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UMBF > SEC Filings for UMBF > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for UMB FINANCIAL CORP

Form 10-Q for UMB FINANCIAL CORP


1-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2012. 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; and

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;

The ability to successfully and timely integrate acquisitions;

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.


Table of Contents

Overview

The Company focuses on the following 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. The emphasis on fee-based operations helps reduce the Company's exposure to changes in interest rates. During the third quarter of 2012, noninterest income increased $5.4 million, or 5.3 percent, compared to the same period in 2011. This increase is primarily attributed to an increase in trust and securities processing income of $4.4 million, or 8.4 percent, for the three months ended September 30, 2012 compared to the same period in 2011.

The second strategy is a focus on net interest income through loan and deposit growth. This is not just a growth strategy but includes a focus on rate, volume and mix. Net interest income increased $1.3 million, or 1.6 percent, compared to the same period in 2011. Average earning assets increased by $987.9 million, or 8.9 percent, compared to the third quarter of 2011. This increase was due to an $831.4 million, or 14.5 percent, increase in average total securities, including trading securities and a $502.9 million, or 10.5 percent, increase in average loans. Average total deposits increased $917.9 million, or 9.7 percent, compared to third quarter of 2011, which positions the Company well to fund customer credit needs as the demand for loans increases.

The third strategy is a focus on improving operating efficiencies. Repositioning and increasing utilization of our distribution network remains a priority. The Company continues to emphasize increasing its customer base by providing a broad offering of services through our existing networks. These efforts have resulted in the total deposits growth previously discussed. The Company's efficiency ratio for the quarter was 74.3 percent in 2012 and 74.2 percent in the third quarter of 2011. The Company continues to invest in technological advances and implement strategies that will help management drive operating efficiencies through improved data analysis and automation. On January 1, 2011, the Company converted to a new financial and human resource software that is integrated and enterprise wide. In addition to the use of automation technology, the Company will continue 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 strives to enhance capital through a mix of reinvesting in organic growth, investing in acquisitions, evaluating increased dividends over time and utilizing a share buy-back strategy when appropriate. As of September 30, 2012, UMB had total shareholders' equity of $1.3 billion, an increase of 10.6 percent over September 30, 2011. The Company repurchased 15,758 shares at an average price of $49.37 per share during the third quarter of 2012.

Earnings Summary

The Company recorded consolidated net income of $26.1 million for the three-month period ended September 30, 2012, compared to $26.0 million for the same period a year earlier. This represents a 0.4 percent increase over the three-month period ended September 30, 2011. Basic earnings per share for the third quarter of 2012 were $0.65 per share ($0.64 per share fully-diluted) compared to $0.65 per share ($0.64 per share fully-diluted) for the third quarter of 2011. Return on average assets and return on average common shareholders' equity for the three-month period ended September 30, 2012 were 0.79 and 8.12 percent, respectively, compared to 0.85 and 8.81 percent for the three-month period ended September 30, 2011.

The Company recorded consolidated net income of $101.7 million for the nine-month period ended September 30, 2012, compared to $83.2 million for the same period a year earlier. This represents a 22.2 percent increase over the nine-month period ended September 30, 2011. Basic earnings per share for the nine-month period ended September 30, 2012 were $2.54 per share ($2.51 per share fully-diluted) compared to $2.08 per share ($2.06 per share fully-diluted) for the period in 2011. Return on average assets and return on average common shareholders' equity for the nine-month period ended September 30, 2012 were 1.03 and 10.90 percent, respectively, compared to 0.90 and 9.89 percent for the same period in 2011.


Table of Contents

Net interest income for the three and nine-month periods ended September 30, 2012 increased $1.3 million, or 1.6 percent, and $2.4 million, or 1.0 percent, respectively, compared to the same period in 2011. These increases are primarily due to the reduced level of interest expense on deposits, which outpaced the reduced level of interest income. For the three-month period ended September 30, 2012, average earning assets increased by $987.9 million, or 8.9 percent, and for the nine-month period ended September 30, 2012, they increased by $834.8 million, or 7.4 percent, compared to the same periods in 2011. Net interest margin, on a tax-equivalent basis, decreased to 2.80 percent and 2.79 percent for the three and nine-months periods ended September 30, 2012, compared to 2.98 percent and 2.95 percent for the same periods in 2011. These changes are discussed in greater detail below under Net Interest Income.

The provision for loan losses remained flat and decreased by $3.7 million for the three and nine-month periods ended September 30, 2012, compared to the same periods in 2011. These changes are a direct result of applying the Company's methodology for computing the allowance for loan losses. The allowance for loan losses as a percentage of total loans decreased by 21 basis points to 1.32 percent as of September 30, 2012, compared to September 30, 2011 and decreased 13 basis points compared to December 31, 2011. 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 2011 Annual Report on Form 10-K.

Noninterest income increased by $5.4 million, or 5.3 percent, for the three-month period ended September 30, 2012 and increased by $32.3 million, or 10.2 percent, for the nine-month period ended September 30, 2012, compared to the same periods one year ago. These increases are discussed in greater detail below under Noninterest Income.

