UMB Financial Corporation (UMBF) Q3 2025 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the UMB Financial Third Quarter 2025 Financial Results Conference Call. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I would now like to hand the call over to the Investor Relations at UMB Kay Gregory to begin. Please go ahead when you're ready.

Good morning, and welcome to our third quarter 2025 call. Mariner Kemper, Chairman and CEO; and Ram Shankar, CFO, will share a few comments about our results, then we'll 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 a 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. We'll share some brief comments about our third quarter results, then open it up for questions. As you may have seen in our recent release, I'm very excited that we've reached the important milestone in our acquisition of Heartland Financial early this October. We successfully completed the full systems and brand conversion of all HTLF locations. I'm incredibly proud of the teams that have been working together around the clock to make the smooth transition for our clients as well as for our associates, all while continuing to excel at their day jobs, which is evidenced by our strong third quarter results. We saw a new record for gross loan production, strong fee income, consistent credit quality and continued positive operating leverage. Reported net income available to common shareholders of $180.4 million included $35.6 million of acquisition expenses compared to $13.5 million in the second quarter. Excluding these and some smaller nonrecurring items, our third quarter net operating income was $206.5 million or $2.70 per share. Third quarter net interest income totaled $475 million, an increase of $8 million or 1.7% from the second quarter, driven primarily by continued organic growth in average loans and earning assets, partially offset by the impact of strong growth and higher cost interest-bearing deposits from our institutional businesses. Fee income was strong, increasing 12.4% on a linked-quarter basis, excluding the impact of market valuation changes on our equity positions. Trust and securities processing income was positively impacted by solid contributions from corporate trust, fund services and private wealth. And in investment banking, increased activity in agency and mortgage-backed trading drove nearly a 14% increase from the second quarter. Looking at the balance sheet, we had solid increases on both sides with 8% linked-quarter annualized growth in both average loans and deposits. Quarterly top line loan production surpassed $2 billion for the first time with strong organic growth momentum supplemented by the continued success from our acquired markets. The rate of payoffs fell slightly to 3.6% and remains in line with historical trends. C&I was our strongest contributor for the quarter with more than 14% annualized growth over the second quarter average balances. Additionally, as I mentioned last quarter, we've begun offering mortgage products in our new regions in the spring and have been encouraged by the early success, which has led to nearly $20 million in closed loans. We continue to see a strong pipeline. Looking ahead in the fourth quarter, overall loan activity and pipeline remains strong, both in legacy and HTLF markets. Our loan growth has continued to outpace our peer banks. Banks that have reported third quarter results so far have reported a 5.5% median annualized increase in average loan balances compared to our 8% growth. With the recent discussions around lending to companies designated as nondepository financial institutions, we've added some stats on our C&I page to give some context. Expanded definition from the Fed on loans to NDFIs was merely a reclassification of a broad range of exposures that includes high-quality working capital or capital call lines, private equity partnerships and loans made to insurance companies. These have long existed within bank C&I portfolios. After recalibrating our reporting to meet these updated definitions, our portfolio was approximately $2.1 billion at the end of September, representing just under 6% of total loans. Approximately 1/3 of these are subscription lines, largely to our fund services and private equity clients. And like all of our loans, these are strategically underwritten and actively monitored and managed and have historically had excellent credit quality. Speaking of credit quality, our allowance increased to 1.07% of total loans on September 30. Total net charge-offs for the third quarter were 20 basis points, with the largest portion being credit card as has been consistent in past quarters. Net charge-offs on legacy UMB loans were just 8 basis points of average loans, down from 13 basis points in the prior quarter. Given what we know today, we continue to expect charge-off levels to remain near or below our historical averages for the remainder of the year. Total nonperforming loans were $132 million or 35 basis points of loans. The quarterly increase was driven by 2 legacy HTLF loans that have substantially adequate PCD reserves today. Banks that have reported third quarter results so far have reported a median NPL ratio of 48 basis points. While we've seen a slight increase in NPLs, we don't expect that there will be any significant change to our outlook for charge-off levels. We continue to build capital with a September 30 common equity Tier 1 ratio of 10.70%, a 31-basis point increase from June 30, moving closer to our pre-acquisition levels. Finally, as announced yesterday, I'm pleased to report that our Board of Directors declared a quarterly dividend of $0.43 per share to common shareholders. This represents an increase of 7.5% from the prior quarter and marks the 23rd dividend increase in the past 20 years. You can see our strong track record of growing our dividends on Slide 46. Since 2004, we've increased our annual dividend almost 300% while continuing to grow our balance sheet and tangible book value. 