UMB Financial Corporation (UMBF) Q2 2026 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the UMB Financial Second Quarter 2026 Financial Results Conference Call. I would now like to turn the call over to Kay Gregory with Investor Relations. Please go ahead.

Good morning, and welcome to our second quarter 2026 call. Mariner Kemper, Chairman and CEO; and Ram Shankar, CFO, will share a few comments about our results, and then we'll open the call for questions from 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 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 48. 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. Yesterday afternoon, we reported second quarter net income of $271.8 million, resulting in earnings per share of $3.56. Our strong results generated an operating return on tangible common equity of 20.3% and an operating efficiency ratio of 48.1%. A few highlights from the quarter include a 12.6% linked-quarter annualized growth in average loan balances, bolstered by a record $2.6 billion in gross production, continued high-quality credit metrics with net charge-offs of just 16 basis points of average loans. Nonperforming loans were 31 basis points, an improvement from 38 basis points in the first quarter, 4 basis points of core margin expansion through disciplined pricing on both sides of the balance sheet and ongoing momentum in our fee businesses. Our private investment activity continued to deliver with $27.1 million in net gains from our holdings, primarily related to our investment in Beacon Communications and SpaceX Technologies. Total fee income from our varied institutional banking businesses increased 6% on a linked-quarter basis and 19.6% from the second quarter in 2025, led by asset servicing and corporate trust. Each of those businesses saw a more than 20% year-over-year increase in fee income. In Fund Services, assets under administration increased nearly $57 billion from the prior quarter and stand at $622 billion. And finally, our off-balance sheet deposits grew by 3.6% from the first quarter to $23.7 billion. This growth drove an increase of $4.2 million or 23% in our 12b-1 fees and money market income. As expected, deposit growth and pricing continue to be an industry focal point. Our average deposit balances were flat for the quarter as increase in commercial and asset servicing were partially offset by the seasonal decline in public funds, along with our lower investor solution balances. Our average cost of interest-bearing deposits stayed roughly flat as well. While balances were flat, we are well positioned with a diverse funding mix, low loan-to-deposit ratio and healthy liquidity levels. The third quarter is typically a seasonal low point for deposits, but we feel good about our deposit pipeline in the second half of the year. Although we were able to improve core margin this past quarter, as you've heard us say, we are focused on balance sheet and net interest income growth as long as it comes at a reasonable spread. Additionally, our balance sheet remains flexible with nearly $1.5 billion of excess cash and additional $24 billion in off-balance sheet client deposits. A portion of those deposits can always be brought on balance sheet if desired at market rates. And our asset base also provides additional flexibility, including $2.3 billion in securities that roll off or mature within the next 12 months. On the capital front, levels continue to build with June 30 common equity Tier 1 ratio of 11.45%, a 29 basis point increase from March. Our capital priorities remain the same with supporting organic loan growth at the top of the list. We have demonstrated consistent growth with a median linked-quarter annualized increase in loan balances of 10.5% over the past decade. Our continued strong financial performance and pace of capital accretion allowed us to raise the dividend this quarter. Yesterday, the Board declared a common dividend of $0.50 a share, representing a 16.3% increase, supporting our commitment to return value to our shareholders. We also opportunistically repurchased approximately 38,000 shares for $5 million during the quarter. Finally, our results in the first half of the year drove positive operating leverage of 12.2% on a year-over-year basis. We continue to expect positive operating leverage for the full year of 2026, even with the continuing impact of lower expected contractual accretion buses. I'm extremely pleased with the second quarter results, and I'm excited to continue this momentum in the second half of the year. Now I'll turn it over to Ram for more detail on the drivers of our results. Ram?

