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| UMBF > SEC Filings for UMBF > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
This review highlights the material changes in the results of operations and changes in financial condition for the three-month and nine-month periods ended September 30, 2009. It should be read in conjunction with the accompanying condensed consolidated financial statements, notes to condensed consolidated financial statements and other financial statistics appearing elsewhere in this report. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The information included or incorporated by reference in this report contains forward-looking statements of expected future developments within the meaning of and pursuant to the safe harbor provisions established by Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may refer to financial condition, results of operations, plans, objectives, future financial performance and business of the Company, including, without limitation:
• Statements that are not historical in nature;
• Statements preceded by, followed by or that include the words "believes," "expects," "may," "should," "could," "anticipates," "estimates," "intends," or similar words or expressions;
Forward-looking statements are not guarantees of future performance or results. You are cautioned not to put undue reliance on any forward-looking statement which speaks only as of the date it was made. Forward-looking statements reflect management's expectations and are based on currently available data; however, they involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
• General economic and political conditions, either nationally, internationally or in the Company's footprint, may be less favorable than expected;
• Legislative or regulatory changes;
• Changes in the interest rate environment;
• Changes in the securities markets impacting mutual fund performance and flows;
• Changes in operations;
• Changes in accounting rules;
• The ability to successfully and timely integrate acquisitions into existing charters;
• Competitive pressures among financial services companies may increase significantly;
• Changes in technology may be more difficult or expensive than anticipated;
• Changes in the ability of customers to repay loans;
• Changes in loan demand may adversely affect liquidity needs; and
• Changes in employee costs.
Any forward-looking statements should be read in conjunction with information about risks and uncertainties set forth in this report and in documents incorporated herein by reference. Forward-looking statements speak only as of the date they are made, and the Company does not intend to review or revise any particular forward-looking statement in light of events that occur thereafter or to reflect the occurrence of unanticipated events.
Overview
The Company focuses on the following five core strategies. Management believes these strategies will continue to improve net income and strengthen the balance sheet.
The first strategy is to grow the Company's fee-based businesses. Despite current economic pressures, the Company continues to emphasize its fee-based operations to help reduce the Company's exposure to changes in interest rates. During the third quarter of 2009, noninterest income increased $1.4 million, or 1.8 percent, compared to the same period of 2008. The Company continues to emphasize its asset management, bankcard services, health care services, and payment and technology solutions businesses. Trust and securities processing income increased $1.1 million, or 3.5 percent, for the three months ended September 30, 2009 compared to the same period in 2008. This increase was primarily due to a $3.0 million, or 27.5 percent, increase in fund administration and custody services, offset by a $0.6 million, or 6.6 percent, decrease in fee income from the Scout Funds and a $0.8 million, or 22.2 percent, decrease in corporate trust income. Trading and investment banking income increased $3.9 million, or 132.5 percent, from the third quarter of 2008 due to market increases in the Company's mutual fund investments. Bankcard fees increased $1.2 million, or 11.6 percent, from the third quarter of 2008 due to increased credit card and ATM processing income. These increases were partially offset by a decrease in service charges on deposits of $2.0 million, or 9.0 percent, compared to the same period in 2008, primarily from a decrease in return item fees of $1.9 million, or 18.0 percent. As noted, a $1.1 million pre-tax gain was recognized in the third quarter of 2008 as a result of the final contingent payment received on the sale of the securities transfer product, which was originated in the third quarter of 2007.
The second strategy is a focus on net interest income through loan and deposit growth. During the third quarter of 2009, progress on this strategy was illustrated by an increase in net interest income of $9.6 million, or 14.5 percent from the previous year. Through the effects of increased volume of average earning assets and a low cost of funds in its balance sheet, the Company has continued to show increased net interest income in a historically low rate environment. Average earning assets increased by $1.3 billion, or 16.9 percent, compared to the third quarter of 2008. This increase was due to a $143.8 million, or 3.4 percent, increase in average loans and a $1.0 billion, or 32.2 percent, increase in total securities, including trading securities. Net interest margin decreased 6 basis points to 3.51 percent for the three months ended September 30, 2009 compared to the same quarter in 2008. The net interest margin decrease was a result of a 25 basis point reduction in the benefit of interest-free funds offset by a 19 basis point increase in net interest spread over the third quarter of 2008. The average earning asset growth was funded with an increase in deposits of $809.0 million, or 11.4 percent, since September 30, 2008.
