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UMBF > SEC Filings for UMBF > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for UMB FINANCIAL CORP


2-May-2013

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 period ended March 31, 2013. 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;

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.


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Overview

The Company focuses on the following four core strategies. Management believes these strategies will guide our efforts to achieving our vision, to deliver the Unparalleled Customer Experience, all while maintaining a focus to improve net income and strengthen the balance sheet.

The first strategy is to maintain high quality through a strong balance sheet, solid credit quality, a low cost of funding, and effective risk management. The strength in the balance sheet can be seen in the solid credit quality of the earning assets and the Company's continued growth in low cost funding. At March 31, 2013, the Company's nonperforming assets as a percentage of total assets were 0.20 percent. As a percentage of loans, nonperforming loans decreased to 0.46 percent as compared to 0.50 percent on March 31, 2012. These credit quality ratios were achieved while maintaining positive directional growth in earning assets, which increased 11.9% from March 31, 2012.

The second strategy is to deliver profitable and sustainable growth by accelerating fee businesses, growing quality earning assets, maximizing efficiencies, and maintaining sales leverage. The Company's acceleration of fee businesses is apparent with the increase in trust and securities processing. Trust and securities processing income increased $7.6 million, or 13.9 percent, for the three months ended March 31, 2013 compared to the same period in 2012. The increase in trust and securities processing income was primarily due to a $4.8 million, or 29.8 percent, increase in advisory fee income from the Scout Funds; a $0.8 million, or 4.0 percent, increase in fund administration and custody services; and a $2.1 million, or 11.9 percent, increase in fees related to institutional and personal investment management services. Also notable is the Company's loan growth. While maintaining the aforementioned credit ratios, the Company's March 31, 2013 total loans increased $865.9 million, or 16.8 percent, as compared to the same three month period one year ago.

The third strategy is to maintain diversified revenue streams. The emphasis on fee-based operations helps reduce the Company's exposure to changes in interest rates. During the first quarter of 2013, noninterest income decreased $11.3 million, or 8.5 percent, compared to the same period of 2012. Gains of $5.9 million on securities available for sale were recognized in the first quarter of 2013 compared to $16.5 million during the same period in 2012. Other noninterest income decreased $9.3 million, or 70.7 percent, primarily driven by an $8.2 million adjustment in contingent consideration liabilities on acquisitions. These adjustments were due to the adoption of new accounting guidance related to fair value measurements in the first quarter of 2012. These prior year drivers are camouflaging the 13.9 percent increase in trust and securities processing in the first quarter of 2013. At March 31, 2013, noninterest income represented 60.4 percent of total revenues, as compared to 62.6 percent at March 31, 2012.

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 utilizing a share buy-back strategy when appropriate. At March 31, 2013, the Company had $1.3 billion in total shareholders' equity. This is an increase of $72.9 million, or 6.0 percent, compared to total shareholders' equity at March 31, 2012. At March 31, 2013, the Company had a total risk-based capital ratio of 11.74 percent, which is higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 35,967 shares at an average price of $46.03 per share during the first quarter of 2013.

Earnings Summary

The Company recorded consolidated net income of $34.9 million for the three-month period ended March 31, 2013, compared to $46.4 million for the same period a year earlier. This represents a 24.6 percent decrease over the three-month period ended March 31, 2012. Basic earnings per share for the first quarter of 2013 were $0.88 per share ($0.87 per share fully-diluted) compared to $1.16 per share ($1.15 per share fully-diluted) for the first quarter of 2012. Return on average assets and return on average common shareholders' equity for the three-month period ended March 31, 2013 were 0.96 and 11.05 percent, respectively, compared to 1.40 and 15.37 percent for the three-month period ended March 31, 2012.


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Net interest income for the three month period ended March 31, 2013 was flat as compared to the same period in 2012. Average earning assets increased by $1.5 billion, or 11.9 percent, compared to the first quarter of 2012. Net interest margin, on a tax-equivalent basis, decreased to 2.51 percent or a 24 basis points decline for the three months ended March 31, 2013, compared to 2.75 percent for the same period in 2012.

The provision for loan losses decreased by $2.5 million for the three month period ended March 31, 2013, compared to the same period in 2012. With the decreased provision and an increase in total loans, the allowance for loan losses as a percentage of total loans decreased by 27 basis points to 1.16 percent as of March 31, 2013, compared to March 31, 2012. 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 on the Company's 2012 Annual Report on Form 10-K.

Noninterest income decreased by $11.3 million, or 8.5 percent, for the three-month period ended March 31, 2013, compared to the same period one year ago. For the three month period, the decreases are primarily due to 2012 gains, partially offset by increases in trust and securities processing income. These changes are discussed in greater detail below under Noninterest Income.

Noninterest expense increased by $8.5 million, or 6.0 percent, for the three-month period ended March 31, 2013, compared to the same period in 2012. For the three month period, the increases were primarily due to increases in salaries, employee benefits, and fair value adjustments to the contingent consideration liabilities on acquisitions. These changes 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 March 31, 2013, net interest income increased by $0.4 million, or 0.5 percent, as compared to the same period in 2012.

