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UMBF > SEC Filings for UMBF > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for UMB FINANCIAL CORP

Form 10-Q for UMB FINANCIAL CORP


31-Oct-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 nine-month periods ended September 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.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

From time to time the Company has made, and in the future will make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "believe," "expect," "anticipate," "intend," "estimate," "project," "outlook," "forecast," "target," "trend," "plan," "goal," or other words of comparable meaning or future-tense or conditional verbs such as "may," "will," "should," "would," or "could." Forward-looking statements convey the Company's expectations, intentions, or forecasts about future events, circumstances, results, or aspirations.

This report, including any information incorporated by reference in this report, contains forward-looking statements. The Company also may make forward-looking statements in other documents that are filed or furnished with the SEC. In addition, the Company may make forward-looking statements orally to investors, analysts, members of the media, or others.

All forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond its control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. The actual future objectives, strategies, plans, prospects, performance, condition, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events, circumstances, or aspirations to differ from those in forward-looking statements include:

local, regional, national, or international business, economic, or political conditions or events;

changes in laws or the regulatory environment, including as a result of recent financial-services legislation or regulation;

changes in monetary, fiscal, or trade laws or policies, including as a result of actions by central banks or supranational authorities;

changes in accounting standards or policies;

shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including changes in market liquidity or volatility or changes in interest or currency rates;

changes in spending, borrowing, or saving by businesses or households;

the Company's ability to effectively manage capital or liquidity or to effectively attract or deploy deposits;

changes in any credit rating assigned to the Company or its affiliates;

adverse publicity or other reputational harm;

changes in the Companys corporate strategies, the composition of its assets, or the way in which it funds those assets;


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the Company's ability to innovate, develop, maintain, or market products or services or to absorb unanticipated costs or liabilities associated with those products or services;

the Company's ability to anticipate the needs of current or future customers, to successfully compete in its chosen business lines, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures;

changes in the credit, liquidity, or other condition of its customers, counterparties, or competitors;

the Company's ability to effectively deal with economic, business, or market slowdowns or disruptions;

judicial, regulatory, or administrative investigations, proceedings, disputes, or rulings that create uncertainty for or are adverse to the Company or its industry;

the Company's ability to address stricter or heightened regulatory or other governmental supervision or requirements;

the Company's ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or facilities, including its capacity to withstand cyber-attacks;

the adequacy of the Company's corporate governance, risk-management framework, compliance programs, or internal controls, including its ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk;

the efficacy of its methods or models in assessing business strategies or opportunities or in valuing, measuring, monitoring, or managing positions or risk;

the Company's ability to keep pace with changes in technology that affect the Company or its customers, counterparties, or competitors;

mergers or acquisitions, including its ability to integrate acquisitions;

the Company's ability to grow revenue, to control expenses, or to attract or retain qualified employees;

natural or man-made disasters, calamities, or conflicts, including terrorist events; or

other assumptions, risks, or uncertainties described in the management discussions and analyses or the risk factors in any of the Company's annual, quarterly, or current reports.

Any forward-looking statement made by the Company or on its behalf speaks only as of the date that it was made. The Company does not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that the Company may make in any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K.

Overview

The Company focuses on the following four core strategies. Management believes these strategies will guide its efforts to achieving its vision, to deliver the Unparalleled Customer Experience, all the 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 September 30, 2013, the Company's nonperforming assets as a percentage of total assets was 0.20 percent. As a percentage of loans, nonperforming loans decreased to 0.48 percent compared to 0.51 percent on September 30, 2012. These credit quality ratios were achieved while maintaining positive directional growth in average earning assets, which increased 14.1 percent from September 30, 2012, driven by a 13.5 percent increase in average total deposits compared to September 30, 2012.


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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 $12.2 million, or 21.6 percent, for the three months ended September 30, 2013 compared to the same period in 2012. The increase in trust and securities processing income was primarily due to a $6.3 million, or 34.1 percent increase, in advisory fee income from the Scout Funds, a $3.6 million, or 20.9 percent, increase in fees related to institutional and personal investment management services and a $2.0 million, or 11.2 percent, increase in fee income from fund administration and custody 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 September 30, 2013 average loans increased $1.1 billion, or 21.3 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 third quarter of 2013, noninterest income increased $15.3 million, or 14.4 percent, compared to the same period of 2012. The Company continues to emphasize its asset management, bankcard services, health care services, and treasury management businesses. In particular, during the third quarter of 2013, this favorable change in noninterest income is primarily attributable to increased trust and securities processing income. At September 30, 2013, noninterest income represented 58.7 percent of total revenues, compared to 57.0 percent at September 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 September 30, 2013, the Company had $1.5 billion in total shareholders' equity. This is an increase of $169.5 million, or 13.1 percent, compared to total shareholders' equity at September 30, 2012. On September 16, 2013, the Company completed the issuance of 3.9 million shares of common stock with net proceeds of $201.2 million to be used for strategic growth purposes. At September 30, 2013, the Company had a total risk-based capital ratio of 13.74 percent, which is greater than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 13,409 shares at an average price of $59.75 per share during the third quarter of 2013.

