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UMBF > SEC Filings for UMBF > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for UMB FINANCIAL CORP

Form 10-Q for UMB FINANCIAL CORP


1-Aug-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 and six-month periods ended June 30, 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; 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.


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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 June 30, 2013, the Company's nonperforming assets as a percentage of total assets was 0.19 percent. As a percentage of loans, nonperforming loans decreased to 0.40 percent as compared to 0.58 percent on June 30, 2012. These credit quality ratios were achieved while maintaining positive directional growth in average earning assets, which increased 12.5 percent from June 30, 2012, driven by a 14.2 percent increase in average noninterest-bearing demand deposits compared to June 30, 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 $7.7 million, or 13.9 percent, for the three months ended June 30, 2013 compared to the same period in 2012. The increase in trust and securities processing income was primarily due to a $4.2 million, or 23.7 percent, in advisory fee income from the Scout Funds and a $2.4 million, or 13.9 percent, increase in fees related to institutional and personal investment management services. Also notable and continuing to push industry trends, the Company produced double digit loan growth. While maintaining the aforementioned credit ratios, the Company's June 30, 2013 average loans increased $942.3 million, or 18.1 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 second quarter of 2013, noninterest income increased $3.4 million, or 3.0 percent, compared to the same period of 2012. The Company continues to emphasize its asset management, brokerage, bankcard services, health care services, and treasury management businesses. In particular, during the second quarter of 2013, this favorable change is primarily attributable to increased trust and securities processing income. At June 30, 2013, noninterest income represented 58.0 percent of total revenues, as compared to 57.8 percent at June 30, 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 June 30, 2013, the Company had $1.2 billion in total shareholders' equity. This is a decrease of $25.5 million, or 2.0 percent, compared to total shareholders' equity at June 30, 2012. At June 30, 2013, the Company had a total risk-based capital ratio of 11.52 percent, which is higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 1,881 shares at an average price of $49.93 per share during the second quarter of 2013.

Earnings Summary

The Company recorded consolidated net income of $29.9 million for the three-month period ended June 30, 2013, compared to $29.2 million for the same period a year earlier. This represents a 2.6 percent increase over the three-month period ended June 30, 2012. Basic earnings per share for the second quarter of 2013 were $0.75 per share ($0.74 per share fully-diluted) compared to $0.73 per share ($0.72 per share fully-diluted) for the second quarter of 2012. Return on average assets and return on average common shareholders' equity for the three-month period ended June 30, 2013 were 0.81 and 9.31 percent, respectively, compared to 0.89 and 9.42 percent for the three-month period ended June 30, 2012.


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The Company recorded consolidated net income of $64.9 million for the six-month period ended June 30, 2013, compared to $75.5 million for the same period a year earlier. This represents a 14.1 percent decrease over the six-month period ended June 30, 2012. Basic earnings per share for the six-month period ended June 30, 2013 were $1.62 per share ($1.61 per share fully-diluted) compared to $1.89 per share ($1.87 per share fully-diluted) for the period in 2012. Return on average assets and return on average common shareholders' equity for the six-month period ended June 30, 2013 were 0.88 and 10.17 percent, respectively, compared to 1.15 and 12.36 percent for the same period in 2012.

Net interest income for the three and six-month periods ended June 30, 2013 increased $2.0 million, or 2.4 percent, and $2.3 million, or 1.5 percent, respectively, compared to the same period in 2012. For the three-month period ended June 30, 2013, average earning assets increased by $1.6 billion, or 13.2 percent, and for the six-month period ended June 30, 2013, they increased by $1.5 billion, or 12.5 percent, compared to the same periods in 2012. Net interest margin, on a tax-equivalent basis, decreased to 2.56 percent and 2.53 percent for the three and six-months periods ended June 30, 2013, compared to 2.82 percent and 2.79 percent for the same periods in 2012. These changes are discussed in greater detail below under Net Interest Income.

The provision for loan losses increased by $0.5 million and decreased by $2.0 million for the three and six-month periods ended June 30, 2013, compared to the same periods in 2012. 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 24 basis points to 1.13 percent as of June 30, 2013, compared to June 30, 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 in the Company's 2012 Annual Report on Form 10-K.

Noninterest income increased by $3.4 million, or 3.1 percent, for the three-month period ended June 30, 2013 and decreased by $7.9 million, or 3.3 percent, for the six-month period ended June 30, 2013, compared to the same periods one year ago. These changes are discussed in greater detail below under Noninterest Income.

