UMB Financial Corp Q2 2026 Earnings Call

Hello. Thank you for standing by. My name is Dennis. 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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the call over to Kay Gregory with investor relations. Please go ahead. Good morning.

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. 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. Non-performing loans were 31 basis points, an improvement from 38 basis points in the first quarter. Four basis points of core margin expansion through disciplined pricing on both sides of the balance sheet. 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. 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. 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 business. 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. Non-interest 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 non-interest 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. 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 I 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. 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 four 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.

At this time, I would like to remind everyone, in order to ask a question, simply press star then the number 1 on your telephone keypad. Your first question's from the line of Jon Arfstrom with RBC. Please go ahead. Okay, thanks.

Good morning. Morning, Jon. Mariner and Jim, I think we ask this every quarter.

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. Is it the overall economy supporting this pace of production? Anything you would call out that was maybe a little bit unusual? Just curious how you feel the pipelines look.

I wish I had something exciting and different to tell you, Jon. It's business as usual. We see growth across all regions, all verticals. Very solid across the board. There's some interesting trends, I think, just in the space in general. There's more private equity and family office purchasing taking place, ESOPs taking place in the marketplace. That's not new. It's just part of the storyline. It's really just kind of business as usual. 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. It's coming from across the footprint as all markets. It's led by C&I as laid out in the deck. It continues to be strong in pipelines. Continue to look good, just like we've continued to perform.

Yeah. As we've said many times, it's market share gains really over economic activity. The economic activity can, on the margin, pull us up or drag us down slightly. It's really market share gains and building out our presence in all the markets we're in.

Yeah. Okay. Good. Fair enough on that. Maybe Ram, for you, I see the stable deposit costs. Anything emerging in terms of deposit competition that you're concerned about, and how do you want us to think about- Dennis, we have another question just comment a little bit on deposit competition, what you're seeing there.

Excuse me, everyone. Can you hear Jon's question?

You guys there? Are you listening?

Can you hear? Hello? You guys hear me?

Yeah. Jon, I can hear you. It appears that there's an issue on the speaker line.

Jon, we can't hear the competition question, we can hear. Can you hear us? Yes.

Okay. We're having some technical difficulties.

We're able to get the questions written online. We cannot hear them, as I understand it, you can hear us. The next question is what, Ram?

Jon's asking about deposit competition.

Deposit competition, that seems to be the general theme across the whole banking industry. Nothing new there. It's always competitive from our perspective. This low point for us is just seasonal, there's nothing really to talk about our deposit. We remain very positive and bullish about the back half of the year. This is really just a seasonal low point and public funds draw down at this point for us, Jon.

Okay. Thank you. The next question's from the line of Chris McGratty with KBW.

Please go ahead. Great morning.

Hey, Dennis, can you take the next question?

Can you guys hear me?

Yes. Can you hear me?

Okay. Yeah. My question is on the size, I guess, Ram, on the size of the balance sheet.

Casey, if you have a question, if you could write it in, you're next in the queue, and then we will respond to it, if you can do that. Somehow we're not able to hear folks on the phone, but you all can hear us.

We can't hear him. We're going to play psychic and take the next guest question.

Yeah. Chris McGratty's asking about the size of the balance sheet and what's the outlook for next quarter.

I think that's the same answer as given loan growth. We expect it to be the same. As far as deposits go, again, we're likely to be at a low point in the third quarter, but we have some line of sight into the remainder of the year with some strong activity for the rest of the deposit base.

Just to add to that, Chris, I would say the earning asset side that Mariner said will entirely depend on what's going on with excess deposit growth and how that gets deployed in the liquidity side of the balance sheet. As you've seen us demonstrate high single digit, low double digit kind of loan growth, and then the treasury portfolio will depend on what's happening with excess deposit growth.

Should we try dialing back in?

Yeah. Everybody, sorry. We're going to try dialing back in and see if we can get better connectivity.

Thank you, and thanks for your patience.

Yeah. Everyone, we will continue to be on a silent hold while we're waiting for the speakers to rejoin.

Again, thank you all for your patience. Once again, ladies and gentlemen, thank you for your patience. We are continuing on our silent hold while we wait for the call to resume. I believe the speakers have rejoined. Can you hear me? Yeah.

Yes. We're here, Dennis. Okay.

Thank you all for rejoining. We'll open up the line of Chris McGratty to continue with his questions. Chris, your line is open.

Great. Thanks. I guess the follow-up line 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 a relationship between deposits, fee income. I guess the question would be really normalizing the fee income adjustments in the quarter. What's the jumping off point for the back half?

It won't really relate to the ongoing growth of our fees. We were able to keep that going independent of what's on and off balance sheet. The number's up a little bit, as we said in the call, like 3.4% or so, but they stay pretty steady. We're able to grow the rest of the business kind of independently of that, if that helps. The comment was that 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. If your question is if we pull it on, does it affect our fee income, the answer is no.

All right. Thank you. Your next question is from the line of Casey Haire with Autonomous.

Please go ahead. Morning, Casey.

Great. Thanks. Good morning, guys.

How you doing? I wanted to drill into.

No worries. 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, maybe if you can, spot rates on both. Thanks. I'll answer the second question first.

The spot rates for us don't make a whole lot of sense because of the volatility of our deposit mix, that's probably not what I would disclose. You're exactly right on the first question. If you look at even this quarter, our loan yields, excluding PAA, went from 599 to 601, and our cost of interest-bearing deposits went up two basis points. We'll expect that to grind up or down based on what's happening. The impact to margin will entirely be predicated on what happens with DDAs and what type of deposits come in at what time. That's kind of driving our flattish outlook for NIM going forward.