Thanks, Mariner. The second quarter included $35.9 million in net interest income from purchase accounting adjustments, $10.9 million of which was related to accelerated accretion from early payoffs of acquired loans. The benefit to net interest margin from total accretion was approximately 23 basis points. On Slide 10 is the projected contractual accretion, which is estimated at approximately $46 million for the remainder of 2026 and $77 million for 2027. Slides 12 and 13 include some key highlights and drivers of our quarter-over-quarter variances. Noninterest income for the quarter was $245.5 million, an increase of $40.7 million or nearly 20% from the first quarter. Drivers included the investment security gains that Mariner noted, along with increased 12b-1 and money market income and strong performance in fund services and corporate trust. Within the other income category, we had some market valuation-related variances, including $8.7 million in company-owned life insurance income, an increase of $11.2 million, which has a similar offset in increased deferred compensation expense. Derivative income related to customer swap activity was $4.1 million, an increase of $1.3 million linked-quarter. activity from former Heartland locations brought in just over half of that income. Adjusting for investment gains and mark-to-market on COLI, our fee income for the second quarter was approximately $210 million. On the expense side, we had just $1.7 million in merger-related costs. Operating noninterest expense was $398 million, an increase of 6% compared to the first quarter. The largest drivers included an increase of $7.5 million in total salaries and benefits expense related to the impact of second quarter merit increases and a $12.6 million increase in deferred compensation expense, offset by $12.5 million in expected seasonal decreases in payroll taxes, insurance and 401(k) expense. Additionally, we recorded $4.1 million in operational losses and a timing-related increase of $3.6 million in legal and consulting expenses. Compared to the guidance we provided last quarter, the increase in expenses was driven largely by deferred compensation expense, which varies with market activity and the operational losses that I mentioned. Looking ahead, we would expect third quarter operating expense to be in line with the current consensus expectations of approximately $390 million. Turning to the balance sheet. Driving the 12.6% annualized loan growth that Mariner mentioned was once again nearly 22% annualized growth in average C&I balances, led by strong activity across the footprint, including St. Louis, Utah, Texas, and Arizona. Our pipeline remains strong heading into the third quarter. Average deposits, as shown on Slide 25, remained flat from the prior quarter as the increase in interest-bearing demand and savings was nearly offset by decreases in DDA and time deposits. Reported net interest margin for the second quarter was 3.32%. Excluding the 23 basis points contribution from purchase accounting adjustments, core margin was 3.09%, increasing 4 basis points sequentially. The primary drivers of the linked-quarter increase in our core NIM included benefits of a favorable earning asset mix shift in favor of loans and the impact of changes in liquidity levels. Relative to the second quarter adjusted margin of 3.09% that excludes accretion, we expect third quarter margin to be relatively flat. As usual, actual margin and NII will depend on levels of DDA growth and excess liquidity, any SOFR movements and mix shifts within the lending and funding portfolios. Finally, our effective tax rate was 20.8% for the second quarter compared to 21.1% for the first quarter. Looking ahead, our tax rate is expected to remain between 20% and 22% for 2026. Now I'll turn it back over to the operator to begin the Q&A session.

Your first question is from the line of Jon Arfstrom with RBC.

Mariner and Jim, I think we ask this every quarter, and I think we probably know the answer, but it's a good way to start the call. Just give us a little bit more on the gross loan production trends that you're seeing. It was another strong number. You call out some markets, but is it the overall economy supporting this pace of production? Anything you would call out that was maybe a little bit unusual? And just curious how you feel the pipelines look.

I wish I had something exciting and different to tell you, Jon, but it's business as usual. We see growth across all regions, all verticals, very solid across the board. There are some interesting trends. I think just in the space in general, there is more private equity and family office purchasing taking place, ESOPs taking place in the marketplace. But that's not new, I mean just part of the storyline. It's really just kind of business as usual and the next 90 days as we've been able to tell you for some time, looks very similar to the last 90 days.

I would only add that obviously, we've highlighted some markets in the past, but it's coming from across the footprint as all markets, and it's led by C&I, is laid out in the deck, but it continues to be strong and pipelines continue to look good, just like we've continued to perform.

Yes. As we've said many times, it's market share gains really over economic activity. Economic activity can on the margin pull us up or drag it down slightly, but it's really market share gains and building out our presence in all the markets we're in. [Audio Gap]

We'll open up the line of Chris McGratty to continue with his questions.

I guess the follow-up would be I heard you on the balance sheet. Could you help on the comments on the on off-balance sheet deposits? I know there's like a relationship between deposit fee income. I guess the question would be really normalizing the fee income adjustments in the quarter, what's the jumping off point in the back half?

So it won't really relate to the ongoing growth of our fees. We were able to kind of keep that going independent of what's on and off balance sheet. That's kind of the numbers up a little bit, as we said in the call, like 3.4% or so. But they stay pretty steady, and we're able to grow the rest of the business kind of independently of that, if that helps. And then the comment was we can pull some portion -- a large portion of that on balance sheet if we need it or desire it, if we're willing to pay market rates. But it shouldn't -- your question is, do we pull it on, does it affect our fee income? The answer is no.

Your next question is from the line of Casey Haire with Autonomous. Casey Haire So I wanted to drill into the core NIM guide a little bit more. Just from a loan yield and deposit rate perspective, just what's backstopping that flattish outlook? Is it loan yields trending up and deposit costs trending up as well or both flat? Just a little bit more color and maybe if you can spot rates on both.

Yes. I'll answer the second question. First, the spot rate for us don't make a whole lot of sense because of the volatility of our deposit mix. So that's probably not what I would disclose. But you're exactly right on the first question is if you look at even this quarter, our loan yields, excluding PAA, went from 5.99% to 6.01% and our cost of interest-bearing deposits went up 2 basis points. So we'll expect that to grind up or down based on what's happening. And then the impact to margin will entirely be predicated on what happens with DDAs and what type of deposits come in at what time. So that's kind of driving our flattish outlook for NIM going forward. And then just on the picture, if there were to be any rate hikes, you can see it on our IRR page. Our sensitivity to higher rates or lower rates are very modest. 47% impact on NII for 100 basis points move. So any quarter, that should be very negligible impact both on NII and NIM.

