10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 0-4887

 


 

UMB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Missouri   43-0903811

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. – Employer

Identification Number)

 

1010 Grand Boulevard

Kansas City, Missouri 64106

(Address of principal executive offices and Zip Code)

 

(816) 860-7000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

As of October 31, 2005 UMB Financial Corporation had 21,553,365 shares of common stock outstanding.

 



UMB FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I – FINANCIAL INFORMATION

   3

ITEM 1. FINANCIAL STATEMENTS

   3

CONDENSED CONSOLIDATED BALANCE SHEETS

   3

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

   4

CONDENSED STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY

   5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   31

ITEM 4. CONTROLS AND PROCEDURES

   36

PART II - OTHER INFORMATION

   37

ITEM 1. LEGAL PROCEEDINGS

   37

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   37

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   37

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

   37

ITEM 5. OTHER INFORMATION

   37

ITEM 6. EXHIBITS

   38

SIGNATURES

   39

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

   40

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

   41

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

   42

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

   43

 

2


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, dollars in thousands, except share data)

 

     September 30,

   

December 31,

2004


 
     2005

    2004

   

ASSETS

                        

Loans:

                        

Commercial, financial and agricultural

   $ 1,518,749     $ 1,137,912     $ 1,204,629  

Real estate construction

     42,259       20,420       27,205  

Consumer

     992,547       992,992       947,105  

Real estate

     788,901       643,542       661,103  

Leases

     5,364       5,028       5,154  

Allowance for loan losses

     (39,715 )     (45,070 )     (42,723 )
    


 


 


Net loans

     3,308,105       2,754,824       2,802,473  

Loans held for sale

     20,326       22,897       24,028  

Securities available for sale:

                        

U.S. Treasury

     597,097       760,362       736,632  

U.S. Agencies

     423,302       385,719       1,420,532  

State and political subdivisions

     568,301       417,302       452,907  

Mortgage backed

     931,486       949,258       978,833  
    


 


 


Total securities available for sale

     2,520,186       2,512,641       3,588,904  

Securities held to maturity:

                        

State and political subdivisions (market value of $105,202, $224,064 and $168,324 respectively)

     104,591       220,237       166,065  

Federal Reserve Bank stock and other

     12,952       8,504       9,042  

Federal funds sold

     150,693       20,000       —    

Securities purchased under agreements to resell

     134,516       334,748       293,599  

Interest bearing due from banks

     1,834       1,834       1,834  

Trading securities

     57,987       76,756       59,920  
    


 


 


Total earning assets

     6,311,190       5,952,441       6,945,865  

Cash and due from banks

     396,416       445,006       497,382  

Bank premises and equipment, net

     226,668       220,396       226,239  

Accrued income

     46,291       37,547       36,584  

Goodwill on purchased affiliates

     59,958       58,884       59,115  

Other intangibles

     4,302       5,045       4,859  

Other assets

     43,100       152,943       34,962  
    


 


 


Total assets

   $ 7,087,925     $ 6,872,262     $ 7,805,006  
    


 


 


LIABILITIES

                        

Deposits:

                        

Noninterest-bearing demand

   $ 1,931,580     $ 1,811,368     $ 1,993,281  

Interest-bearing demand and savings

     2,082,229       2,090,748       2,438,419  

Time deposits under $100,000

     714,943       650,361       630,988  

Time deposits of $100,000 or more

     277,989       226,552       325,550  
    


 


 


Total deposits

     5,006,741       4,779,029       5,388,238  

Federal funds purchased and repurchase agreements

     1,127,111       1,076,140       1,506,000  

Short-term debt

     18,491       52,680       39,426  

Long-term debt

     39,083       15,744       21,051  

Accrued expenses and taxes

     37,447       20,842       21,530  

Other liabilities

     28,106       108,277       9,579  
    


 


 


Total liabilities

     6,256,979       6,052,712       6,985,824  
    


 


 


SHAREHOLDERS’ EQUITY

                        

Common stock, $1.00 par value; authorized 33,000,000 shares, 27,528,365 issued, 21,550,945, 21,650,414 and 21,641,053 shares outstanding, respectively

     27,528       27,528       27,528  

Capital surplus

     727,987       726,488       726,595  

Unearned compensation

     (2,090 )     —         —    

Retained earnings

     333,096       299,084       305,986  

Accumulated other comprehensive loss

     (18,573 )     (4,103 )     (10,619 )

Treasury stock, 5,977,420, 5,877,951 and 5,887,312 shares, at cost, respectively

     (237,002 )     (229,447 )     (230,308 )
    


 


 


Total shareholders’ equity

     830,946       819,550       819,182  
    


 


 


Total liabilities and shareholders’ equity

   $ 7,087,925     $ 6,872,262     $ 7,805,006  
    


 


 


 

See Notes to Condensed Consolidated Financial Statements.

 

3


UMB FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, dollars in thousands, except per share data)

 

    

Three Months Ended

September 30,


  

Nine Months Ended

September 30,


     2005

    2004

   2005

    2004

INTEREST INCOME

                             

Loans

   $ 48,081     $ 34,906    $ 128,726     $ 99,986

Securities:

                             

Taxable interest

     15,043       13,767      46,641       42,665

Tax-exempt interest

     5,330       4,673      14,459       14,391
    


 

  


 

Total securities income

     20,373       18,440      61,100       57,056

Federal funds and resell agreements

     2,382       1,048      5,057       2,708

Trading securities and other

     581       616      1,734       1,549
    


 

  


 

Total interest income

     71,417       55,010      196,617       161,299
    


 

  


 

INTEREST EXPENSE

                             

Deposits

     14,233       6,522      34,480       18,929

Federal funds and repurchase agreements

     7,833       3,026      20,409       7,364

Short-term debt

     108       21      283       109

Long-term debt

     518       206      1,309       674
    


 

  


 

Total interest expense

     22,692       9,775      56,481       27,076
    


 

  


 

Net interest income

     48,725       45,235      140,136       134,223

Provision for loan losses

     1,454       1,887      2,954       5,420
    


 

  


 

Net interest income after provision for loan losses

     47,271       43,348      137,182       128,803
    


 

  


 

NONINTEREST INCOME

                             

Trust and securities processing

     20,590       18,822      61,056       55,896

Trading and investment banking

     4,004       3,667      13,516       13,682

Service charges on deposits

     20,716       18,599      60,210       55,767

Insurance fees and commissions

     837       951      2,580       2,840

Brokerage fees

     1,515       1,701      4,575       6,042

Bankcard fees

     8,592       8,008      24,705       23,440

Gains on sales of assets and deposits, net

     4,801       1,837      8,772       1,852

Gain on sale of employee benefit accounts

     —         —        3,600       764

Gain (loss) on sales of securities available for sale

     (190 )     —        (223 )     141

Other

     3,871       3,406      12,176       11,163
    


 

  


 

Total noninterest income

     64,736       56,991      190,967       171,587
    


 

  


 

NONINTEREST EXPENSE

                             

Salaries and employee benefits

     47,821       47,271      148,232       144,593

Occupancy, net

     6,841       6,643      19,728       19,542

Equipment

     11,115       11,175      32,843       32,819

Supplies, postage and telephone

     5,288       5,461      16,518       16,690

Marketing and business development

     3,473       3,825      10,040       11,280

Processing fees

     6,233       5,213      17,320       15,514

Legal and consulting

     1,890       1,669      5,613       6,082

Amortization of other intangibles

     185       185      557       556

Other

     7,090       5,489      20,311       15,336
    


 

  


 

Total noninterest expense

     89,936       86,931      271,162       262,412
    


 

  


 

Income before income taxes

     22,071       13,408      56,987       37,978

Income tax provision

     5,900       1,400      15,624       6,798
    


 

  


 

NET INCOME

   $ 16,171     $ 12,008    $ 41,363     $ 31,180
    


 

  


 

PER SHARE DATA

                             

Net income - basic

   $ 0.75     $ 0.55    $ 1.92     $ 1.44

Net income - diluted

     0.75       0.55      1.91       1.43

Dividends

     0.22       0.21      0.66       0.63

Weighted average shares outstanding

     21,513,304       21,664,878      21,579,138       21,675,626
                               

 

See Notes to Condensed Consolidated Financial Statements

 

4


UMB FINANCIAL CORPORATION

CONDENSED STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY

(unaudited, dollars in thousands)

 

     Common
Stock


   Capital
Surplus


   Unearned
Compensation


    Retained
Earnings


    Accumulated
Other
Comprehensive
Income/(Loss)


    Treasury
Stock


    Total

 

Balance - January 1, 2004

   $ 27,528    $ 726,405    $ —       $ 281,556     $ 3,183     $ (226,749 )   $ 811,923  

Comprehensive income

                                                      

Net income

     —        —        —         31,180       —         —         31,180  

Other comprehensive income/(loss), change in unrealized gains (losses) on securities of ($11,662), net of tax of $4,286 and the reclassification adjustment (gains)/losses included in net income of ($141) net of tax $51

     —        —        —         —         (7,286 )     —         (7,286 )
                                                  


Total comprehensive income

                                                   23,894  

Cash dividends ($0.63 per share)

     —        —        —         (13,652 )     —         —         (13,652 )

Purchase of treasury stock

     —        —        —         —         —         (3,175 )     (3,175 )

Sale of treasury stock

     —        —        —         —         —         3       3  

Exercise of stock options

     —        83      —         —         —         474       557  
    

  

  


 


 


 


 


Balance - September 30, 2004

   $ 27,528    $ 726,488    $ —       $ 299,084     $ (4,103 )   $ (229,447 )   $ 819,550  
    

  

  


 


 


 


 


Balance - January 1, 2005

   $ 27,528    $ 726,595    $ —       $ 305,986     $ (10,619 )   $ (230,308 )   $ 819,182  

Comprehensive income

                                                      

Net income

     —        —        —         41,363       —         —         41,363  

Other comprehensive income/(loss), change in unrealized gains (losses) on securities of ($12,618) net of tax of $4,519; reclassification adjustment (gains)/losses included in net income of $223 net of tax ($78)

     —        —        —         —         (7,954 )     —         (7,954 )
                                                  


Total comprehensive income

                                                   33,409  

Cash dividends ($0.66 per share)

     —        —        —         (14,253 )     —         —         (14,253 )

Purchase of treasury stock

     —        —        —         —         —         (8,506 )     (8,506 )

Issuance of restricted stock

     —        1,140      (2,379 )     —         —         1,239       —    

Recognition of restricted stock compensation

     —        —        289       —         —         —         289  

Sale of treasury stock

     —        131      —         —         —         128       259  

Exercise of stock options

     —        121      —         —         —         445       566  
    

  

  


 


 


 


 


