Umb Financial Corp Q4 FY2025 Earnings Call

Hello, everyone, and thank you for joining the UMB Financial Fourth Quarter 2025 Financial Results Conference Call. My name is Gabrielle, and I will be coordinating your call today. I will now hand over to your host, Kay Gregory. Please go ahead.

Good morning, and welcome to our Fourth Quarter 2025 Call. Mariner Kemper, Chairman and CEO; and Ram Shankar, CFO, will share a few comments about our results, then we'll open the call for questions from 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, benefits, synergies, gains and costs that the company expects to realize from our acquisition as well as other opportunities management foresees. Forward-looking statements and any pro forma metrics are subject to assumptions, risks and uncertainties as outlined in our SEC filings and summarized in our presentation on Slide 50. Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them, except to the extent required by securities laws. Presentation materials are available online at investorrelations.umb.com and include reconciliations of non-GAAP financial measures. All per share metrics refer to common shares and are on a diluted share basis. Now I'll turn the call over to Mariner Kemper.

Thank you, Kay, and good morning, everyone. We will share some brief comments about our results, then open up for questions. We reported another strong quarter to close out 2025, with the successful acquisition of Heartland Financial, the opening of our first branch location in Utah and another year of record earnings. We posted significant improvements in our profitability metrics, as we continue to build scale, deliver profitable growth on both sides of the balance sheet and maintain our unwavering focus on strong asset quality metrics. A few fourth quarter metrics that I want to highlight are: Return on average assets of $120 million compared to $104 million in the third quarter, return on average common equity of 11.27% up from 10.14%, and an efficiency ratio that improved to 55.5% from 58.1% in the third quarter and 51.8% in the period a year ago. I'm incredibly proud of our associates for delivering strong fundamental and financial performance in 2025, while providing an outstanding customer experience to our existing and newly acquired clients, all of which continue to drive our exceptional results. Reported net income available for common shareholders for the fourth quarter was $209.5 million or $2.74 per share, an increase of 16.1% from the third quarter. For the full year, we earned $684.6 million or $9.29 per share. The fourth quarter included $39.7 million of acquisition expenses compared to $35.6 million last quarter. Excluding these, and some smaller nonrecurring items, our fourth quarter net operating income was $235.2 million or $3.08 per share. Fourth quarter net interest income totaled $522.5 million, an increase of 10% from the third quarter. This was driven by double-digit growth in loans and DDAs, along with the impact of lower rates on our index deposits which benefited net interest income. Our fee businesses continued their strong performance in the quarter, while our total noninterest income was impacted by several market-related variances. New business activities from our fund services and private wealth teams continue to drive results, which contributed $4.5 million or 5.1% linked quarter increase in trust and securities processing income. During the quarter, we exited substantially all of our position in Voyager shares. While we can't predict the future success in our private investment business, our pipeline remains strong, and we're likely to see periodic monetization going forward. Looking at the balance sheet, we posted 13% linked quarter annualized growth in average loans and 5.6% in average deposits. Quarterly top line loan production reached $2.6 billion in the quarter. We are seeing positive activity across our footprint, and I'm excited about our additional opportunities in our acquired markets post-conversion. C&I was again our strongest contributor this quarter with 27% annualized growth over the third quarter average balances. The rate of net payoffs and pay downs as a percentage of total loans was 3.9%. Looking ahead into the first quarter, overall loan activity and pipeline remains strong. Our loan growth has continued to outpace many peer banks. Banks that have reported fourth quarter results so far have posted a 4.9% median annualized increase in average loans compared to our 13%. Total net charge-offs for the fourth quarter were just 13 basis points. For the full year of 2025, net charge-offs were 23 basis points, below our long-term historical average of 27 basis points. Total nonperforming loans were $145 million or 37 basis points of loans, while total criticized loan levels improved 9.1% from the prior quarter. Industry-wide NPLs for the banks reported so far were a median of 55 basis points. Our total loss levels will fluctuate from quarter to quarter as we manage our book. We're quick to recognize trouble, take action and address any issues. This proactive management has been consistent and historically, we've seen very little migration to loss, as evidenced by our charge-off history. We are incredibly proud of our history. As I mentioned, for the 20-year period ending with 2025, our annual losses have averaged just 27 basis points. Over that same period, average loan balances have increased from $3 billion to $36 billion through market and vertical expansion, including our recent acquisition. This equates to a median annual growth rate of 10.4%. We've achieved these results through our focus on risk management and the continuity that comes with having the same team in place managing credit together through all of these cycles. We continue to build capital with December 31 common equity Tier 1 ratio of 10.6%, a 26 basis point increase from September and ahead of the timeline in which we noted in our announcement of our acquisition. Our capital priorities remain the same, with organic growth at the top of the list. Many bank management teams have received questions on their fourth quarter calls about their M&A stance, and I'd like to proactively address that topic. As I've said many times, we don't need to do M&A. We have a strong, proven ability to generate assets, and we continue to take share and grow organically at a pace ahead of our peers as you saw us demonstrate in this past quarter. And we do that with exceptional asset quality metrics that we are really proud of. We expect these trends to continue, especially given the opportunities we see for penetration in our newly acquired markets and expanding in our existing markets. Organic growth is and always will be our top capital priority. At the same time, we also feel that we are adept at evaluating and integrating acquisitions to bolster our organic growth. We're still answering our phones, building and maintaining relationships, and we expect that tuck-in acquisitions that make financial and strategic sense can be part of our ongoing strategy. We've also been asked about the size of potential deals. Without giving specific parameters, we would be wary of transactions that would put us close to the $100 billion mark. We are in the early stages of assessing what the threshold means to us. And until we are ready, our appetite for any M&A will continue to be measured. While many believe thresholds may move under the current administration, we are operating as if those rules still remain in place. We believe that we've built something very special here at UMB, including one of the best teams in the business. We are not going to put that at risk by pursuing a deal that might dilute our culture, our business model, our organic momentum or our strong balance sheet. Finally, as we look into 2026, we're excited to continue the momentum we saw in 2025 and capitalize on the opportunities in our newly acquired markets. As always, our primary focus will be on positive operating leverage no matter what the economic or geopolitical environment brings our way. Now I'll turn it over to Ram for more details.