Earnings Summary

The Company recorded consolidated net income of $34.4 million for the three-month period ended September 30, 2013, compared to $26.1 million for the same period a year earlier. This represents a 31.8 percent increase over the three-month period ended September 30, 2012. Basic earnings per share for the third quarter of 2013 were $0.85 per share ($0.83 per share fully-diluted) compared to $0.65 per share ($0.64 per share fully-diluted) for the third quarter of 2012. Return on average assets and return on average common shareholders' equity for the three-month period ended September 30, 2013 were 0.92 and 10.84 percent, respectively, compared to 0.79 and 8.12 percent for the three-month period ended September 30, 2012.

The Company recorded consolidated net income of $99.3 million for the nine-month period ended September 30, 2013, compared to $101.7 million for the same period a year earlier. This represents a 2.3 percent decrease over the nine-month period ended September 30, 2012. Basic earnings per share for the nine-month period ended September 30, 2013 were $2.47 per share ($2.44 per share fully-diluted) compared to $2.54 per share ($2.51 per share fully-diluted) for the period in 2012. Return on average assets and return on average common shareholders' equity for the nine-month period ended September 30, 2013 were 0.89 and 10.39 percent, respectively, compared to 1.03 and 10.90 percent for the same period in 2012.


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Net interest income for the three and nine-month periods ended September 30, 2013 increased $5.2 million, or 6.4 percent, and $7.5 million, or 3.1 percent, respectively, compared to the same period in 2012. These increases are primarily due to the reduced level of interest expense on deposits, coupled with an increased level of interest income. For the three-month period ended September 30, 2013, average earning assets increased by $1.7 billion, or 14.1 percent, and for the nine-month period ended September 30, 2013, they increased by $1.6 billion, or 13.0 percent, compared to the same periods in 2012. Net interest margin, on a tax-equivalent basis, decreased to 2.61 percent and 2.56 percent for the three and nine-months periods ended September 30, 2013, compared to 2.80 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 $2.0 million for three-month period and remained flat for the nine-month period ended September 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 17 basis points to 1.15 percent as of September 30, 2013, compared to September 30, 2012 and decreased 11 basis points compared to December 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 in the Company's 2012 Annual Report on Form 10-K.

Noninterest income increased by $15.3 million, or 14.4 percent, for the three-month period ended September 30, 2013 and increased by $7.4 million, or 2.1 percent, for the nine-month period ended September 30, 2013, compared to the same periods one year ago. These increases are discussed in greater detail below under Noninterest Income.

Noninterest expense increased by $7.2 million, or 4.9 percent, for the three-month period ended September 30, 2013, and increased by $21.3 million, or 4.9 percent, for the nine-month period ended September 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 September 30, 2013, net interest income increased $5.2 million, or 6.4 percent, compared to the same period in 2012. For the nine-month period ended September 30, 2013, net interest income increased $7.5 million, or 3.1 percent, 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 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, 2013 decreased by 15 basis points and net interest margin decreased by 19 basis points compared to the same period in 2012. Net interest spread for the nine months ended September 30, 2013 decreased by 20 basis points and net interest margin decreased by 23 basis points compared to the same period in 2012. These results are primarily due to a favorable volume variance, offset by an unfavorable rate 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 increases in interest income, or an increase in the Company's net interest income 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 2.55 percent for the three-month period ended September 30, 2013 and 2.78 percent for the same period in 2012. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.51 percent for the nine-month period ended September 30, 2013 and 2.79 percent for the same period in 2012.

                                                         Three Months Ended September 30,
                                                     2013                                 2012
                                          Average            Average           Average            Average
                                          Balance          Yield/Rate          Balance          Yield/Rate
Assets
Loans, net of unearned interest         $  6,418,368              3.65 %     $  5,292,970              4.10 %
Securities:
Taxable                                    4,835,235              1.56          4,617,059              1.75
Tax-exempt                                 2,150,108              2.95          1,903,490              3.05

Total securities                           6,985,343              1.99          6,520,549              2.13
Federal funds and resell agreements           46,593              0.53             38,498              0.50
Interest-bearing due from banks              342,307              0.32            248,290              0.36
Trading                                       63,302              1.85             47,269              1.86

Total earning assets                      13,855,913              2.71         12,147,576              2.94
Allowance for loan losses                    (72,792 )                            (72,909 )
Other assets                               1,140,648                            1,097,489

Total assets                            $ 14,923,769                         $ 13,172,156

Liabilities and Shareholders' Equity
Interest-bearing deposits               $  7,117,927              0.17 %     $  6,183,598              0.26 %
Federal funds and repurchase
agreements                                 1,764,082              0.09          1,315,729              0.14
Borrowed funds                                 4,688              5.84              7,962              4.05

Total interest-bearing liabilities         8,886,697              0.16          7,507,289              0.24
Noninterest-bearing demand deposits        4,669,742                            4,199,085
Other liabilities                            107,000                              186,612
Shareholders' equity                       1,260,330                            1,279,170