Balance - September 30, 2005

   $ 27,528    $ 727,987    $ (2,090 )   $ 333,096     $ (18,573 )   $ (237,002 )   $ 830,946  
    

  

  


 


 


 


 


 

See Notes to Condensed Consolidated Financial Statements

 

5


UMB FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

    

Nine Months Ended

September 30,


 
     2005

    2004

 

Operating Activities

                

Net income

   $ 41,363     $ 31,180  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Provision for loan losses

     2,954       5,420  

Depreciation and amortization

     23,255       23,739  

Deferred income tax expense/(benefit)

     1,167       (4,564 )

Net decrease/(increase) in trading securities and other earning assets

     1,933       (15,976 )

(Gains)/loss on sales of securities available for sale

     223       (141 )

Amortization of securities premiums, net of discount accretion

     13,172       22,676  

Gains on sales of assets and deposits, net

     (8,772 )     (1,852 )

Stock based compensation

     289       —    

Changes in:

                

Accrued income

     (9,707 )     2,881  

Accrued expenses and taxes

     15,917       (4,192 )

Other assets and liabilities, net

     11,165       10,440  
    


 


Net cash provided by operating activities

     92,959       69,611  
    


 


Investing Activities

                

Proceeds from maturities of securities held to maturity

     68,961       85,582  

Proceeds from sales of securities available for sale

     15,006       11,259  

Proceeds from maturities of securities available for sale

     8,370,418       5,431,835  

Purchases of securities held to maturity

     (12,020 )     (462 )

Purchases of securities available for sale

     (7,342,097 )     (4,581,709 )

Net increase in loans

     (505,145 )     (104,343 )

Net (increase)/decrease in fed funds and resell agreements

     8,390       (78,033 )

Purchases of bank premises and equipment

     (28,091 )     (27,317 )

Net change in unsettled securities transactions

     2,849       (22,977 )

Cash paid for branch deposits sold, net of cash received

     (94,557 )     —    

Investment in consolidated subsidiary

     (843 )     (1,456 )

Proceeds from sales of bank premises and equipment

     7,516       5,038  
    


 


Net cash provided by investing activities

     490,387       717,417  
    


 


Financing Activities

                

Net decrease in demand and savings deposits

     (348,363 )     (648,187 )

Net increase/(decrease) in time deposits

     67,798       (208,909 )

Net decrease in fed funds/repurchase agreements

     (378,889 )     (97,787 )

Net decrease in short-term debt

     (20,935 )     (17,924 )

Proceeds from long-term debt

     20,110       3,380  

Repayment of long-term debt

     (2,078 )     (3,916 )

Cash dividends

     (14,274 )     (13,652 )

Proceeds from exercise of stock options and sales of treasury shares

     825       560  

Purchases of treasury stock

     (8,506 )     (3,175 )
    


 


Net cash used in financing activities

     (684,312 )     (989,610 )
    


 


Decrease in cash and due from banks

     (100,966 )     (202,582 )

Cash and due from banks at beginning of period

     497,382       647,588  
    


 


Cash and due from banks at end of period

   $ 396,416     $ 445,006  
    


 


 

See Notes to Condensed Consolidated Financial Statements.

 

6


UMB FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

 

1. Financial Statement Presentation

 

The condensed consolidated financial statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the “Company”) after elimination of all material intercompany transactions. In the opinion of management of the Company, all adjustments, which were of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations, have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year. The financial statements should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

 

2. Summary of Accounting Policies

 

The Company is a multi-bank financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices in the states of Missouri, Kansas, Colorado, Illinois, Oklahoma, Arizona, Nebraska and Wisconsin. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation are listed in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

 

Per Share Data

 

Basic income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted quarterly per share data includes the diluted effect of 114,553 and 63,266 shares issueable under options granted by the Company at September 30, 2005 and 2004, respectively. Diluted year-to-date income per share includes the diluted effect of 95,374 and 70,631 shares issueable upon the exercise of stock options granted by the Company at September 30, 2005 and 2004, respectively.

 

Accounting for Stock-Based Compensation

 

In accordance with Statement of Financial Accounting Standard, (SFAS) No. 123 “Accounting for Stock-based Compensation”, the Company has elected to account for stock-based compensation using the intrinsic value method under the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”. The following table illustrates the effect on net income and earnings per share, if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

 

(unaudited, dollars in thousands, except per share data)

 

   Three Months Ended
September 30,


   Nine Months Ended
September 30,


   2005

   2004

   2005

   2004

Net income, as reported

   $ 16,171    $ 12,008    $ 41,363    $ 31,180

Stock-based compensation expense included in reported net income, net of tax

     90      —        184      —  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     280      85      800      165
    

  

  

  

Pro forma net income

   $ 15,981    $ 11,923    $ 40,747    $ 31,015
    

  

  

  

Earnings per share:

                           

Basic-as reported

     0.75      0.55      1.92      1.44

Basic-pro forma

     0.75      0.55      1.91      1.43

Diluted-as reported

     0.74      0.55      1.89      1.43

Diluted-pro forma

     0.74      0.55      1.88      1.42

 

7


UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

 

On April 26, 2005, the UMB Financial Corporation Long-Term Incentive Plan (LTIP) was adopted by the shareholders of the Company. Details of the LTIP are provided on Appendix B of the Company’s Proxy Statement for the 2005 Annual Meeting of Shareholders. Under this LTIP restricted stock shares have been issued to executives of the Company. The related expenses for the restricted stock shares are included in the table above. No restricted stock expense was recognized prior to 2005.

 

Reclassification

 

Certain reclassifications were made to the 2004 Condensed Consolidated Financial Statements to conform to the current year presentation.

 

3. Allowance for loan losses

 

This table is an analysis of the allowance for loan losses for the three and nine months ended September 30, 2005 and 2004 (unaudited, dollars in thousands):

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2005

    2004

    2005

    2004

 

Allowance - July 1 and January 1

   $ 39,756     $ 44,744     $ 42,723     $ 43,494  

Additions (deductions):

                                

Charge - offs

     (2,032 )     (2,250 )     (7,687 )     (6,739 )

Recoveries

     537       689       1,725       2,895  
    


 


 


 


Net charge-offs

     (1,495 )     (1,561 )     (5,962 )     (3,844 )
    


 


 


 


Provision charged to expense

     1,454       1,887       2,954       5,420  
    


 


 


 


Allowance - September 30

   $ 39,715     $ 45,070     $ 39,715     $ 45,070  
    


 


 


 


 

Impaired loans under SFAS No. 114. SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral securing the loan. The summary below provides an analysis of impaired loans under SFAS No. 114 for the nine months ended September 30, 2005 and 2004 and for the year ended December 31, 2004 (unaudited, dollars in thousands):

 

     Nine Months Ended
September 30,


  

December 31,

2004


     2005

   2004

  

Total impaired loans as of September 30 and December 31

   $ 7,483    $ 7,821    $ 10,007
    

  

  

Amount of impaired loans which have a related allowance

     1,408      1,216      2,603

Amount of related allowance

     805      868      2,330
    

  

  

Remaining impaired loans with no allowance

     6,075      6,605      7,404
    

  

  

Average recorded investment in impaired loans during the period

   $ 7,950    $ 10,563    $ 10,169
    

  

  

 

8


UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

 

 

4. Goodwill and other intangibles

 

Changes in the carrying amount of goodwill for the nine months ended September 30, 2005 and 2004 by operating segment are as follows (unaudited, dollars in thousands):

 

     Consumer
Services


   Asset
Management


   Investment
Services Group


   Total

Balances as of January 1, 2004

   $ 34,743    $ 10,479    $ 12,206    $ 57,428

Goodwill acquired during period

     —        —        1,456      1,456
    

  

  

  

Balances as of September 30, 2004

   $ 34,743    $ 10,479    $ 13,662    $ 58,884
    

  

  

  

Balances as of January 1, 2005

   $ 34,981    $ 10,479    $ 13,655    $ 59,115

Goodwill acquired during period

     —        —        843      843
    

  

  

  

Balances as of September 30, 2005

   $ 34,981    $ 10,479    $ 14,498    $ 59,958
    

  

  

  

 

Following are the intangible assets that continue to be subject to amortization as of September 30, 2005 and 2004 and December 31, 2004 (unaudited, dollars in thousands):

 

     As of September 30, 2005

     Gross
Carrying
Amount


   Accumulated
Amortization


   Net Carrying
Amount


Core deposit intangible assets

   $ 16,777    $ 16,735    $ 42

Other intangible assets

     7,200      2,940      4,260
    

  

  

Total

   $ 23,977    $ 19,675    $ 4,302
    

  

  

 

     As of September 30, 2004

     Gross
Carrying
Amount


   Accumulated
Amortization


   Net Carrying
Amount


Core deposit intangible assets

   $ 16,777    $ 16,724    $ 53

Other intangible assets

     7,200      2,208      4,992
    

  

  

Total

   $ 23,977    $ 18,932    $ 5,045
    

  

  

 

     As of December 31, 2004

     Gross
Carrying
Amount


   Accumulated
Amortization


   Net Carrying
Amount


Core deposit intangibles assets

   $ 16,777    $ 16,727    $ 50

Other intangible assets

     7,200      2,391      4,809
    

  

  

Total

   $ 23,977    $ 19,118    $ 4,859
    

  

  

 

     Three Months Ended
September 30,


   Nine Months Ended
September 30,


     2005

   2004

   2005

   2004

Aggregate amortization expense

   $ 185    $ 185    $ 557    $ 556
    

  

  

  

 

Estimated amortization expense of intangible assets on future years:

      

For the year ended December 31, 2005

   $ 742

For the year ended December 31, 2006

     742

For the year ended December 31, 2007

     742

For the year ended December 31, 2008

     742

For the year ended December 31, 2009

     734

 

9


UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

 

5. Commitments, Contingencies and Guarantees

 

In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, and futures contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. These conditions generally include, but are not limited to, each customer being current as to repayment terms of existing loans and no deterioration in the customer’s financial condition. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The interest rate is generally a variable rate. If the commitment has a fixed interest rate, the rate is generally not set until such time as credit is extended. For credit card customers, the Company has the right to change or terminate terms or conditions of the credit card account at any time. Since a large portion of the commitments and unused credit card lines are never actually drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, real estate, plant and equipment, stock, securities and certificates of deposit.

 

Commercial letters of credit are issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, as a general rule, drafts will be drawn when the underlying transaction is consummated as intended.

 

Standby letters of credit are conditional commitments issued by the Company payable upon the non-performance of a customer’s obligations to a third party. The Company issues standby letters of credit for terms ranging from three months to three years. The maximum liability to the Company under standby letters of credit at September 30, 2005 and 2004, and December 31, 2004 were $190.7 million, $181.0 million, and $203.8 million, respectively. As of September 30, 2005 and 2004, and December 31, 2004 standby letters of credit totaling $47.0 million, $42.9 million, and $47.1 million, respectively, were with related parties to the Company.

