UMBF) Q2 2025 Earnings Report, Transcript and Summary

Good morning. Thank you for joining today's UMB Financial Second Quarter 2025 Financial Results Conference Call. My name is Jalyn and I'll be your moderator for today. [Operator Instructions] I would now like to pass the conference over to our host, Kay Gregory with Investor Relations. Kay, please proceed.

Good morning, and welcome to our second quarter 2025 call. Mariner Kemper, Chairman and CEO; and Ram Shankar, CFO, will share a few comments about our results, then we will open the call for questions from our equity research analysts. Jim Rine, President of the holding company and CEO of UMB Bank; along with Tom Terry, Chief Credit Officer, will be available for the question-and- answer session. Before we begin, let me remind you that today's presentation contains forward-looking statements, including the discussion of future financial and operating results, benefits, synergies, gains and costs, that the company expects to realize from the acquisition as well as other opportunities management foresees. Forward-looking statements and any pro forma metrics are subject to assumptions, risks and uncertainties as outlined in our SEC filings and summarized in our presentation on Slide 50. Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them, except to the extent required by securities laws. Presentation materials are available online at investorrelations.umb.com and include reconciliations of non-GAAP financial measures. All per share metrics refer to common shares and are on a diluted share basis. Now I'll turn the call over to Mariner Kemper.

Thank you, Kay, and good morning, everyone. Thank you for joining us to discuss our second quarter results. We'll share some brief comments and open up for questions. Compared to 90 days ago, the business environment and economic landscape remains positive as perceived real headwinds post liberation day have largely subsided. While there are still some uncertainties in ever brewing geopolitical tension, the sticker shock from the headline seems to be wearing off. Borrower sentiment continues to be strong, especially as you consider the financial strength of our customer base. Regardless of uncertainties, we remain focused on what we can control, leveraging our business model, which is proven in all economic environments, which you can see in our strong performance in the quarter. Our reported net income available for common shareholders of $215.4 million included $13.5 million of acquisition expense compared to $53.2 million in the first quarter. Excluding these and some smaller nonrecurring items, our second quarter net operating income was $225.4 million or $2.96 per share. One of these drivers for the quarter's strong results was a $37.7 million pretax gain on prior investments made through our various private investment entities included with a pretax gain of $29.4 million on our investment in Voyager Technologies, which went public in June. This equates to a multiple on invested capital of 5.8x and an internal rate of return of 59%. This investment, made over the past 5 years, is another success story from our private investment team. Through this team, UMB partners with private businesses that have strong long-term growth potential by taking equity, subordinated or mezzanine positions. We have a successful track record of financing businesses and have invested more than $200 million across more than 50 businesses to date. Other highlights of the quarter include an 8 basis point expansion in our core net interest margin, double-digit balance sheet growth, solid credit metrics and strong positive operating leverage. On a linked quarter basis, average loans increased 12.7% to $36.4 billion, while average deposits increased 10.7% to $55.6 billion. This reflects solid organic growth as well as the impact of the additional month of Heartland operations in the second quarter. Legacy UMB average loan balances increased 15.3% on an annualized basis from the prior quarter, once again outpacing many peer banks. Banks that have reported second quarter results so far have reported a 5.2% median annualized increase in average loan balances. Our loan balances were relatively flat quarter-over-quarter as top line production was offset by elevated payoff activity as we continue to align the portfolio to our standards. Looking ahead into the third quarter, the loan pipeline remains strong both on legacy UMB and in Heartland markets. Quarterly top line production was a new record, coming in at $1.9 billion in the second quarter. We saw strong growth in C&I and CRE as well as an 11% increase in residential mortgage balances as we begin offering mortgage products in our new regions. We've been encouraged by the activity and production of our new Heartland associates. Net charge-offs attributed to the legacy UMB portfolio in the second quarter were $9 million or just 13 basis points of average UMB loans for the quarter, with the largest portion being credit card. Total net charge-offs for the quarter, including acquired loans were 17 basis points. Given what we know today, we continue to expect charge-off levels to remain near or below our historical averages in the second half of the year. Total nonperforming loans to total loans improved 2 basis points from the prior quarter to 26 basis points. Nonperforming loans related to legacy UMB were just 10 basis points. For reference, banks that have reported second quarter results so far have reported a 0.50% median NPL ratio. We continue to rebuild capital following the acquisition with a CET1 ratio of 10.39%, a 28 basis point increase from March 31. During the second quarter, we completed an offering of Series B preferred stock netting $294 million of Tier 1 capital. On July 15, we redeemed $115 million in outstanding Series A preferred that was acquired in the HTLF deal. Finally, over the weekend of July 11, we successfully executed our pilot conversion of Heartland's Minnesota franchise, bringing it on to the core UMB platform. This initial conversion of a small set of locations allowed us to test our conversion plans and procedures. The process went smoothly and positions us well for the full conversion slated for mid-October, a huge shout out to our teams, especially the technology and product and operations teams as well as our client-facing associates that have worked tirelessly around the clock enabling the seamless conversion. Now I'll turn it over to Ram for more detail.