The third strategy is a focus on improving operating efficiencies. At September 30, 2009, the Company had 135 branches. The Company continues to emphasize increasing its primary retail customer base by providing a broad offering of services through our existing branch network. These efforts have resulted in the total deposits growth previously discussed. The Company continues to evaluate its cost structure for opportunities to moderate expense growth without sacrificing growth initiatives.
The fourth strategy is a focus on capital management. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company's ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, investing in acquisitions, evaluating increased dividends over time and properly utilizing a share buy-back strategy. At September 30, 2009 the Company had $1.0 billion in total shareholders' equity. This is an increase of $25.2 million, or 2.5 percent, from total shareholders' equity at December 31, 2008 of $974.8 million. At September 30, 2009, the Company had a total risk-based capital ratio of 14.35 percent, which is substantially higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 226,796 shares at an average price of $39.83 per share during the third quarter of 2009.
The fifth strategy is to deliver the unparalleled customer experience. The Company delivers products and services through outstanding associates who are focused on a high-touch customer service model. The Company continues to hire key associates within the core segments that are focused on achieving our strategies through a high level of service. The Company's associates exhibit pride, power, and passion each day to enable the Company to retain a strong customer base and focus on growing this base to obtain the financial results noted below.
Earnings Summary
The Company recorded consolidated net income of $24.0 million for the three-month period ended September 30, 2009, compared to $21.8 million for the same period a year earlier. This represents a 10.2 percent increase over the three-month period ended September 30, 2008. Basic earnings per share for the third quarter of 2009 were $0.60 per share ($0.59 per share fully-diluted) compared to $0.54 per share ($0.53 per share fully-diluted) for the third quarter of 2008. Return on average assets and return on average common shareholders' equity for the three-month period ended September 30, 2009 were 0.97 and 9.43 percent, respectively, compared to 1.00 and 9.25 percent for the three-month period ended September 30, 2008.
The Company recorded consolidated net income of $65.6 million for the nine-month period ended September 30, 2009, compared to $77.8 million for the same period a year earlier. This represents a 15.7 percent decrease over the nine-month period ended September 30, 2008. Basic earnings per share for the nine-month period ended September 30, 2009 were $1.62 per share ($1.61 per share fully-diluted) compared to $1.91 per share ($1.89 per share fully-diluted) for the period in 2008. Return on average assets and return on average common shareholders' equity for the nine-month period ended September 30, 2009 were 0.87 and 8.78 percent, respectively, compared to 1.21 and 11.23 percent for the same period in 2008.
Net interest income for the three and nine-month periods ended September 30, 2009 increased $9.6 million, or 14.5 percent, and $28.6 million, or 14.5 percent, respectively, compared to the same periods in 2008. These increases are primarily due to a higher volume of average earning assets. For the three-month period ended September 30, 2009, average earning assets increased by $1.3 billion, or 16.9 percent, and for the nine-month period ended September 30, 2009, they increased by $1.5 billion, or 20.0 percent, compared to the same periods in 2008. Net interest margin, on a tax-equivalent basis, decreased to 3.51 percent and 3.44 percent for the three and nine-months periods ended September 30, 2009, compared to 3.57 percent and 3.59 percent for the same periods in 2008. These changes are discussed in greater detail below under Net Interest Income.
The provision for loan losses increased by $3.8 million and $8.3 million for the three and nine-month periods ended September 30, 2009, compared to the same periods in 2008. These changes are a direct result of applying the Company's methodology for computing the allowance for loan losses. With the increased provision, the allowance for loan losses as a percentage of total loans increased by 17 basis points to 1.36 percent as of September 30, 2009, compared to September 30, 2008. For a description of the Company's methodology for computing the allowance for loan losses, please see the summary discussion of the Allowance for Loan Losses within the Critical Accounting Policies and Estimates subsection of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in the Company's 2008 Annual Report on Form 10-K.
Noninterest income increased by $1.4 million, or 1.8 percent, for the three-month period ended September 30, 2009 and decreased by $16.3 million, or 6.7 percent, for the nine-month period ended September 30, 2009, compared to the same periods one year ago. These changes are discussed in greater detail below under Noninterest Income.
Noninterest expense increased by $5.4 million, or 4.9 percent, for the three-month period ended September 30, 2009, and increased by $25.3 million, or 8.0 percent, for the nine-month period ended September 30, 2009, compared to the same periods in 2008. These increases are discussed in greater detail below under Noninterest Expense.
Net Interest Income
Net interest income is a significant source of the Company's earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. For the three-month period ended September 30, 2009, net interest income increased $9.6 million, or 14.5 percent, compared to the same period in 2008. For the nine-month period ended September 30, 2009, net interest income increased $28.6 million, or 14.5 percent, compared to the same period in 2008.