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. Our third quarter results included $40.7 million in net accretion and net interest income, $5.6 million of which was related to accelerated accretion from early payoffs of acquired loans. The net benefit to net interest margin from total accretion was approximately 26 basis points. Our operating expenses again included $23.4 million in acquisition-related amortization of intangibles. On Slide 10 is the projected contractual accretion for the next 5 quarters as well as for full year 2027. Slides 12 and 13 include some key highlights and drivers of our quarter-over-quarter variances as well as a breakout of onetime costs by expense categories. You will see the accretion income there, along with the solid noninterest income growth Mariner mentioned. Metrics behind our fee income included a 6.8% increase in total institutional assets under administration, which now stands at $642 billion. Additionally, our Specialty Trust and Agency Solutions team have seen a 49% increase in new business year-to-date and public finance has closed 117 deals in 2025, an increase of 22% over 2024. Fee income will continue to be impacted by changes in market value of our 904,000 share ownership in Voyager stock. As noted, the September 30 closing price was $29.78 compared to $39.25 on June 30. The second quarter gain from the IPO of $29 million and a $9 million mark-to-market from the change in stock price during the third quarter resulted in a negative $38 million swing in fee income sequentially. As we've said previously, our pipeline remains strong in our private investment business, and we are likely to see periodic monetizations going forward. Also, as noted, excluding the investment gain line item and normal mark-to-market accretion on BOLI and COLI investments, we also benefited from some onetime fees this quarter to the tune of $6 million. These primarily included a $2.3 million BOLI debt benefit and a $2.5 million legal settlement paid to us. On the expense side, we had $35.6 million of merger-related costs compared to $13.5 million in the previous quarter. Excluding the impact of merger and onetime costs, operating noninterest expense was $385 million, an increase of just 1.3% compared to the second quarter. Looking ahead, we would expect fourth quarter operating expense to be in the $375 million to $380 million range to include a $2 million charitable contribution and the expected ramp-up in performance-related incentive comp net of cost saves. We remain on track with our announced acquisition-related expenses as well as cost synergies. Turning to the balance sheet and margin. Reported net interest margin for the third quarter was 3.04%. Excluding the 26-basis point contribution from purchase accounting adjustments, core margin was 2.78%, down 5 basis points sequentially. The primary drivers of the linked-quarter decline in net interest margin were a 3-basis point negative impact from free funds and 4 basis points compression due to a strong 4% growth in average interest-bearing deposits, led by higher cost deposit balances held by our institutional clients. These balances totaling over $1 billion, coupled with the seasonal decline in DDAs, drove our cost of interest-bearing deposits higher by 2 basis points and our cost of total deposits up by 7 basis points. We realized blended betas in line with our expectations on our index deposits in the month of September, but the benefit was muted due to the mid-September timing of the FOMC cut. On Page 27, we disclose our current composition of deposits by rate sensitivity. As a reminder, our interest rate simulation on that page shows us positioned as essentially neutral and is a static balance sheet analysis where cash flows are replaced by similar instruments at current market yields. It does not contemplate growth in the balance sheet, which may impact overall margin. Relative to the third quarter core margin of 2.78%, excluding accretion, we expect fourth quarter margin to be essentially flat. Key assumptions include one additional 25 basis points rate cut in October and the residual benefit from the September rate cut, along with a slight seasonal rebound in DDA balances and positive churn in the bond and fixed rate loan portfolios as highlighted on Slides 25 and 27. Offsets include the impact of September and October rate cuts on our variable rate loan portfolio and lower benefit of free funds in a lower rate environment. Finally, our effective tax rate was 20.4% for the third quarter compared to 19.2% for the same quarter last year. For the full year 2025, our effective tax rate is expected to be between 19% and 22%. Now I will turn it back over to the operator to begin the question-and-answer session.

