UMB Financial Corporation (UMBF) 2026 Q3 法說會逐字稿

Hello, everyone. Thank you for joining us, and welcome to UMB Financial's third-quarter 2026 financial results conference call. (Operator Instructions)

I will now hand the conference over to Kay Gregory, Investor Relations. Please go ahead.

Good morning, and welcome to our third quarter 2026 call. Along with our quarterly results, we announced an acquisition to acquire El Dorado Savings Bank, headquartered in California. You will note that we've posted two presentations to our website, our typical quarterly review, and an overview of the announced acquisition. Mariner Kemper, Chairman and CEO, and Ram Shankar, CFO, will provide brief comments about the transaction and our results, and then we'll open the call for questions.

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. Actual results may differ and are subject to assumptions and risks.

These risks are outlined in our SEC filings and summarized in our presentation on slide 48. Now, I'll turn the call over to Mariner Kemper.

Thank you, Kay, and good morning, everyone. I'm very excited to report both our strong third quarter results and the acquisition of Placerville, California-based El Dorado Savings Bank. In recent quarters, we've discussed our desire to build scale in our retail franchise by screening for well-run banks in markets where we already operate. Part of our ongoing strategy is to selectively augment our organic growth engine with tuck-in acquisitions that meet our criteria: a granular low-cost retail deposit base, low loan-to-deposit ratio, quality credit metrics, and a similar culture. El Dorado fits that description very well, strengthening our physical and brand presence on the West Coast, with 35 branches across the Sacramento metro area, the Sierra Nevada foothills, in the Lake Tahoe community, and in the Reno area.

The acquisition will launch us into some of the most desirable markets in both California and Nevada and will deepen our foothold in areas adjacent to our current branch network. El Dorado is ranked as the number one community bank in three markets, including the vibrant and fast-growing Lake Tahoe area, and within the top 10 in 6 additional markets.

Our total branch count will grow to 227 across the footprint, an increase of 18%. With the addition of El Dorado's $2.1 billion in deposits, our consumer franchise will represent approximately 26% of our total deposit base. At just 88 basis points, El Dorado's total cost of deposits in the third quarter ranks among the lowest nationwide. Additional attractive characteristics of this franchise include an 89% insured ratio, $60 million in average deposits per branch, and an average deposit account age of 14 years, excluding CDs.

With this highly liquid balance sheet and a loan-to-deposit ratio of just 24%, we see significant potential value as we deploy the excess liquidity. We will also be acquiring approximately $500 million in loans, predominantly made up of consumer mortgages, with a 39% loan-to-value and an average loan size of $138,000. Both banks share a culture focused on providing high-quality customer service, a strong associate experience, and support the communities we serve. We expect the transaction to close in the first quarter of 2027, subject to the approval of El Dorado shareholders and customary regulatory approvals. Ram will provide a few additional details about the transaction shortly. Now, turning to a few brief comments on the third quarter. We reported net income of $272.3 million, which resulted in earnings per share of $3.56.

Balance sheet and fee income growth, strong asset quality metrics, and stable net interest margin contributed to an operating return on tangible common equity of 19.5% for the quarter. A few highlights from the quarter include record top-line loan production of $3.1 billion, driving $1.1 billion or 11.1% linked-quarter annualized growth in average loan balances.

We maintained exceptional credit quality with just 13 basis points in net charge-offs and an improved non-performing loan ratio of 28 basis points compared to 31 basis points in the second quarter. For comparison, the industry-wide NPL ratio for banks reported so far this quarter was a median of 53 basis points. We had continued growth and momentum in our fee businesses. Total fee income from our institutional banking business increased 3.2% from linked quarter and nearly 18% year to date.

Specifically, fund services contribution to trust and securities processing income grew 8.8% compared to the second quarter and more than 22% year to date. Corporate Trust posted a nearly 19% year-to-date increase. Additionally, Corporate Trust recently advanced in the league tables, now ranking as the number two municipal trustee in the country based on deal count. In fund services, we announced the continued expansion of ETF servicing capabilities, broadening our focus on supporting a variety of asset classes. Private wealth teams have brought in $1.2 billion in net new assets September year to date, already matching full year 2025 levels. Finally, our year-to-date results have produced positive operating leverage of 11.5%. As I noted, we had extraordinary loan production in the third quarter.

While we still expect a strong fourth quarter, gross production levels are likely to moderate from these record levels to be more in line with the first half of the year. On the capital front, on September 15, we redeemed $150 million of our subordinated debt. Our quarter-end CET1 ratio rose by 5 basis points from June to 1150. Organic growth remains our top capital priority, given our long, uninterrupted track record of outperformance and growing loan balances. At the same time, we've also demonstrated our ability to evaluate and integrate acquisitions that support our organic growth, as evidenced by our successful integration of HTLF.

Now I'll turn it over to Ram for more detail.

Thanks, Mariner. The third quarter included $33.1 million in net interest income from purchase accounting adjustments, $9 million of which was related to accelerated accretion from early payoffs of acquired HTLF loans. The benefit to net interest margin from total accretion was approximately 22 basis points. Slide 10 of our third quarter deck shows projected contractual accretion, which is estimated at approximately $23 million for the fourth quarter, $75 million for 2027, and $62 million in 2028. Non-interest income for the quarter was $232.4 million, a decrease of $13.1 million from the second quarter. Drivers included a $16.1 million reduction in gains on investment securities following an exceptionally strong second quarter and a $7 million decline in company-owned life insurance income.