Thanks, Mariner. I'll begin with the purchase accounting update included on Slides 9 and 10 of our materials. On Page 9, you can see that our second quarter results included $42.2 million in net accretion to net interest income, $13.1 million of which was related to an accelerated accretion from early payoffs of acquired loans. The net benefit to margin from total accretion was approximately 27 basis points. Our operating expenses included $23.4 million in acquisition-related amortization of intangibles. On Slide 10 is the projected contractual accretion for the rest of 2025 as well as for full years '26 and '27. On Slide 12 and 13, we've included some key highlights and drivers of our quarter-over-quarter variances as well as breaking out onetime costs by expense categories. I hope this is helpful, especially with all the moving pieces related to the acquisition and market-related variances. You'll see the accretion income there along with the investment security gains Mariner mentioned. Other notable items impacting fee income in the second quarter included a $3.5 million increase in trust and securities processing led by fund services, which brought on several new clients. Assets under administration and fund services and custody grew to $543 billion, while AUA for all institutional banking businesses topped $600 billion in the quarter. Additionally, credit and debit card purchase volumes reached $5.6 billion, with the related interchange income, driving a 10.4% increase in bank card fees compared to the first quarter. On the expense side, we had $13.5 million of merger-related costs, and we've included the line item breakdown for those costs. We remain on track with our announced acquisition-related expenses. Excluding the impact of merger and other onetime costs, salaries and benefits expense increased by $21.3 million, largely driven by a full quarter of expenses for the new associates from Heartland. Also, as noted, we made charitable contributions of $8.3 million in the quarter compared to $524,000 in the first quarter. Looking ahead, we would expect third quarter operating expense to be slightly higher in the $380 million to $385 million range, driven primarily by the full impact of the mid-second quarter merit increases and increased incentive accruals for strong company performance as well as an additional day count. Our third quarter fee income will be impacted by changes in market value through every quarter end of our 904,000 share ownership in Voyager stock relative to the June 30 closing price of $39.25, this will continue in subsequent periods until we choose to exit our position. Turning to the balance sheet. We had strong deposit growth, both organic and related to the full quarter of HTLF balances. Interest- bearing and DDA balances increased 11.9% and 7.3%, respectively, from the first quarter. The cost of interest-bearing deposits remained flat at 3.34% while total deposit costs increased 2 basis points, reflecting the mix shift. Relative to the core margin of $2.83 in the second quarter, that excludes all accretion, we expect third quarter margin to be essentially flat. The positive impact from fixed asset repricing on bonds and fixed rate loans will likely be offset by increased interest expense from the strong interest-bearing deposit growth I just mentioned, combined with a typical third quarter low point for DDA balances. Finally, our preferred dividend in the second quarter was $2 million. Dividends on the newly issued Series B shares will commence in the third quarter with a payment of $7.9 million, including a portion for the stub period that spans the issue date of June 12 through the interest payment date on July 15. Subsequent quarter preferred dividends will be $5.8 million. And our effective tax rate for the full year 2025 is expected to be between 19% and 21%. Now I'll turn it back over to the operator to begin the Q&A session.