[Operator Instructions] And our first question comes from Jon Arfstrom with RBC Capital.

I asked about this last quarter on production trends, and I just want to go back to it because trends are up again. Curious, Mariner, you touched on it, but can you dissect it a little bit more for us? Is that improvement from borrower sentiment? Anything you're doing differently? Is it Heartland? Or is it something else? And then maybe comment on the sustainability of that?

Yes. Thanks, Jon. It's a long-standing answer. We use the term runway and penetration often when we talk about our loan growth. And it's really across all categories, all regions. It's coming from Heartland, it's coming from UMB. And as we've talked before, our loan growth budgeting and forecasting comes from what the penetration is locally, the size of the opportunities that we have from the towns that we're in and then importantly, what the capacity and capability of the officer core is. So it's a bottoms-up exercise and the tenure of our associates building long, deep pipelines and the sheer opportunity we have across our footprint. So nothing really new to report, lots of execution opportunity as long as we keep our people, keep let them build their pipelines. And the exciting thing is it's really early days on seeing the penetration opportunities in the new footprint. So we're seeing some already early signs from it, but I mean, it's just super early days. When we did the acquisition, we talked about the chassis and the engine. So the chassis is that we picked up through Heartland is absolutely what we thought it was going to be, and we're seeing the early indications of that success. But again, really good news. It's still very early.

Okay. Good. Maybe for you, Tom, credit has been topical. I think yours looks just fine and you guys touched on it a little bit. But anything new on credit? It looks like the balance changes are primarily Heartland driven, but anything to note on some of the core trends on credit?

No, we're still very pleased with how we're handling the new Heartland credits. And we've talked about the last couple of quarters, the fact that we've identified a lot of these. We have already put reserves against them, and now we're just working them through. So still feel very good about where we are today and what we see over the next couple of quarters in terms of charge-offs. We think we'll be right in line with what we've talked about and the one thing to keep in mind is we did have a couple of larger additions to the nonperforming. We still expect those to come out in good shape. We're secured. We have reserves against them. We're secured. We just need to work through them. So still feel optimistic about the economy. Our borrowers are making money. So it's kind of the same message we've had the last couple of quarters.

And I would just reiterate that our comments on guidance around charge-offs, I just reiterate that, which is that we don't expect anything different, and we'd expect the remainder of the year to be at or below our historic charge-off levels.

And our next question comes from David Long with Raymond James.

Ram, I appreciate the color on the fourth quarter outlook on the expenses. But as we look into the first quarter of '26, you guys have completed the core conversion. How should we be thinking about the step in expenses into the first quarter with the conversion being done then?

Yes, I'll take a stab at it. And we don't give specific guidance beyond the next quarter. And I'll speak to the top of the house. We expect all the cost saves that we expect from Heartland at the time of the announcement to materialize by the end of first quarter, right? So I had said at legal day 1, which was back in January, we got close to $70 million of the cost saves on an annualized run rate basis. Following the conversion, we've taken actions on another $5 million quarterly, so call it $20 million of additional cost saves that leaves about $30 million left which we'll get over the next 3, 4 months. So that will be fully baked in. The reason I can specifically answer your question is, obviously, there's core inflation that's going on at UMB in terms of investing in certain things. So -- but just said, like as I said before, we expect $375 million to $380 million. We have some more cost saves to come in, and then there will be some normal inflation as part of UMB's investment, legacy UMB investment.

Got it. And then just to be clear, so it sounds like there's still -- in the first quarter, there still could be some costs that need to come out. So is the second quarter the clean quarter?

Yes, I would say that.

Okay. Okay. Perfect. And then switching gears, just on the lending side, with the acquisition of HTLF and bringing in their lenders, how have they been integrated? And are they continuing to operate with the same sort of customer focus as they had under the HTLF brand? Or are there opportunities for them to step up and maybe take on some larger relationships? Just talk about that integration process.

I'll take a stab at this and then let Jim jump in. But as we talked before, the beauty of this -- the combination was we got to drop the UMB way of doing things in holistically across the organization day 1. And we had enough talent in our group with regional credit officers to drop them in across the whole footprint to provide guidance and quick turnaround times, access to decision makers, et cetera to not only keep up what they were able to deliver, but I would argue to improve what they're delivering as far as turnaround times and quality of the way we lend. So they've been, I think, really pleased with what we're bringing to the table. And so the uptake has been very quick because it was -- we were not meshing 2 cultures. Jim, I don't know if you want to add anything to that?

Yes. There, I don't have much else to add other than the former HTLF officers certainly embraced it. They have more support in market, more turning -- ability to turn answers around to the clients quicker. And our sales process, it differs in various banks, but we feel like our credit culture is extremely strong, and they've embraced what we do, and it's also increased their ability on higher hold limits where it's necessary. So it's working great. It really is.