Excluding the impact of investment security gains, mark-to-market on COLI, and the $1.8 million one-time gain on the sale of the building, we saw a sequential increase of $8.2 million or 3.9% in fee income, largely driven by a $5.7 million increase in trust and securities processing income, along with other smaller positive variances outlined on slide 17.

Adjusting for those items, our run rate fee income for the third quarter was approximately $218 million. Non-interest expense was $399.5 million, virtually flat from the prior quarter. As outlined on slide 18, the $5.9 million decrease in salary and benefits expense was largely offset by increases related to timing of laptop purchases within supplies and services, timing of marketing spend related to deposit campaigns, higher occupancy costs stemming from redundant service providers, along with a non-recurring OREO loss of $1.5 million.

Professional services included expenses related to our investment in AI and digital asset offerings. We've selected Glean as the tool to help our business teams with day-to-day workflows and processes. Glean has been rolled out to nearly 1,000 associates who collectively have used the tool to prompt over 53,000 work actions. The work has generated more than 550 use cases to date from both customer-facing and back-office departments.

These range from training, credit administration, and portfolio management, board and management reporting, and others. Business cases are being prioritized to achieve hard dollar cost savings, process improvements, and overall improved productivity. Looking ahead, we would expect fourth quarter operating expense to range between $400 million and $405 million, largely reflecting incentive compensation accruals related to company performance as well as technology project costs. Turning to the balance sheet.

The 11.1% annualized loan growth Mariner mentioned was driven once again by nearly 22% annualized growth in average C&I balances, led by strong activity across the footprint led by St. Louis, Texas, and Utah. As Mariner mentioned, we posted extraordinary loan production of $3.1 billion in the third quarter. Loan yields continue to benefit from higher short-term interest rates and fixed asset repricing, as well as a mix shift towards C&I categories.

Customer sentiment remains strong, and our pipeline for the fourth quarter remains healthy. I will add the typical caveat that payoff levels remain hard to predict with certainty and will impact net growth levels. Average deposits, as shown on slide 25, increased 1.1% from the linked quarter. Average DDA balances declined 6.1% from the second quarter, reflecting expected seasonal disbursements within the institutional banking business.

Reported net interest margin for the third quarter was 3.32%, in line with the prior quarter. Excluding the 22 basis points contribution from purchase accounting adjustments, core margin was 3.10%, increasing one basis point sequentially. The primary linked quarter drivers of core NIM included continued benefits from asset repricing and higher reinvestment rates within the lending and bond portfolios and the impact of changes in liquidity levels resulting in a favorable mix shift, offset by a lower benefit from free funds due to DDA seasonality and higher interest-bearing deposit costs. Our cost of interest-bearing deposits increased nearly four basis points, reflecting the partial impact of the FOMC rate hike in September and to a lesser extent, mix shift within deposit categories.

Our balance sheet remains generally interest rate neutral, with approximately 55% of our $66 billion of earning assets considered to be variable and generally indexed to one-month SOFR rates, while approximately 52% of our $58 billion deposit book is indexed to short-term interest rates. The trajectory of margin in any particular quarter may be impacted by the timing of both FOMC rate hikes and how one-month SOFR prices in anticipation of those actions and the mix of new loans and deposits.

As shown on slide 26, the index deposits will reprice immediately in response to FOMC action, while loan yields reset with a slight lag on the contractual reset dates. Relative to the third quarter core margin of 3.10%, we expect fourth quarter margin to be relatively flat. Finally, our effective tax rate for the third quarter was 18.7% compared to 20.8% in the second quarter.

The decrease was primarily driven by a discrete tax benefit from the release of valuation allowances related to certain state deferred tax assets. For the fourth quarter, our tax rate is expected to be between 21% to 22%. Turning to the financial metrics of the El Dorado Savings Bank acquisition, transaction assumptions are on slide eight of the acquisition deck. With $2.1 billion in high-quality core consumer deposits and $500 million in loans, we view this acquisition as akin to a branch transaction.

The purchase price consideration of approximately $500 million will be structured as a cash stock transaction. UMB will issue 1.8 million shares to El Dorado shareholders based on a fixed exchange ratio of 13.553 x UMB shares for each share of El Dorado. This transaction will provide an opportunity for customary cost synergies coupled with additional liquidity to continue funding our extraordinary loan growth.

We expect the transaction to be modestly accretive to earnings in 2027. Now I'll turn it back over to the Operator to begin the Q&A session.

(Operator Instructions)

Casey Haire, Autonomous Research.

Thanks. Good morning, everyone. Ram, wanted to touch on the NIM, the core NIM flat in the quarter. Just a little help on some of the drivers. Number one, the new money loan yields versus that 609, and then just some updated thoughts on where IB beta can finish in this next upcycle versus the previous upcycle. Thanks.

Yeah, sure. As we said, we expect fourth quarter NIM to be consistent with where we were on a core basis. Some of the drivers are the usual ones, right? Fixed asset repricing. If you look at our debt, we have more than $3 billion of loans priced at 5.25% that are going to reset about 100 basis points based on that. We also have $2.5 billion in securities that are going to reprice from 380 to, if you look, we're getting close to 560 on new money yield. That's consistently going to happen for us as you approach the rate cycle. The other drivers are just if you look at loan yields excluding PAA, that was up 5 basis points. That's a combination of, again, the fixed asset repricing and new money coming in.