Thanks, Mariner. Our fourth quarter results included $52.7 million in net interest income from purchase accounting adjustments, $12.3 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 33 basis points. On Slide 10 is the projected contractual accretion, which is estimated at $126 million for the full year '26 and $92 million for '27. These totals do not include any estimates for accelerated payoffs. Slides 12 and 13 include some key highlights and drivers of our quarter-over-quarter variances as well as a breakout of one-time costs by expense categories. Noninterest income for the quarter included $2.2 million in net investment security gains, comprised of $6.3 million of gains on various equity investments, partially offset by a $4.8 million linked quarter market value loss on Voyager stock. As Mariner noted, we sold substantially all of our Voyager position in the fourth quarter. Since its IPO, our net gain on our investment in Voyager was approximately $17 million on an initial investment of $6 million, translating to an internal rate of return of 30% and a nearly 4x multiple on invested capital. Fee income, excluding these valuation changes, was $196.2 million, a decrease of $11.2 million from the third quarter. The largest drivers were $9.2 million in market-related variances in both COLI and BOLI income and a $2.9 million decrease in derivative income from elevated 3Q levels as noted on Slide 12. And as previously disclosed, we had a nonrecurring benefit in the third quarter of $2.5 million related to a legal settlement. Partially offsetting these decreases was the $4.5 million increase in trust and securities processing income that Mariner mentioned, driven by solid performance in asset servicing and private wealth. Our fund services and custody teams added a total of 15 new fund families in 2025 with a total of 109 new funds. On the expense side, we have $39.7 million of merger-related costs compared to $35.6 million in the prior quarter. As shown, the largest portion of these costs in the past 2 quarters have been for contract termination and conversion expense that were heavily weighted in the back half of the year. Excluding the impact of merger and other one-time costs, operating noninterest expense was $391.8 million, up 1.8% compared to the third quarter. The largest drivers included an additional $10.5 million in incentive compensation expense related to our strong fourth quarter and full year outperformance, increases of $3.4 million in additional charitable contributions and $1.1 million in marketing expense, which included some retail advertising campaigns in our new regions. Deferred compensation expense, as shown on Slide 12, was $1.6 million for the quarter. Excluding the deferred comp impact, the recalibration of incentive compensation for the fourth quarter outperformance and the additional $2 million in charitable expenses, our normalized quarterly expenses were approximately $380 million. Looking ahead, we would expect first quarter operating expense to be in the $385 million to $390 million range. This includes an estimated additional $15 million increase in FICA, payroll taxes and 401(k) expenses, driven both by typical seasonal resets and timing of bonus payments as well as normal inflation in medical and other costs. Offsets will include day count impact and post-conversion synergies. After the first quarter elevated levels, we would expect FICA and other payroll taxes to decline by approximately $10 million in the second quarter. As Mariner noted, we expect to achieve positive operating leverage in 2026, notwithstanding an estimated $38 million in lower contractual purchase accounting accretion benefit and approximately $30 million benefit from our investment in Voyager and other investment gains recognized in 2025. Turning to the balance sheet and margin. Reported net interest margin for the fourth quarter was 3.29%. Excluding the 33 basis points contribution from purchase accounting adjustments, core margin was 2.96%, increasing 18 basis points sequentially. The primary drivers of the linked quarter increase in core NIM included a nonrecurring 4 basis points benefit from interest recapture on nonaccrual loans that became current during the quarter and a bond repayment, favorable basis risk between Fed target rates, which impact our funding costs, and one month SOFR, which impacted our loan yields, benefits of a favorable mix shift in both earning assets and deposits, including the 24.9% linked quarter annualized increase in DDA balances, repricing of index deposits from the December 10th rate cut, and higher loan fees, partially offset by lower benefits from free funds. Total average deposits in the fourth quarter increased 5.6% on a linked quarter annualized basis. While we expected DDAs to rebound from seasonal lows in the third quarter, the outsized growth was driven in large part by new customer acquisitions in our Corporate Trust business as well as the often episodic nature of these deposit inflows. As previously noted, we have very limited line of sight into these movements. This balancing mix, coupled with the impact of rate cuts, drove our cost of total deposits down by 29 basis points to 2.25% while the cost of interest-bearing deposits declined by 33 basis points to 3.03%. We realized a blended beta of 76% on interest-bearing deposits for the quarter, driven by favorable mix shift as well as outperformance for repricing on our soft index deposits. On Page 27, we disclosed our current composition of deposits by rate sensitivity along with our interest rate simulation that shows us positioned as essentially neutral. Relative to the fourth quarter, adjusted margin of 2.92% that excludes accretion and the nonrecurring 4 basis points from interest reversals on nonaccrual and the bond prepayment that I mentioned, we expect first quarter margins to be relatively flat as pricing on variable rate loans with monthly resets catch up and are offset by positive churn in fixed rate loans and bond reinvestments and day impact. We have not assumed any upside to margin from additional rate cuts in the first quarter based on current implied market probabilities. Actual margin and NII results will depend on levels of DDA growth, levels of excess liquidity, any SOFR movements, and mix shifts within the lending and funding portfolios. Finally, our effective tax rate was 20.3% for the fourth quarter and 19.7% for the full year. This compares to 18.5% for the full year 2024. Looking ahead, our effective tax rate is expected to be between 20% and 22% for 2026. Now I'll turn it back over to the operator to begin the Q&A session.