Noninterest expense increased by $6.5 million, or 4.7 percent, for the three-month period ended September 30, 2012, and increased by $12.0 million, or 2.9 percent, for the nine-month period ended September 30, 2012, compared to the same periods in 2011. 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, 2012, net interest income increased $1.3 million, or 1.6 percent, compared to the same period in 2011. For the nine-month period ended September 30, 2012, net interest income increased $2.4 million, or 1.0 percent, compared to the same period in 2011.

Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. 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 this table, net interest spread for the three months ended September 30, 2012 decreased by 15 basis points and net interest margin decreased by 18 basis points compared to the same period in 2011. Net interest spread for the nine months ended September 30, 2012 decreased by 15 basis points and net interest margin decreased by 16 basis points compared to the same period in 2011. These results are primarily due to an unfavorable rate variance on loans and securities, offset by a favorable volume variance on earning assets. The combined impact of these variances coupled with a favorable rate variance on interest-bearing liabilities has led to decreases in interest expense and flat interest income, or an increase in the Company's net interest income as compared to results one year ago.

The favorable rate variance on deposits is bolstered by the contribution from free funds. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 of this section. Table 2 also illustrates how the changes in volume and rates have resulted in an increase in net interest income.


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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 2.78 percent for the three-month period ended September 30, 2012 and 3.04 percent for the same period in 2011. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.79 percent for the nine-month period ended September 30, 2012 and 3.03 percent for the same period in 2011.

                                                         Three Months Ended September 30,
                                                     2012                                 2011
                                          Average            Average           Average            Average
                                          Balance          Yield/Rate          Balance          Yield/Rate
Assets
Loans, net of unearned interest         $  5,292,970              4.10 %     $  4,790,043              4.60 %
Securities:
Taxable                                    4,617,059              1.75          4,119,391              1.98
Tax-exempt                                 1,903,490              3.05          1,569,903              3.42

Total securities                           6,520,549              2.13          5,689,294              2.37
Federal funds and resell agreements           38,498              0.50             49,159              0.36
Interest-bearing due from banks              248,290              0.36            584,130              0.43
Trading                                       47,269              1.86             47,098              1.74

Total earning assets                      12,147,576              2.94         11,159,724              3.21
Allowance for loan losses                    (72,909 )                            (71,513 )
Other assets                               1,097,489                            1,069,219

Total assets                            $ 13,172,156                         $ 12,157,430

Liabilities and Shareholders' Equity
Interest-bearing deposits               $  6,183,598              0.26 %     $  5,956,609              0.41 %
Federal funds and repurchase
agreements                                 1,315,729              0.14          1,306,627              0.10
Borrowed funds                                 7,962              4.05             31,155              0.93

Total interest-bearing liabilities         7,507,289              0.24          7,294,391              0.36
Noninterest-bearing demand deposits        4,199,085                            3,508,183
Other liabilities                            186,612                              183,084
Shareholders' equity                       1,279,170                            1,171,772

Total liabilities and shareholders'
equity                                  $ 13,172,156                         $ 12,157,430

Net interest spread                                               2.70 %                               2.85 %
Net interest margin                                               2.80                                 2.98


Table of Contents
                                                          Nine Months Ended September 30,
                                                     2012                                 2011
                                          Average            Average           Average            Average
                                          Balance          Yield/Rate          Balance          Yield/Rate
Assets
Loans, net of unearned interest         $  5,187,756              4.19 %     $  4,716,008              4.67 %
Securities:
Taxable                                    4,525,462              1.82          4,229,389              2.05
Tax-exempt                                 1,833,229              3.15          1,428,301              3.62

Total securities                           6,358,691              2.20          5,657,690              2.45
Federal funds and resell agreements           27,686              0.42             29,913              0.33
Interest-bearing due from banks              573,474              0.33            908,528              0.39
Trading                                       49,741              2.44             50,384              1.96

Total earning assets                      12,197,348              2.95         11,362,523              3.19
Allowance for loan losses                    (73,246 )                            (73,109 )
Other assets                               1,099,748                            1,084,414

Total assets                            $ 13,223,850                         $ 12,373,828

Liabilities and Shareholders' Equity
Interest-bearing deposits               $  6,231,448              0.29 %     $  6,231,546              0.41 %
Federal funds and repurchase
agreements                                 1,445,701              0.13          1,546,097              0.12
Borrowed funds                                13,384              3.89             34,917              1.29

Total interest-bearing liabilities         7,690,533              0.26          7,812,560              0.35
Noninterest-bearing demand deposits        4,103,786                            3,263,666
Other liabilities                            183,447                              172,487
Shareholders' equity                       1,246,084                            1,125,115

Total liabilities and shareholders'
equity                                  $ 13,223,850                         $ 12,373,828

Net interest spread                                               2.69 %                               2.84 %
Net interest margin                                               2.79                                 2.95

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 average interest-free funds (total earning assets less interest-bearing liabilities) increased $775.0 million for the three-month period ended September 30, 2012 compared to the same period in 2011 and increased $956.9 million for the nine-month period ended September 30, 2012 compared to the same period in 2011, the benefit from interest free funds declined by 3 basis points from the three months ended September 30, 2011, and declined by 1 basis point from the nine months ended September 30, 2011, due to decreases in interest rates.