Obviously one month SOFR started moving well ahead of what the Fed did in September as well, so that was a benefit. On the flip side of the balance sheet, it's also driven by what's happening with our index deposits. As I said in my prepared comments, 52% of our deposits are indexed.

So far, we've done a pretty good job early on with the soft index in terms of how we negotiate those rates. Obviously as you know, the hard index deposits are very formulaic and they reprice. Generally I would say same thing as the down cycle, we expect 90% beta on the hard index. Over time, maybe 65% to 70% beta on the soft index, and then the rest of the deposit book should be generally priced.

Given rates are as high as they are, there is not a lot of pressure on obviously DDAs in the back book. That is kind of the entire picture of margin drivers. The other thing that also happened the last couple of quarters is just the mix that I talked about. If you look at our loan growth, almost all of it was C&I loan growth, which has a higher yield than any other loan category. When you look at bonds and excess cash versus loans, we had a lot more of loans as a relative percentage of earning assets.

That stuff will reprice on the way up.

Yeah, exactly.

Okay, great. Just lastly on the deposit front, was there any pulling of off-balance sheet funds onto the balance sheet this quarter? Just thinking longer term, the loan growth is great. The deposits have lagged it. I know you guys are in a good position at 69% loan to deposit ratio. If these trends continue where loans significantly outpace deposits, at some point you are going to bump up on that 75% loan deposit ratio. Would that force you to slow down loan growth or push up deposit pricing?

Yeah, I'll take that. I think unfortunately, if you've been listening to our calls, you know that we talk every year about a low point in the third quarter. We have experienced a low point in the third quarter based on seasonality basically. We fully expect to have happen in the fourth quarter what always happens in the fourth quarter.

And fully expect, if you look at our deck over time, the way loan growth and deposit growth worked year-over-year for that to continue to happen. So we have zero expectation that what you just described is even remotely a scenario for us to encounter. So fourth quarter deposits will grow. We have a really nice line of sight and some really great corporate institutional deposit growth in the first quarter. And so that's not even a thing, I guess is what I'd tell you.

Okay, thank you.

Jared Shaw, Barclays Capital.

Hey, everybody. Good morning. Thanks for the color on the trends going into the fourth quarter. Anything on fee income? You've had really good success there. How should we think about the rate of growth coming off of core fees with some of those newer initiatives?

Yeah. What I love about our remarks every quarter and year in and year out is that our strategy is working. The good news is what you have seen, you should continue to see. Our fund services team is on fire. The pipeline is very strong. With the addition of our ETF business, we expect the coming year to be very strong just in the ETF side alone. We've talked about how that business has changed over the last five or six years from having to rely on smaller, younger businesses to really being able to win large mandates from large existing clients and prospects. There's not a piece of business we can't win, and we're talking to everybody, and we have a really deep, awesome pipeline. We're very excited about that business.

As you heard in the prepared remark, our Corporate Trust business, we've just gone up to number two in the league tables. With offices on both coasts and throughout the country, we're picking up bigger mandates. We talked about this before, where now that we're on the coast, if you have a sewer and water deal in Illinois or Iowa, it could be a $300 million deal. You have a sewer and water district in New Jersey, it can be a $1 billion deal. It's really changed the dynamic of the business over time. We also have been able to attract a lot of talent in that business, in both those businesses, but particularly in the Corporate Trust business as the larger banks take their eye off the ball and really aren't focused on smaller businesses.

A $100 million business for a large national bank is one they're not interested in. For us, we're pretty excited about a $100 million business. We find ourselves picking up people who feel forgotten from some of these larger institutions. That's been really great. Then it's just kind of across the board. There's nice solid strength through the other businesses. We talked about having $1.5 billion in new asset growth in our wealth business, which is better than where we were full year last year. Just hitting on all strides. Teams are really doing well. The technology is leverageable. The teams are leverageable. We couldn't be more jacked about our institutional and fee businesses than we are right now.

Great. Appreciate that color. Secondly, looking at the pay downs and payoffs, was there anything unusual in third quarter? Or just as you get bigger, we should think that that's sort of a good stable level offset by the strong production?

Yeah, we have been trying to assess that ourselves, whether it was unusual. I think it just was a large quarter. I think we are a bigger company, and just over time, the base should grow. We think that the third quarter was slightly larger than what the average should be going forward. But we do have a bigger base, so we are not totally sure ourselves. But it is more likely to kind of reset to the last couple of quarters than it is to stay at $3.1 billion. But we honestly do not know ourselves because we do have a bigger footprint with a lot of new people hitting stride. We will know maybe another four quarters down the road what our new baseline is with Heartland, but right now we are kind of feeling our way through that.

Great. Thanks.

Jon Arfstrom, RBC Capital Markets.

Hey, thanks. Hey, good morning. Just following up on Jared Shaw's question on the loan production numbers. Obviously very strong, better than the prior quarters. I understand you expect some moderation, but anything that you would call out on that over $3 billion production number?

No, just that it was a strong quarter, and we think, exclamation point on think, that it's probably a little larger than what we should expect. Probably resets a little bit more to a three-quarter average looking backwards. But we don't really know.

This is Jim Rine. Much more C&I driven. Just as a takeaway, we saw additional payoffs in real estate that we've expected, and that it wasn't like we lost clients. It just rolled to the secondary market on construction loans, which is exactly how that business is supposed to work for us.

