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UMBF > SEC Filings for UMBF > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for UMB FINANCIAL CORP

Form 10-K for UMB FINANCIAL CORP


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS

This review highlights the material changes in the results of operations and changes in financial condition for the year-ended December 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.

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 or in writing 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 the Company's control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, 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 to the Company;

changes in the Company's 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 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 innovate 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 the Company's 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 the financial-services 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 the Company's 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 the Company's ability to integrate acquisitions;

the adequacy of the Company's succession planning for key executives or other personnel;

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 Risk Factors (Item 1A), Management's Discussion and Analysis (Item 7), or the Notes to Consolidated Financial Statements (Item 8) in this Annual Report on Form 10-K or described in any of the Company's 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 Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.

Results of Operations

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 grow the Company's fee-based businesses. As the industry continues to experience economic uncertainty, the Company has continued to emphasize its fee-based operations. With a diverse source of revenues, this strategy has helped reduce the Company's exposure to sustained low interest rates. During 2013,


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noninterest income increased $33.7 million, or 7.4 percent, to $491.8 million for the year ended December 31, 2013, compared to the same period in 2012. Trust and securities processing income increased $40.9 million, or 18.1 percent, for year-to-date December 31, 2013 compared to the same period in 2012. Equity earnings on alternative investments increased $18.6 million for the year-ended December 31, 2013 primarily due to $17.0 million in unrealized gains on Prairie Capital Management equity method investments. These increases in noninterest income were offset by decreases in trading and investment banking income, gains on sales of available for sale securities and other noninterest income. Trading and investment banking income decreased $9.7 million, or 32.0 percent, due to a decline in trading volume. Gains of $8.5 million on securities available for sale were recognized during the year ended December 31, 2013 compared to $20.2 million during the same period in 2012. Other noninterest income decreased $11.3 million primarily due to an $8.7 million adjustment in contingent consideration liabilities on acquisitions recognized in 2012. These adjustments were due to the adoption of new accounting guidance in 2012 related to fair value measurements and changes in cash flow projections.

The second strategy is a focus on net interest income through loan and deposit growth. During 2013, continued progress on this strategy was illustrated by an increase in net interest income of $13.2 million, or 4.1 percent, from the previous year. The Company has continued to show increased net interest income in a historically low rate environment through the effects of increased volume of average earning assets and a low cost of funds in its balance sheet. Average earning assets increased by $1.6 billion, or 13.0 percent, from 2012. Average loan balances increased $970.0 million, or 18.5 percent, for year-to-date December 31, 2013 compared to the same period in 2012. Earning asset growth was primarily funded with a $955.6 million increase in average interest-bearing deposits, or 15.3 percent, and a $453.0 million increase in average noninterest-bearing deposits, or 10.6 percent, compared to 2012 respectively. Net interest margin, on a tax-equivalent basis, decreased 20 basis points, and net interest spread decreased 16 basis points compared to 2012, respectively.

The third strategy is a focus on improving operating efficiencies. At December 31, 2013, the Company had 112 branches. The Company continues to emphasize increasing its primary retail customer base by providing a broad offering of services through our existing branch network. These efforts have resulted in the total loans and deposits growth previously discussed. The Company continues to invest in technological advances that will help management drive operating efficiencies through improved data analysis and automation. During 2013, systems infrastructure enhancements have been implemented. In addition to the use of automation technology, the Company has merged the subsidiary banks into a single chartered entity. This helped enhance regulatory capital and provides a more streamlined structure for the implementation of strategic initiatives. The Company continues to evaluate core systems and will invest in enhancements that will yield operating efficiencies. The Company evaluates its cost structure for opportunities to moderate expense growth without sacrificing growth initiatives.

The fourth strategy is a focus on capital management. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company's ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, evaluating acquisition opportunities that complement the strategies, increasing dividends over time, and properly utilizing a share buy-back strategy. At December 31, 2013, the Company had $1.5 billion in total shareholders' equity. This is an increase of $226.7 million, or 17.7 percent, compared to total shareholders' equity at December 31, 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. In addition, UMB granted the underwriters a 30-day option to purchase up to an additional 585 thousand shares of common stock. On October 17, 2013, the underwriters exercised the option of 585 thousand shares, which generated additional net proceeds of $30.2 million. At December 31, 2013, the Company had a total risk-based capital ratio of 14.43 percent. The Company repurchased 66,462 shares at an average price of $52.67 per share during 2013. Further, the Company paid $36.4 million in dividends during 2013, which represents an 8.1 percent increase compared to 2012.