Our first question is from Jon Arfstrom from RBC Capital Markets.

Maybe Mariner or Jim, can you give us a little more detail on the drivers of the commercial loan growth in the quarter, pretty strong, but if you can give us a little more detail on that? And then as a follow-up, just curious if you can talk a little bit more about the Heartland contributions to the growth? You flagged that last quarter about how, post conversion, it could be a little bit stronger.

Yes, Jon. Thanks. It's Mariner. Fortunately, the story remains consistent as it has been during my 22 years as CEO. We are observing solid performance across all markets and verticals this quarter. As previously mentioned, about 50% of our growth is driven by new customer acquisition, primarily through market share gains. This trend continues. A few notable trends include strong performance in the energy sector, along with robust M&A, family office dealings, and transactional work throughout our footprint, particularly with companies being acquired by private equity firms or seeking growth or transition capital. Overall, the outlook is quite broad. Jim, do you have anything to add?

Yes, I would agree. We've had some real bright spots through the HTLF acquisition. Our franchise lending group has been additive to what we're doing. We've also seen nice growth from the team out in California as it relates to our ag business, which has been a real bright spot. But again, the C&I has been, across the board, the real drivers, as Mariner had mentioned.

And it's early still with Heartland. All good signs, but still early. We converted on Columbus Day. So we think that the benefit from Heartland is still significant and forward-looking. We'll see that benefit in the coming years just accelerate as time goes on.

Okay. Good. Tom, a quick one for you, certainly not worried about credit, but can you touch on the NPL increase and just any likely updated timeline for working through some of the acquired credits?

Yes. The increase was specific to one credit that is fully secured. We don't anticipate any loss from that one. As it relates to the overall portfolio of the NPLs and the watch list, that's a process and it takes time. We're having a lot of success. I would take you back to our historic charge-off numbers, and we expect the historical norms to remain the same as we go forward. So with what we know today, we still feel positive and good about the portfolio, and we're working through them. But again, our report card really net charge-offs, and we believe with what we know today, we're still going to trend towards that historical norm.

Our next question is from Jared Shaw from Barclays.