We just had a lot of things book, whether that was delays from second quarter or pulled through from fourth quarter. But we feel like our previous run rate was also very strong too. We think that'll normalize back in, as Mariner said, by the first half of the year. But nothing that stands out as a certain industry or segment that was leading the charge. It's very diversified across the board.

Yes. Okay. Thank you. Very helpful. Maybe Mariner, El Dorado, I understand it's not a huge deal, but I think it makes sense and it's a good fit. Can you maybe talk about the medium-term plans you might have in those markets other than taking the loan-to-deposit ratio up, and then touch on just overall M&A appetite that you might have?

Sure. Yeah. I'd love to take a moment on El Dorado. I spent a lot of my time getting to know other bank CEOs that think about the customer and the associate the way we do across our footprint, and got to know the Cooks over the summer and late last year. We realized very quickly that we thought about the world the same way, really care about our associates, really care about our communities and our customers. We're over 110 years old. They're a little over 50 years old. Multi-generations just like us. We really hit it off. The near-term goals are to do no harm, right? Let them continue to do what they do so well in the Sacramento and surrounding areas. The other thing that's really neat is the Nevada part of that is newer.

What's happening with the flights from California into Nevada with a lot of the tech money that's been made and a lot of the wealth that's been made in California. We think that there's a really nice early-day benefit that could have longer-term, really big upside surprise is what's happening around Lake Tahoe. If you look at the map we have there, they're quite a presence right around the lake there and up and through Reno. There's quite a bit happening with movement from one state to another into better tax environments. This bank has already benefited a lot from that. We think we can kind of double down on that. I think that's going to be some really great early and long-term upside surprise is what's happening in Nevada.

As we take our corporate and commercial banking franchise and product set up from Fresno onto the Sacramento Valley, while I'm excited that we have time, we don't really need to worry about it yet. We can kind of take our time to do that right, leverage our way into Sacramento with some hiring and that kind of thing, and maybe positioning of branches around the greater metro area.

So we're very excited about that. But early on, it's just to leverage the franchise into the whole organization with those great deposits and the under-levered situation. We're very, very excited about it. You can see that the branch footprint is very contiguous to the one we have. I love the fact that it's a dense footprint. I love the fact that it increases our overall branch network significantly. The low cost improves.

This deal will improve our interest-bearing deposits as a company by 7 basis points, and it'll take our total cost of deposits down by 4 basis points. It'll be accretive in 2027 and beyond. It's just one brick at a time. This is a very additive, beautiful deal that just fits right into who we are like a glove.

Thank you.

Janet Lee, TD Cowen.

Good morning. Maybe I missed it. I appreciate all the color around the betas for your different types of deposits. Did that include the El Dorado $2 billion of low-cost deposits? Could you maybe just put the pieces together and give your rough estimate around what the combined beta on your interest-bearing deposits could be this cycle? Maybe the mix or the growth of the deposits by category could shift versus what you have on your slide going forward?

Yeah. A couple of things, Janet. The $2 billion, while it is significant, it is not going to materially change the numbers I gave you. The numbers I gave you are just core UMB. One of the things I would say, Mariner said it and it is in our deck, this quarter, their cost of deposits was 88 basis points.

Last quarter was 93 basis points. That is kind of bucking the trend of what is going on with including us, the rest of the industry with their deposit costs. I do not expect a whole lot of changes to the beta numbers that I gave earlier from El Dorado. Again, these are very granular core deposits. The average age of the client, excluding CDs, is about 14 years. No material changes to those beta numbers.

On the mix of future growth, Mariner said we have a strong pipeline of commercial and institutional deposits. Obviously, we are running deposit campaigns as well as you can see from our marketing spend. It is multi-pronged.

Okay. Got it. Thanks. Staying on that topic, it looks like you are still alluding to a slight asset sensitive before turning as a sensitive. You have talked about core NIM being relatively stable in the fourth quarter. Should we expect a modest dip in core NIM and then NIM expansion in outer quarters? Or because of the fixed-rate asset repricing, and you still have over 50% of your earning assets floating rate, could it be more of a stable to upward pattern?

It's more of the latter, more of stable because one month, obviously, we'll know today, unlikely that the Fed does anything today. Whenever one month SOFR starts repricing for that, we'll see that benefit on a lag basis on the lending book. As I said earlier, the fixed asset loans and bonds are happening on a daily basis organically. Then it's just what'll happen to deposits, hard and soft index when the Fed does move, assuming that it does move in December. I would say it's more expected to be stable. The sensitivity post-Heartland for any FOMC move is dramatically reduced. Before Heartland, where we got a lot of consumer deposits, our sensitivity was initially the first couple of quarters because of the deposits repricing faster than loans, you would see a small dip in margin. That sensitivity has been greatly reduced since then.

Along with the remixing on the asset side, more C&I. We're, I think, what are we, 68% variable now?

77%, yeah. Two-thirds are variable, and then we have a small --

That includes the rest of the base.

Yeah. We have a CLO book and some other CMO floaters that we have. That's kind of the 58% of our earning assets are variable in nature as well. I would, as I said in my prepared comments, I'd say we are pretty interest rate neutral from a balance sheet perspective, and slide 26 demonstrates that.

Great. Makes sense. Thank you.

Timur Braziler, UBS.

Morning, Timur.