Noninterest expense increased by $5.6 million, or 3.9 percent, for the three-month period ended June 30, 2013, and increased by $14.1 million, or 4.9 percent, for the six-month period ended June 30, 2013, compared to the same periods in 2012. 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 June 30, 2013, average earning assets increased by $1.6 billion, or 13.2 percent, and for the six-month period ended June 30, 2013, they increased by $1.5 billion, or 12.5 percent, compared to the same periods in 2012. Net interest margin, on a tax-equivalent basis, decreased to 2.56 percent and 2.53 percent for the three and six-months periods ended June 30, 2013, compared to 2.82 percent and 2.79 percent for the same periods 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 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 through volume. As illustrated in this table, net interest spread for the three months ended June 30, 2013 decreased by 24 basis points and net interest margin decreased by 26 basis points compared to the same period in 2012. Net interest spread for the six months ended June 30, 2013 decreased by 23 basis points and net interest margin decreased by 26 basis points compared to the same period in 2012. These results are primarily due to an unfavorable rate variance, offset by a favorable volume variance on loans and securities. The combined impact of these variances has led to a decrease in interest expense and flat interest income, or an increase in the Company's net interest income as compare to results one year ago.


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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 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 2.51 percent for the three-month period ended June 30, 2013 and 2.82 percent for the same period in 2012. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.49 percent for the six-month period ended June 30, 2013 and 2.80 percent for the same period in 2012.

                                                            Three Months Ended June 30,
                                                     2013                                 2012
                                          Average            Average           Average            Average
                                          Balance          Yield/Rate          Balance          Yield/Rate
Assets
Loans, net of unearned interest         $  6,158,821              3.69 %     $  5,216,477              4.17 %
Securities:
Taxable                                    4,978,109              1.52          4,616,169              1.85
Tax-exempt                                 2,113,009              2.97          1,830,468              3.16

Total securities                           7,091,118              1.95          6,446,637              2.22
Federal funds and resell agreements           28,524              0.56             24,908              0.40
Interest-bearing due from banks              432,588              0.31            432,693              0.34
Trading                                       66,482              1.79             49,789              2.80

Total earning assets                      13,777,533              2.67         12,170,504              2.99
Allowance for loan losses                    (70,004 )                            (74,437 )
Other assets                               1,167,899                            1,105,978

Total assets                            $ 14,875,428                         $ 13,202,045

Liabilities and Shareholders' Equity
Interest-bearing deposits               $  6,943,399              0.19 %     $  6,194,126              0.28 %
Federal funds and repurchase
agreements                                 1,848,118              0.11          1,450,375              0.14
Borrowed funds                                 4,592              5.33             15,317              2.44

Total interest-bearing liabilities         8,796,109              0.18          7,659,818              0.26
Noninterest-bearing demand deposits        4,636,240                            4,126,141
Other liabilities                            153,227                              170,920
Shareholders' equity                       1,289,852                            1,245,166

Total liabilities and shareholders'
equity                                  $ 14,875,428                         $ 13,202,045

Net interest spread                                               2.49 %                               2.73 %
Net interest margin                                               2.56                                 2.82


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                                                             Six Months Ended June 30,
                                                     2013                                 2012
                                          Average            Average           Average            Average
                                          Balance          Yield/Rate          Balance          Yield/Rate
Assets
Loans, net of unearned interest         $  5,987,788              3.75 %     $  5,134,570              4.24 %
Securities:
Taxable                                    4,925,312              1.53          4,479,160              1.85
Tax-exempt                                 2,054,141              3.02          1,797,713              3.21

Total securities                           6,979,453              1.97          6,276,873              2.24
Federal funds and resell agreements           23,858              0.54             22,220              0.37
Interest-bearing due from banks              701,282              0.29            737,853              0.33
Trading                                       62,048              1.92             50,991              2.71

Total earning assets                      13,754,429              2.65         12,222,507              2.96
Allowance for loan losses                    (70,750 )                            (73,416 )
Other assets                               1,145,799                            1,100,889

Total assets                            $ 14,829,478                         $ 13,249,980

Liabilities and Shareholders' Equity
Interest-bearing deposits               $  6,980,728              0.21 %     $  6,255,636              0.30 %
Federal funds and repurchase
agreements                                 1,761,074              0.12          1,511,401              0.13
Borrowed funds                                 4,989              4.89             16,125              3.85

Total interest-bearing liabilities         8,746,791              0.19          7,783,162              0.27
Noninterest-bearing demand deposits        4,631,425                            4,055,613
Other liabilities                            165,117                              181,845
Shareholders' equity                       1,286,145                            1,229,360

Total liabilities and shareholders'
equity                                  $ 14,829,478                         $ 13,249,980

Net interest spread                                               2.46 %                               2.69 %
Net interest margin                                               2.53                                 2.79

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 $470.7 million for the three-month and $568.3 million for the six-month periods ended June 30, 2013 compared to the same periods in 2012, the benefit from interest free funds decreased by 3 basis points in the three and six month periods, due to decreases in interest rates.