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 downward repricing of these earning assets and interest-bearing liabilities during the recent interest rate cycle. As illustrated on this table, net interest spread for the three months ended March 31, 2013 decreased by 22 basis points and net interest margin decreased by 24 basis points compared to the same period in 2012. These results are primarily due to the interest-bearing liabilities repricing slower or incrementally less than the earning assets. The increase of $641.5 million of average noninterest-bearing demand deposits, as compared to the first quarter of 2012, continues to be a positive impact. However, with the rate on interest-bearing liabilities decreasing to 0.21 percent as compared to 0.29 percent one year ago, the contribution from free funds is diminished. 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 the flattening of 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 2.48 percent for the three-month period ended March 31, 2013 and 2.78 percent for the same period in 2012.

                                                           Three Months Ended March 31,
                                                     2013                                 2012
                                          Average            Average           Average            Average
                                          Balance          Yield/Rate          Balance          Yield/Rate
Assets
Loans, net of unearned interest         $  5,814,855              3.82 %     $  5,052,663              4.31 %
Securities:
Taxable                                    4,871,926              1.54          4,342,151              1.86
Tax-exempt                                 1,994,620              3.07          1,764,958              3.25

Total securities                           6,866,546              1.98          6,107,109              2.26
Federal funds and resell agreements           19,140              0.51             19,532              0.33
Interest-bearing due from banks              972,962              0.28          1,043,014              0.32
Other earning assets                          57,565              2.09             52,193              2.64

Total earning assets                      13,731,068              2.64         12,274,511              2.94
Allowance for loan losses                    (71,504 )                            (72,395 )
Other assets                               1,123,453                            1,095,799

Total assets                            $ 14,783,017                         $ 13,297,915

Liabilities and Shareholders' Equity
Interest-bearing deposits               $  7,018,471              0.22 %     $  6,317,146              0.32 %
Federal funds and repurchase
agreements                                 1,673,062              0.14          1,572,427              0.11
Borrowed funds                                 5,392              4.51             16,934              5.15

Total interest-bearing liabilities         8,696,925              0.21          7,906,507              0.29
Noninterest-bearing demand deposits        4,626,556                            3,985,085
Other liabilities                            177,139                              192,769
Shareholders' equity                       1,282,397                            1,213,554

Total liabilities and shareholders'
equity                                  $ 14,783,017                         $ 13,297,915

Net interest spread                                               2.43 %                               2.65 %
Net interest margin                                               2.51                                 2.75

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 the average balance of interest free funds (total earning assets less interest-bearing liabilities) increased $666.1 million for the three-month period ended March 31, 2013 compared to the same period in 2012, the benefit from interest free funds declined by 2 basis points from the three months ended March 31, 2012.


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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
                                                               March 31, 2013 and 2012
                                                       Volume           Rate            Total
Change in interest earned on:
Loans                                                 $  6,949        $  (6,284 )      $    665
Securities:
Taxable                                                  1,947           (3,611 )        (1,664 )
Tax-exempt                                               1,347             (962 )           385
Federal funds sold and resell agreements                    -                 8               8
Interest-bearing due from banks                            (48 )           (111 )          (159 )
Trading                                                     23              (82 )           (59 )

Interest income                                         10,218          (11,042 )          (824 )
Change in interest incurred on:
Interest-bearing deposits                                  371           (1,567 )        (1,196 )
Federal funds purchased and repurchase agreements           33               95             128
Other borrowed funds                                      (130 )            (27 )          (157 )

Interest expense                                           274           (1,499 )        (1,225 )

Net interest income                                   $  9,944        $  (9,543 )      $    401

                        ANALYSIS OF NET INTEREST MARGIN



                                                        Three Months Ended March 31,
                                                 2013                2012              Change
Average earning assets                       $ 13,731,068        $ 12,274,511        $ 1,456,557
Interest-bearing liabilities                    8,696,925           7,906,507            790,418

Interest-free funds                          $  5,034,143        $  4,368,004        $   666,139

Free funds ratio (free funds to earning
assets)                                             36.66 %             35.59 %             1.07 %
Tax-equivalent yield on earning assets               2.64 %              2.94 %            (0.30 )%
Cost of interest-bearing liabilities                 0.21                0.29              (0.08 )

Net interest spread                                  2.43 %              2.65 %            (0.22 )%
Benefit of interest-free funds                       0.08                0.10              (0.02 )

Net interest margin                                  2.51 %              2.75 %            (0.24 )%

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. 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 $2.0 million related to the provision for loan losses for the three month period ended March 31, 2013, compared to $4.5 million for the same period in 2012. As illustrated in Table 3 below, the ALL decreased to 1.16 percent of total loans as of March 31, 2013, compared to 1.43 percent of total loans as of the same period in 2012.