Hi, good morning. Morning, guys. Back on the M&A conversation, you guys have been very clear in the past just in regards to tailoring that you wouldn't do anything in advance of that $100 billion threshold getting lifted. I'm wondering with some momentum gaining there, how we should think about future deals. Obviously, the last two have been very retail-focused, El Dorado's smaller. Is that still the primary focus, retail, and then size becomes a little bit more fluid? Or just given the economics on the smaller transaction is the likelihood that we're going to continue seeing smaller tuck-in deals versus maybe something larger? Thank you.

Yeah, Timur. I would just repeat what I've been saying really, which is our capital priorities are investing in the company through organic growth first, and that works really well. We've got it dialed in to the extent that we can through networking and staying in touch with the overall banking community, run into opportunities that we would define as tuck-in. We will certainly review those and see if they're the right strategic and financial fit for us, particularly as they relate to end market, places where we want to be more meaningful, get a more meaningful presence wherever we already are. So that's similar, same story. I use the definition of tuck-in, and I would say how I define tuck-in is where we retain small enough that we retain control in every way you would define that.

Control the boardroom, control the culture, control the staff, the team, the leadership. Control in every way that you can define it is how I would define what a tuck-in looks like. As it relates to retail or otherwise, it's really more about making sure that we're adding value, and a traditional bank deal for us is about a quality core deposit franchise that's not fully levered up.

We don't need somebody else's lending prowess. We've got a lending juggernaut as a machine. We know how to do that on our own. We don't need to pick up somebody else's problems. It's really more about the deposits, and that kind of by default translates into something more largely retail-based. It also, through more retail-based, is more granular. So smaller, lower cost average deposit size, which is also attractive.

That's what I would say about all that. Again, it's not something we have to do. But strategically, I think any bank should be looking at all their options. If you find high-quality institutions that can make your company more valuable over time, every company should look at those things.

Makes sense. Thanks for that. Maybe just on the sustainability of the cost of deposits from El Dorado, clearly very low, but also very little in terms of loan to deposit, those deposits being lent out. Is there a level of confidence that the incremental cost of deposits at El Dorado is going to stay well below the broader base? Or once you start maybe leaning on some of those deposits to actually fund growth in some of those markets, the cost there is going to be of greater equivalence to kind of where legacy UMB is?

We are not expecting any change at all in that other than just traditional market pressures that may exist already today. No. I think we may mix into that footprint some small business, middle market, and commercial deposits over time, which I suppose over time would bring up the average cost of the deposits in the market area. But what's there today and expanding and building on the retail base there and building a few more branches, et cetera, I think all that should stay just right in line with what we see today.

Great. Thanks for the questions.

Brian Wilczynski, Morgan Stanley.

Hey, morning. Thanks for taking my questions. I wanted to ask about the non-interest-bearing deposits. You've highlighted that Q3 is typically the seasonal low for UMB. You typically see some nice growth in the average balance in the fourth quarter. To what degree does higher rates weigh on non-interest-bearing growth? Should we be expecting a smaller increase in NIB in the fourth quarter?

We've talked about, we have a lot of episodic ups and downs. Averages are more important than end of period. The third quarter is traditionally a low point for us in general. The other day I was looking at our previous year, second to third quarter, and actually this year is better than the previous year as far as the DDA decline. There's nothing under the hood related to a higher rate environment that's causing that.

These are operating dollars, so that's the important point is the DDAs that are really on our balance sheet are operating dollars. They're not hot money for the most part. To the extent that businesses are operating as they normally would, they're going to need operating dollars. The stuff that we have off balance sheet is already off balance sheet. You know what I mean?

Excess dollars are already wherever they're going to be. What you see from a DDA perspective is general operating money. It's just a seasonally low point for us in the third quarter. We expect it to build as it always does. Again, looking back historically for us, we expect similar trends to build back up DDA balances in the fourth quarter.

Got it. Appreciate that. Going back to the loan production that you saw in the third quarter, can you talk a little bit more about where specifically UMB is gaining incremental market share right now? Also how? I'm wondering what some of the key factors are. Is it speed to close? Are you being more flexible on pricing? What's driving that incremental market share for UMB right now? Thanks.

Brian, are you asking us to give our secret sauce on this call to everybody and all our competitors? Just kidding. I guess the thing I'd say is for us, what I would do is I'd just point you to 22 years of double-digit loan growth every quarter in and out. Without giving you all the level competitive detail as to how we win, I would just say that we do a bottoms-up budgeting process that is not dependent on some multiple of GDP. We look at the officer capability, capacity, tenure, and pipeline, and couple that with what is our penetration in both a geographic market as well as the vertical markets across our footprint. The runway for that for us by ring fencing and keeping our talent is kind of unending.

We can't see the end of the runway for us to continue to outperform just by keeping our people and executing into market share gains and making sure that we build over time capacity by bringing people up under our team members so that they can be released to do more work. There's nothing real special to it, and I guess we hail from the Show Me State. I would say that the proof's in the pudding. You can kind of see it in our results. We do it quarter in and quarter out, and I would say that we don't see any reason why we can't keep doing it. Do you want to add to that, Jim?

I would just add to that, Brian, that while we're not giving away our secret sauce, as Mariner said, which I love, we talk about being flexible, nimble, and responsive in commercial banking. The flexibility is we might be flexible on terms or a covenant or what have you, but we are not flexible on credit quality. That's the underlying ingredient, if you will, that has remained true for the history of the company. Our process allows us to be more responsive the way we go to market and the way we have regional credit officers in each market, along with local leadership. So we're able to turn things around more quickly. By having experienced bankers, you add more value when you're sitting in front of a client.