The Company continues to experience a repricing of these earning assets and interest-bearing liabilities during the recent interest rate cycle. While the Company continues to see declining rates, it has been able to improve net interest income. As illustrated in
Table 1, net interest spread for the three months ended September 30, 2009 increased by 19 basis points and net interest margin decreased by 6 basis points compared to the same period in 2008. Net interest spread for the nine months ended September 30, 2009 increased by 16 basis points, but net interest margin decreased by 15 basis points compared to the same period in 2008. These results are primarily due to the interest-bearing liabilities repricing quicker than the earning assets, coupled with the contribution from noninterest-bearing demand deposits (free funds). While the Company has experienced a decline in net interest margin over the same periods one year ago, its increase in volume of earning assets has led to an increase in net interest income. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and rates have resulted in an increase in net interest income.
Table 1
AVERAGE BALANCES/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)
The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax equivalent basis adjustment would have been 3.89 percent for the three-month period ended September 30, 2009 and 4.78 percent for the same period in 2008.
Three Months Ended September 30,
2009 2008
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
Assets
Loans, net of unearned interest $ 4,354,961 4.97 % $ 4,211,114 5.60 %
Securities:
Taxable 3,175,441 3.18 2,386,983 4.24
Tax-exempt 984,534 4.73 737,617 5.19
Total securities 4,159,975 3.55 3,124,600 4.46
Federal funds and resell agreements 40,057 0.48 370,291 2.09
Interest-bearing due from banks 473,868 0.99 - -
Trading 37,250 2.47 49,325 3.69
Total earning assets 9,066,111 4.08 7,755,330 4.96
Allowance for loan losses (57,957 ) (49,877 )
Other assets 839,486 912,501
Total assets $ 9,847,640 $ 8,617,954
Liabilities and Shareholders' Equity
Interest-bearing deposits $ 5,171,736 0.94 % $ 4,656,627 1.91 %
Federal funds and repurchase agreements 1,184,647 0.15 1,038,779 1.64
Borrowed funds 50,285 2.85 41,801 4.40
Total interest-bearing liabilities 6,406,668 0.81 5,737,207 1.88
Noninterest-bearing demand deposits 2,297,832 1,863,035
Other liabilities 133,028 81,630
Shareholders' equity 1,010,112 936,082
Total liabilities and shareholders' equity $ 9,847,640 $ 8,617,954
Net interest spread 3.27 % 3.08 %
Net interest margin 3.51 3.57
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Nine Months Ended September 30,
2009 2008
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
Assets
Loans, net of unearned interest $ 4,400,316 4.89 % $ 4,143,287 5.89 %
Securities:
Taxable 3,361,316 3.20 2,376,901 4.40
Tax-exempt 911,449 4.96 755,499 5.23
Total securities 4,272,765 3.57 3,132,400 4.60
Federal funds and resell agreements 57,322 0.53 375,759 2.63
Interest-bearing due from banks 473,040 0.84 - -
Trading 33,239 2.56 43,715 3.54
Total earning assets 9,236,682 4.04 7,695,161 5.19
Allowance for loan losses (55,651 ) (48,593 )
Other assets 849,803 972,405
Total assets $ 10,030,834 $ 8,618,973
Liabilities and Shareholders' Equity
Interest-bearing deposits $ 5,172,665 1.00 % $ 4,438,631 2.14 %
Federal funds and repurchase agreements 1,364,476 0.16 1,228,640 2.13
Borrowed funds 52,502 2.90 46,407 4.19
Total interest-bearing liabilities 6,589,643 0.84 5,713,678 2.15
Noninterest-bearing demand deposits 2,333,091 1,887,034
Other liabilities 108,397 92,323
Shareholders' equity 999,703 925,938
Total liabilities and shareholders' equity $ 10,030,834 $ 8,618,973
Net interest spread 3.20 % 3.04 %
Net interest margin 3.44 3.59
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Table 2 presents the dollar amount of change in net interest income and margin due to volume and rate. Table 2 also reflects the effect that interest-free funds have on net interest margin. Although interest-free funds (total earning assets less interest-bearing liabilities) increased $641.3 million for the three-month period ended September 30, 2009 compared to the same period in 2008 and increased $665.6 million for the nine-month period ended September 30, 2009 compared to the same period in 2008, the benefit from interest free funds declined by 25 basis points from the three months ended September 30, 2008, and declined by 31 basis points from the nine months ended September 30, 2008, due to decreases in interest rates.