Yes. Most important thing is we're not meshing 2 people. I mean the really important thing is we're not really -- we're not meshing 2 cultures. So that would slow things down. So there's really 0 of that to contend with.

The next question comes from Brian Wilczynski with Morgan Stanley.

Maybe just staying with Heartland and the opportunity there. It definitely sounds like you're still early innings in terms of the benefit. Can you just elaborate a little bit more in terms of where you see the most opportunity for new loan production, either across Heartland's regions and in particular or any particular loan categories where you're seeing the most opportunity?

How much time do you have? I mean it's really across the board and in different stages in different places. I mean just a couple of examples. California, as we all know, is a very significant market opportunity, for example. So to get -- there's just an unending opportunity with what we can do in California. So it's about what pace we do that, what kind of hiring takes place. So that's an example of California. So without a loan, like it's hard to even put a number on that one. Other things like Rockford were really -- was a real positive surprise for us. We knew it would be additive, but where it's placed on the map, being close to Chicago and the team up there and the production that we're already seeing has been a really nice upside surprise. Wisconsin at all across Wisconsin, lots of really fantastic opportunities. There's a really, really neat team there. And I hate even starting doing this because there's great people across all the markets that we picked up, seeing a lot of really great activity in New Mexico. So some of it's kind of population based where we see maybe more opportunities. It's going to be some of these markets with more population. And then you back into where we are in the life cycle of how many people were already hired and how many people we could -- can hire. And yes, how penetrated we are already. So there's really low penetration. It's the age-old story for UMB even before Heartland, which is there's really significant penetration opportunity just to get our -- just getting our small share, let's say, we're aiming to take 10% of all those markets. I mean, that would triple the size of UMB just by itself. So it's an enormous opportunity, and we're in just early days about just retaining this great talent we picked up and adding to it over the next few years.

That's really helpful. And then I wanted to ask about bank M&A activity clearly picking up across many parts of the country, including in your footprint. I was wondering what opportunities that presents for UMB, either as an acquirer or as a way to win business from other banks who are doing deals? How do you think about the opportunity for the bank here?

Yes. I'm going to reiterate some comments I've been making about this subject for some time. We don't need to do M&A. We have a very strong engine. But because of that very strong engine, we do believe strategically, over time, we want to augment our loan growth ultimately as a company with acquired deposits through M&A because they're sticky, they're granular, they're low cost and they're hard to come by to ultimately keep up with the kind of loan growth we've had over time. So we think it is a good strategic move for us to back up the engine we have with augmented acquired underlevered deposits to really great franchises across our footprint. So we don't have anything other than a desire and a strategic focus. It is part of our strategy. So we build relationships and are looking for good partners over time. No need from a time line perspective other than we just think over the life cycle of UMB, it's good and additive to add good partnerships to the well-run banks to the mix.

And the next question comes from Jared Shaw with Barclays.

I guess sticking with the capital discussion, you grew CET1 this quarter. It's still below where it was before the Heartland deal. Do you think you could deploy capital through a deal with the CET1 here? Or would you want that to be above 11% before sort of embarking on any capital strategies?

Well, there's a lot of moving pieces in the M&A space. Anything from picking up a bank that has excess capital itself to our ability to earn back very quickly after an M&A transaction to raising capital, et cetera. I mean, there's any number of variances and variables to answer that question with. We certainly think over time, psalms 1 quarter or 2 or a couple of quarters connect to each other, we'd like to be at higher levels of capital. We're very comfortable dropping down for a couple of quarters if it's based on a high-quality transaction. Ram, I don't know if you want to add anything to that?

Yes. Just on the capital side, Jared, related to the M&A comment, our capital build to get back to 11%, that will happen within 1 or 2 quarters on the pace that we're growing, right? So we are ahead of our schedule in terms of what we thought would happen to our capital accretion from the Heartland transaction because of both the benefits of the merger as well as for UMB outperformance. So that could be a couple of quarters away.

Yes. And so the answer to the extent that M&A played a role on that, those were my answers.

Great. And then on the securities portfolio, last quarter, you sort of implied that we could see higher growth in securities. How are we -- are you thinking about sort of that cash securities mix here going into the end of the year?

