UMB Financial Corp 2026 Q3 Earnings Call

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 six 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 15th, 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.