[Operator Instructions] Our first question comes from Jon Arfstrom with the company, RBC.

This all looks good. And I just wanted to talk a little bit about loan growth. Maybe Mariner, Jim, that gross loan production number jumped quite a bit. And can you just deconstruct that a little bit for us? How much of it is Heartland? How much of it is the rebound from 90 days ago? And how you expect that to trend generally going forward?

Yes. I think what I'd say about it is it's kind of in line with our expectations. And the next quarter looks very similar. On a combined basis, we're seeing strong production out of Heartland and just as strong as we ever have been with our own team. So it was a nearly $2 billion quarter on top line, and we expect a similar number in the second quarter, coming across all categories, all verticals, all regions, just the solid same story we've been telling for 20 years.

And we've seen nice activity from the Heartland team as well, not just legacy UMB.

Yes, their activity is very solid coming through across the board. So we're really excited about what we're seeing from their team. I think there was some pent-up demand. And obviously, also, you have the higher hold limits, et cetera. So to open the door for them quite a bit.

Okay. Very good. And then just a follow-up. Mariner, you made a comment about continuing to align the 2 portfolios. Curious how much of that is left to do? And then if you could comment a little bit on payoffs and pay downs, if you feel like they're still a little bit elevated?

Yes. So we do expect, without being able to identify any particular number or a credit for you to continue to align being sort of there are some credits that aren't done the way ours are, and that may be a few that may or may not be here at the end of the year. But the payoffs on a combined basis should be immaterial to the balance sheet on whatever happens. So I guess that's really the key. I would tell you is whatever does come from that realignment will not materially change our payoff levels on a combined basis.

Our next question comes from Jared Shaw with the company Barclays.

Maybe first question, just have you given any thought to the impact of the HSA changes under the new budget bill and what that could potentially do for a longer-term growth rate in deposits and fees?

Jim, why don't you take that?

Jared, we have -- we've been monitoring it closely. As you know, originally, it was going to be much more sweeping and would open it up to roughly 20 million. Folks that have not previously been eligible right now, we anticipate that number to be around 7 million. While we do view it as an opportunity. It would be more marginal. There'll be a lot of education that will go along with the folks that are really eligible, but we don't anticipate it being a huge windfall for our HSA business. We feel it will be more on the margin. We do have the sales teams and folks who would be able to provide that education as needed, but we do feel like it would be just more marginal.

Good color. And then as my follow-up just on expenses. If we look at expenses, excluding merger costs as we go into '26 after the integration, how should we think about sort of a longer-term expense growth rate, getting the cost saves from the deal, but then offsetting that with some of the investments as you build out commercial? How should we think about sort of a longer-term expense rate?

Yes. We're not giving specific guidance, Jared. I would say, so we'll get the second slug of cost saves from the transaction in the fourth and first quarters as we consolidate vendors and we complete our conversion process. And then I know we don't specifically give guidance on expense growth rate because of our business model. It's all about positive operating leverage, and we want to keep improving operating leverage based on what the revenue environment is. So without giving specific numbers, I would just say, we're going to achieve all the cost saves that we targeted generally from the Heartland transaction. And then in terms of investments, I mean, we have a pretty robust process in terms of how we intake projects. So there's not a big pipeline of investments. And if there are investments, they always have a revenue component or an ROI associated with it. So there's not a lot of pent-up demand in that fashion for us to be spending and investing.

Okay. But maybe the way to think then the way to think of it is continued positive operating leverage from the combined operations as we...

Absolutely. Yes. Yes. And ultimately improved operating leverage.

Our next question comes from Chris McGratty with the company, KBW.

Ram, the $124 million cost saves that you've identified at the time of the announcement, where -- I guess, how much have you realized so far? And then to Jared's question or in your answer, Q1, you'll be through most of it. I'm just trying to get a sense of where that expense level are before you start?