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Earnings Summary

The Company recorded consolidated net income of $134.0 million for the year-ended December 31, 2013. This represents a 9.2 percent increase over 2012. Net income for 2012 was $122.7 million, or an increase of 15.3 percent compared to 2011. Basic earnings per share for the year-ended December 31, 2013, were $3.25 per share compared to $3.07 per share in 2012 and $2.66 per share in 2011. Basic earnings per share for 2013 increased 5.9 percent over 2012, which increased 15.4 percent over 2011. Fully diluted earnings per share for the year-ended December 31, 2013, were $3.20 per share compared to $3.04 per share in 2012 and $2.64 per share in 2011. The Company's net interest income increased to $333.3 million in 2013 compared to $320.1 million in 2012 and $317.0 million in 2011. In total, a favorable volume variance outpaced the impact from an unfavorable rate variance, resulting in a $13.2 million increase in net interest income in 2013, compared to 2012. The impact from an unfavorable rate variance and favorable volume variance on earning assets was slightly offset by the reduced cost of funding on the volume growth of interest-bearing deposits, resulting in the net favorable volume variance described. See Table 2 on page
27. The favorable volume variance on earning assets was predominately driven by the increase in average loan balances of $970.0 million, or 18.5 percent, for 2013 compared to the same period in 2012. This was largely impacted by an unfavorable rate variance in the same categories. Additionally, a 10 basis points reduction in rate on a volume increase of $955.6 million on average interest-bearing deposits helped drive the resulting increase in net interest income. While decreasing due to the current low rate environment, the Company continues to see benefit from interest-free funds. The impact of this benefit is illustrated on Table 3 on page 28. The $3.1 million increase in net interest income in 2012, compared to 2011, is primarily a result of a favorable volume variance. The favorable volume variance on earning assets was predominately driven by the increase in average loan balances of $495.1 million, or 10.4 percent, for 2012 compared to the same period in 2011. This was more than offset by an unfavorable rate variance in the same categories. However, a 12 basis points reduction in rate on a volume increase of $86.2 million on interest-bearing deposits drove the resulting increase in net interest income. The current economic environment has made it difficult to anticipate the future of the Company's margins. The magnitude and duration of this impact will be largely dependent upon the Federal Reserve's policy decisions and market movements. See Table 20 on page 50 for an illustration of the impact of a rate increase or decrease on net interest income as of December 31, 2013.

The Company had an increase of $33.7 million, or 7.4 percent, in noninterest income in 2013, compared to 2012, and a $43.8 million, or 10.6 percent, increase in 2012, compared to 2011. The increase in 2013 is primarily attributable to higher trust and securities processing income and equity earnings in alternative investments, partially offset by decreases in trading and investment banking, gains on the sales of securities available for sale, and other noninterest income. Trust and securities processing income increased $40.9 million, or 18.2 percent, for the year-ended December 31, 2013, compared to the same period in 2012. Equity earnings on alternative investments increased $18.6 million for the year-ended December 31, 2013, primarily due to $17.0 million in unrealized gains on Prairie Capital Management equity method investments. Trading and investment banking income decreased $9.7 million, or 32.0 percent, due to a general decline in trading volume. Gains of $8.5 million on securities available for sale were recognized during the year ended December 31, 2013 compared to $20.2 million during the same period in 2012. Other noninterest income decreased $11.3 million primarily due to an $8.7 million adjustment in contingent consideration liabilities on acquisitions recognized in 2012. These adjustments were due to the adoption of new accounting guidance related to fair value measurements and additional changes in cash flow projections. The change in noninterest income in 2013 from 2012, and 2012 from 2011 is illustrated on Table 6 on page 31.

Noninterest expense increased in 2013 by $33.7 million, or 5.7 percent, compared to 2012 and increased in 2012 by $27.7 million, or 4.9 percent, compared to 2011. This increase is primarily driven by an increase of $19.8 million, or 6.2 percent, in salary and employee benefit expense, a $6.6 million, or 12.9 percent, increase in processing fees primarily driven by fees paid by the advisor to third-party distributors of the Scout Funds, and a $5.7 million, or 13.2 percent increase in equipment expense driven by increased computer hardware and software expense. Other noninterest expense increased $3.7 million, or 11.4 percent, due to a $5.2 million increase in contingent consideration liabilities on acquisitions, offset by a $4.0 million decrease in derivatives expense. The increase in noninterest expense in 2013 from 2012, and 2012 from 2011 is illustrated on Table 7 on page 32.


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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. Table 2 summarizes the change in net interest income resulting from changes in volume and rates for 2013, 2012 and 2011.

Net interest margin is calculated as net interest income on a fully tax equivalent basis (FTE) as a percentage of average earning assets. Net interest income is presented on a tax-equivalent basis to adjust for the tax-exempt status of earnings from certain loans and investments, which are primarily obligations of state and local governments. A critical component of net interest income and related net interest margin is the percentage of earning assets funded by interest-free sources. Table 3 analyzes net interest margin for the three years ended December 31, 2013, 2012 and 2011. Net interest income, average balance sheet amounts and the corresponding yields earned and rates paid for the years 2011 through 2013 are presented in Table 1 below.

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.