Maybe just looking at deposits, some really good growth in DDAs there, both average and end of period. And I know that there's moving parts that can impact that at any given day. But as we start off the year here, how should we think about maybe average DDA growth quarter-over-quarter? Is there an opportunity for that to grow?

Yes, I think there is likely to be a slight increase. Historically, we see a small uptick between the fourth and first quarters. Regarding public funds, this will not only pertain to interest-bearing accounts but will show a modest increase. As I mentioned in my opening remarks, we have gained new clients, especially in our corporate trust group. We are optimistic about the potential from our newly acquired teams in the CLO sector and other corporate trust teams. Additionally, on the public fund front, we saw around $1 billion in inflows in December, which continued to build in January. However, in the second half of February, we expect about $1 billion to leave as part of the deposit dynamics.

Yes. Due to tax payments.

How are the early trends on the HSA side benefiting from the budget bill? Have you had a chance to assess the potential market impact? Is there an interest in possibly making a deal in that area?

I'll take that high level, and if I miss something, Jim can jump in. But I think that's pretty much business as usual for us, nice steady growth through the enrollment season and continuing to sell into our customer base. I think the benefit of the Heartland footprint and customer base will be additive to our ability to sell direct there. But I wouldn't say anything elevated one way or the other. It's a nice steady addition to the book.

Our next question is from Chris McGratty from KBW.

I understand your points about expenses in the first quarter and the normalization afterward. Are all the cost savings fully realized? I'm also curious about where the additional dollars are being reinvested into the business. While you're seeing operating leverage, what areas are you focusing on to drive growth for the company?

Yes, definitely 100% of the cost saves that we identified at the time of the announcement of the transaction have been realized as of today. So post conversion, after a little while, there were the terms, there were contract terminations that are happening right now. You saw part of our one-time costs in the fourth quarter as well. So as we sit today, all those have been acted upon in part of our run rate going forward. And then the other side is just normal inflation, as I said in the prepared comments about medical costs, obviously, in the first quarter because of the timing of our bonus payments and resets of FICA, 401(k) match, and payroll taxes, the elevated spike is being a larger company and all that, but that should also recede in the second quarter by about $10 million.

And I would just add that I think the thing to focus on, and we've demonstrated it and we'll continue to, is that we're disciplined. And so the operating leverage is where we're focused. As it relates to expenses going forward, you shouldn't expect to see anything other than coming from whether we're successful with sales activities, as has been in the past, our expenses can be elevated because of the activities from the sales side of the business. Otherwise, really, we ought to be able to get investments that we make in the business out of business as usual levels of commitment.

Okay. Great. As a follow-up, the trust and securities processing line has been a significant source of growth. I tend to underestimate the growth rate. Can you provide guidance on what a reasonable growth rate for that business might be?

Looking back, we don't provide guidance. Institutional Banking experienced a 12.8% growth rate year-over-year. The momentum and advantages we have are still strong. Our fund services business, particularly from the alternative sector like private equity and hedge funds, is a key contributor, along with our Corporate Trust business. While growth is coming from all our areas, these two are the biggest contributors with the most significant tailwinds.

Our next question is from Ben Gerlinger from Citi.

I appreciate the insights on the GAAP versus core margin. Regarding the commentary for the first quarter, I understand that you don't provide full-year guidance. I'm just considering philosophically, if the trend remains the same and there are no further cuts, is the growth you're achieving dilutive or accretive to the core margin? Your growth is impressive, and I'm trying to understand how new investments on both sides of the balance sheet might influence whether the core margin would drift higher or lower.

Generally, I believe the margin will remain stable, assuming no changes in rates or shifts in our earning assets. It will mainly depend on the steepness of the yield curve. Currently, we are in a favorable environment with decreasing short-term rates that influence our funding, although we expect this decrease may not occur until June. On the longer end, reinvestment yields have remained strong, averaging between 4.25% and 4.40% for bond investments compared to a roll-off of 3.60%. These factors can provide support to the margin and mitigate any repricing risks that could arise from the loan book or if the yield curve remains unchanged without further pressure on deposit pricing, particularly since the Federal Reserve is not expected to cut rates. I expect our margin will generally align with our current position.

I might add, environmentally, SOFR has been kind of a tailwind the way it's been priced in recent periods. So that has been a tailwind. So if that continues, it would...

Yes, that's a great point. Yes, if you just look at since the Fed started tightening this cycle since September, Fed target has come down 75 basis points. And one month of SOFR, which tends to lead that, has come down only 68 basis points. So between that and the steepness of the curve, we've seen the benefits that we're seeing in our margin in the fourth quarter and outlook forward as well.