So last quarter, I noted that on a run rate basis, we got $17 million on a quarterly basis out of the run rate, which was higher than what we had planned when we announced the transaction. And then, as I said last quarter also, in the second and third quarter, there was not a lot of opportunity of additional cost synergies just because the next big slug, as I said earlier, it comes from conversion and consolidation of vendors. So the big slug of cost saves will be more in the fourth quarter. So there were some cost saves in the second and some in the third, but not material, I would say. So yes, the $124 million, we got on a quarterly basis, $17 million of that so far, and then we'll get the rest of it in the fourth and first quarters. And then on the -- and then in 2026, we'll have some nominal growth in both the legacy and -- the legacy UMB and Heartland franchises, again, without giving any specific numbers we're going to shoot for improved operating leverage.

But we do expect to get -- we do expect to get the full saves that we projected at announcement.

Okay. And then just on the balance sheet, you talked about the DDA hitting the trough in the third quarter, I think. Can you just remind us the pro forma seasonality with your deposit base? And then also what you plan to do with the investment portfolio, growing the portfolio, funding organic growth? Just trying to put a finer point on that.

Yes. If you look at the last couple of years, that's a good barometer for what might happen with DDAs. We've had mid-single-digit contraction in DDA balances in the third quarter. So that's probably something that happens very seasonally, again, with DDA -- there's a lot of interest in bond payments that go out. So that's why it's very predictable from that standpoint. And then there's no other big seasonal items in the third quarter. Public funds really starts building up in the fourth and first quarter. So there's not a lot of other things. But as you saw in our third quarter results, and as you guys rightly recapped, we saw some strong interest-bearing deposit growth in the second quarter, right? So most of that is business related and we'll stick on. And then on the bond portfolio side, on a combined basis, so at the quarter end, we had about $10 billion of cash sitting on our balance sheet, earning $440 million. We've since deployed a lot of that. And today, it's around $5 billion. So we have continued our overbuy and prebuy activities as part of our bond portfolio purchases. So we'd expect our bond portfolio to be about $17 billion, and then the excess liquidity could be another $6 billion, $7 billion. So that kind of rounds out what our earning asset base might look like in the third quarter.

Our next question comes from Ben Gerlinger with the company City.

Just wanted to first -- the last answer you gave in security was really helpful. I was kind of curious if we could switch to just the front and back book of deposit pricing itself given that Heartland was added in, kind of, let's call it, the middle of 1Q and 2Q. So it's kind of apples and oranges. When you look at the core margin, Ram, I know you said it was going to be flat linked quarter. But I was just kind of curious, what was like the June core margin? I'm just trying to get a sense of the overall kind of run rate throughout the quarter.

I don't know if I have it handy or I don't know if that's material, Ben, in terms of what June was. There's a lot of things that happened in terms of well, obviously, purchase accounting adjustments can happen. I know you asked our core margin. My guidance for flat NIM, as I explained in my prepared comments, it's pretty good in a lot of tailwinds and a couple of headwinds, including the DDA seasonality that I talked about. So I'm not sure what else I can add there.

Got you. Okay. And then I know you've had some larger, call it, unscheduled purchase accounting or early payoffs, I should say? Is there something that's causing that because we haven't seen much rate movement? I know it's usual with deals. Just kind of curious, is there an underlying driver?

Yes. We just -- we've talked about the alignment on the Heartland portfolio. So just moving out a couple of credits that earlier in the year than predicted.

Our next question comes from Nathan Race with the company Piper Sandler.

Just coming back to the discussion, I appreciate the flat guide for the third quarter. But just given that it seems like both loan and deposit growth is somewhat margin accretive. I know you had the benefit from Heartland as well in the quarter, but assuming the Fed remains on pause, do you think there is an upward bias to the margin in the fourth quarter and maybe thereafter, again, assuming the Fed remains on pause? But even if we got some cuts, I imagine, the margin could still expand just given what you have repricing on the deposit side?