Yes. What I said last time was our treasury managed portfolio, which includes the Fed account will be about $24 billion. So we've added a new line on the summary pages you noticed what's between AFS held to maturity and the portfolio. So we could see based on the overbuy activity that we were doing, we could see that going up to about $24.5 billion versus the $23.7 billion that you are seeing for third quarter averages.

Okay. If I could just sneak one last one in on the accretion. If we get the cut as expected -- as you expect in your outlook, what could that do to accelerated accretion? How much do you think is sort of, I guess, you could say, at risk with another cut in terms of being able to accelerate?

It's really hard to say whether -- what's driving the prepays. It could be market, it could be property selling. It could be a lot of variety of things. I don't know if the first 50 basis points cut is enough to move the needle on refinancings at this point. But again, it's anybody's guess, Jared. What we do on Page 10 is just do the contractual accretion. So we know in all likelihood, it will outperform that because of just the prepays and what happens with the loan portfolio churn. But in terms of trying to quantify it or tie it to how many rate cuts we get, it's challenging.

The next question comes from Janet Lee with TD Cowen.

I want to talk about your Institutional Banking division. Obviously, that is a key differentiator and growth driver for you. If I look at the trust and secure processing fee line, it's up almost 18% year-over-year. And if I look at the assets under administration, it's up very strong over the past year. What is the key driver behind that? Are you just taking more market share away from the competitors? Or are you seeing more accelerated growth from the Heartland acquisition where maybe you're picking up some growth? I would assume a lot of that is just like legacy UMB. But I want to get a sense of where your outlook is for this division. I would also assume the one big beautiful bill that could also increase the TAM for your HSA deposits. So I just want to get a sense of where you think this business is headed.

I'll hit a couple of high-level things, and Jim might add some things because those businesses report to him directly. At the high-level basis, 2 of these business lines drive most of that, and that would be assets, our asset servicing business, which is you'll see on Page 36 in our investor deck. And majority of that comes from alternatives, which would be like hedge funds and private equity. We're a top player on a national basis in that particular space. And there's been a lot of disruption. PE has been -- acquired a lot of these firms, and that's been disruptive to the boardrooms. So because of that, we've picked up a lot of the business that has been available through boardroom conversations. And the momentum is very, very strong. We have exceptional reputation. If you look again on Page 36, upper right-hand corner, you can see some of the best in fund accounting, the awards we get year in and year out. And so we have an exceptional reputation and a deep pipeline converting all the time. And lastly, I'd say there's a trend in the space, which is the democratization of private investing, which you've been reading about, I'm sure. And we have partnered with a couple of the major players as their service provider who are providing vehicles on a broad basis across the nation to democratize the availability of private investing. So we're seeing a lot of growth just through those large partnerships we have. And so that's what I say about fund services. It's a really, really great profile. They're marching their way towards -- aiming towards $1 trillion in assets under administration. So there -- it's a really strong team. On corporate trust, which would be the other big driver, we're a consolidator on a national basis. We're top 1 or 2. You can see that on Page 37. And we're doing #3 by number of issues and by dollar volume. And we recently, over the last 5 years, we opened offices in L.A. and New York, which allow us to upscale the opportunity to go up on the lead table. So for example, if you do a -- like a sewer or water deal in Des Moines, Iowa, it's going to be a couple of hundred million. You do a sewer water deal in L.A. it could be a couple of billion. So by doing business on the coast, it really lifts our ability to go up the lead tables and take more share. So that's exciting for that business. And we have some new verticals there that are doing really well, CLOs, ABS and then our aviation business is really on fire. So we're sort of a top-tier player, taking more share all the time in that space. You mentioned HSAs, good solid business. Mostly we pick up business through the business we already have largely during the enrollment seasons. It's a good, steady, solid addition for us. As far as the big beautiful bill, there could be some benefit there, but I think it's been overplayed a bit. Jim, I probably took most of your thunder but go ahead.

It's okay, Mariner, I'm used to it. But I would add that this is all legacy UMB as far as the business and the opportunity is very strong in the corporate trust space, especially in these new markets as you know a lot of this sort of local issuance and when you're doing business in those markets. So it will be a great referral source from the HTLF team and also be able for us to expand our footprint. But institutional banking will continue to benefit from the Heartland acquisition.

Our wealth business, there's other businesses in there that are very additive and doing a great job, but our wealth business is on fire as well. But those are the 2 big drivers right now.

