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UMBF > SEC Filings for UMBF > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for UMB FINANCIAL CORP

Form 10-Q for UMB FINANCIAL CORP


31-Jul-2014

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, 2014. It should be read in conjunction with the accompanying consolidated financial statements, notes to 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 Notes to Consolidated Financial Statements (Item 1) in this Form 10-Q and Management's Discussion and Analysis (Item 2), or the 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.


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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, 2014, the Company's nonperforming assets as a percentage of total assets was 0.18 percent. As a percentage of loans, nonperforming loans decreased to 0.39 percent compared to 0.40 percent on June 30, 2013. These credit quality ratios were achieved while maintaining positive directional growth in average earning assets, which increased 8.9 percent from June 30, 2013, driven by an 11.4 percent increase in average noninterest-bearing demand deposits compared to June 30, 2013.

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 $9.9 million, or 15.6 percent, for the three months ended June 30, 2014 compared to the same period in 2013. The increase in trust and securities processing income was primarily due to a $3.7 million, or 18.9 percent, increase in fees related to institutional and personal investment management services, a $3.1 million, or 16.3 percent, increase in fund administration and custody services, and a $2.2 million, or 10.0 percent increase, in advisory fee income from the Scout Funds. 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, 2014 average loans increased $739.0 million, or 12.0 percent, 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 2014, noninterest income increased $20.4 million, or 18.0 percent, compared to the same period of 2013. 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 2014, this favorable change is primarily attributable to increased trust and securities processing income and increased equity earnings on alternative investments. At June 30, 2014, noninterest income represented 60.9 percent of total revenues, compared to 58.0 percent at June 30, 2013.

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, 2014, the Company had $1.6 billion in total shareholders' equity. This is an increase of $374.9 million, or 30.6 percent, compared to total shareholders' equity at June 30, 2013. In 2013, the Company completed the issuance of 4.5 million shares of common stock with net proceeds of $231.4 million to be used for strategic growth purposes. At June 30, 2014, the Company had a total risk-based capital ratio of 14.62 percent, which is higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 5,153 shares at an average price of $57.73 per share during the second quarter of 2014.

Earnings Summary

The Company recorded consolidated net income of $34.7 million for the three-month period ended June 30, 2014, compared to $29.9 million for the same period a year earlier. This represents a 15.9 percent increase over the three-month period ended June 30, 2013. Basic earnings per share for the second quarter of 2014 were $0.77 per share ($0.76 per share fully-diluted) compared to $0.75 per share ($0.74 per share fully-diluted) for the second quarter of 2013. Return on average assets and return on average common shareholders' equity for the three-month period ended June 30, 2014 were 0.89 and 8.77 percent, respectively, compared to 0.81 and 9.31 percent for the three-month period ended June 30, 2013.


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The Company recorded consolidated net income of $58.1 million for the six-month period ended June 30, 2014, compared to $64.9 million for the same period a year earlier. This represents a 10.5 percent decrease over the six-month period ended June 30, 2013. Basic earnings per share for the six-month period ended June 30, 2014 were $1.30 per share ($1.28 per share fully-diluted) compared to $1.62 per share ($1.61 per share fully-diluted) for the period in 2013. Return on average assets and return on average common shareholders' equity for the six-month period ended June 30, 2014 were 0.73 and 7.48 percent, respectively, compared to 0.88 and 10.17 percent for the same period in 2013.

Net interest income for the three and six-month periods ended June 30, 2014 increased $3.8 million, or 4.7 percent, and $9.8 million, or 6.1 percent, respectively, compared to the same period in 2013. For the three-month period ended June 30, 2014, average earning assets increased by $749.3 million, or 5.4 percent, and for the six-month period ended June 30, 2014, they increased by $1.2 billion, or 8.9 percent, compared to the same periods in 2013. Net interest margin, on a tax-equivalent basis, decreased to 2.53 percent and 2.45 percent for the three and six-months periods ended June 30, 2014, compared to 2.56 percent and 2.53 percent for the same periods in 2013. These changes are discussed in greater detail below under Net Interest Income.