 

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities. The Company holds collateral supporting those commitments when deemed necessary. Collateral varies but may include such items as those described for commitments to extend credit.

 

Futures contracts are contracts for delayed delivery of securities or money market instruments in which the seller agrees to make delivery at a specified future date, of a specified instrument, at a specified yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movement in securities values and interest rates. Instruments used in trading activities are carried at market value and gains and losses on futures contracts are settled in cash daily. Any changes in the market value are recognized in trading and investment banking income.

 

The Company’s use of futures contracts is very limited. The Company uses contracts to offset interest rate risk on specific securities held in the trading portfolio. Open futures contract positions averaged $43.8 million, $46.7 million, and $46.2 million during the nine months ended September 30, 2005 and 2004, and at December 31, 2004, respectively. Net futures activity resulted in a gain of $0.5 million and a loss of $0.6 million for the nine months ended September 30, 2005 and 2004, respectively. Net futures activity resulted in gains of $0.4 million and a loss of $0.7 million for the three months ended September 30, 2005 and 2004. The Company controls the credit risk of its futures contracts through credit approvals, limits and monitoring procedures.

 

10


UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

 

The Company also enters into foreign exchange contracts on a limited basis. For operating purposes, the Company maintains certain balances with foreign banks. Foreign exchange contracts are purchased on a monthly basis to avoid foreign exchange risk on these foreign balances. The Company will also enter into foreign exchange contracts to facilitate foreign exchange needs of customers. The Company will enter into a contract to buy or sell a foreign currency at a future date only as part of a contract to sell or buy the foreign currency at the same future date to a customer. During the nine months ended September 30, 2005, contracts to purchase and to sell foreign currency averaged approximately $19.0 million compared to $14.9 million during the same period in 2004. The net gains on these foreign exchange contracts for the nine months ended September 30, 2005 and 2004 were $1.2 million and $1.1 million, respectively. The net gains on these foreign exchange contracts for the three months ended September 30, 2005 and 2004 were $0.4 million and $0.4 million, respectively.

 

With respect to group concentrations of credit risk, most of the Company’s business activity is with customers in the states of Missouri, Kansas, Colorado, Oklahoma, Nebraska and Illinois. At September 30, 2005, the Company did not have any significant credit concentrations in any particular industry.

 

In the normal course of business, the Company and its subsidiaries are named defendants in various lawsuits and counter-claims. In the opinion of management, after consultation with legal counsel, none of these lawsuits are expected to have a materially adverse effect on the financial position or results of operations of the Company.

 

Contract or Notional Amount (unaudited, dollars in thousands)

 

     September 30,

   December 31,

     2005

   2004

   2004

Commitments to extend credit for loans (excluding credit card loans)

   $ 1,254,285    $ 859,595    $ 1,061,788

Commitments to extend credit under credit card loans

     925,750      899,983      900,284

Commercial letters of credit

     10,224      10,053      12,589

Standby letters of credit

     190,698      180,963      203,791

Futures contracts

     49,200      58,700      44,000

Forward foreign exchange contracts

     16,690      13,666      13,015

Spot foreign exchange contracts

     1,190      4,177      6,539

 

6. Business Segment Reporting

 

The Company has strategically aligned its operations into six major lines of business, as shown below (collectively, “Business Segments”).

 

Business Segment Information

 

Line of business/segment financial results were as follows (unaudited, dollars in thousands):

 

     Three Months Ended September 30,

     Commercial Banking and
Lending


   Corporate Services

     2005

   2004

   2005

   2004

Net interest income

   $ 12,942    $ 12,478    $ 11,481    $ 9,726

Provision for loan losses

     945      1,007      —        —  

Noninterest income

     819      249      16,537      15,220

Noninterest expense

     6,580      6,855      20,971      19,266

Income taxes

     —        —        —        —  
    

  

  

  

Net income (loss)

   $ 6,236    $ 4,865    $ 7,047    $ 5,680
    

  

  

  

Average assets

   $ 1,969    $ 1,713    $ 45    $ 145

Depreciation and amortization

     347      369      1,697      1,760

Expenditures for additions to premises and equipment

     324      516      3,345      2,516

 

11


UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

 

     Banking Services

    Consumer Services

 
     2005

    2004

    2005

   2004

 

Net interest income

   $ 925     $ 1,578     $ 21,060    $ 19,805  

Provision for loan losses

     —         —         509      880  

Noninterest income

     7,064       6,931       20,164      17,092  

Noninterest expense

     7,575       6,892       34,500      36,946  

Income taxes

     —         —         —        —    
    


 


 

  


Net income (loss)

   $ 414     $ 1,617     $ 6,215    $ (929 )
    


 


 

  


Average assets

   $ 81     $ 103     $ 1,171    $ 1,124  

Depreciation and amortization

     311       328       3,908      4,246  

Expenditures for additions to premises and equipment

     467       373       4,869      9,329  
     Asset Management

    Investment Services Group

 
     2005

    2004

    2005

   2004

 

Net interest income

   $ 20     $ 109     $ 2,316    $ 1,473  

Provision for loan losses

     —         —         —        —    

Noninterest income

     11,962       11,447       9,466      8,398  

Noninterest expense

     9,832       9,676       10,110      8,049  

Income taxes

     —         —         —        —    
    


 


 

  


Net income (loss)

   $ 2,150     $ 1,880     $ 1,672    $ 1,822  
    


 


 

  


Average assets

   $ 13     $ 11     $ 25    $ 23  

Depreciation and amortization

     382       366       746      658  

Expenditures for additions to premises and equipment

     583       449       1,563      747  
     Treasury and Other
Adjustments


    Total Consolidated Company

 
     2005

    2004

    2005

   2004

 

Net interest income

   $ (19 )   $ 66     $ 48,725    $ 45,235  

Provision for loan losses

     —         —         1,454      1,887  

Noninterest income

     (1,276 )     (2,346 )     64,736      56,991  

Noninterest expense

     368       (753 )     89,936      86,931  

Income Taxes

     5,900       1,400       5,900      1,400  
    


 


 

  


Net income (loss)

   $ (7,563 )   $ (2,927 )   $ 16,171    $ 12,008  
    


 


 

  


Average assets

   $ 3,723     $ 3,566     $ 7,027    $ 6,685  

Depreciation and amortization

     363       343       7,754      8,070  

Expenditures for additions to premises and equipment

     131       469       11,282      14,399  

 

12


UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

 

     Nine Months Ended September 30,

 
     Commercial Banking and
Lending


   Corporate Services

 
     2005

   2004

   2005

   2004

 

Net interest income

   $ 37,224    $ 34,945    $ 32,463    $ 30,483  

Provision for loan losses

     1,920      2,021      —        —    

Noninterest income

     1,510      997      48,207      47,171  

Noninterest expense

     20,757      19,656      59,817      57,979  

Income taxes

     —        —        —        —    
    

  

  

  


Net income (loss)

   $ 16,057    $ 14,265    $ 20,853    $ 19,675  
    

  

  

  


Average assets

   $ 1,885    $ 1,757    $ 49    $ 147  

Depreciation and amortization

     1,075      1,094      4,944      4,678  

Expenditures for additions to premises and equipment

     895      1,004      7,175      5,770  
     Banking Services

   Consumer Services

 
     2005

   2004

   2005

   2004

 

Net interest income

   $ 3,011    $ 4,778    $ 60,214    $ 57,757  

Provision for loan losses

     —        —        1,034      3,399  

Noninterest income

     22,790      23,906      55,512      45,615  

Noninterest expense

     23,720      21,871      107,835      106,284  

Income taxes

     —        —        —        —    
    

  

  

  


Net income (loss)

   $ 2,081    $ 6,813    $ 6,857    $ (6,311 )
    

  

  

  


Average assets

   $ 72    $ 98    $ 1,116    $ 1,074  

Depreciation and amortization

     999      913      11,883      12,269  

Expenditures for additions to premises and equipment

     993      893      14,355      14,614  
     Asset Management

   Investment Services Group

 
     2005

   2004

   2005

   2004

 

Net interest income

   $ 121    $ 374    $ 6,397    $ 4,987  

Provision for loan losses

     —        —        —           

Noninterest income

     35,757      34,255      27,789      24,964  

Noninterest expense

     31,491      29,452      27,446      25,276  

Income taxes

     —        —        —        —    
    

  

  

  


Net income (loss)

   $ 4,387    $ 5,177    $ 6,740    $ 4,675  
    

  

  

  


Average assets

   $ 12    $ 10    $ 26    $ 25  

Depreciation and amortization

     1,202      1,116      2,085      1,895  

Expenditures for additions to premises and equipment

     1,379      1,154      2,890      1,915  

 

13


UMB FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

 

     Treasury and Other
Adjustments


    Total Consolidated Company

     2005

    2004

    2005

   2004

Net interest income

   $ 706     $ 899     $ 140,136    $ 134,223

Provision for loan losses

     —         —         2,954      5,420

Noninterest income

     (598 )     (5,321 )     190,967      171,587

Noninterest expense

     96       1,894       271,162      262,412

Income Taxes

     15,624       6,798       15,624      6,798
    


 


 

  

Net income (loss)

   $ (15,612 )   $ (13,114 )   $ 41,363    $ 31,180
    


 


 

  

Average assets

   $ 3,866     $ 3,778     $ 7,026    $ 6,889

Depreciation and amortization

     1,067       1,774       23,255      23,739

Expenditures for additions to premises and equipment

     404       1,967       28,091      27,317

 

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 both the three month and nine month periods ended September 30, 2005. It should be read in conjunction with the accompanying condensed consolidated financial statements, notes to condensed consolidated financial statements and other financial statistics appearing elsewhere in this report. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

The information included or incorporated by reference in this report contains forward-looking statements of expected future developments within the meaning of and pursuant to the safe harbor provisions established by Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may refer to financial condition, results of operations, plans, objectives, future financial performance and business of the Company, including, without limitation:

 

    Statements that are not historical in nature;

 

    Statements preceded by, followed by or that include the words “believes,” “expects,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “intends,” or similar words or expressions; and

 

    Statements regarding the timing of the closing of branch sales and purchases.

 

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:

 

    changes in the interest rate environment;

 

    general economic and political conditions, either nationally, internationally or in the Company’s markets, may be less favorable than expected;

 

    competitive pressures among financial services companies may increase significantly;

 

    changes in loan demand;

 

14


    changes in the ability of customers to repay loans;

 

    changes in consumer saving habits;

 

    changes in interest margin on loans;

 

    changes in allowance for loan losses;

 

    changes in employee costs;

 

    legislative or regulatory changes may adversely affect the Company’s business;

 

    technological changes may be more difficult or expensive than anticipated; and

 

    changes may occur in the securities markets.