Total liabilities and shareholders'
equity                                  $ 14,923,769                         $ 13,172,156

Net interest spread                                               2.55 %                               2.70 %
Net interest margin                                               2.61                                 2.80


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                                                          Nine Months Ended September 30,
                                                     2013                                 2012
                                          Average            Average           Average            Average
                                          Balance          Yield/Rate          Balance          Yield/Rate
Assets
Loans, net of unearned interest         $  6,132,892              3.72 %     $  5,187,756              4.19 %
Securities:
Taxable                                    4,894,956              1.54          4,525,462              1.82
Tax-exempt                                 2,086,482              2.99          1,833,229              3.15

Total securities                           6,981,438              1.97          6,358,691              2.20
Federal funds and resell agreements           31,519              0.53             27,686              0.42
Interest-bearing due from banks              580,309              0.29            573,474              0.33
Trading                                       62,470              1.89             49,741              2.44

Total earning assets                      13,788,628              2.67         12,197,348              2.95
Allowance for loan losses                    (71,438 )                            (73,246 )
Other assets                               1,144,064                            1,099,748

Total assets                            $ 14,861,254                         $ 13,223,850

Liabilities and Shareholders' Equity
Interest-bearing deposits               $  7,026,963              0.19 %     $  6,231,448              0.29 %
Federal funds and repurchase
agreements                                 1,762,087              0.11          1,445,701              0.13
Borrowed funds                                 4,888              5.20             13,384              3.89

Total interest-bearing liabilities         8,793,938              0.18          7,690,533              0.26
Noninterest-bearing demand deposits        4,644,338                            4,103,786
Other liabilities                            145,533                              183,447
Shareholders' equity                       1,277,445                            1,246,084

Total liabilities and shareholders'
equity                                  $ 14,861,254                         $ 13,223,850

Net interest spread                                               2.49 %                               2.69 %
Net interest margin                                               2.56                                 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 average interest-free funds (total earning assets less interest-bearing liabilities) increased $328.9 million for the three-month period ended September 30, 2013 compared to the same period in 2012 and increased $487.9 million for the nine-month period ended September 30, 2013 compared to the same period in 2012, the benefit from interest free funds declined by 5 basis points from the three months ended September 30, 2012, and declined by 3 basis points from the nine months ended September 30, 2012, 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                                     Nine Months Ended
                                              September 30, 2013 vs 2012                            September 30, 2013 vs 2012
                                       Volume             Rate             Total             Volume             Rate             Total
Change in interest earned on:
Loans                               $     10,494      $     (5,927 )    $     4,567       $     26,266      $    (18,420 )    $     7,846
Securities:
Taxable                                      873            (2,201 )         (1,328 )            4,234            (9,561 )         (5,327 )
Tax-exempt                                 1,361              (625 )            736              4,425            (2,654 )          1,771
Federal funds sold and resell
agreements                                    11                 3               14                 15                23               38
Interest-bearing due from banks               76               (25 )             51                 15              (161 )           (146 )
Trading                                       78                (1 )             77                 86              (118 )            (32 )

Interest income                           12,893            (8,776 )          4,117             35,041           (30,891 )          4,150
Change in interest incurred on:
Interest-bearing deposits                    409            (1,391 )           (982 )            1,154            (4,375 )         (3,221 )
Federal funds purchased and
repurchase agreements                         98              (167 )            (69 )              258              (217 )             41
Borrowed funds                               (48 )              36              (12 )             (331 )             131             (200 )

Interest expense                             459            (1,522 )         (1,063 )            1,081            (4,461 )         (3,380 )

Net interest income                 $     12,434      $     (7,254 )    $     5,180       $     33,960      $    (26,430 )          7,530

                                                     ANALYSIS OF NET INTEREST MARGIN

                                           Three Months Ended September 30,                       Nine Months Ended September 30,
                                        2013              2012            Change              2013              2012            Change
Average earning assets              $ 13,855,913      $ 12,147,576      $ 1,708,337       $ 13,788,628      $ 12,197,348      $ 1,591,280
Average interest-bearing
liabilities                            8,886,697         7,507,289        1,379,408          8,793,938         7,690,533        1,103,405

Average interest free funds         $  4,969,216      $  4,640,287      $   328,929       $  4,994,690      $  4,506,815      $   487,875

Free funds ratio (free funds to
earning assets)                            35.86 %           38.20 %          (2.34 )%           36.22 %           36.95 %          (0.73 )%
Tax-equivalent yield on earning
assets                                      2.71              2.94            (0.23 )%            2.67 %            2.95 %          (0.28 )%
Cost of interest-bearing
liabilities                                 0.16              0.24            (0.08 )             0.18              0.26            (0.08 )

Net interest spread                         2.55 %            2.70 %          (0.15 )%            2.49 %            2.69 %          (0.20 )%
Benefit of interest-free funds              0.06              0.10            (0.04 )             0.07              0.10            (0.03 )

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