Yes, potentially, Nate. And as you know, we have 45% of our deposits are indexed. In the short term, the Fed actually cutting is a positive to margin because these index deposits reprice down, right? Internally right now and it might be subject to change, we have 2 more rate cuts, one in September and one in December, but it sounds like there's more reasons for pausing that. So I would say at the margin, not having rate cuts can be neutral to slightly down for margin expectations because deposit costs won't move, right? I mean as we said in the call before, our deposit pricing doesn't change unless the Fed starts cutting rates. And then in terms of the other positive tailwinds, if you will, for the margin. We've talked about fixed asset repricing. If you look at our treasury waterfall that we say the Page 20, we have $1.8 billion of cash flows coming from our bond portfolio that are being reinvested 120 basis points higher. We have a similar phenomenon going on with the fixed rate loans that can also go up 200 basis points. And then as you look at third quarter, the only tailwind besides the day effect, the other day effect on an average can impact our margins by 2 to 3 basis points because we have a lot of 3360 products. And then the only thing that can act negatively or possibly the level of DDAs, which I talked about, it could be down mid-single digits.

Right. That's very helpful. Maybe switching to fee income and specifically fund services. That revenue line has grown at least at a high single-digit pace over the last handful of years. Just curious with the law of large numbers, maybe catch up with you guys, if you think that rate of growth is still sustainable going forward within fund services?

Yes. I think absolutely. There's really great tailwinds for that business. We have an exceptional service ratings from our client base and the industry and the technology stack is great. There's a lot of disruption, stuff that I've been saying in the call for some time continues to persist. The environment for our team -- on the alternative side, there's a lot of product being built and a lot of our current -- so we're bringing on a lot of business. We're also benefiting from a lot of platforms that are doing very, very well. So it's a combination of the client base doing very well as well as bringing on a lot of new business. The pipeline remains very, very strong. We are kind of the dominant player in the private space. We win almost everything that we bid on, and it's -- the tailwinds are excellent.

Our next question comes from Brian Wilczynski with the company, Morgan Stanley.

I was wondering if we could circle back to credit quality at Heartland. So good to see nonperforming loans down Q-on-Q. I was wondering if you could just elaborate on what you're seeing in that portfolio and how you're thinking about the path for NCOs as you work through that?

Yes. So I take -- you hit NPLs and charge-offs. I'll start with NPLs. You'll see on a linked quarter basis, they've already started coming down. We expect month-over-month, quarter-over-quarter for that number to continue to come down as we work the portfolio. Charge-offs, I would just point you back to the overall statement I said about the company on a combined basis. As we've gotten our arms around their portfolio and ours continues to perform, we expect the second half of the year to perform at our -- at or near our historic averages with what we know. So we feel very good about getting arms around their portfolio and are pleased with the path we're on and the team that they have is fantastic. So we're really excited about the production that we're getting out of the team. So across the board really good. In the direction -- we feel pretty good about the direction and just kind of month-over-month, quarter-over-quarter improvement from kind of where we are on the NPL side.

That's really helpful. And then I was wondering if you could comment on what you're seeing in terms of deposit competition across your markets as the macro environment gets better, maybe industry-wide loan growth picks up? Just wondering what you're seeing and what you're expecting from a deposit pricing perspective?

Well, so you've got our -- there's -- put it in 2 buckets really. You've got our commercial and our institutional and then you've got our consumer business. And the consumer -- the commercial and institutional for us, very easy for us to build, but it comes with pretty much straight down the middle of the fairway competitive pricing. So we can bring on as much of that as we want as long as we pay basically institutional money market like rates. So that's kind of what corporate and institutional looks like. So that's kind of ever -- we didn't have that grow at whatever rate we want that to grow at. And then on the small business and consumer we've seen kind of 1% to 2% growth rate there. That's -- obviously, we can control that a bit better. And now that we've doubled our branch network and we picked up all the Heartland team, and we're doing a complete refresh of the branches. We're in the market now on a regular basis with campaigns. We think we can get our share of the consumer deposits in the markets that we're in now, now that we've increased -- we're in 6 new states with doubled the branch network. So we're excited about what we're able to do. It's a little early to tell you what those results would look like. But being in the market, doing campaigns, we doubled the branch network, we feel pretty good about getting some lift out of our consumer business.