And expectations, we outpaced growth anyway. Casey Haire Got you. Okay. And then just from a loan-to-deposit perspective, I know you guys are in great shape at under 70%. I think you guys have talked about a ceiling of 75%. Just what -- do you expect to get there? I know this is a seasonally challenging quarter for deposits, but just trying to -- the loan growth momentum is very strong. I know you guys feel comfortable with your deposit outlook longer term. But just trying to get a sense of when -- where you expect the loan-to-deposit ratio to land and when -- at what level would you step up the urgency in terms of deposit pricing? So I think we don't -- that level of urgency has been in place. It's been in place -- I've been CEO for 22 years. We have the same level of urgency about core deposits as we have ever had. And banks should never ignore core deposit growth, and they do periodically to improve their ratios. So that has never been something we played around with. I think deposits are the essence of the value of our balance sheet and the value of our company altogether. So if you look at Page 40 in our deck, I would say that's really the way to think about our business is not to think about it from quarter-to-quarter, but really to think about what we're able to do year-over-year over year-over-year. And there is no expectation that we can't continue to do what you see on Page 40, which is nice, steady deposit growth. And so we're not -- that's one of the reasons we don't talk about or think about where we aim that loan-to-deposit ratio because if you look at what we're able to do on Page 40 over a long period of time with the exact same management team, we have no expectation that we can't keep delivering.

Your next question is from the line of Janet Lee with TD Cowen.

So your core fee income in the second quarter, excluding the market-related income looks to be around the $210 million range. We've been growing trust and securities processing fees at around mid-teens plus range in the past few quarters. Is there any reason why that growth trajectory should derail from where you've been in the past few quarters? Or are there any new product launches or anything that could further support that kind of growth trajectory? Or should it moderate? How should we think about that?

We expect in trust and securities processing to be able to continue to have the same general growth rate with possible upside. So we have a very strong pipeline. We continue to gain share. One of the things I'd say overall about -- one of the main pieces within trust and securities processing is our fund servicing business. And if you were to go back, say, 10 years in that business, we depended on start-up fund business, which we were chasing profitability and growth by focusing on that part of the business, fast forward to where we are today, and we are doing very little start-up business and average size has come up a lot. And we're competing for any piece of business in that space at this point, up and down the size spectrum and complexity spectrum. And so the pipelines are very, very strong. And I think we talked before to one of the -- we've been able to benefit from backing some of the platforms that are democratizing alternative investing for the larger population. And so that has really benefited us as well as those platforms continue to grow with us being the piping behind that. So the profile for all those businesses and corporate trust and really the rest of them, the 2 anchors are Fund Services and Corporate Trust. The growth is coming across all of our fee businesses, and no expectation that we can't keep the same growth rate or better.

Got it. And on deposit growth, are you pointing to public fund overall deposits being down in the third quarter given the further public fund outflows and then rebound in the fourth quarter? And is there any seasonality to Investor Solutions segment within the deposit category, which has been down a couple of quarters?

Yes. No, I mean I think the way to think about it is 2 pieces to our deposit story on an annual basis, and we use 2 terms. You have the seasonality part, which is mostly public funds and then you have episodic. And because of our institutional businesses, on an average basis, versus actual basis, you can have a lot of noise because there's a lot of episodic transaction-based activity at the client level throughout our whole institutional base. That's why we always point to longer terms, annual terms or averages over time instead of point in time type numbers. So that's -- so the point about seasonal low point in the third quarter is we do start to build public funds and there are some other trust type relationships that start to build back up in the back half of the year. So that's why we say that. In addition to that, there's episodic stuff that can drive us up significantly or drag us down 1 month to the next or something. So we -- but it's really -- I really like to try to have the investor group focus on Page 40, which is what are we able to do as a company with fees and loan-to-deposit ratio over the long period of time, not quarter-to-quarter or month-to-month.

Your next question is from the line of Nathan Race with Piper Sandler.

This is Adam Kroll on for Nate Race. So maybe just starting, is there any update to the potential impact from the new capital rules and just how that could impact your long-term CET1 target and appetite for buybacks, just given what your profitability, you'll be building capital at pretty strong clips?

Yes. We've done some preliminary assessment on that, Adam. And our early expectation is it could be depending on the RWA changes, it could be 50 to 60 basis points net benefit after inclusion of AOCI. We'll wait for any guidance on how we deploy that in capital, but you heard us all say #1 priority for capital is always going to be organic loan growth. As you've heard from the team, our pipeline remains strong for the next foreseeable future. And so that will always be the primary source of deployment of capital. But our CET1 is at 11.5%, as Mariner said in his prepared remarks, we're well ahead of where we thought we would be post Heartland and it continues to build. You saw what we did this quarter and last quarter with repurchases last quarter, a big dividend increase this quarter, strong continued organic growth. So those will be the options in front of us.