Got it. And you called out that $6 million sort of onetime benefit in the third quarter to your fee income. But is -- so if I exclude that $6 million, is that a good run rate? Or is there more to come down a little in the fourth quarter?

Yes. The best way -- if you go to Page 15, Janet, I'll just do a waterfall, if you will. So our GAAP fees were $203 million. If you add back the $4 million security losses that we had, that's $207 million. And then if you look at the BOLI line, this quarter around, we broke out BOLI and COLI. The absolute amount was $16.5 million, of which $2.5 million was that debt benefit that I mentioned in my prepared comments. And then the remaining $14.5 million, there's always an equal offset on 50% of that with deferred comp expenses, they were up $7 million because of that. So there's a market volatility to it. It's not something that we can control. So those get written up or written down based on what happens to the equity markets. And then if you look at the other line, excluding the COLI and BOLI, we have $16.5 million. I had mentioned $2.5 million of a onetime legal settlement that was a benefit to us. There was another $1 million of some onetime fees. So the run rate there is about $13 million. And as you see in one of the other pages, the biggest driver of that was back-to-back swaps. So our derivative team had a pretty impressive quarter with $5 million of fees this quarter compared to about $3 million, $3.5 million last quarter. So those are the big drivers. So if you add all that, subtract all that, you could end up with -- again, depending on what happens with COLI and BOLI, you could end up with $190 million. The last point I'll make is what I said in my prepared comments, our private investment portfolio, we expect some monetizations more frequently. So that's been a good trend for us. And then the other thing that can happen is the volatility with some of our existing equity investments.

And the next question comes from Timur Braziler with Wells Fargo.

Maybe tying fees into NII, but really strong quarter for some of the trust and securities processing fees. And then I noticed you called out the asset servicing client deposit balances as part of the mix shift that was maybe weighing on margin. I'm just wondering, in general, as we look out and we get a couple of rate cuts in here, the remixing on the institutional side for the deposit base, just the puts and takes of whether or not incremental dollars of deposits coming in are still dilutive to the cost of funds. Does that kind of neutralize as we get a couple more rate cuts? Just maybe talk us through some of the mix shift on the deposit side and what that might portend for cost of funding as we start getting some rate cuts here.

Yes. And it's really hard to predict what happens with some of these large clients. It can be for a variety of reasons that we typically don't have some visibility into it, why the buildup happens. It could be they're holding cash before they invest in the markets, they're rebalancing. So a lot of things can happen. But when you look at the asset servicing, just using that as an example, they are one of those hard index deposits. And so they'll be priced at Fed funds minus 25 basis points, for instance, right? And so when you look at our total cost of interest-bearing deposits at 3.30% and based on the Fed funds rate, that will be higher than what the current prevailing deposit costs are, right? So that can happen. And then as I said, going back to the margin puts and takes, we're going to get absolutely in the fourth quarter, somewhere between $1.5 billion and $2 billion of new deposits coming from our public funds business between the second half of December through February. So those would be positive things that happen for deposit growth. As I noted in my prepared comments, we expect a slight pickup in DDAs from the low point of seasonality in the third quarter. And then there's all the index deposits that get repriced down for the September rate cut. So we didn't see the full benefit of the third quarter. So we're going to see that in the fourth quarter. And then today's rate cut, assuming that we get one today, that will also -- the fact that it's so early in the quarter will also help bring down the cost of deposits.

And over time, I mean, again, some of this is just guessing, but from history, if we get all the cuts that are anticipated, there's less interest in the rate paid, the further you get down. And so moving rates down becomes easier in a lower rate environment. So that history has played its way out. That's a few quarters away.

Okay. That's good color. And then looking at the 2 legacy HTLF loans that were moved to NPL status this quarter. I know earlier in the call, you had referred to the fact that a lot of these had already been reserved for. But with these 2 specific ones, were these part of kind of the purchase accounting mark taken at deal close? Or did something happen kind of subsequent to deal close that drove the credit migration there?

Tom, do you want to take that?

Yes. The larger of the 2, we had identified in due diligence and had a specific reserve against it. There's a smaller one that is -- was newer, that was on their watch list, but we hadn't reserved for until this quarter. So...

But again, I'd reiterate our comments around charge-offs, which is even with them being further deteriorated, we still feel confident in our charge-off rate comments.

And the next question comes from Brian Foran with Truist.