At the end of the day, it all starts with our people and calling on the right types of companies that when we do have success and are awarded the business, that it shows up in a meaningful way. That's been repeatable again for the last 20 plus years. So if you're wondering how we continue to do it's not by being the cheapest or giving the house away on quality remains at the core.

Given that El Dorado is based in California only makes up about 3% of your loans today. Is it fair to say that's where the new incremental opportunity is? Does that open up a lot for UMB?

California, for us, after Heartland, we have a litany of opportunities for significant expansion. California's one of them with a fourth or fifth largest economy, depending on how you measure it. We've got Twin Cities, we have Utah, we have Texas. All these are nascent, young markets for us with great people on the ground in California. We got Alice Laney as our new president out there, and we're very excited about what he brings to the table. California is one of the opportunities, but it's one of many.

Brian, great. Mariner mentioned it, but in our existing markets, there is runway. We have two major metros that we are number one in market share. So market penetration is the core to how we plan on continuing to grow. What that means is we take other banks' clients in those markets. It is not dependent upon a growing economy or GDP. It is market penetration. That continues to be the number one focus on how we grow the company. Lending wise.

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

Thanks, Brian.

Brandon Rud,Stephens.

Morning. Thanks for taking my question. Most of mine have been answered. If I could just maybe ask one more modeling question. Can you give us some guidelines or guideposts for the capital impact of El Dorado, whether it's TBV dilution or CET1?

It will be about 15 to 20 basis points diluted to CET1 at close, but given the pace of our capital generation between now and close, we will be right back where we are. I mean, we are at 11.5% CET1, for instance, at 9/30, and we will be north of that post-deal as well. It is not material from that standpoint.

Okay. Perfect. Thanks for taking my question.

Brendan Nosal, Hovde Group.

Hey, good morning, folks. Just one from me. Wanted to approach the earlier loan-to-deposit question from more of the opportunity side as opposed to the risk side. So if I look back over the past year or two, richer balance sheet, right? More loans, plus cash, a more utilized loans-to-deposit ratio. Just wondering how much further you're either able to or willing to push balance sheet capacity given that you clearly still have more headroom versus your typical bank.

Brendan, I think if you're implying you think that our loan-to-deposit ratio is creeping on us to a point where that ends up starting to look different. Is that what you're alluding to?

I'm more coming from the angle of you have a richer, more profitable balance sheet than you've had a year or two ago, just given the richer mix. And how much more willing are you able to let that run to drive a continued richer mix? More of an opportunity as opposed to a risk.

I'm not sure I understand the question.

Yeah. You're talking about cash. I mean, we had excess cash because of the buildup during COVID and all that, right? We're comfortable where cash is from the current standpoint. As we've said, our loan-to-deposit ratio is 69% right now. If you look at the highest point, we've been at 74 or 75. We're not doing that intentionally in the sense that we're not taking our loan-to-deposit ratio higher. As Mariner said, both sides of the balance sheet, we see a lot of opportunities from the pipeline perspective.

Yeah. I thought that's what you were asking. If you were to look at page 40 in our deck, that's the way to think about the business. We fully expect to keep doing what we've been doing by having the deposits continue to keep pace with loan growth through all the different activities. But one of the beauties of our company is all the different sources of deposit growth that we have, and the strength of our institutional businesses and our wealth business, our private banking business, and our small business operation. If you look at the middle bar there, our loan-to-deposit ratio, no matter what has happened through there, it's bumped around between 68 and 65. Any one quarter, maybe it bumps up a little over 70 maybe.

We are happy to be at a higher level if that happens, but we fully expect to fund our business with our deposits. The real value of a banking franchise is in their deposits. If we ever felt like we were having to buy money to fund our loan growth, we would feel like we lost our strategic footing. We're very focused on being able to, over time, keep deposit growth pace with our loan growth. We think we can do that. We've done it. If you look at, again, page 40, you can see what we do year in and year out. No reason I can see that we wouldn't be able to continue to do that on a go-forward basis.

Yeah, perfect. Thanks for taking my question.

Thanks, Brendan.

Nathan Race, Piper Sandler.

Yeah. Hi, guys. Good morning. Thanks for taking the questions. Mariner, you alluded to a bit earlier on the fund services growth in the quarter, but it seems like it's one of the strongest sequential growth that we've seen within fund services over the past several quarters, and revenues in that line up 22% year-to-date over last year. So just curious if you can just unpack if there were any kind of unique client wins and just generally is the rate of growth that we've seen year-to-date and over the second quarter sustainable within that line going forward?

Yeah. The business is really just hitting its stride. I think it just gets better from here. The pipeline is very robust. The client sizes are bigger, the opportunities are larger, deeper, broader. I think the business is just kind of hitting its maturity and its ability to really compete across all the asset classes and the asset types. I just think it gets better from here.

There is no particular account I would point to that is looking backwards that is part of that nice growth, 22% growth. I would say it is broad. We talked a little bit about a few things that are driving it, i.e., the platforms for democratizing investing, the guys that are making available alternative investments to a broader base of clientele. Those platforms that we were partnering with at the very beginning of that, we just benefit from their growth.

The ETF business, it is early days. We are just launching that. We already have line of sight into the clients that are going to come into that. That is why we launched it. That also ties into my comments about some of the visibility of deposit growth in the first quarter. Yeah, we just got a great team, a great product set, and they are just hitting stride. I would also add that the custody side of the business doesn't totally depend on just the fund services business anymore. We are fully selling that across all verticals, insurance, government, corporate, and having a lot of success there as well.