The provision for loan losses was flat for the three-month period ended June 30, 2014, and increased by $2.5 million for the six-month periods ended June 30, 2014, compared to the same periods in 2013. 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 two basis points to 1.11 percent as of June 30, 2014, compared to June 30, 2013. 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 2013 Annual Report on Form 10-K.

Noninterest income increased by $20.4 million, or 18.0 percent, for the three-month period ended June 30, 2014 and increased by $22.4 million, or 9.5 percent, for the six-month period ended June 30, 2014, compared to the same periods one year ago. These changes are discussed in greater detail below under Noninterest Income.

Noninterest expense increased by $16.2 million, or 10.8 percent, for the three-month period ended June 30, 2014, and increased by $38.1 million, or 12.7 percent, for the six-month period ended June 30, 2014, compared to the same periods in 2013. 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, 2014, average earning assets increased by $749.3 million, or 5.4 percent, and for the six-month period ended June 30, 2014, they increased by $1.2 billion, or 8.9 percent, compared to the same periods in 2013. Net interest margin, on a tax-equivalent basis, decreased to 2.53 percent and 2.45 percent for the three and six-months periods ended June 30, 2014, compared to 2.56 percent and 2.53 percent for the same periods in 2013.

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 and margin for the three months ended June 30, 2014 decreased by three basis points compared to the same period in 2013. Net interest spread for the six months ended June 30, 2014 decreased by seven basis points and net interest margin decreased by eight basis points compared to the same period in 2013. These results are primarily due to an unfavorable rate variance, offset by a favorable volume variance on loans. The combined impact of these variances has led to an increase in interest income and a slight decrease in interest expense, or an increase in the Company's net interest income as compared 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 2.48 percent for the three-month period ended June 30, 2014 and 2.51 percent for the same period in 2013. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.41 percent for the six-month period ended June 30, 2014 and 2.49 percent for the same period in 2013.

                                                               Three Months Ended June 30,
                                                         2014                               2013
                                               Average           Average          Average           Average
                                               Balance         Yield/Rate         Balance         Yield/Rate
Assets
Loans, net of unearned interest              $  6,897,840             3.51 %    $  6,158,821             3.69 %
Securities:
Taxable                                         4,836,080             1.58         4,978,109             1.52
Tax-exempt                                      2,104,368             2.88         2,113,009             2.97

Total securities                                6,940,448             1.97         7,091,118             1.95
Federal funds and resell agreements                32,692             0.56            28,524             0.56
Interest-bearing due from banks                   619,094             0.30           432,588             0.31
Trading                                            36,785             1.80            66,482             1.79

Total earning assets                           14,526,859             2.63        13,777,533             2.67
Allowance for loan losses                         (75,929 )                          (70,004 )
Other assets                                    1,167,262                          1,167,899

Total assets                                 $ 15,618,192                       $ 14,875,428


Liabilities and Shareholders' Equity
Interest-bearing deposits                    $  7,126,614             0.17 %    $  6,943,399             0.19 %
Federal funds and repurchase agreements         1,592,986             0.11         1,848,118             0.11
Borrowed funds                                      5,771             5.07             4,592             5.33

Total interest-bearing liabilities              8,725,371             0.17         8,796,109             0.18
Noninterest-bearing demand deposits             5,152,980                          4,636,240
Other liabilities                                 154,229                            153,227
Shareholders' equity                            1,585,612                          1,289,852

Total liabilities and shareholders' equity   $ 15,618,192                       $ 14,875,428

Net interest spread                                                   2.46 %                             2.49 %
Net interest margin                                                   2.53                               2.56


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                                                                Six Months Ended June 30,
                                                         2014                               2013
                                               Average           Average          Average           Average
                                               Balance         Yield/Rate         Balance         Yield/Rate
Assets
Loans, net of unearned interest              $  6,788,991             3.54 %    $  5,987,788             3.75 %
Securities:
Taxable                                         4,861,475             1.58         4,925,312             1.53
Tax-exempt                                      2,107,119             2.90         2,054,141             3.02