Got you. That's really helpful color. And then the second question, I know you guys have kind of shied off on whole bank M&A. But given the market disruption pretty much throughout your footprint, considering it's a pretty large footprint, is there opportunities for increased hiring throughout '26 via disruption or even team lift out? I'm just kind of curious on what you guys are approaching as a third party to M&A. Is there anything that's on the table that would be considered low-hanging fruit?

You mentioned a few points. Regarding pure M&A, I want to emphasize that our primary focus is on organic growth. We remain open to discussions and maintain relationships in the M&A space, looking for potential tuck-ins along the way, but our priority is organic growth. You also brought up other ways to enhance our business that resemble M&A, such as lift-outs and teams. We are constantly looking for good teams, whether they're in corporate trust or lenders who may feel out of place in their current market. We are open to those opportunities. To summarize, M&A is secondary to our focus on organic growth, and we are continually seeking high-quality talent in this people-centric business.

Our next question is from Brian Wilczynski from Morgan Stanley.

I wanted to go back to the opportunity with Heartland. I was wondering if you could talk about some of the potential revenue synergies on the fee income side in terms of offering capabilities that UMB has that Heartland did not. Is there anything that you're seeing already today? And how should we think about that progressing over time?

Great question. I'll address this as we've progressed through the quarters. The primary areas are mortgage and fees. Heartland didn’t have a mortgage product, but we offer a fantastic custom mortgage product. With our private banking services, we believe we can excel significantly in this area. In terms of credit cards, they didn’t provide a credit card service, so we've already launched one. While it’s still early, the initial signs and activity are promising. Our Corporate Trust business operates locally, which we've discussed before. Increasing our presence with more signs and offices will enhance our ability to serve local markets, especially in California, which presents a significant opportunity, along with other areas where we lacked a presence, such as New Mexico, Wisconsin, and Minnesota. Those are very exciting prospects. Additionally, in treasury management, they had a basic platform, so we expect to benefit from larger corporate opportunities in their areas. Finally, there are clear opportunities related to our legal lending limit; there are transactions where they were participants but now we can lead. We’re already seeing several instances, such as franchise lending, where we move from being a participant to leading or taking on the entire deal. Opportunities like these are happening quite frequently, which is very encouraging. This highlights another point about UMB: due to the complexity of our offerings, we've made the Heartland officers aware that at any networking event, every person is a potential target for us, unlike most other banks. Whether someone is from a private equity firm, the government, or a law firm dealing with Corporate Trust and Bond Council, we can engage with virtually anyone at an event. This broadens our networking potential significantly.

That's really helpful color. And then as my follow-up on the loan growth, another quarter of record production. If I look at Slide 31, the line utilization over the past few quarters has been relatively flat. I know that chart goes back about a year or so, but I was just wondering if you could provide some additional context where you are today versus historical levels, what you're seeing and how you expect that to play out over the course of '26?

That's a great question. High level, it remains relatively flat and can bump a little bit one way or the other from quarter to quarter. You would think and we would think that it'd be slightly more elevated just because of the environment that we've had for many years now with the supply chain issues, et cetera. But I think the answer to that for UMB largely is the high-quality nature of our borrower. So we have a borrowing base on the C&I side that has a strong net worth and a really strong earnings power, which just sort of tamps down the overall line utilization, and it stays pretty steady surprisingly, regardless of what the environment is.

Our next question is from Brian Foran from Truist.

I have one small one. Just one small one, and then maybe one bigger picture one. So the small one, I'm looking at Slide 36, I definitely understand this business has great momentum. There was a small tick down in AUA, at least in like the top netted out totals. Was there anything to note there, why the quarter-over-quarter decline in AUA for the overall business?

Yes, Brian, this is Mariner. I saw that in your early note and we all sat around trying to figure out where you came up with that because it is in the category of transfer agency. We did have a quarter linked quarter slight decline, but I would say that's just a nuance. It pops around a little bit. I would focus you on the top line instead of the transfer agency line because it can move around from quarter to quarter, number of client activity, inflows, outflows. So really the better way to think about that is the total assets under administration, which is up on a linked-quarter basis. So nothing in there on the trend side. The business has tremendous momentum.

Perfect. And then on the M&A commentary, I wonder if like maybe you could look back with Heartland, almost a year under your belt, key lessons learned that maybe inform any future transactions? Are there 1 or 2 things you really felt went great and got right that you'd want to replicate in any future deals? And then conversely, anything that you would have done different or would do different as you think about targeting, sourcing, integrating any, just big picture, having done this one of the bigger transactions, I guess the biggest, the first one in a while, what were the top 1 or 2 lessons learned?