 

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.

 

Overview

 

The growth in net income for the third quarter of 2005 over the same quarter in 2004 reflects management’s strategy of focusing on growing net interest income and noninterest income by a greater percentage than noninterest expense increases. This strategy resulted in a 34.7% increase in net income for the third quarter of 2005 as compared to the same quarter in 2004.

 

Net interest income is $3.5 million, or 7.8%, higher for the third quarter of 2005 as compared to the same period in 2004 reflecting increased loan balances, particularly in commercial loans, as well as yield improvements within the securities portfolio. While net interest income grew, net interest margin remained relatively flat at 3.26% for the three months ended September 3, 2005 as compared to 3.23% for the same period in 2004. In the recent rising rate environment, the Company’s liabilities have repriced more quickly than assets. Management believes that net interest margin will continue to grow at a slow pace as long as interest rates will continue to increase. However, management expects net interest income to continue to grow for the following reasons: First, management expects the growth in the loan portfolio to continue throughout the year based upon the Company’s strategy of optimizing the balance sheet mix by growing loans, and in particular focusing on commercial loans, home equity lines of credit, credit cards and small business loans; and second, management has adopted a portfolio modification plan by extending the average life of the investment portfolio in order to obtain higher yields on investments. (See discussion under “Net Interest Income” located under the “Results of Operations” in this section) Although this strategy has been hindered by the recent flattening of the yield curve, the Company intends to continue to implement this extension strategy over the course of the next four to six quarters. See Item 3, Quantitative Disclosures about Market Risk, which discusses in detail the impact of rising and declining rates on net interest income.

 

Management continues to focus on diversifying revenue sources to offset lower than average loan to deposit ratios and to make net income of the Company less susceptible to changes in interest rates. For the third quarter of 2005, noninterest income grew 13.6%, or $7.7 million over the same period in 2004. Specific areas of focus include asset and treasury management, investment services, deposit service charges and other fee-based services. As some of the Company’s fee-based business is the direct result of the market value of its customers investments, the overall health of the equity and financial markets plays an important role in the recognition of fee income, particularly in the trust, mutual fund servicing and investment management areas of the Company. If the overall equity and financial markets continue to improve, the basis on which certain fee income is calculated should continue to grow. Other fee-based services that are less dependent upon the equity markets include trading and investment banking fees, deposit service charge income and bankcard fees.

 

15


The Company’s goal is to differentiate itself from its large super-regional and national competitors through superior service, attention to detail, customer knowledge and responsiveness. The Company’s size allows it to meet this goal and at the same time offer the wide range of products most customers need. This strategy has worked especially well during a period of bank consolidation and should continue to be a benefit. In addition to commercial loan growth in Kansas City, the Company has experienced loan growth in markets outside of the Kansas City metropolitan area and is developing its customer base in these regions including Denver, St. Louis and Phoenix. The Company believes that there is demand in these markets for bank services delivered with a customer-centric focus. Another part of this strategy is to improve profitability of our existing branch network by maintaining, relocating or eliminating branches as management deems appropriate. Through the third quarter of 2005, we have announced the sales of nine branches; the closure (or relocation) of 4 branch locations throughout our network, while adding an additional 2 locations.

 

Earnings Summary

 

The Company recorded consolidated net income of $16.2 million for the three months ended September 30, 2005 compared to $12.0 million for the same period a year earlier. This represents a 34.7% increase over the three month period ended September 30, 2004, which was driven by three factors. First, net interest income increased 7.7%, or $3.5 million due primarily to the favorable volume variances offsetting the unfavorable rate variance (see Table 2, “Analysis of Changes in Net Interest Income and Margin” under the discussion of “Results of Operations” below). Second, noninterest income increased by $7.7 million, or 13.6% from the third quarter of 2004 due mostly to higher trust and securities processing income, greater service charges on deposits and one-time net gains from the sales and closures of banking facilities. Third, noninterest expense increased by a much smaller percent than income growth. Noninterest expense increased by 3.5% over the three month period ended September 30, 2004 due primarily to higher processing fees, bankcard fees and service charge charge-offs. Basic earnings per share for the third quarter 2005 were $0.75 per basic share ($0.75 per share fully-diluted) compared to $0.55 per basic share ($0.55 per share fully-diluted) for the third quarter 2004. Return on average assets and return on average common shareholders’ equity for the three month period ended September 30, 2005, was 0.91% and 7.71% respectively, as compared to 0.71% and 5.83% for the same period in 2004.

 

The Company recorded consolidated net income of $41.4 million for the nine months ended September 30, 2005 compared to $31.2 million for the same period a year earlier. This represents a 32.7% increase over the nine month period ended September 30, 2004, primarily because of increases in net interest income and noninterest income. First, net interest income for the year-to-date September 30, 2005 increased 4.4% from the same period in 2004. The increase in net interest income was primarily the result of increases in loan balances and rates, as well as a favorable rate variance related to the securities portfolio. The favorable variance was partially reduced by interest-bearing liability yield increases. Second, the increase in noninterest income was primarily attributable to increases in trust fees and securities processing fees, greater service charge income and one-time net gains from the sales and closures of banking facilities. Third, noninterest expense increased $8.8 million or 3.3% for the year-to-date September 30, 2005 compared to the same period in 2004 primarily due to $4.4 million associated with costs of the voluntary separation plan (“VSP”) initiated by the Company in the first quarter of 2005 as well as higher bankcard expenses, processing fees, contributions and charge-offs related to deposit accounts. These increases were partially offset by decreases in marketing and business development.

 

Basic earnings per share for the nine months ended September 30, 2005 were $1.92 per share ($1.91 per share full-diluted) compared to $1.44 per share ($1.43 per share fully-diluted) for the same period in 2004. Return on average assets and return on average common shareholders’ equity for the nine month period ended September 30, 2005 was 0.79% and 6.68% respectively, as compared to 0.60% and 5.08% for the same period in 2004.

 

Results of Operations

 

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, affects net interest income.

 

16


Quarter-To-Date

 

For the third quarter of 2005 net interest income increased $3.5 million or 7.7%. Analysis of changes in net interest income in Table 2 shows that the net interest income increased due to a favorable volume variance and an unfavorable rate variance for the same period. The volume variance is primarily attributable to strong loan growth, while the rate variance is primarily a result of liabilities repricing more quickly than assets.

 

Management believes that the overall outlook in its net interest income is positive. First, management expects loan interest income to continue to increase due to both volume and rate. Loan balances as of September 30, 2005 were 19.3% higher than the balances as of September 30, 2004. Average loans for the three months ended September 30, 2005 were 15.7% higher than the same period in 2004. New loans have been a combination of fixed and variable rate. If rates continue to rise, the rate impact of this added volume will be favorable. Further, management continues to emphasize loan growth through a variety of sales initiatives. In addition to commercial loan growth, other areas of focus include credit cards, home equity lines of credit and small business loans.

 

Second, management believes that the securities portfolio continues to be an opportunity for both interest income and yield improvement. In late 2004, management adopted a portfolio modification plan designed to improve interest income by extending the average life of the investment portfolio. The Company intends to continue to implement this extension strategy over the course of the next four to six quarters. This plan calls for a modest extension of 6-12 months to the portfolio average life. The total investment portfolio had an average life of 28.2 months and 15.9 months at September 30, 2005 and December 31, 2004, respectively. This increase was primarily a result of a significant portfolio of extremely short-term discount notes as of December 31, 2004. These securities are held due to the seasonal fluctuation related to public fund deposits which are expected to flow out of the bank in a relatively short period. At September 30, 2005 the amount of such discount notes was approximately $2.5 million which had a negligible impact on the portfolio average life. At December 31, 2004, the amount of such discount notes was approximately $1.0 billion, and without these discount notes, the average life of the core portfolio would have been 21.0 months. This is a difference in the portfolio average life of 5.1 months. Management expects the average life of its total investment portfolio to decrease at year-end once additional funds are received from public entities. However, management expects that the average life of its portfolio without the extremely short-term discount notes will continue to increase as the portfolio modification plan is implemented. Implementation of this plan is subject to market conditions including sufficient supply of securities with acceptable risk/reward characteristics. The effectiveness of this plan is uncertain as it is dependent upon future market conditions including interest rate changes. In addition to the portfolio modification plan, additional improvement in securities income and yield should occur due to the replacement of bonds with higher yields. During the fourth quarter of 2005, approximately $309 million of securities are scheduled to mature.

 

Total interest expense increased by $12.9 million, or 132.1% for the three months ended September 30, 2005 as compared to the same period in 2004. As illustrated in Table 2, although this is caused by both an unfavorable rate and volume difference, the rate variance is the most significant cause of the change. As interest rates rise, the Company’s liabilities reprice more quickly than assets.

 

Overall, if interest rates continue to rise at a measured pace and given the term and changing mix of the Company’s balance sheet, management expects net interest income to increase. Management believes the Company will obtain additional improvement in net interest income once rates stabilize.

 

Year-To-Date

 

For the year-to-date period ended September 30, 2005 net interest income increased $5.9 million or 4.4% over the same period in 2004. During this same period, net interest margin improved gradually to 3.17% for the nine months ended September 30, 2005 as compared to 3.13% for the same period in 2004. Table 1 shows the impact of increased earnings asset rates as compared to interest-bearing liabilities.

 

Total interest income increased by $35.3 million, or 21.9% for the nine months ended September 30, 2005 as compared to the same period in 2004. As shown on Table 2, this is a result of favorable volume and rate variances.

 

17


Total interest expense is higher for the nine months ended September 30, 2005 by $29.4 million, or 108.6%, as compared to the same period in 2004. As illustrated in Table 2, although this is caused by both an unfavorable rate and volume difference, the rate variance is the most significant cause of the change. The net interest rate increased to 1.77% for the nine months ended September 30, 2005 as compared to 0.87% for the same period in 2004.

 

Table 1

AVERAGE BALANCES/YIELDS AND RATES (tax equivalent basis) (unaudited, dollars in thousands)

 

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and resulting yields, as well as the interest expense on average interest-bearing liabilities, 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 4.23% for the year-to-date September 30, 2005 and 3.56% for the same period in 2004. The average yield on earnings assets without the tax equivalent basis adjustment would have been 4.53% for the three month period ended September 30, 2005 and 3.72% for the same period in 2004.