Total securities                                6,968,594             1.98         6,979,453             1.97
Federal funds and resell agreements                29,939             0.53            23,858             0.54
Interest-bearing due from banks                 1,154,811             0.28           701,282             0.29
Trading                                            37,682             1.63            62,048             1.92

Total earning assets                           14,980,017             2.55        13,754,429             2.65
Allowance for loan losses                         (75,466 )                          (70,750 )
Other assets                                    1,160,124                          1,145,799

Total assets                                 $ 16,064,675                       $ 14,829,478


Liabilities and Shareholders' Equity
Interest-bearing deposits                    $  7,545,182             0.16 %    $  6,980,728             0.21 %
Federal funds and repurchase agreements         1,630,169             0.12         1,761,074             0.12
Borrowed funds                                      5,738             4.74             4,989             4.89

Total interest-bearing liabilities              9,181,089             0.16         8,746,791             0.19
Noninterest-bearing demand deposits             5,160,206                          4,631,425
Other liabilities                                 156,608                            165,117
Shareholders' equity                            1,566,772                          1,286,145

Total liabilities and shareholders' equity   $ 16,064,675                       $ 14,829,478

Net interest spread                                                   2.39 %                             2.46 %
Net interest margin                                                   2.45                               2.53

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 $820.1 million for the three-month and $791.3 million for the six-month periods ended June 30, 2014 compared to the same periods in 2013, the benefit from interest free funds was flat in the three-month period and declined one basis point in the six-month period, 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, 2014 vs 2013                    June 30, 2014 vs 2013
                                          Volume         Rate         Total        Volume         Rate         Total
Change in interest earned on:
Loans                                     $ 6,462      $ (2,768 )    $ 3,694      $ 14,088      $ (6,214 )    $  7,874
Securities:
Taxable                                      (559 )         739          180          (499 )       1,176           677
Tax-exempt                                    (35 )        (285 )       (320 )         852        (1,024 )        (172 )
Federal funds sold and resell
agreements                                      6            -             6            16            (1 )          15
Interest-bearing due from banks               140            (6 )        134           624           (35 )         589
Trading                                      (121 )           2         (119 )        (137 )        (124 )        (261 )

Interest income                             5,893        (2,318 )      3,575        14,944        (6,222 )       8,722
Change in interest incurred on:
Interest-bearing deposits                      79          (320 )       (241 )         460        (1,434 )        (974 )
Federal funds purchased and repurchase
agreements                                    (73 )          36          (37 )         (75 )         (48 )        (123 )
Borrowed funds                                 15            (3 )         12            18            (4 )          14

Interest expense                               21          (287 )       (266 )         403        (1,486 )      (1,083 )


Net interest income                       $ 5,872      $ (2,031 )    $ 3,841      $ 14,541      $ (4,736 )    $  9,805

                        ANALYSIS OF NET INTEREST MARGIN



                                                       Three Months Ended                                    Six Months Ended
                                                            June 30,                                             June 30,
                                              2014              2013           Change             2014              2013            Change

Average earning assets                    $ 14,526,859      $ 13,777,533      $ 749,326       $ 14,980,017      $ 13,754,429      $ 1,225,588

Average interest-bearing liabilities         8,725,371         8,796,109        (70,738 )        9,181,089         8,746,791          434,298

Average interest free funds               $  5,801,488      $  4,981,424      $ 820,064       $  5,798,928      $  5,007,638      $   791,290


Free funds ratio (free funds to earning
assets)                                          39.94 %           36.16 %         3.78 %            38.71 %           36.41 %           2.30 %

Tax-equivalent yield on earning assets            2.63 %            2.67 %        (0.04 )%            2.55 %            2.65 %          (0.10 )%
Cost of interest-bearing liabilities              0.17              0.18          (0.01 )             0.16              0.19            (0.03 )

Net interest spread                               2.46 %            2.49 %        (0.03 )%            2.39 %            2.46 %          (0.07 )%
Benefit of interest-free funds                    0.07              0.07           0.00               0.06              0.07            (0.01 )

Net interest margin                               2.53 %            2.56 %        (0.03 )%            2.45 %            2.53 %          (0.08 )%


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Provision and Allowance for Loan Losses

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