Table of Contents

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, 2012 vs 2011                September 30, 2012 vs 2011
                                       Volume         Rate         Total         Volume         Rate          Total
Change in interest earned on:
Loans                                  $ 5,138      $ (6,004 )    $   (866 )    $ 14,912      $ (16,818 )    $ (1,906 )
Securities:
Taxable                                  2,166        (2,332 )        (166 )       4,055         (7,299 )      (3,244 )
Tax-exempt                               2,339        (1,562 )         777         8,626         (5,526 )       3,100
Federal funds sold and resell
agreements                                 (13 )          16             3            (7 )           22            15
Interest-bearing due from banks           (304 )         (97 )        (401 )        (829 )         (382 )      (1,211 )
Trading                                      1             9            10            (4 )          162           158

Interest income                          9,327        (9,970 )        (643 )      26,753        (29,841 )      (3,088 )
Change in interest incurred on:
Interest-bearing deposits                  149        (2,209 )      (2,060 )          -          (5,525 )      (5,525 )
Federal funds purchased and
repurchase agreements                        3           112           115           (96 )           93            (3 )
Borrowed funds                            (236 )         244             8          (627 )          681            54

Interest expense                           (84 )      (1,853 )      (1,937 )        (723 )       (4,751 )      (5,474 )

Net interest income                    $ 9,411      $ (8,117 )    $  1,294      $ 27,476      $ (25,090 )       2,386

                        ANALYSIS OF NET INTEREST MARGIN



                                           Three Months Ended September 30,                     Nine Months Ended September 30,
                                         2012              2011           Change             2012              2011            Change
Average earning assets               $ 12,147,576      $ 11,159,724      $ 987,852       $ 12,197,348      $ 11,362,523      $  834,825
Average interest-bearing
liabilities                             7,507,289         7,294,391        212,898          7,690,533         7,812,560        (122,027 )

Average interest free funds          $  4,640,287      $  3,865,333      $ 774,954       $  4,506,815      $  3,549,963      $  956,852

Free funds ratio (free funds to
earning assets)                             38.20 %           34.64 %         3.56 %            36.95 %           31.24 %          5.71 %
Tax-equivalent yield on earning
assets                                       2.94              3.21          (0.27 )%            2.95 %            3.19 %         (0.24 )%
Cost of interest-bearing
liabilities                                  0.24              0.36          (0.12 )             0.26              0.35           (0.09 )

Net interest spread                          2.70 %            2.85 %        (0.15 )%            2.69 %            2.84 %         (0.15 )%
Benefit of interest-free funds               0.10              0.13          (0.03 )             0.10              0.11           (0.01 )

Net interest margin                          2.80 %            2.98 %        (0.18 )%            2.79 %            2.95 %         (0.16 )%


Table of Contents

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 items 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 $4.5 million and $13.5 million related to the provision for loan losses for the three and nine-month periods ended September 30, 2012, compared to $4.5 million and $17.2 million for the same periods in 2011. As illustrated in Table 3 below, the ALL decreased to 1.32 percent of total loans as of September 30, 2012, compared to 1.53 percent of total loans as of the same period in 2011.

Table 3 presents a summary of the Company's ALL for the nine months ended September 30, 2012 and 2011 and for the year ended December 31, 2011. Net charge-offs were $14.1 million for the first nine months of 2012, compared to $18.3 million for the same period in 2011. 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,
                                                       2012              2011                2011
Allowance-January 1                                 $    72,017       $    73,952       $       73,952
Provision for loan losses                                13,500            17,200               22,200

Charge-offs:
Commercial                                               (6,385 )          (9,456 )            (12,693 )
Consumer:
Bankcard                                                 (8,437 )         (10,347 )            (13,493 )
Other                                                    (1,237 )          (1,541 )             (1,945 )
Real estate                                                (724 )            (505 )               (532 )

Total charge-offs                                       (16,783 )         (21,849 )            (28,663 )

Recoveries:
Commercial                                                  401               484                  813
Consumer:
Bankcard                                                  1,383             2,007                2,366
Other                                                       825             1,058                1,317
Real estate                                                  25                24                   32

Total recoveries                                          2,634             3,573                4,528

Net charge-offs                                         (14,149 )         (18,276 )            (24,135 )

Allowance-end of period                                  71,368            72,876               72,017

Average loans, net of unearned interest             $ 5,179,791       $ 4,709,011       $    4,748,909
Loans at end of period, net of unearned interest      5,389,763         4,776,071            4,960,343
Allowance to loans at end of period                        1.32 %            1.53 %               1.45 %
Allowance as a multiple of net charge-offs                 3.78 x            2.98 x               2.98 x
Net charge-offs to:
Provision for loan losses                                104.81 %          106.25 %             108.71 %
Average loans                                              0.36               .52                 0.51
. . .
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