 

     Nine Months Ended September 30,

 
     2005

    2004

 
     Average
Balance


   

Average

Yield/Rate


    Average
Balance


    Average
Yield/Rate


 

Assets

                            

Loans, net of unearned interest

   $ 3,063,563     5.63 %   $ 2,759,622     4.85 %

Securities:

                            

Taxable

     2,259,293     2.76       2,336,766     2.44  

Tax-exempt

     619,921     4.65       619,071     4.73  
    


 

 


 

Total securities

     2,879,214     3.17       2,955,837     2.92  

Federal funds and resell agreements

     213,957     3.16       268,655     1.35  

Other earning assets

     61,529     3.86       69,236     3.08  
    


 

 


 

Total earning assets

     6,218,263     4.39       6,053,350     3.73  

Allowance for loan losses

     (40,621 )           (44,304 )      

Other assets

     848,275             879,686        
    


       


     

Total assets

   $ 7,025,917           $ 6,888,732        
    


       


     

Liabilities and Shareholders’ Equity

                            

Interest-bearing deposits

   $ 3,182,195     1.45 %   $ 3,098,707     0.82 %

Federal funds and repurchase agreements

     1,040,823     2.62       1,025,635     0.96  

Borrowed funds

     47,991     4.44       35,228     2.97  
    


 

 


 

Total interest-bearing liabilities

     4,271,009     1.77       4,159,570     0.87  

Noninterest-bearing demand deposits

     1,886,366             1,862,712        

Other liabilities

     40,511             46,528        

Shareholders’ equity

     828,031             819,922        
    


       


     

Total liabilities and shareholders’ equity

   $ 7,025,917           $ 6,888,732        
    


       


     

Net interest spread

           2.62 %           2.86 %

Net interest margin

           3.17             3.13  

 

18


     Three Months Ended September 30,

 
     2005

    2004

 
     Average
Balance


    Average
Yield/Rate


    Average
Balance


    Average
Yield/Rate


 

Assets

                            

Loans, net of unearned interest

   $ 3,257,584     5.86 %   $ 2,816,287     4.94 %

Securities:

                            

Taxable

     2,020,836     2.95       2,139,770     2.56  

Tax-exempt

     661,749     4.75       608,824     4.63  
    


 

 


 

Total securities

     2,682,585     3.40       2,748,594     3.02  

Federal funds and resell agreements

     259,151     3.65       245,774     1.70  

Other earning assets

     57,975     4.06       74,188     3.39  
    


 

 


 

Total earning assets

     6,257,295     4.70       5,884,843     3.89  

Allowance for loan losses

     (39,991 )           (44,662 )      

Other assets

     809,211             844,946        
    


       


     

Total assets

   $ 7,026,515           $ 6,685,127        
    


       


     

Liabilities and Shareholders’ Equity

                            

Interest-bearing deposits

   $ 3,225,571     1.75 %   $ 3,028,446     0.86 %

Federal funds and repurchase agreements

     994,099     3.13       981,900     1.23  

Borrowed funds

     52,320     4.75       22,388     4.03  
    


 

 


 

Total interest-bearing liabilities

     4,271,990     2.11       4,032,734     0.96  

Noninterest-bearing demand deposits

     1,873,330             1,788,181        

Other liabilities

     49,573             45,024        

Shareholders’ equity

     831,622             819,188        
    


       


     

Total liabilities and shareholders’ equity

   $ 7,026,515           $ 6,685,127        
    


       


     

Net interest spread

           2.59 %           2.92 %

Net interest margin

           3.26             3.23  

 

Table 2 presents the dollar amount of change in the 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. Interest free funds (total earning assets less interest-bearing liabilities) increased $133.2 million for the three month period ended September 30, 2005 compared to the same period in 2004 and increased $53.5 million for the nine month period ended September 30, 2005 compared to the same period in 2004.

 

19


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
September 30, 2005 vs 2004


    Nine Months Ended
September 30, 2005 vs 2004


     Volume

    Rate

    Total

    Volume

    Rate

    Total

Change in interest earned on:

                                              

Loans

   $ 6,567     $ 6,608     $ 13,175     $ 12,752     $ 15,988     $ 28,740

Securities:

                                              

Taxable

     (874 )     2,150       1,276       (1,608 )     5,584       3,976

Tax-exempt

     510       147       657       61       7       68

Federal funds sold and resell agreements

     123       1,211       1,334       (1,294 )     3,643       2,349

Other

     (163 )     128       (35 )     (98 )     283       185
    


 


 


 


 


 

Interest income

     6,163       10,244       16,407       9,813       25,505       35,318

Change in interest incurred on:

                                              

Interest-bearing deposits

     872       6,839       7,711       904       14,647       15,551

Federal funds purchased and repurchase agreements

     96       4,711       4,807       —         13,045       13,045

Other borrowed funds

     359       40       399       423       386       809
    


 


 


 


 


 

Interest expense

     1,327       11,590       12,917       1,327       28,078       29,405
    


 


 


 


 


 

Net interest income

   $ 4,836     $ (1,346 )   $ 3,490     $ 8,486     $ (2,573 )   $ 5,913
    


 


 


 


 


 

 

ANALYSIS OF NET INTEREST MARGIN

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    Change

    2005

    2004

    Change

 

Average earning assets

   $ 6,257,295     $ 5,884,843     $ 372,452     $ 6,218,263     $ 6,053,350     $ 164,913  

Interest-bearing liabilities

     4,271,990       4,032,734       239,256       4,271,009       4,159,570       111,439  
    


 


 


 


 


 


Interest free funds

   $ 1,985,305     $ 1,852,109     $ 133,196     $ 1,947,254     $ 1,893,780     $ 53,474  
    


 


 


 


 


 


Free funds ratio (free funds to earning assets)

     32.05 %     32.16 %     (0.11 ) %     31.14 %     31.19 %     (0.05 ) %

Tax-equivalent yield on earning assets

     4.70 %     3.89 %     0.81 %     4.39 %     3.73 %     0.65 %

Cost of interest-bearing liabilities

     2.11       0.96       1.14       1.77       0.87       0.90  
    


 


 


 


 


 


Net interest spread

     2.59 %     2.92 %     (0.33 ) %     2.62 %     2.86 %     (0.24 ) %

Benefit of interest free funds

     0.67       0.30       0.37       0.55       0.27       0.28  
    


 


 


 


 


 


Net interest margin

     3.26 %     3.23 %     0.03 %     3.17 %     3.13 %     0.04 %
    


 


 


 


 


 


 

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. The provision for loan losses is the amount necessary to adjust the Company’s ALL to the level considered appropriate by management. The adequacy of the ALL is reviewed quarterly, considering such items as historical loss trends, a review of individual loans, current economic conditions, loan growth and characteristics, industry or segment concentration and other factors. Bank regulatory agencies require that the adequacy of the ALL be maintained on a bank-by-bank basis for each of the Company’s subsidiaries. The Company utilizes a centralized credit administration function, which provides information on affiliate bank risk levels, delinquencies, an internal ranking system and overall credit exposure. In addition, loan requests are centrally reviewed to ensure the consistent application of the loan policy and standards.

 

20


The Company recorded a provision for loan losses of $1.5 million for the third quarter 2005 compared to $1.9 million for the third quarter 2004. Also, the Company recorded a provision for loan losses of $3.0 million for the nine month period ended September 30, 2005 compared to $5.4 million for the same period in 2004. This decreased the ALL from 1.60% of total loans to 1.18% as of September 30, 2004 and 2005, respectively. This decrease was due to management’s estimate of inherent losses within the loan portfolio being adequate as a result of a decline in nonperforming loans in 2005 as a percentage of total loans outstanding and a trend of sustained low charge-offs in 2003 and 2004 and the first nine months of 2005.

 

Table 3 presents a summary of the Company’s ALL for the nine months ended September 30, 2005 and 2004, as well as for the year ended December 31, 2004. Also please see “Credit Risk Management” under Risk Management section of Item 3 in this report for information relating to non-accrual, past due, restructured loans and other credit risk matters.

 

Table 3

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)

 

     Nine Months Ended
September 30,


    Year Ended
December 31,


 
     2005

    2004

    2004

 

Allowance-January 1

   $ 42,723     $ 43,494     $ 43,494  

Provision for loan losses

     2,954       5,420       5,370  

Charge-offs:

                        

Commercial

     (2,206 )     (1,069 )     (2,150 )

Consumer:

                        

Bankcard

     (4,162 )     (4,151 )     (5,541 )

Other

     (1,316 )     (1,515 )     (2,050 )

Real estate

     (3 )     (4 )     (4 )

Agricultural

     —         —         —    
    


 


 


Total charge-offs

     (7,687 )     (6,739 )     (9,745 )

Recoveries:

                        

Commercial

     239       1,083       1,257  

Consumer:

                        

Bankcard

     764       833       1,129  

Other

     721       978       1,217  

Real estate

     1       1       1  

Agricultural

     —         —         —    
    


 


 


Total recoveries

     1,725       2,895       3,604  
    


 


 


Net charge-offs

     (5,962 )     (3,844 )     (6,141 )
    


 


 


Allowance-end of period

   $ 39,715     $ 45,070     $ 42,723  
    


 


 


Average loans, net of unearned interest

   $ 3,063,563     $ 2,759,622     $ 2,781,084  

Loans at end of period, net of unearned interest

     3,368,146       2,822,791       2,869,224  

Allowance to loans at end of period

     1.18 %     1.60 %     1.49 %

Allowance as a multiple of net charge-offs

     6.66 x     11.72 x     6.96 x

Net charge-offs to:

                        

Provision for loan losses

     201.83 %     70.92 %     114.36 %

Average loans

     0.19       0.14       0.22  
    


 


 


 

Noninterest Income

 

A key objective of the Company is the growth of noninterest income to enhance profitability as fee-based services are generally non-credit related and provide steady income. Fee-based services provide the opportunity to

 

21


offer multiple products and services to customers and, therefore, more closely align the customer with the Company. The Company’s ongoing focus is to develop and offer multiple products and services to its customers, the quality of which will differentiate it from the competition. Fee-based services that have been emphasized include trust and securities processing, securities trading/brokerage, asset and treasury management and service charges. Management believes that the Company’s new Healthcare Services division has the potential to be a source of noninterest income growth with its emphasis on providing Health Savings Accounts and Flexible Spending Accounts. Management believes that it can offer these products and services both efficiently and profitably as most of these are driven off of common platforms and support structures.

 

Table 4

SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)

 

     Three Months Ended
September 30,


   Nine Months Ended
September 30,


     2005

    2004

   2005

    2004

Trust and securities processing

   $ 20,590     $ 18,822    $ 61,056     $ 55,896

Trading and investment banking

     4,004       3,667      13,516       13,682

Service charges on deposits

     20,716       18,599      60,210       55,767

Insurance fees and commissions

     837       951      2,580       2,840

Brokerage fees

     1,515       1,701      4,575       6,042

Bankcard fees

     8,592       8,008      24,705       23,440

Gains on sales of assets and deposits, net

     4,801       1,837      8,772       1,852

Gains on sale of employee benefit accounts

     —         —        3,600       764

Gains/(losses) on sales of securities available for sale, net

     (190 )     —        (223 )     141

Other

     3,871       3,406      12,176       11,163
    


 

  


 

Total noninterest income

   $ 64,736     $ 56,991    $ 190,967     $ 171,587
    


 

  


 

 

Quarter-To-Date

 

Noninterest income (summarized in Table 4) increased $7.7 million or 13.6% for the third quarter 2005 compared to the same period in 2004, primarily because of increases in trust and securities processing income, service charge income, bankcard fees and one-time gains on the sale of certain assets.