Table 2
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in
thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended Nine Months Ended
September 30, 2009 vs. 2008 September 30, 2009 vs. 2008
Volume Rate Total Volume Rate Total
Change in interest earned on:
Loans $ 1,831 $ (6,561 ) $ (4,730 ) $ 9,352 $ (31,098 ) $ (21,746 )
Securities:
Taxable 6,355 (6,319 ) 36 23,507 (21,323 ) 2,184
Tax-exempt 2,246 (1,049 ) 1,197 4,139 (1,958 ) 2,181
Federal funds sold and resell
agreements (395 ) (1,505 ) (1,900 ) (1,273 ) (5,909 ) (7,182 )
Interest-bearing due from banks 1,181 - 1,181 2,965 - 2,965
Trading (77 ) (155 ) (232 ) (91 ) (428 ) (519 )
Interest income 11,141 (15,589 ) (4,448 ) 38,599 (60,716 ) (22,117 )
Change in interest incurred on:
Interest-bearing deposits 1,223 (11,339 ) (10,116 ) 5,478 (37,955 ) (32,477 )
Federal funds purchased and
repurchase agreements 55 (3,884 ) (3,829 ) 164 (18,079 ) (17,915 )
Borrowed funds 61 (162 ) (101 ) 132 (448 ) (316 )
Interest expense 1,339 (15,385 ) (14,046 ) 5,774 (56,482 ) (50,708 )
Net interest income $ 9,802 $ (204 ) $ 9,598 $ 32,825 $ (4,234 ) $ 28,591
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ANALYSIS OF NET INTEREST MARGIN
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
Average earning assets $ 9,066,111 $ 7,755,330 $ 1,310,781 $ 9,236,682 $ 7,695,161 $ 1,541,521
Average interest-bearing
liabilities 6,406,668 5,737,207 669,461 6,589,643 5,713,678 875,965
Average interest free funds $ 2,659,443 $ 2,018,123 $ 641,320 $ 2,647,039 $ 1,981,483 $ 665,556
Free funds ratio (free funds to
earning assets) 29.33 % 26.02 % 3.31 % 28.66 % 25.75 % 2.91 %
Tax-equivalent yield on earning
assets 4.08 4.96 (0.88 ) % 4.04 % 5.19 % (1.15 ) %
Cost of interest-bearing
liabilities 0.81 1.88 (1.07 ) 0.84 2.15 (1.31 )
Net interest spread 3.27 % 3.08 % 0.19 % 3.20 % 3.04 % 0.16 %
Benefit of interest-free funds 0.24 0.49 (0.25 ) 0.24 0.55 (0.31 )
Net interest margin 3.51 % 3.57 % (0.06 ) % 3.44 % 3.59 % (0.15 ) %
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Provision and Allowance for Loan Losses
The allowance for loan losses (ALL) represents management's judgment of the losses inherent in the Company's loan portfolio as of the balance sheet date. An analysis is performed quarterly to determine the appropriate balance of the ALL. This analysis considers qualitative and quantitative measures such as historical loss trends, a review of individual loans, migration analysis, current economic conditions, loan growth and characteristics, industry or segment concentration and other factors. This analysis is performed
separately for each bank as regulatory agencies require that the adequacy of the ALL be maintained on a bank-by-bank basis. After the balance sheet analysis is performed for the ALL, the provision for loan losses is computed as the amount required to adjust the ALL to the appropriate level.
Based on the factors above, management of the Company expensed $8.3 million and $20.6 million related to the provision for loan losses for the three and nine-month periods ended September 30, 2009, compared to $4.5 million and $12.4 million for the same periods in 2008. As illustrated in Table 3 below, the ALL increased to 1.36 percent of total loans as of September 30, 2009, compared to 1.19 percent of total loans as of the same period in 2008.
Table 3 presents a summary of the Company's ALL for the nine months ended September 30, 2009 and 2008 and for the year ended December 31, 2008. Net charge-offs were $14.1 million for the first nine months of 2009, compared to $7.9 million for the same period in 2008. See "Credit Risk Management" under "Item 3. Quantitative and Qualitative Disclosures About Market Risk" in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.
Table 3
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)
Nine Months Ended Year Ended
September 30, December 31,
2009 2008 2008
Allowance-January 1 $ 52,297 $ 45,986 $ 45,986
Provision for loan losses 20,600 12,350 17,850
Allowance of banks and loans acquired - - 216
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