Got it. That is helpful. Just one more from me on operating leverage and kind of the expectations there around expense growth. Historically, expenses have been growing 6%, 7% absent the Heartland acquisition from last year. Just curious, just given some opportunities to maybe become more efficient with AI and back office areas. Are you guys maybe thinking that operating leverage can accelerate into next year and perhaps 2028, notwithstanding the acquisition impact? Just if you can comment on kind of what opportunities you are seeing to just streamline operations with some of the technology out there these days.

Yeah. I don't want to go down a rabbit hole here on that. Ram had some comments in his prepared remarks about that. I think you should hear more from all of us about that over time. We absolutely think as a company we will become more efficient as we deploy AI into things like credit administration, fraud detection, all those kinds of things across the organization, which we are currently deploying. It is too early to give you the actual impact. All those projects are underway across the whole company. Yeah, it is just the latest iteration of the technology evolution, and companies sure as heck better be deploying all this everywhere they can.

One of the things we want to do, being a financial institution where large companies depend on us day in and day out, is we want to make sure we're doing it judiciously and carefully so that while we're making ourselves better, we don't increase risk at the same time. We're taking our time to do it right and put all the governance in place along the way on the front end. We have over 1,000 associates now using Glean, and we're seeing all sorts of benefit on a daily basis as we measure how that's being used. Again, part of that is like, let's make sure we measure how that's being used, how people are using it, how the tokens are being used. Do it very judiciously.

But I would tell you we're using it everywhere, plan to deploy it everywhere and in every way to make ourselves more efficient. Take repeatable tasks out of human hands, take friction out, reduce human error. To me, more importantly than all of this, is allow our people to do more, as opposed to focusing on reducing staffing levels. This is allowing our great people to do more. I'm very excited about the way we're using AI. I think it's a great benefit, and it's just kind of next gen tech in my mind, the way I think about it. You guys want to add anything to that?

I think you covered it. I think you covered it well. There are lots of small wins. There have been some bigger wins, especially in the fraud area, and look forward to that continuing.

Okay, great. I appreciate the color. Thanks, everyone.

Terry McEvoy, Wells Fargo.

Thanks. Good morning. Just one question from me. The NDFI loans represented about, call it 35% of the net loan growth last quarter, and I am just comparing the presentations Q2, Q3. My question is, what NDFI verticals were behind the $400 million increase? How sustainable is that growth?

Yeah. Thanks for that question. We have looked at that and thought, is there something that stands out here? I would say that nothing really stands out in there. It is kind of broad-based. We have this big fund services business, so there is some subscription lines in there. Most of it would be, as we studied it, is just current customers using their lines and borrowing money. That is really what happened in the quarter. For the most part, it was not actually growth in client level for the most part. It was more using the debt, the existing debt with existing clients. I would just say, while it does show up as part of our loan growth in the quarter, I would remind you that from my vantage point, NDFI really is just a reclass. Most of these clients have been doing business with us for 20-plus years.

Just as a general reminder for everybody, NDFI was just a reclass done by the government so they could have better vantage point into how banks in general were lending to other companies who did similar things to us. It wasn't supposed to capture a new trend. It was really more of a reclassification. I just want to remind you of that. For us, that's all it was. There really is no NDFI growth on our balance sheet. It's a classification of things we've been doing forever. Nothing really to note. Customers using their lines, and expanding their businesses and such.

Great. Thanks for the added color.

David Feaster, Raymond James.

Hi, good morning, everybody. I wanted to start just following up on the credit side. Obviously, you guys are very disciplined on credit. You got a strong track record. Your credit metrics are really good. But as you dig into the portfolio, as you talk to your clients, is there anything that you're watching a bit more closely or proactively maybe managing out or throttling back on? Just as you stress the book from higher rates, is there anything that you're maybe watching a bit more closely?

It's a great question, David. I guess how I'd answer that is we're all trained pessimists. Tom and Jim and myself, who are all in this room together, have been doing business together and approving loans together for 30-plus years together. We've seen just about everything, and we like to think we're getting smarter as we go through all the things we've been through. We believe in gravity as a company, and we believe what goes up comes down. We're always worried. I would just say that, we underwrite every credit we underwrite as if it's going to go bad, and how are we going to get our money back. We don't worry unusually about our own portfolio. If you're asking comments about the economy, I could spend the next 30 minutes talking to you about how I'm worried about the economy.

That's why we take such good care of our own credit portfolio. We've gone from 2004, $2 billion in loans and 22 basis points to charge-off to $42 billion in loans today and 13 basis of charge-off. We like to think we get the bumps and the bruises make us smarter and keep us out of trouble. One of the things we do really well is we identify challenges and potential challenges on our watch list. The top category of our watch list, the fives can look like an EKG or the Rocky Mountains because we're quick to put stuff on there.

But what you'll notice is the very bottom line, the charge-off line on our chart, that we would produce, is zero. We have next to zero charge-offs because we're quick to take action, quick to identify problems, and quick to manage things. I guess this is something I am most proud of and care about the most. We worry a lot about credit, and that is why we have such a clean book.

Okay. That is awesome. Then maybe just following up on El Dorado --

I will just say your bigger question about the client base, they are basically all talking about the economy. They are concerned about it, but they are still cautiously optimistic. We are not hearing a lot of deep concern from our customer base.