Just circling back to the M&A discussion, I guess when you talk about the primary attraction being deposits that can feed the loan growth engine over time, beyond whole bank acquisitions or anything like branch divestitures, maybe consolidation in the trust and custody space, I think people immediately think to like buying a bank outright. But are there any other kind of other avenues that might accomplish the goal of getting some low-cost funding to help you going forward?

Sure. All things are on the table. I would just say that we are diligent and disciplined around profitability. So it's harder to make sense of branch deals than it is whole bank deals just from a profitability standpoint. And I would also say that oftentimes, branch deals, I mean, just by definition, when somebody is getting rid of branches, it's the branches they don't want. So it's harder to pick through branch deals in my mind. We've looked at them, and you can continue to get excited about them. But if you kind of parse what you're looking at, sometimes it's kind of hard to see something better than what the people getting rid of and we're seeing. So they're all on the table, and we're just, I guess, disciplined about profitability. And all those other ideas are always on the table. The deposits are probably -- the engine for UMB is loan growth, and we're really, really good at it. And so we just don't want to be distracted. So if we do other deals, we don't want to distract from making sure we keep the engine or the golden goose or whatever -- whatever analogy you want to use, we got to make sure we keep it healthy. So we're disciplined, what I'd say about that.

And the next question comes from Nathan Race with Piper Sandler.

Just a point of clarification on the margin outlook for the fourth quarter. I think you said stable versus the 3Q level. Were you referring to the reported margin or the core margin that I think came in at 2.78% in the quarter?

The 2.78%, yes, core margin. As I said earlier, it's hard to predict what might happen with accretion outside of the contractual part. So my comments were about the 2.78% core margin, excluding all accretion.

Okay. Got it. And then I know you guys don't provide guidance into next year but just thinking about some of the margin factors at play. I mean, is there still an opportunity to continue to work down the cash levels as we saw here in the third quarter? And then I imagine with the cash flow coming off the bond portfolio and just the higher beta nature of your deposit base that the margin can maybe kind of grind a little higher if we get Fed rate cuts spread out over the course of next year. And I know you guys provide the NII sensitivity in your deck, but I don't think necessarily we're going to see a parallel shift down in rates. So if we just see some movement on the short end, is that generally a positive scenario in terms of the margin outlook?

Yes, absolutely, Nate. Definitely, I would say, based on cash flows, right? So have -- for instance, if you look at Page 25, where we show our securities portfolio cash flows over the next 12 months, we have $2.1 billion of cash flows rolling off at 360 yields. We would say that today's repurchase yields are about 450 on mortgage backs and maybe even 100 basis points or 80 basis points higher on the municipal side, if we can find the muni supply that we want to. So definitely, that churn, as I talked about, positive churn still exists in the bond portfolio. Really, the buy yields have to come down by 100 basis points before that becomes neutral in terms of the breakeven on what's rolling off versus what's rolling on. Similarly, if we look at our fixed rate loan portfolio on Page 27, we added this other bullet in here. We have $3 billion of fixed rate loans that are going to reprice within 12 months. The average rate today on those is less than 5%. So arguably, that's another 150 basis points pick up. And then as you rightly mentioned, we have close to 50% of our deposits, total deposits that are indexed to movements in short-term rates. So those are the positive impacts from a margin perspective outside of accretion and everything else. The only other flip side is what happens with loan pricing, right? As we see on Page 27, 2/3 of our loan book is also repricing on a lag basis to either prime rate or 1-month SOFR. So that will have some detrimental impact. And that's where the interest rate simulation comes in. And to my comments in the prepared comments, we are pretty neutral from a balance sheet perspective. On year 1, for 100 basis points rate cut, you can see a 1.1% increase. And then in year 2, because of the 1.7% drag because of loans catching up with what happens on the deposit side. So if you factor both those in, that's pretty neutral from a rate positioning perspective.

Okay. Really helpful. And then not to beat a dead horse on the M&A commentary. But Mariner, can you just remind us if the right opportunity came along, what type of acquisition should we be thinking about in terms of maybe size, geography and what kind of earn-back period you would look to include in that type of deal on tangible book dilution?