I feel incredibly fortunate to work with an exceptional team, and we've brought on some fantastic individuals who excel in handling transactions at Heartland since they have experience with similar deals. I am almost at a loss for words about how well the transaction went; it was incredibly smooth and nearly flawless. There were minor lessons learned along the way, but overall, it was successful primarily due to our highly committed and intelligent team. We adhered to the principle of 'do no harm,' which we communicated consistently. We had representatives from UMB closely involved with locations and individuals across the company during the conversion, ready to answer questions and support customer interactions to ensure a seamless experience. Overall, I'm amazed as I speak about it; it was a remarkable deal. Regarding lessons learned, we anticipated some deposit runoff, as is common with these transactions, yet we experienced deposit growth. We exceeded expectations for growth on a combined basis and successfully achieved all our synergies from the deal. We've been received positively in the communities we serve. As I mentioned, I find it hard to believe there weren't significant lessons to discuss. I’m open to any thoughts from the team.

And this is Jim Rine. One positive outcome is the significant muscle memory we've developed. The team has established a successful process, and Mariner executed it perfectly. It really couldn't have gone any better. However, the most important factor in any of these situations is culture. It's crucial that we fully understand what we're getting into regarding culture, ensuring it is the right fit.

Yes. In this situation, we ensured that any future deals would be small enough for us to retain control over culture, management, and the Board. This approach proved to be very beneficial and will continue to be our strategy. I should mention that one lesson learned is that we should have more modest expectations for growth from the company we acquire during the period between closing and conversion. We saw this with UMB, which performed better than expected during that time. Overall, we achieved strong results on a combined basis. However, I think it’s wise to anticipate more restrained growth from acquired companies. This was a fantastic transaction, and I wouldn’t change anything. I want to emphasize that we have a dedicated team that works tirelessly, and I feel fortunate to have them.

Our next question is from Janet Lee from TD Cowen.

I just want to ensure that I understand your comments about NIM correctly. Essentially, through 2026, you're fairly neutral to changes in interest rates. As long as you can maintain that beta on deposits, you could keep that NIM relatively stable, excluding the 4 basis points one-off impact from the quarter. Another question I have is regarding the 76% deposit beta in the quarter, which seems quite high. Do you think you'll be able to sustain that, or was that a result of an unusually strong quarter?

Yes, I'll take that, Janet. Yes. So we are pretty neutral as you look at our interest rate simulation that we disclosed in our pages. So if you look at it, based on fourth quarter results, $33 billion of our earning assets are variable. So that's about 51% of our total earning asset base. And if you look at our funding deposit mix, 50% of our deposits are indexed, right? So we run a pretty matched both on the asset side and the liability side. So any changes in NIM from quarter to quarter will largely be predicated on what happens with changes in DDA balances, interest rate mix of deposits, or when the Fed rate cut happens, right? So if your situation plays out where we don't have any more rate cuts, as I said in my prepared comments, there are potential upside if the June rate can happen.

So our internal view based on market probabilities is still 2 more rate cuts, one probably at the end of the second quarter and one probably in the fourth quarter. There's additional upside for margin from that because our index deposits will reprice down. But then there's always a catch-up in loan yields for the following period, right, based on how they reset. So at this point to answer your first question, yes, generally, we would expect our NIM to be plus or minus where our core NIM was in the fourth quarter adjusted for that 4 basis points. I forgot your second question already. Can you repeat that second one?

Just the beta of 76%, is that sustainable or outsized?

Regarding the rate, if cuts occur, we anticipate that the team has excelled in managing soft index deposits, as mentioned in our prepared comments. If we expect no further rate cuts, the impact on deposit costs will be quite limited until then. Index deposits will largely follow a formula in the fourth quarter. In response to the cuts in September, October, and December, we passed along around 76% of the benefits to our current clients. Therefore, it primarily depends on when the rate cut takes place. While we are reviewing our back book, only about 30% of our deposits are non-index deposits outside of DDAs. This means there is limited opportunity to continue adjusting betas without another Fed cut.

Got it. And just one follow-up. Should we consider your loan and deposit growth as correlated, meaning your loan growth will be funded by deposit growth in a similar dollar amount? What would be the ideal loan-to-deposit ratio? Would you like that to increase a bit, or do you want to maintain it at the current level? How should we approach this?