 

Trust and securities processing consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and money management services and servicing of mutual fund assets. These fees increased $1.8 million, or 9.4% in the third quarter of 2005 compared to the third quarter of 2004. The increase is primarily attributable to higher fund administration fee income of $1.3 million, as well as additional income related to the UMB Scout Funds and corporate trust services as compared to the same period last year. The amount of UMB Scout Fund fee income increased as a result of increased flows into the funds of $302 million for the three months ended September 30, 2005.

 

Service charges on deposit accounts increased $2.1 million, or 11.4% for the three months ended September 30, 2005 compared to the same period in 2004. This increase was primarily attributable to $2.4 million of increases of overdraft fees as a result of the centralization and automation of the related decision making process in September 2004. These higher overdraft fees were partially offset by decreases in corporate service charge income mostly due to increases in earnings credits on compensating balances maintained by corporate customers.

 

Bankcard fees increased $0.6 million for the third quarter of 2005 compared to 2004, or 7.3%. This increase is primarily a result of higher interchange fee income due to a higher number of cards outstanding and an increase in the average volume.

 

Gains on sales of assets and deposits, net was $4.8 million for the quarter ended September 30, 2005. This gain is a result of the net gain from the sale of eight banking facilities and the closure of another facility.

 

22


Year-To-Date

 

Noninterest income (summarized in Table 4) increased by $19.4 million or 11.3% for the nine months ended September 30, 2005 compared to the same period in 2004. The increase in 2005 is attributable to higher trust and securities processing fees, service charges and bankcard fees, as well as one-time gains.

 

Trust and securities processing fees increased $5.2 million for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. The increase is primarily a result of higher fund administration and processing fees of $3.2 million and additional fee income related to the UMB Scout Funds of $1.4 million. The amount of UMB Scout Fund fee income increased as a result of increased flows into the funds of $659 million for the first nine months of 2005. Management believes that the overall quality of both its investment management and UMB Scout Funds will continue to attract both increased and new investable dollars to its assets under management. The Company continues to put a special emphasis on selling the UMB Scout Funds through its institutional channels through the Company’s dedicated sales force. Although any forecast of future growth of such funds is uncertain, management believes that the continued efforts of the sales force will continue to bring additional inflows into the Scout Funds.

 

Service charges on deposit accounts increased $4.4 million, or 8.0% for the nine months ended September 30, 2005 compared to the same period in 2004. The increase in fees was primarily related to an increase in individual overdraft income of $5.5 million. This increase was partially offset by decreases in corporate service charge income as a result of higher earnings credits on compensating balances maintained by corporate customers. The recent interest rate increases have had a negative impact on fees within this business sector. Management believes that if rates continue to increase, income related to corporate service charges will decrease in the future. Management believes that although the volume of service charge income as a result of non-sufficient funds and overdrafts will continue to be strong, the large increases will get smaller as the change to the overdraft fee structure was implemented in September 2004. Additionally, management believes that cash management income will be challenged due to a shift of customer payments from paper to electronic. Although the Company has focused significant resources into maintaining its cash management income levels, the external challenges facing the Company make the impact of these changes to its income uncertain.

 

Brokerage fee income relates primarily to fee income from the sale of annuity and mutual fund products. Brokerage fee income decreased by $1.5 million, or 24.3% from 2004. This large percentage decrease is primarily attributable to a $0.7 million decrease in 12b-1 fees primarily related to employee benefit accounts that were sold in February 2004 to Marshall & Ilsley. Additionally, overall brokerage fees decreased by approximately $0.8 million due to decreased demand for annuity products.

 

Bankcard fees increased by $1.3 million, or 5.4%, for the nine months ended September 30, 2005 as compared to the same period in 2004. This increase is a result of a $1.9 million increase in interchange fees during 2005 partially offset by lower ATM and other card fee income.

 

The Company’s net gain on sale of assets and deposits is $8.8 million for the year. In the first quarter of 2005, the Company recorded a $2.4 million gain on the sale of a banking facility to the city of Kansas City under threat of condemnation for purposes of a new downtown arena. The remaining income is primarily from the net gains from the sale of eight additional banking facilities and the closure of two facilities. The Company also sold a parcel of land next to an existing Kansas City, Missouri branch. In 2004, a gain of $1.9 million was recognized primarily from the sale of parking facility under threat of condemnation.

 

Gains on sale of employee benefit accounts increased $2.8 million for the nine months ended September 30, 2005 as compared to the same period in 2004. This is due to income recognition from the final earnout payment related to the sale of employee benefit accounts to Marshall & Ilsley. Income of $3.6 million was recorded in the first quarter of 2005. Under the terms of the contract for the sale of the employee benefit accounts, this final earnout payment was due to the Company based upon gross revenues received by those employee benefit accounts retained by Marshall & Ilsley from February 2004 to February 2005. Income of $0.8 million was recorded related to this sale in 2004.

 

23


Noninterest Expense

 

Table 5

SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)

 

     Three Months Ended
September 30,


   Nine Months Ended
September 30,


     2005

   2004

   2005

   2004

Salaries and employee benefits

   $ 47,821    $ 47,271    $ 148,232    $ 144,593

Occupancy, net

     6,841      6,643      19,728      19,542

Equipment

     11,115      11,175      32,843      32,819

Supplies, postage and telephone

     5,288      5,461      16,518      16,690

Marketing and business development

     3,473      3,825      10,040      11,280

Processing fees

     6,233      5,213      17,320      15,514

Legal and consulting

     1,890      1,669      5,613      6,082

Amortization of other intangibles

     185      185      557      556

Other

     7,090      5,489      20,311      15,336
    

  

  

  

Total noninterest expense

   $ 89,936    $ 86,931    $ 271,162    $ 262,412
    

  

  

  

 

Quarter-To-Date

 

Noninterest expense increased $3.0 million, or 3.5%, for the three months ended September 30, 2005 compared to the same period in 2004 primarily as a result of increases in processing fees and other expense.

 

Processing fees increased $1.0 million, or 19.6% for the quarter ended September 30, 2005 as compared to the same quarter in 2004. Processing fees are up primarily due to the inflows in Scout Funds causing an increase in related shareholder servicing and other administration fees paid to investment advisors.

 

Other noninterest expense consists of several items among which include charitable contributions, bankcard expenses, regulatory fees and other non-credit related operating losses net of recoveries. For the third quarter of 2005, each of these categories had increases over the same quarter in 2004. The impact of these increases amounted to a $1.6 million increase in other expense for the third quarter of 2005 compared to the same quarter in 2004.

 

Year-To-Date

 

Noninterest expense (summarized in table 5) increased $8.8 million, or 3.3% for the year-to-date September 30, 2005 compared to the same period in 2004 due primarily to increases in salaries and benefits, processing fees and other expense as described below. These increases were partially offset by a decrease in marketing and business development expenses.

 

Salaries and employee benefits expenses increased by $3.6 million, or 2.5% year-to-date September 30, 2005 as compared to the same period in 2004. In the first quarter of 2005, the Company offered a VSP to certain employees. Most eligible employees had until March 31, 2005 to accept the terms of such program. In the first nine months of 2005, a charge of $4.4 million was taken related to such program. Additionally, new short-term and long-term incentives plans have added $2.5 million in expense in 2005 as compared to 2004. These increases have been off-set by decreases in employees. The number of full-time equivalent employees declined by 161 to 3,447 at September 30, 2005 as compared to 3,608 at September 30, 2004.

 

Marketing and business development expenses decreased by approximately $1.2 million, or 11.0%, from 2004. This is primarily attributable to a plan by management to lower overall advertising costs of the Company in 2005 as compared to 2004 through decreases of most of the regional and line of business advertising expenditures. This decrease was partially offset by an increase in charitable contributions and sponsorships as discussed below.

 

24


Processing fee expenses increased by $1.8 million, or 11.6% for the nine months ended September 30, 2005 as compared to the same period in 2004. This increase is primarily attributable to increases in shareholder servicing and other administration fees paid to investment advisors related to the Scout Funds.

 

Other expense increased by $5.0 million over 2004. This increase is primarily attributable to increases in bankcard expenses, contributions and non-credit related operating losses net of recoveries. Bankcard expenses are higher due to increased activity volume and rebate programs. Charitable contributions have increased as management has focused on improving sponsorships in the communities within the Company’s footprint.

 

Income Tax Expense

 

Income tax expense increased by $8.8 million for the nine months ended September 30, 2005 as compared to the same period in 2004. The effective tax rate is 27.4% in 2005 as compared to 17.9% in 2004. For the three months ended September 30, 2005, income tax expense increased $4.5 million compared to the third quarter of 2004. The effective tax rate for the third quarter was 26.7% in 2005 compared to 10.4% in 2004. The increase in effective tax rate is primarily attributable to tax-exempt income representing a smaller percentage of total income in 2005 as compared to 2004; and the $1.8 million tax effect of federal rehabilitation tax credits received in the third quarter of 2004.

 

Strategic Lines of Business

 

The Company’s operations are strategically aligned into six major lines of business: Commercial Banking and Lending, Corporate Services, Banking Services, Consumer Services, Asset Management, and Investment Services Group. The lines of business in the second quarter of 2004 were Commercial Banking, Retail Banking, Trust and Wealth Management, and Investment Services Group. Management changed the lines of businesses in the fourth quarter of 2004 to better reflect the current organizational structure. This resulted in breaking Commercial Banking into three separate sectors: Commercial Banking and Lending, Corporate Services, and Banking Services. This breakout was done to better reflect how the Company markets its products and services as well as adding more granularity to help management to better identify the primary drivers of the Company’s profitability. In addition, the Company merged consumer oriented business lines into the Retail Banking Business Segment and created Consumer Services. Finally, to reflect its desire to focus on both Personal and Institutional lines of business, the Trust and Wealth Management Business Segment has been renamed Asset Management. Under Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the prior year information has been reclassified to conform to the 2005 reporting structure. The lines of business are differentiated by both the customers and the products and services offered. The Treasury and Other Adjustments category includes items not directly associated with the other lines of business.