Well, you're not going to like this answer because I'm not going to give you much of one. But what I'd say is that I kind of come back to discipline. There are some pretty standard. There's really good data around market acceptance of deals around how many years payback the Street has been comfortable with, et cetera. So we're well aware of kind of what the norms are, and we're disciplined around how we think about that. As far as size goes, we're -- there's just a lot of variables. I mean we're just looking for high-quality partners. Certainly, now with what we've been able to accomplish already, you do the same amount of work for a small deal as you do a bigger deal. So we know we can do a bank per loan size and do it well. So there's no real guidance I'd give you on size. There are a lot of dynamics ahead of us right now that make that answer really complicated around crossing $100 billion and regulatory environment. Is that changing? Is it not changing? So it's kind of a hard conversation to get into you on a call like this, but we're -- I hope that helps.

And our next question comes from Brendan Nosal with Hovde Group.

Just wanted to ask a follow-up on M&A, but more about the perspective of how you folks think about preserving what you already have in that scenario. Specifically, how do you think about preserving your fee franchise and your strong fee revenue mix with a potential deal, just given that your fee franchise is one of the most unique characteristics of UMB and seemingly any deal you do would probably dilute that mix at least a little bit? So how do you approach balancing that?

Yes. Well, first of all, I think the absolute growth rate of our fee is more important than a percentage to total. So as long as -- in my mind, anyway, as long as we continue to grow those very healthily and maybe even accelerate their growth rate, I'm personally with about its percentage to total revenue than I -- if all things are working. It's all about staying disciplined. I mean we're not going to do a deal that picks up more net interest income than fees if it's not going to contribute handsomely, right, to the overall story. So as long as they're all growing and all improving their profit profiles, I'm not sure I really care what the percentages to total are. That's how I feel about it.

[Operator Instructions] And our next question comes from Chris McGratty with KBW.

Ram or Mariner, just going back to the fee income discussion. I mean, for the industry, fees aren't really growing. You've got unique businesses, which I think have some structural tailwinds that you talked through. But I just want to try to put a little bit of a finer point on the opportunity in the trust and securities processing asset servicing. I mean, would you think this is kind of a mid- to high single-digit opportunity growth annually, double digit? I'm just trying to get a sense because I think we've all been underestimating the potential here.

Yes. I mean it's hard to -- obviously, we don't give guidance, so I can't really directly answer that. So we're aiming much higher and I think we have the capability to continue to grow the profile. The thing that's happening, I was in New York with our team making calls a couple of weeks ago. And because of the profile, what's happened to the businesses is we've gone from calling on and winning smaller profile boutique business to winning business from household names that you would recognize that have global profiles, right? So the sort of this -- the profile of the business has changed dramatically. And so the types of business we're winning is different. And there's really not any business on the landscape of fund services or corporate trust or any of the businesses that we can't win. And so the technology is there, the people are there, the profile is there, the momentum is there, and it's just sheer execution. It's about keeping our people and staying invested in the technology. And so if I retain the team and we stay invested in the technology, which we can do through the -- you've seen what's happened to our profitability metrics, which allows us to stay invested in our businesses. There's nothing from keeping us growing the profile of those businesses and taking more share.

Okay. And I guess as a follow-up or an extension, maybe the question is operating leverage, efficiency ratio. I guess what's the -- I'm trying to get a little bit of a sense of now that you're through the deal and you've got the growth kicking up again. Where do you think, especially in light of regulatory costs, like where do you think this company as it is today, what's the potential of in terms of KPI?

Do you want to take that? I mean there's a lot of improvement. You see it in the numbers. You see it in the numbers already. Our profitability metrics are up very nicely, and that was intended. It's part of why we did the deal. And back to my last comment, I mean, this profitability allows us to invest in our businesses more efficiently. So we can invest in our retail business more efficiently than we could before, which allows us to grow the business more profitably. And you could say that about several of the lines. I don't know what else...

On the regulatory front, we're going to be really mentioned, right? There's a lot of dialogue about what $100 million might look like in the future. So we're not going to -- we're going to researching it, but in terms of spending any dollars relative to that in '25 or even in '26, we're going to be measured until we know what the rules that we are going to face are. So at this point, I wouldn't consider or contemplate any big significant investments from that standpoint because the overtones are certainly positive that most of the $100 million requirements will continue to move higher or go away.

And that was our final question. So I'll hand back over to the management team for any closing remarks.

Thanks, everybody, for joining. That was a full and thorough -- lots of great questions. As you know, we love talking about UMB. It was a great quarter, and we look forward to reporting our results next quarter. Thank you.

Thank you, everyone, for joining today's call. This concludes the call. You may now disconnect. Have a great rest of your day.