I too take a balanced approach to it. I mean we certainly want to focus on building long-term value through focusing on organic growth as the first priority. But there's a balance to that, and that's why we increased the dividend and have done some buybacks. So we like to kind of take a balanced approach and look at everything and with just the priority being investing in the business.

Got it. I appreciate the color there. And then one other one for me is I'd be curious if you could provide some color on how competition has evolved across your footprint from a loan pricing perspective? And just generally, what are new loans coming on the portfolio at?

Well, if you look at our peer group, you can see that we have the best, if not one of the best loan yields in the group. So we're able to maintain our strong loan yields. And you can see on a linked-quarter basis, it's very steady there. So I would say that it's always competitive. Some of it really has to do with mix and how much variable rate loans you're putting on versus fixed. And we like to manage that, think about that as we're worried about what -- where interest rates are headed and mixing in -- at the right time, mixing in more fixed rate debt and vice versa depending on kind of the way the prevailing winds are going on interest rates. But we are very neutral on that front. We managed to be neutral. And we're very confident that we can keep leading loan yields based on value proposition and mix relationships. So everybody probably says that, but you can see it in our numbers.

Our next question is from the line of Brian Wilczynski with Morgan Stanley.

I wanted to go back to fee income. For the institutional businesses like Fund Services and trust, can you talk about the impact that capital markets activity has on those businesses? I was wondering what matters the most for them? Is it the level of asset prices, M&A activity, debt capital markets? What would you say matters the most for growth in those areas from a market perspective?

So the capital markets part of our business, which would be public debt issuance and escrow work and all that, that it's a little complicated. We have our underwriting business, which is pretty small, but it is a nice contributor. Then we have our Corporate Trust business where we do the escrow agent work with that. And to the extent, I would say that to the extent that we have recovery in the market and there is more debt being issued, we will play a bigger role on a national basis as an administrator as that public and public private debt takes place, which it has been. So the leading indicator for Corporate Trust would be activity, right, debt issuance, both private and public. We have seen a nice uptick on that across the board. And so -- and then there's -- again, there's a lot here. So then on the Fund Services side, we've got like CLOs and ABL, ABS work. And then we'll do the administration of the fund servicing on those funds. So we benefit from that. So again, to the extent that debt issuance is on the upswing, we benefit from that, both as an issuer on the municipal side. We have a great bank qualified and nonbank qualified issuance and sales business, sales and trading business. And then we have our corporate trust business that plays more broadly in public and private debt across the spectrum of asset classes. And that's -- so you have seen an uptick across the country, and that's -- we benefited from that. Jim wants to add.

No, I was just going to add, if you think of it in terms of like similar to our commercial business, it's market penetration and taking market share from other providers, that's also going to be part of the growth regardless for us. So we continue to see the fruits of our labor in those efforts.

The 2 biggest drivers, as I mentioned earlier, in institutional for us are Fund Services and Corporate Trust. And while we're talking about debt issuance on Corporate Trust side, there's also aviation and then there's administering CLOs and all that. So it's more complex. It's not an easy question to answer, but the trends across all the verticals are very strong, I guess, what I'd leave you with.

Got it. Really appreciate all of that color. And then maybe going back to loan growth for a moment. It does look like the paydowns increased a bit Q-on-Q and were maybe a little bit higher than expected in the second quarter. Can you just talk about what drove that and how you're thinking about the cadence of paydowns from here?

Yes. So 2 things I'd say. One, if you look at a 3-quarter linked basis there, you'll see that really Q1 is kind of a low point and Q2 is really more normalized with the previous 3 quarters. And so I would say that last quarter is probably an anomaly low quarter, but that's the comment I would make about this particular quarter compared to last quarter. But just generally speaking, the anticipation for higher payoffs would be around rates. So the current environment is not indicative of increased payoffs and we're likely -- most likely to see rate increases by the end of the year. So we don't have much expectation really for accelerated payoffs in the near term. All right. Well, that seems to be the last question. We appreciate everybody's questions and really sorry about the technical difficulties, but we -- it looks like we had a good recovery. Again, I always appreciate the questions, and we are thrilled about our quarter and your interest. We'll see you next quarter.

Yes. Thank you, Mariner. If you have any follow-ups, you can always reach us at (816) 860-7106. Thanks for joining us today, and have a good day.

Ladies and gentlemen, this does conclude the UMB Financial Second Quarter 2026 Financial Results Conference Call. Thank you for joining. You may now disconnect.