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Table 3 presents a summary of the Company's ALL for the three months ended March 31, 2013 and 2012 and for the year ended December 31, 2012. Net charge-offs were $3.5 million for the first three months of 2013, compared to $3.0 million for the same period in 2012. 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)



                                                         Three Months Ended               Year Ended
                                                              March 31,                  December 31,
                                                       2013              2012                2012
Allowance-January 1                                 $    71,426       $    72,017       $       72,017
Provision for loan losses                                 2,000             4,500               17,500

Charge-offs:
Commercial                                               (1,397 )            (269 )             (8,446 )
Consumer:
Credit card                                              (2,880 )          (3,010 )            (11,148 )
Other                                                      (377 )            (480 )             (1,530 )
Real estate                                                (195 )            (339 )               (932 )

Total charge-offs                                        (4,849 )          (4,098 )            (22,056 )

Recoveries:
Commercial                                                  374               237                1,136
Consumer:
Credit card                                                 661               498                1,766
Other                                                       260               326                1,035
Real estate                                                   9                 6                   28

Total recoveries                                          1,304             1,067                3,965

Net charge-offs                                          (3,545 )          (3,031 )            (18,091 )

Allowance-end of period                                  69,881            73,486               71,426

Average loans, net of unearned interest             $ 5,809,284       $ 5,045,709       $    5,243,264
Loans at end of period, net of unearned interest      6,010,681         5,144,767            5,686,749
Allowance to loans at end of period                        1.16 %            1.43 %               1.26 %
Allowance as a multiple of net charge-offs                 4.86 x            6.03 x               3.95 x
Net charge-offs to:
Provision for loan losses                                177.25 %           67.36 %             103.38 %
Average loans                                              0.25              0.24                 0.35

Noninterest Income

A key objective of the Company is the growth of noninterest income to enhance profitability and provide steady income. Fee-based businesses are typically non-credit related and not generally affected by fluctuations in interest rates.

The Company's fee-based businesses provide the opportunity to offer multiple products and services, which management believes will more closely align the customer with the Company. The Company is currently emphasizing fee-based businesses including trust and securities processing, bankcard, brokerage, health care services, and treasury management. Management believes it can offer these products and services both efficiently and profitably, as most share common platforms and support structures.


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Table 4

SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)



                                         Three Months Ended         Dollar        Percent
                                              March 31,             Change         Change
                                         2013          2012          13-12         13-12
 Trust and securities processing       $  62,312     $  54,710     $   7,602         13.90 %
 Trading and investment banking            7,109         9,678        (2,569 )      (26.54 )
 Service charges on deposit accounts      21,523        20,011         1,512          7.56
 Insurance fees and commissions              961         1,009           (48 )       (4.76 )
 Brokerage fees                            2,946         2,514           432         17.18
 Bankcard fees                            16,439        14,735         1,704         11.56
 Gains on sales of securities
 available for sale, net                   5,893        16,541       (10,648 )      (64.37 )
 Other                                     3,833        13,103        (9,270 )      (70.75 )

 Total noninterest income              $ 121,016     $ 132,301     $ (11,285 )       (8.53 )%

Fee-based, or noninterest income (summarized in Table 4), decreased by $11.3 million, or 8.5 percent, during the three months ended March 31, 2013, compared to the same period in 2012. Table 4 above summarizes the components of noninterest income and the respective year-over-year comparison for each category.

Trust and securities processing consists of fees earned on personal and corporate trust accounts, custody of securities, trust investments and money management services, and servicing of mutual fund assets. The 13.9 percent increase in trust and securities processing income was primarily due to a $4.8 million, or 29.8 percent, increase in advisory fee income from the Scout Funds; a $0.8 million, or 4.0 percent, increase in fund administration and custody services; and a $2.1 million, or 11.9 percent, increase in fees related to institutional and personal investment management services. Trust and securities processing fees are asset-based. As such, they are highly correlated to the change in market value of the assets. Thus, the related income for the remainder of the year will be affected by changes in the securities markets. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels.

In the first quarter of 2013, $5.9 million in pre-tax gains were recognized on the sales of securities available for sale, as compared to $16.5 million one year ago. The investment portfolio is continually evaluated for opportunities to improve its performance and risk profile relative to market conditions and the Company's interest rate expectations. This can result in differences from quarter to quarter in the amount of realized gains.

Other noninterest income decreased $9.3 million, or 70.8 percent, primarily driven by an $8.2 million adjustment in contingent consideration liabilities on acquisitions recognized. These adjustments were due to the adoption of new accounting guidance related to fair value measurements.


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Noninterest Expense

The components of noninterest expense are shown below on Table 5.

Table 5

SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)



                                             Three Months Ended        Dollar       Percent
                                                  March 31,            Change        Change
                                             2013          2012         13-12        13-12
 Salaries and employee benefits            $  83,702     $  79,914     $ 3,788          4.74 %
 Occupancy, net                                9,887         9,278         609          6.56
. . .
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