 

Table 6

NET INCOME (LOSS) BY LINE OF BUSINESS (unaudited, dollars in thousands)

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2005

    2004

    2005

    2004

 

Line of Business

                                

Commercial Banking & Lending

   $ 6,236     $ 4,865     $ 16,057     $ 14,265  

Corporate Services

     7,047       5,680       20,853       19,675  

Banking Services

     414       1,617       2,081       6,813  

Consumer Services

     6,215       (929 )     6,857       (6,311 )

Asset Management

     2,150       1,880       4,387       5,177  

Investment Services Group

     1,672       1,822       6,740       4,675  

Treasury and Other Adjustments

     (7,563 )     (2,927 )     (15,612 )     (13,114 )
    


 


 


 


Total Consolidated Company

   $ 16,171     $ 12,008     $ 41,363     $ 31,180  
    


 


 


 


 

25


Commercial Banking and Lending serves the commercial lending/leasing as well as the capital markets needs of the Company’s middle market businesses and governmental entities by offering various products and services. Commercial Banking and Lending’s net income year-to-date increased $1.8 million, or 12.6% compared to 2004. Net interest income increased $2.3 million compared to 2004 due to increases in commercial loans and recent interest rate increases. Provision for loan losses decreased slightly because management believes that the ALL reserve is adequately funded for the current loan portfolio mix and the number of non-performing loans decreased. Noninterest income increased $0.5 million compared to 2004. Management believes that its renewed sales focus and an anticipated improving economy will spur an increase in both loan commitments and outstanding loan balances which will generate increased net interest income in the future. Noninterest expense increased $1.1 million, or 5.6% primarily because of an increased focus on advertising and charitable contributions allocated to this segment in order to attract new commercial customers. Additionally, the Company’s recognition of expense related to the VSP caused an increase in salaries.

 

Corporate Services meets the treasury management, treasury services as well as the corporate trust and security transfer needs of its commercial clients. Corporate Services’ net income for the year increased by $1.2 million, or 6.0% compared to 2004. Net interest income increased $2.0 million, or 6.5% due to increases in interest bearing deposits and the corresponding positive effect of repricing of earning assets in a rising rate environment. Noninterest income increased $1.0 million, or 2.2%. The increase is primarily related to the increase in commercial credit card income from increased volume and increases in corporate trust income. Noninterest expense increased by $1.8 million, or 3.2% compared to 2004. This increase was primarily due to an increase in depreciation and salaries. Management continues to focus efforts to increase service charge income despite pressures from rising interest rates.

 

Banking Services provides products and services to both the Company’s customer base as well as selling the same products and services through its correspondent banking network. Banking Services’ net income for the year decreased $4.7 million, or 69.5% compared to 2004. This decline is due to decreases in net interest income of $1.8 million and decreases in noninterest income of $1.1 million and increases in noninterest expense of $1.8 million. Net interest income decreased primarily because of a decline in the correspondent bank deposit balances and a shift in deposit mix from noninterest bearing deposits to interest bearing repurchase agreements. If this trend continues, future increases in interest rates would continue to have an adverse effect on net interest income. Noninterest income is down 4.7% due to decreases in bond trading income and deposit service charge income. Noninterest expense increased 8.5% because of increases in salary due to the VSP and increases in pricing from the Federal Reserve Bank.

 

Consumer Services delivers a full range of products and services through the Company’s bank branch and ATM network. Consumer Services’ net income increased $13.2 million year-to-date compared to 2004. Net interest income increased 4.25% during this period. Consumer loans grew approximately 6.5% for the year primarily in indirect auto loans and home equity loans. Consumer deposits grew approximately 3.4% for the year mostly in money market accounts. There has also been a shift of deposits during the year from interest bearing to noninterest bearing resulting in a reduction of interest expense. Provision for loan losses decreased $2.4 million due to the ALL reserve being adequately funded for the current loan portfolio mix and a reduction in non-performing loans. Noninterest income increased $9.9 million or 21.7% primarily due to sales and closures of banking facilities. Additionally, increases in overdraft and insufficient funds fee income were recognized due to fee increases in the second quarter of 2005 and changes in the overdraft fee structure initiated in 2004. Noninterest expense increased $1.6 million, or 1.5% primarily from the VSP. Management believes this segment will continue to improve net interest margin by growing noninterest bearing deposits and having an additional sales focus on variable rate loan products.

 

Asset Management provides a full spectrum of trust and custody services to both personal and institutional clients of the Company focusing on estate planning, trust, retirement planning and investment management services to individuals and institutional customers. Asset Management’s net income decreased $0.8 million year-to-date compared to the same period of 2004. Noninterest income increased $1.5 million, or 4.4% offset by a 2.0 million, or 6.9% increase in noninterest expense year-to-date. An increase in net cash inflows to the UMB Scout Funds has increased fee income compared to the same period last year. Noninterest expense increased this year due to increases in salary and benefits from the VSP; higher commissions and higher mutual fund shareholder meeting expenses. Further, servicing and other administration fees paid to investment advisors of the UMB Scout Funds

 

26


have increased as these fees are based on asset values. Management has had great success in its efforts to increase cash inflows to the UMB Scout Funds and will continue to focus sales efforts to continue this trend. In March 2005, the UMB Scout Funds held a shareholder meeting to approve changes to the individual fund structures and organization. The most significant change related to fee unbundling. In the past, Scout Investment Advisors, a wholly-owned subsidiary of the Company, collected a fee from the funds and was responsible for paying expenses on behalf of the funds. Effective April 1, 2005, Scout Investment Advisors charges an advisory fee and the individual funds pay direct expenses including accounting, administration, transfer agency and audit fees. The Company anticipates the overall decrease in expenses paid by the Company will be greater than the reduced revenue received. Therefore, overall net income should increase.

 

Investment Services Group provides a full range of services for mutual funds, hedge funds, separate accounts and commingled funds to a wide range of investment advisors, independent money managers, broker/dealers, banks, third-party administrators, insurance companies and other financial service providers. Investment Services Group’s net income increased $2.1 million year-to-date compared to 2004. Net interest income rose $1.4 million, or 28.3% due primarily to interest income associated with investing the additional deposits generated from this line of business. Noninterest income increased $2.8 million, or 11.3% primarily from the addition of new clients during the past year. Management believes the new clients added will continue to increase fee income the remainder of 2005, subject to uncertainties in the mutual fund and alternative investment markets. Noninterest expense increased $2.2 million, or 8.6% due to increased staffing and processing costs in support of the new clients added.

 

Treasury and Other Adjustments includes asset and liability management activities and other miscellaneous items of a corporate nature not allocated to specific business lines. The net loss for the Treasury and Other category was $15.6 million for the nine months ended September 30, 2005, compared to a net loss of $13.1 million for the same period in 2004. The net loss for the two periods includes unallocated income tax expense for the consolidated Company and the income from the employee benefit accounts sold in 2004.

 

Balance Sheet Analysis

 

Total assets of the Company declined $717.1 million as of September 30, 2005 compared to December 31, 2004 and increased $215.7 million compared to September 30, 2004. The decrease from December to September is a result of lower deposits and securities sold under agreement to repurchase related to public entities. This fluctuation is primarily driven by the cyclical trend due to public fund tax deposit inflows, which are generally higher around the end of the calendar year.

 

Table 7

SELECTED BALANCE SHEET INFORMATION (unaudited, dollars in thousands)

 

     September 30,

  

December 31,

2004


     2005

   2004

  

Total assets

   $ 7,087,925    $ 6,872,262    $ 7,805,006

Loans, net of unearned interest

     3,368,146      2,822,791      2,869,224

Total investment securities

     2,637,729      2,741,382      3,764,011

Total earning assets

     6,311,190      5,952,441      6,945,865

Total deposits

     5,006,741      4,779,029      5,388,238

Total borrowed funds

     1,184,685      1,144,564      1,566,477

 

Loans

 

Total loan balances have increased $498.9 million or 17.4% compared to December 31, 2004, and $545.4 million or 19.3% compared to September 30, 2004. These increases were a result of increased focus on new commercial and consumer loan relationships, as well as an emphasis on home equity lines of credit.

 

Loans represent the Company’s largest source of interest income. In addition to growing the Commercial Loan Portfolio, management has focused on its consumer and middle market business as these market niches

 

27


represent its best opportunity to cross-sell fee-related services, such as cash management. Management has developed a new incentive plan for loan officers, as well as increased loan authority for regional presidents. Management expects the loan growth to improve net interest margin due to the higher interest rates on loans compared to those available in the securities market.

 

Nonaccrual, past due and restructured loans are discussed under “Credit Risk Management” within the Quantitative and Qualitative Disclosures about Market Risk in Item 3 of this report.

 

Securities

 

Securities available for sale and securities held to maturity comprised 42%, 46% and 54% respectively, of the earning assets as of September 30, 2005, September 30, 2004 and December 31, 2004. Loan demand and public deposits are the primary factors impacting changes in the level of security holdings.

 

In addition to providing a potential source of liquidity, the security portfolio can be used as a tool to manage interest rate sensitivity. The Company’s goal in the management of its securities portfolio is to maximize return within the Company’s parameters of liquidity goals, interest rate risk and credit risk. The Company maintains high liquidity levels while investing in only high-grade securities. The security portfolio generates the Company’s second largest component of interest income.

 

Further, management has adopted a portfolio modification plan designed to improve interest margin which it intends to continue to implement over the course of the next two years. This plan calls for a modest extension of 6-12 months, to the portfolio average life. Complete implementation of this plan is subject to market conditions including sufficient supply of securities with acceptable risk/reward characteristics. The effectiveness of this plan is uncertain as it is dependent on future market conditions including interest rate changes.

 

Deposits and Borrowed Funds

 

Deposits increased $227.7 million from September 30, 2004, and decreased $381.5 million from December 31, 2004. Noninterest bearing deposits increased $120.2 million and decreased $61.7 million, and interest bearing deposits increased $107.5 and decreased $319.8 million compared to September 30, 2004 and December 31, 2004, respectively.

 

Deposits represent the Company’s primary funding source for its asset base. In addition to the core deposits garnered by the Company’s retail branch structure, the Company continues to focus on its cash management services, as well as its trust and mutual fund servicing lines of business in order to attract and retain additional core deposits and commercial funding customers. Management believes Treasury Management is one of the Company’s core competencies given both its scale and competitive product mix.

 

Borrowed funds increased $40.1 million compared to the September 30, 2004, and decreased $381.8 million from December 31, 2004. Borrowed funds are typically higher at year end due to repurchase agreements related to public funds. Borrowings other than repurchase agreements are a function of the source and use of funds and will fluctuate to cover short term gaps in funding.

 

Federal funds purchased and securities sold under agreement to repurchase totaled $1.1 billion at September 30, 2005 and 2004 and $1.5 billion at December 31, 2004. Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company under an agreement to repurchase the same or similar issues at an agreed-upon price and date.