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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                                     Six Months Ended
                                                 June 30, 2013 vs 2012                                 June 30, 2013 vs 2012
                                       Volume             Rate             Total             Volume             Rate             Total
Change in interest earned on:
Loans                               $      8,783      $     (6,168 )    $     2,615       $     15,749      $    (12,469 )    $     3,280
Securities:
Taxable                                    1,385            (3,722 )         (2,337 )            3,343            (7,345 )         (4,002 )
Tax-exempt                                 1,703            (1,053 )            650              3,056            (2,022 )          1,034
Federal funds sold and resell
agreements                                     5                10               15                  4                19               23
Interest-bearing due from banks               -                (32 )            (32 )              (53 )            (144 )           (197 )
Trading                                       75              (124 )            (49 )               61              (168 )           (107 )

Interest income                           11,951           (11,089 )            862             22,160           (22,129 )             31
Change in interest incurred on:
Interest-bearing deposits                    362            (1,405 )         (1,043 )              735            (2,974 )         (2,239 )
Federal funds purchased and
repurchase agreements                        106              (123 )            (17 )              148               (38 )            110
Borrowed funds                              (142 )             110              (32 )             (271 )              83             (188 )

Interest expense                             326            (1,418 )         (1,092 )              612            (2,929 )         (2,317 )

Net interest income                 $     11,625      $     (9,671 )    $     1,954       $     21,548      $    (19,200 )    $     2,348

                                                     ANALYSIS OF NET INTEREST MARGIN

                                              Three Months Ended June 30,                            Six Months Ended June 30,
                                        2013              2012            Change              2013              2012            Change
Average earning assets              $ 13,777,533      $ 12,170,504      $ 1,607,029       $ 13,754,429      $ 12,222,507      $ 1,531,922
Average interest-bearing
liabilities                            8,796,109         7,659,818        1,136,291          8,746,791         7,783,162          963,629

Average interest free funds         $  4,981,424      $  4,510,686      $   470,738       $  5,007,638      $  4,439,345      $   568,293

Free funds ratio (free funds to
earning assets)                            36.15 %           37.06 %          (0.91 )%           36.41 %           36.32 %           0.09 %
Tax-equivalent yield on earning
assets                                      2.67              2.99            (0.32 )%            2.65 %            2.96 %          (0.31 )%
Cost of interest-bearing
liabilities                                 0.18              0.26            (0.08 )             0.19              0.27            (0.08 )

Net interest spread                         2.49 %            2.73 %          (0.24 )%            2.46 %            2.69 %          (0.23 )%
Benefit of interest-free funds              0.07              0.10            (0.03 )             0.07              0.10            (0.03 )

Net interest margin                         2.56 %            2.83 %          (0.27 )%            2.53 %            2.79 %          (0.26 )%


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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 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 $5.0 million and $7.0 million related to the provision for loan losses for the three and six-month periods ended June 30, 2013, compared to $4.5 million and $9.0 million for the same periods in 2012. As illustrated in Table 3 below, the ALL decreased to 1.13 percent of total loans as of June 30, 2013, compared to 1.37 percent of total loans as of the same period in 2012.

Table 3 presents a summary of the Company's ALL for the six months ended June 30, 2013 and 2012 and for the year ended December 31, 2012. Net charge-offs were $6.8 million for the first six months of 2013, compared to $8.4 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)



                                                          Six Months Ended                Year Ended
                                                              June 30,                   December 31,
                                                       2013              2012                2012
Allowance-January 1                                 $    71,426       $    72,017       $       72,017
Provision for loan losses                                 7,000             9,000               17,500

Charge-offs:
Commercial                                               (2,423 )          (3,237 )             (8,446 )
Consumer:
Credit card                                              (5,372 )          (5,787 )            (11,148 )
Other                                                      (767 )            (801 )             (1,530 )
Real estate                                                (371 )            (408 )               (932 )

Total charge-offs                                        (8,933 )         (10,233 )            (22,056 )

Recoveries:
Commercial                                                  515               250                1,136
Consumer:
Credit card                                               1,115             1,045                1,766
Other                                                       508               564                1,035
Real estate                                                  16                 9                   28

Total recoveries                                          2,154             1,868                3,965

Net charge-offs                                          (6,779 )          (8,365 )            (18,091 )

Allowance-end of period                             $    71,647       $    72,652       $       71,426

Average loans, net of unearned interest             $ 5,982,266       $ 5,127,382       $    5,243,264
. . .
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