That is encouraging.

Yeah.

And maybe just following up on El Dorado. Look, obviously, you're getting a ton of excess liquidity, great core deposit base. How do you think about as you close, there's going to be some opportunities to maybe reinvest those or reposition the book. How do you think about using that excess liquidity and maybe as you think about managing your rate sensitivity?

Well, how we plan on using that liquidity is we want to help our customers build their lives and borrow money from us to do so. We're excited to be able to deploy that with our customers both in California and elsewhere. We'd love to put it to work right there in those communities. We're excited to do that, and as far as the investment book, if you were asking about that, Ram can take that.

Yeah. So they have $1.4 billion of high-quality mortgage-backed securities primarily. As part of the acquisition, as you know, David, we'll mark to market, so they'll come to current yields. Current mortgage yields call it 5.25% or even higher than that. So that's a pretty good book in line with what we would buy from a pre-purchase analysis and everything my treasury team does here. So that's a pretty quality book. Then we'll use the existing cash flows both from our existing bond portfolio and new deposit growth to continue to fund our organic growth strategy.

Terrific. Thanks, everybody.

Thanks, David.

Ben Gerlinger, Citi.

Hi. Ram, over the past, I am thinking four quarters, you have given a guide of NIM being flat-ish, and it has been in the [ish], but it has always had an upward bias. Just kind of thinking, when you look at over the past year, what has outperformed when you give that forward NIM to being better than flat?

The one basis points core NIM, I would say if I had to pick one, it was probably the mix of assets within the loan book in favor of C&I and then less cash. Cash makes 388 today. If I take the same funds and make a new loan at 6.25 that it helps at the margin what the loan yields are doing. That is why we have a 5 basis points increase in our core loan yields. I think that is a big part of the remixing and then everything else, right? Remixing within the fixed asset repricing that we talked about within the bond portfolio and the loan portfolio. Again, with the amount of deposit moves and lending that we do, it is always hard to predict margin. But I feel pretty good that we got to within a basis point of where it was last quarter.

If I outperform in the fourth quarter, it is because we have more deposit growth coming in. It could be off plus or minus a couple of basis points. So feel pretty good about margin guidance overall. Other than that, I cannot think of anything. Obviously, as I said in my prepared comments, the timing of when the FOMC might do something October versus December would impact that as well.

Got you. That is helpful. Mariner, you sounded open to doing some deals, and you kind of gave some guide of like boardroom composition and culture and things like that. But in theory, you could have a pretty wide range in terms of assets. Is there a ceiling? Considering if you are looking at just boardroom itself, you could in theory do something like $25 billion. I do not want to put words in your mouth, but it seems like you are open to doing deals with a bias towards the smaller end, but you are agnostic on size. Is that a fair way to frame it?

I would not say we are agnostic on size. A couple of things that are of note. We are approaching 100 billion, and we need to make sure we are ready for that. Because we are not ready today, while we have a plan, we are not ready today. We would not do a deal that would put us on top of that number. So that is important for you to know when you think of those numbers you are throwing around. The other part about board composition, the idea of what I was trying to get at there was that I like my board and I do not need somebody else's board.

To the extent that I have to do a deal that is of a size where I am giving up board seats, we do not need to do that. That was what was intended to help you with sizing is typically when you are giving up percentage of your company of any meaningful size, you are giving up board seats. So that was where I was trying to take that, if that helps

That is helpful. Yeah. Absolutely. Yeah. I appreciate it. Thank you.

Yeah. Thanks, Ben.

Anthony Elian, JPMorgan.

Great. Thank you. On loans, you saw another quarter of really strong net growth. I know you mentioned in the prepared remarks that production is likely to moderate here in 4Q, but how should we think about net loan growth in 4Q also in light of the macro headwinds you call out in the press release?

We didn't intend to call out any macro headwinds in the press release if we did. I think the loan growth, what we try to do is give a look at the next 90 days. That's about as much as we normally do. And what I was trying to guide for fourth quarter was a loan growth rate that looks more like the third quarter and the second quarter, or sorry, the second quarter and the first quarter than the third quarter, if that makes sense.

Okay. And I guess the comment I was referring to is where you mentioned persistent inflation, the Middle East conflict, high rates, et cetera. I hear your message. My follow-up on El Dorado. You're picking up -- Go ahead, Mariner.

Yeah. I think those are just backdrop conversations. They were not intended to guide you towards loan growth.

That's clear. My follow-up on El Dorado. You're picking up over $2 billion of low-cost deposits, and it looks like a small enough deal for UMB. Over the near term, is additional M&A off the table as you work to close and integrate El Dorado? Thank you.

No, that's a great question. Absolutely not. It's a small enough deal. Our team has got really good muscle memory. The government is in a place where they're very helpful and kind of moving things along. We're looking at this more like a branch deal, not a heavy lift. I know my own people are looking at me thinking they're going to be yelling at me because they're going to be doing the work. Long story long, no, it shouldn't keep us from doing more M&As if the right deal came along.

That's clear. Thank you.

Yeah. Thank you.

We have reached the end of the Q&A session. I will now turn the call back to management for closing remarks.

I guess I jumped the gun. Thanks, everybody. We are really thrilled about our quarter and about joining up with the Cook family in California and all the great things we are going to do. Thanks for the time and the support. We will talk to you soon.

Thanks, Mariner. If you have questions, you can always reach us at 816-860-7106. Thanks, and have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.