I would suggest approaching it from a different perspective. We consider the value of a bank's franchise to be tied to its deposits. Our priority is to consistently attract high-quality, cost-effective, and granular deposits without any limitations. We allow the loan amounts to be determined naturally. Ultimately, we do not provide specific guidance on this. We anticipate strong growth in both loans and deposits and are comfortable with a higher loan-to-deposit ratio, having previously operated at levels as high as 75%. However, we do not have a specific target in mind and are not providing guidance on aiming for that. Our main focus is on developing the franchise through high-quality loans and core deposits while allowing the situation to unfold. We do want to avoid being excessively lent, and we certainly do not aspire to be in the '90s, as that would be concerning for us.

And to add to that, the flexibility of our balance sheet on Page 25 shows that we have $2.2 billion in cash flows from our bond portfolio. We are intentional about that. In the past, we've used that to fund our loan growth if we identify excess opportunities from Heartland. There is always an opportunity. However, as Mariner mentioned, our primary focus is on deposits.

And there's no doubt about the strength of our franchise and the success of our deposit-generating capabilities; we keep around $20 billion off balance sheet.

Yes.

We have $20 billion off balance sheet for clients that we invest in money markets, earning 12b-1 fees on it. We can access these funds whenever necessary based on our loan growth if we offer market rates. Therefore, we excel at deposit generation. As an asset-generating machine, we are also effective at generating deposits, so this is not a concern for us.

Our next question is from David Long from Raymond James.

On the growth expectations from the HTLF franchise, I understand you're fully in one organization now. But when you just look at the HTLF growth that you're expecting from that organization, does it come mostly from the current HTLF team or the legacy HTLF team? Those bankers growing into the UMB model? Or do you guys have to bring in more veteran bankers from larger institutions in those locations?

The answer is both. We see significant potential with the middle market and small business teams that have been established. Additionally, in areas like California, Minnesota, and Milwaukee, where we are newer and smaller, there is an opportunity to bring in talent over the next few years. So it's a combination.

I don't have that, Dave, but using any particular month or period end doesn't work for us because of the nature of inflows when the timing of the inflows happen, right? We could have $3 billion, $4 billion of deposits come in and change the average for any month or a period end. So it's hard to judge what that is. But I would say, for the December 10 rate cut, based on that 76% beta, there's still some juice left to squeeze on the deposit cost side because it's not fully baked in for the fourth quarter. So that will still happen. But I don't have specifics, and it's not relevant really to give you 1 month for us.

Our next question is from Nathan Race from Piper Sandler.

Mariner, the level of gross loan production has increased in each of the last few quarters and further back as well. I'm curious, considering the current capacity of the team and the growth potential you've mentioned before, do you believe this trend can continue this year? Or would it require additional hiring to see a significant change in that gross loan production level?

No, I think we try not to provide too much guidance beyond a quarter ahead, which we do. I would say the first quarter looks to be as strong as or close to the fourth quarter in terms of production. We're all here at this table, and we've been working together for 30 years. If you look at our presentation, we have a 13% 20-year CAGR for loan growth. This is due to capturing market share and maintaining consistency, continuity, and tenure with our team. We don’t have high turnover, and there’s significant growth potential in most of our markets where we still have low penetration. As long as we retain our people and build our pipelines, I have no doubt we can continue our current trajectory and do it on an even larger scale. Our average loan base has increased from $24 billion to $36 billion, and I expect we will keep doing what we’re doing on this larger base.

Okay. Great. That's helpful. And then maybe for Ram. I appreciate the expense guide for the first quarter. And then I think you mentioned you're expecting about $10 million in terms of the step down from the seasonal increase in the second quarter. Are there any other kind of offsets in terms of where you're investing around other areas of expense growth that would mitigate that relief in the second quarter?

Yes, the $10 million, just to be clear, is only on those seasonal expenses like FICA payroll and 401(k) match, right? No dramatic change in our expense trajectory. We would go back to operating leverage. So to the extent that revenue growth exceeds our expectations or exceeds quarter over quarter, you might see an additional step-up in expenses on commissions paid on widgets sold, but nothing otherwise in terms of dramatic investments.

We are a disciplined team and will remain focused on ensuring that there is alignment between our spending and the leverage it provides.

Understood. That's helpful. If I could just sneak one more in. I appreciate that the focus is on organic, and you're less inclined to do any depository type acquisitions. But just curious what the opportunity set may be out there, what the appetite is to maybe acquire a non-bank entity that could augment some of your less capital-intensive fee businesses to maybe get that fee income proportion up close to the historical levels around 35% plus total revenue.