Our next question comes from David Long with the company, Raymond James.

With the HTLF acquisition, you talked about some of the credit and the loan -- loan demand and what have you. But what's going on in the fee revenue side? Are you realizing any synergies there from the HTLF franchise at this point?

It's -- we're starting to see the energy. It's going to be a while before we really realize that. But we are -- we have started selling credit cards. Do you have that currently in your memory?

Credit cards, we've had additional 270 mortgage loan applications throughout the HTLF network. We also feel like it's going to be a great opportunity for Corporate Trust referrals. So again, as Mariner said, more to come, but we're already seeing nice activity.

Yes. The energy level and the pipelines are building, conversations are taking place, not a lot to report on in the results yet, but feeling good about the activity levels in the direction.

The next question comes from Timur Braziler with the company Wells Fargo.

Wells Fargo Securities, LLC, Research Division Keeping on the Heartland team, just the contribution to balance sheet growth this quarter was a little surprising as to how fast it came online. I'm just wondering, are they at capacity here? Is there additional ramp in terms of that growth rate? And ultimately, when it is at full capacity, how much more contribution are you expecting for the balance sheet growth rate from Heartland relative to the Q2 levels?

Yes. I think there's probably a bit of a miss on maybe how we've talked about that or what that looks like. I think there's the -- we are at the very beginning of what that can look like. They're -- we're just beginning to see what can come out of those guys to be honest. So that -- so yes, I mean, we're barely seeing what's possible there. They had a good quarter. But we're just at the beginning. I mean, there's a huge potential out of the whole franchise, great team. And I guess -- I say -- I think we -- that's a bit of a miss on kind of where we are what they're able to contribute. They're on the front end of what they're going to be able to contribute.

Wells Fargo Securities, LLC, Research Division Okay. Got it. And then I guess going back to the deposit pricing competition. Just looking at the linked quarter change in interest- bearing deposit costs, I would have thought the added contribution or the full contribution from Heartland would have brought that down maybe a little bit more. Can you just talk to what core kind of IB deposit costs increased in 2Q? And as we head into the third quarter, what that expectation is for deposit costs going higher given the seasonality in DDA plus the competition on the commercial deposit side?

Yes. Timur, the cost didn't go up or they were stable, right, at 334 quarter-over-quarter. You're right. With the addition of Heartland, it should have maybe gone down a couple of basis points. But as I noted in my prepared comments, we had some really robust interest- bearing deposit growth, both in the middle market and institutional space. And those tend to come slightly priced higher than where our current portfolio yield of 334 is and versus the new money rates are more like 4. So it's not like the costs are increasing. It's just a mix of getting more of these deposits coming in that changed the trajectory of our interest-bearing deposit costs.

More growth of balance sheet than it is competition. I mean...

Yes, it's not driven by competition, right.

Yes, we're not -- those rates are not up because we're defending our book. It's just pure growth.

[Operator Instructions] At this time, there are no more questions registered in queue. I'd like to pass the conference over to our management team for closing remarks.

Thanks, everybody, for getting on the call with us. We're really excited about the quarter and the results from our perspective were strong across the board really on every level. And the acquisition, we're very excited about the team, the results. We didn't end up really talking about capital markets. So I want to make sure everybody understands that the Voyager gain is -- while we can't predict when these things are going to come, we do have a very strong private investments team, and we're excited about continuing to report on things that will come out of that group for you. And otherwise, thanks for listening, and we're really excited about how things are coming together with Heartland.

Thanks, Mariner, and thanks, everyone, for joining us today. If you have follow-up questions, you can always reach us at (816) 860-7106. Thank you, and have a great day.

That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.