Yeah 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, 0.7%. Impact on NII is for 100 basis points move, so any quarter, that should be very negligible impact both on NII and NIM.

Expectations we outpace it with growth anyway.

Correct. Gotcha. Okay. 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%. Do you expect to get there? I know this is a seasonally challenging quarter for deposits, but 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 where you expect the loan to deposit ratio to land and at what level would you step up the urgency in terms of deposit pricing?

I think that level of urgency has 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. Banks should never ignore core deposit growth. They do periodically to improve their ratios. 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. 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. There is no expectation that we can't continue to do what you see on page 40, which is nice, steady deposit growth.

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.

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

Please go ahead. Morning, Janet.

Good morning. Your core fee income in the second quarter, excluding the market-related income, looks to be around the $210 million range. You've been growing trust and securities processing fees at around mid-teens plus range the past few quarters. Is there any reason why that growth trajectory should derail from where you've been in the past few quarters? 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. We have a very strong pipeline. We continue to gain share. Well, one of the things I'd say overall about one of the main pieces within trust and securities processing is our fund servicing business. If you were to go back, say, 10 years in that business, we depended on startup fund business, which we were chasing profitability and growth by focusing on that part of the business. You fast-forward to where we are today, and we are doing very little startup business and average sizes come up a lot, and we're competing for any piece of business in that space at this point, up and down this size spectrum and complexity spectrum.

The pipelines are very strong and I think we talked before too, we've been able to benefit from backing some of the platforms that are democratizing alternative investing for the larger population. That has really benefited us as well as those platforms continue to grow with us being the piping behind that. The profile for all those businesses and corporate trust and really the rest of them, the two 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. Thanks for all the color. On deposit growth, are you pointing to public fund, the overall deposits being down in the third quarter, given the further public fund outflows and then rebound in the fourth quarter? Is there any seasonality to investors solutions segment within the deposits No category which has been down a couple quarters?

Yeah, no, the way to think about it is two pieces to our deposit story on an annual basis, and we use two terms. You got the seasonality part, which is mostly public funds, and then you have episodic. 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. 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. That's why we say that.

In addition to that, there's episodic stuff that can drive us up significantly or drag us down one month to the next or something. 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.

Got it. Thanks for taking my questions.

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

Please go ahead. Morning, Nate.

Hey, this is Adam Crowell on for Nate Race. Good morning, and thanks for taking my questions.

Morning. 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 with your profitability?

You'll be building capital at a pretty strong clip.

Yeah, we've done some preliminary assessment on that, Adam, and our early expectations, 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, you heard us all say number one 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, that'll always be the primary source of deployment of capital. Our CET1 is at 11.5%, as Mariner said in his prepared remarks. We're well ahead of where we thought we would be at 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.

Those will be the options in front of us.

Try to take a balanced approach to it. We certainly want to focus on building long-term value through focusing on organic growth as the first priority. There's a balance to that, and that's why we increased the dividend and have done some buybacks. 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. 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. We're able to maintain our strong loan yields, and you can see on a linked quarter basis, it's very steady there. 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. We like to manage that, think about that as we're worried about 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. We're very neutral on that front.

We've managed to be neutral, and we're very confident that we can keep leading loan yields based on value proposition and mix and relationships. Everybody probably says that, but you can see it in our numbers.

Got it. I appreciate the color, and thanks for taking my questions.

Thanks, Adam. Once again, if you would like to ask a question, please press star one on your telephone keypad.

Your next question's from the line of Brian Wilczynski with Morgan Stanley. Please go ahead. Hi. Good morning.

Thanks for taking my questions. 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 markets perspective?

The capital markets part of our business, which would be public debt issuance and escrow work and all that, it's a little complicated because we have our underwriting business, which is pretty small, but is a nice contributor. We have our corporate trust business where we do the escrow, trustee, paying agent work with debt. 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. The leading indicator for corporate trust would be activity, right? Debt issuance, both privately and public. We have seen a nice uptick on that across the board. Then there's a lot here. On the fund services side, you've got CLOs and ABL, ABS work.

We'll do the administration and the fund servicing on those funds. We benefit from that. 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 non-bank-qualified issuance and sales business, sales and trading business. We have our corporate trust business that plays more broadly into public and private debt across the spectrum of asset classes. You have seen an uptick across the country, and we've benefited from that. Looks like Jim wants to add something.

No, I was just going to add, if you think of it in terms of 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.

Yeah. We continue to see the fruits of our labor in those efforts.

The two biggest drivers, as I've mentioned earlier in institutional for us, are fund services and corporate trust. While we were talking about debt issuance on the corporate trust side, there's also aviation and then there's administering.

CLOs CLOs and all that.

It's more complex. It's not an easy question to answer, but the trends across all the verticals is very strong. That's what I'd leave you with.

Got it. Really appreciate all of that color. 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? Thanks. Yeah. Two things I'd say.

One, if you look at a three-quarter link basis there, you'll see that really Q1 was kind of a low point, and Q2 is really more normalized with the previous three quarters. I would say the last quarter is probably an anomaly low quarter. That's the comment I would make about this particular quarter compared to last quarter. Just generally speaking, the anticipation for higher payoffs would be around rates. The current environment is not indicative of increased payoffs when we're most likely to see rate increases by the end of the year. We don't have much expectation really for accelerated payoffs in the near term.

Got it. Really appreciate all of the detail, and thank you for taking my questions.

Thanks, Brian. All right. Well, that seems to be the last question.

We appreciate everybody's questions. Really sorry about the technical difficulties, looks like we had a good recovery. Again, always appreciate the questions, and we are thrilled about our quarter and your interest. We'll see you next quarter.

Yeah. Thank you, Mariner. If you have any follow-ups, you can always reach us at 816-860-7106. Thanks for joining us today, 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.