You asked two questions. First, regarding our fee income, I want to highlight that after we sold Scout, our fees decreased by over $100 million in one year. However, we managed to recover that amount through organic growth within 12 months. Therefore, we believe it’s better to consider fee income growth in terms of absolute loan growth rather than its percentage of total. If we can sustain a growth rate of 12.8% in our institutional businesses and maintain an overall fee income increase of over 7%, as we have shown, that’s more crucial than its percentage of total, especially since interest rates can affect that mix year over year. Our main focus is on ensuring momentum and strength within the businesses themselves. While I anticipate that we will gradually regain some share of total revenue, we do not have a specific target in mind. Regarding M&A, I reiterate that our emphasis is on organic growth. We are open to conversations and exploring options, particularly for smaller, complementary acquisitions. However, it is essential for us to retain control in any deal we pursue.

Nate, this is Jim Rine. The only other thing I would add to that is what you've seen from us on the institutional side has mainly been through talent, acquiring great people in those markets to accelerate that fee income. And I think that's what you should probably expect in the immediate future.

Yes, lift-outs in Corporate Trust and other places like that. We keep an eye out for a little. We do them all the time. You guys don't even see them, really. We do little announcements, small, tiny little acquisitions, lift-outs for our institutional teams. But the pure dollar level of those are immaterial, so they don't really show up on the radar screen, but they're always additive.

Our next question is from Timur Braziler from Wells Fargo.

Hi. Can you hear me now?

Yes.

Just one more for me on loan growth, a 2-parter. I guess, first on the Heartland piece. Is that now firing on all cylinders? Or is there still ability to add capacity there in terms of overall production? And then similarly, on loan payoffs, that's been stepping up over the last couple of quarters. I'm just wondering if we're reaching a plateau there or if there's, you think another leg higher as rates move lower?

Regarding the Heartland loan growth capacity and capability, it's still early. We are seeing good traction and believe we can maximize the existing team's potential. In some newer and smaller markets, we anticipate adding talent over time to boost growth. There's a lot of energy and activity in the loan committee, and I'm optimistic about the team's early performance. As for loan payoffs, there was a slight increase, but when we look at the combined numbers of paydowns and payoffs from the third to fourth quarter, they remain fairly consistent. If interest rates decrease, we might see some acceleration in activity. The combined category of these numbers rose from 3.3% to 3.9% in the fourth quarter, indicating a small uptick, though it doesn't suggest a clear trend. There is potential for increased activity, especially with the demand for secondary market contributions from the construction book, but we haven't observed that yet. As we prepare for the first quarter and consult with our teams, the projections align closely with what we experienced in the fourth quarter.

We currently have no further questions, so I will hand back to management for closing remarks.

I've got a few things to wrap up because we're really pleased with the results following our acquisition. I’d like to remind you that I’m here with Tom and Jim, and we've been collaborating for many years—30 years for us, and 40 for Tom. I've been leading the credit efforts for 22 years, and I've been on these calls for almost 100 quarters. One thing I've learned from you, our investors, is that surprises and alarm are unwelcome. So, I want to take a moment to refer to the long-term performance trends in our presentation to alleviate any concerns. Over the last 20 years, UMB has consistently achieved strong results: our net interest income has grown at a compound annual growth rate of 12.1%, and our revenue has seen a 9.4% CAGR. Our net loan growth stands at a 13% CAGR, with deposit growth at 12.6%. Charge-offs have remained low, below 27 basis points over the past two decades, and during the crisis from 2008 to 2012, our performance was notably stable in comparison to the industry. Looking at our current position with $38 billion in loans, we had only 13 basis points of charge-offs, while 20 years ago, with $2.7 billion in loans, our charge-offs were 22 basis points. For dividend enthusiasts, we've seen a 274% increase in dividends over the last 20 years, with a 5.5% rise year-over-year. Moreover, our risk-adjusted returns are robust as displayed on Page 45 of our deck, which demonstrates our strong growth and quality metrics. Our diluted earnings per share have grown at 7.9% over the last 20 years, significantly outpacing the KRX at 4.1%, peer median at 3.2%, and the industry at 3.5%. Our tangible book value per share has grown by 6.8%, outperforming the KRX, peers, and the industry as well. In summary, I understand you prefer stability and quality, so I encourage you to review the figures and consider the future with us. We promise to deliver on our commitments and have been doing so consistently for a long time. Thank you for your time. We're excited about the future and value our collaboration with all of you. Have a great day.

Thanks, Mariner. As always, if you have follow-ups, you can reach us at (816) 860-7106. Thanks for joining us, and have a great day.

Thank you all. This concludes today's UMB Financial's Fourth Quarter 2025 Financial Results Conference Call. Thank you for joining. You may now disconnect your lines.