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Table 1

THREE YEAR AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis)
(in millions)



                                                            2013                                              2012
                                                          Interest           Rate                           Interest           Rate
                                         Average           Income/         Earned/         Average           Income/         Earned/
                                         Balance         Expense (1)       Paid (1)        Balance         Expense (1)       Paid (1)
ASSETS
Loans, net of unearned interest (FTE)
(2) (3) (4)                             $  6,221.3      $       229.7           3.69 %    $  5,251.3      $       217.6           4.14 %
Securities:
Taxable                                    4,876.3               75.2           1.54         4,612.5               81.0           1.76
Tax-exempt (FTE)                           2,102.2               62.5           2.97         1,862.8               57.9           3.11

Total securities                           6,978.5              137.7           1.97         6,475.3              138.9           2.14
Federal funds sold and resell
agreements                                    36.6                0.2           0.53            26.5                0.1           0.46
Interest-bearing                             663.9                1.9           0.29           547.8                1.8           0.33
Other earning assets (FTE)                    56.0                1.1           1.90            53.2                1.2           2.34

Total earning assets (FTE)                13,956.3              370.6           2.66        12,354.1              359.6           2.91
Allowance for loan losses                    (72.4 )                                           (73.0 )
Cash and due from banks                      439.5                                             402.1
Other assets                                 707.4                                             706.0

Total assets                            $ 15,030.8                                        $ 13,389.2

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand and savings
deposits                                $  6,073.5      $         5.3           0.09 %    $  5,021.5      $         6.5           0.13 %
Time deposits under $100,000                 527.3                3.5           0.66           577.6                4.9           0.85
Time deposits of $100,000 or more            619.9                4.4           0.71           665.9                6.0           0.90

Total interest bearing deposits            7,220.7               13.2           0.18         6,265.0               17.4           0.28
Short-term debt                                0.2                 -              -              5.6                0.1           1.75
Long-term debt                                 4.7                0.2           4.26             5.9                0.3           5.08
Federal funds purchased and
repurchase agreements                      1,613.6                1.7           0.11         1,410.5                1.9           0.13

Total interest bearing liabilities         8,839.2               15.1           0.17         7,687.0               19.7           0.26
Noninterest bearing demand deposits        4,709.6                                           4,256.6
Other                                        144.9                                             187.3

Total                                     13,693.7                                          12,130.9

Total shareholders' equity                 1,337.1                                           1,258.3

Total liabilities and shareholders'
equity                                  $ 15,030.8                                        $ 13,389.2

Net interest income (FTE)                               $       355.5                                     $       339.9
Net interest spread                                                             2.49 %                                            2.65 %
Net interest margin                                                             2.55 %                                            2.75 %

(1) Interest income and yields are stated on a fully tax-equivalent (FTE) basis, using a rate of 35%. The tax-equivalent interest income and yields give effect to disallowance of interest expense, for federal income tax purposes related to certain tax-free assets. Rates earned/paid may not compute to the rates shown due to presentation in millions. The tax-equivalent interest income totaled $22.2 million, $19.9 million, and $18.6 million in 2013, 2012, and 2011, respectively.

(2) Loan fees are included in interest income. Such fees totaled $10.9 million, $11.0 million, and $11.6 million in 2013, 2012, and 2011, respectively.

(3) Loans on non-accrual are included in the computation of average balances. Interest income on these loans is also included in loan income.

(4) Amount includes loans held for sale.


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THREE YEAR AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis)
(in millions)



                                                                          2011
                                                                        Interest            Rate
                                                      Average            Income/          Earned/
                                                      Balance          Expense (1)        Paid (1)
ASSETS
Loans, net of unearned interest (FTE) (2) (3)        $  4,756.2       $       219.4            4.61 %
Securities:
Taxable                                                 4,224.5                85.1            2.01
Tax-exempt (FTE)                                        1,497.8                53.0            3.54

Total securities                                        5,722.3               138.1            2.41
Federal funds sold and resell agreements                   31.3                 0.1            0.32
Interest-bearing                                          837.8                 3.3            0.39
Other earning assets (FTE)                                 51.9                 1.4            2.64

Total earning assets (FTE)                             11,399.5               362.3            3.18
Allowance for loan losses                                 (73.0 )
Cash and due from banks                                   396.9
Other assets                                              693.9

Total assets                                         $ 12,417.3

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand and savings deposits         $  4,731.3       $         8.0            0.17 %
Time deposits under $100,000                              662.0                 7.8            1.18
Time deposits of $100,000 or more                         785.5                 8.8            1.12

Total interest bearing deposits                         6,178.8                24.6            0.40
Short-term debt                                            25.3                 0.2            0.79
Long-term debt                                             11.3                 0.2            1.77
Federal funds purchased and repurchase agreements       1,471.0                 1.7            0.12

Total interest bearing liabilities                      7,686.4                26.7            0.35
Noninterest bearing demand deposits                     3,414.8
Other                                                     177.4

Total                                                  11,278.6

Total shareholders' equity                              1,138.7

Total liabilities and shareholders' equity           $ 12,417.3

Net interest income (FTE)                                             $       335.6
Net interest spread                                                                            2.83 %
Net interest margin                                                                            2.94 %


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Table 2

RATE-VOLUME ANALYSIS (in thousands)

This analysis attributes changes in net interest income either to changes in average balances or to changes in average rates for earning assets and . . .

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