 

Capital Resources and Liquidity

 

The Company places a significant emphasis on the maintenance of a strong capital position, which 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. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. Management manages capital for each subsidiary based upon the subsidiary’s respective risks and growth opportunities as well as regulatory requirements.

 

28


Total shareholders’ equity was $830.9 million at September 30, 2005, compared to $819.6 million at September 30, 2004 and $819.2 million at December 31, 2004. The Company’s Board of Directors authorized at its April 26, 2005, April 29, 2004 and April 18, 2003 meetings the repurchase of the Company’s common stock up to one million shares during the 12 months following each respective meeting. During the nine months ended September 30, 2005 and 2004, the Company acquired 150,677 shares and 64,631 shares, respectively, of its common stock.

 

Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institution’s assets. A financial institution’s total capital is required to equal at least 8% of risk-weighted assets. At least half of that 8% must consist of Tier 1 core capital, and the remainder may be Tier 2 supplementary capital. The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance-sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. Due to the Company’s high level of core capital and substantial portion of earning assets invested in government securities, the Tier 1 risk-based capital ratio of 17.09% and total risk-based capital ratio of 17.97% substantially exceed the regulatory minimums of 6% and 10% for Tier 1 risk-based capital and total risk-based capital ratios, respectively.

 

For further discussion of capital and liquidity, please see “Liquidity Risk” of Item 3 in this report.

 

Table 8

The Company’s capital position is summarized in the table below and exceeds regulatory requirements discussed above (unaudited):

 

     Nine Months Ended
September 30,


    Three Months Ended
September 30,


 
     2005

    2004

    2005

    2004

 

RATIOS

                        

Return on average assets

   0.79 %   0.60 %   0.91 %   0.71 %

Return on average equity

   6.68     5.08     7.71     5.83  

Average equity to assets

   11.79     11.90     11.84     12.25  

Tier 1 risk-based capital ratio

   17.09     18.91     17.09     18.91  

Total risk-based capital ratio

   17.97     20.03     17.97     20.03  

Leverage ratio

   11.28     11.47     11.28     11.47  

 

The Company’s per share data is summarized in the table below.

 

     Nine Months Ended
September 30,


    Three Months Ended
September 30,


 
     2005

    2004

    2005

    2004

 

Per Share Data

                                

Earnings basic

   $ 1.92     $ 1.44     $ 0.75     $ 0.55  

Earnings diluted

     1.91       1.43       0.75       0.55  

Cash dividends

     0.66       0.63       0.22       0.21  

Dividend payout ratio

     34.55 %     43.75 %     29.33 %     38.18 %

Book value

   $ 38.56     $ 37.85     $ 38.56     $ 37.85  

 

Off-balance Sheet Arrangements

 

The Company’s main off-balance sheet arrangements are loan commitments, commercial and standby letters of credit, futures contracts and forward exchange contracts, which have maturity dates rather than payment due dates. Please see Note 5, “Commitments, Contingencies and Guarantees” in the Notes to Condensed Consolidated Financial Statements for detailed information on these arrangements. There was no material change from December 31, 2004.

 

29


Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of financial condition and results of operations discusses the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customers and suppliers, allowance for loan losses, bad debts, investments, financing operations, long-lived assets, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from the recorded estimates under different assumptions or conditions. A summary of critical accounting policies are listed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s 2004 Annual Report of Form 10-K for the fiscal year ended December 31, 2004.

 

30


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Risk Management

 

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading.

 

The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The following discussion of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading because the instruments held for trading represent such a small portion of the Company’s portfolio that the interest rate risk associated with them is immaterial.

 

Interest Rate Risk

 

The Company is subject to a major risk exposure through changing interest rates. To minimize the effect of interest rate changes to net interest income and exposure levels to economic losses, the Company manages its exposure to changes in interest rates through asset and liability management within guidelines established by its Funds Management Committee (“FMC”) and approved by the Company’s Board of Directors. The FMC has the responsibility for approving and ensuring compliance with asset/liability management policies, including interest rate exposure. The Company uses the following methods (simulation tools) for measuring and analyzing consolidated interest rate risk: Market Value of Equity Modeling (“Net Portfolio Value”), Net Interest Income Simulation Analysis, and Repricing Mismatch Analysis. The Company does not use hedges or swaps to manage interest rate risk except for the use of future contracts to offset interest rate risk on specific securities held in its trading portfolio.

 

Market Value of Equity (Net Portfolio Value) Modeling

 

The Company uses the Net Portfolio Value to measure and manage interest rate sensitivity. The Net Portfolio Value measures the degree to which the market values of the Company’s assets and liabilities will change given a change in interest rates. This model is designed to represent, as of the respective date selected, the increase or decrease in the market value of assets and liabilities that would result from a hypothetical change in interest rates on such date. The Company uses a hypothetical rate change (rate shock) of 100 basis points and 200 basis points up or down. To perform these calculations, the Company uses the current loan, investment and deposit portfolios. The Company then makes certain cash flow assumptions regarding non-maturity deposits based on historical analysis, and management’s outlook. The Company also analyzes loan prepayments and other market risks from industry estimates of prepayment yields and other market changes. Table 9 sets forth, for September 30, 2005 and 2004 and December 31, 2004, the increase or decrease (as applicable) in Net Portfolio Value that would be caused by the following hypothetical immediate changes in interest rates on such date: an immediate increase of 200 basis points; an immediate increase of 100 basis points; an immediate decrease in 200 basis points; and an immediate decrease of 100 basis points, respectively.

 

Net Portfolio Value changes as of September 30, 2005 reflect that the Company is less sensitive to both interest rate increases and decreases compared to September 30, 2004 and December 31, 2004. The Company should benefit from rate increases because a majority of its earning assets and deposits reprice within twelve months. The indicated benefit from rising rate on Net Portfolio Value may not necessarily translate into improved earnings over the near-term.

 

31


Table 9

MARKET RISK (unaudited, dollars in thousands)

 

     Net Portfolio Value

 

Hypothetical change

in interest rate

(in Basis Points)

(Rate Shock)


   September 30, 2005

    September 30, 2004

    December 31, 2004

 
   Amount

   Dollar
Change


    Percent
Change


    Amount

   Dollar
Change


    Percent
Change


    Amount

   Dollar
Change


    Percent
Change


 

200

   $ 1,773,489    $ 143,349     8.79 %   $ 1,676,993    $ 181,309     12.12 %   $ 1,817,077    $ 201,738     12.49 %

100

     1,701,815      71,675     4.40       1,586,339      90,655     6.06       1,716,208      100,869     6.24  

Static

     1,630,140      —       —         1,495,684      —       —         1,615,339      —       —    

(100)

     1,534,835      (95,306 )   (5.85 )     1,367,372      (128,312 )   (8.58 )     1,468,201      (147,138 )   (9.11 )

(200)

     1,439,529      (190,611 )   (11.69 )     1,239,061      (256,623 )   (17.16 )     1,321,062      (294,277 )   (18.22 )

 

Net Interest Income Modeling

 

Another tool used to measure interest rate risk and the effect of interest rate changes on net interest income and net interest margin is Net Interest Income Simulation Analysis. This analysis incorporates substantially all of the Company’s assets and liabilities together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on net interest income of a 200 basis point upward or downward gradual change of market interest rates over a one year period. These simulations include assumptions about how the balance sheet is likely to change with changes in loan and deposit growth. Assumptions are made to project rates for new loans and deposits based on historical analysis, management outlook and repricing strategies. Asset prepayments and other market risks are developed from industry estimates of prepayment speeds and other market changes. Because the results of these simulations can be significantly influenced by the assumptions utilized, management evaluates the sensitivity of the simulation results to changes in assumptions. Due to the low level of interest rates, the scenarios that simulate a 100 basis point decrease and a 200 basis point decrease could not be completed as of September 30, 2004. Table 10 shows the net interest income increase or decrease over the next twelve months as of September 30, 2005 and 2004 and December 31, 2004. The three periods show that if rates rise 100 or 200 basis points, net interest income will increase.

 

Table 10

MARKET RISK (unaudited, dollars in thousands)

 

Hypothetical change

in interest rate

(in Basis Points)

(Rate Shock)


   September 30, 2005
Amount of change


    September 30, 2004
Amount of change


    December 31, 2004
Amount of change


 

200

   $ 2,406     $ 4,536     $ 4,753  

100

     1,203       2,268       2,377  

Static

     —         —         —    

(100)

     (1,604 )     (5,126 )     (3,160 )

(200)

     (3,208 )     —         (6,320 )

 

Repricing Mismatch Analysis

 

The Company also evaluates its interest rate sensitivity position in an attempt to maintain a balance between the amount of interest-bearing assets and interest-bearing liabilities which are expected to mature or reprice at any point in time. While a traditional repricing mismatch analysis (“gap analysis”) provides a snapshot of interest rate risk, it does not take into consideration that assets and liabilities with similar repricing characteristics may not in fact reprice at the same time or the same degree. Also, it does not necessarily predict the impact of changes in general levels of interest rates on net interest income.

 

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Management attempts to structure the balance sheet to provide for the repricing of approximately equal amounts of assets and liabilities within specific time intervals. The Company is in a positive gap position because assets maturing or repricing exceed liabilities.

 

Trading Account

 

The Company’s subsidiary UMB Bank, n.a. carries taxable governmental securities in a trading account that is maintained according to a Board-approved policy and relevant procedures. The policy limits the amount and type of securities that can be carried in the trading account as well as requiring that any limits under applicable law and regulations also be complied with, and mandates the use of a value at risk methodology to manage price volatility risks within financial parameters. The risk associated with the carrying of trading securities is offset by the sale of exchange traded financial futures contracts, with both the trading account and futures contracts marked to market daily. This account had a balance of $58.0 million as of September 30, 2005 compared to $76.8 million as of September 30, 2004 and $59.9 million as of December 31, 2004.

 

The Manager of the Investment Banking Division of UMB Bank, n.a. presents documentation of the methodology used in determining value at risk at least annually to the Board for approval in compliance with OCC Banking Circular 277, Risk Management of Financial Derivatives, and other banking laws and regulations. The aggregate value at risk is reviewed quarterly. The aggregate value at risk in the trading account was negligible as of September 30, 2005 and 2004 and December 31, 2004.

 

Other Market Risk

 

The Company does not have material commodity price risks or derivative risks. The Company has foreign currency risks as a result of foreign exchange contracts. Please see Note 5 “Commitments, Contingencies and Guarantees” in the Notes to the Condensed Consolidated Financial Statements.

 

Credit Risk Management

 

Credit risk represents the risk that a customer or counterparty may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers. The Company utilizes a centralized credit administration function, which provides information on affiliate bank risk levels, delinquencies, an internal ranking system and overall credit exposure. In addition, loan requests are centrally reviewed to ensure the consistent application of the loan policy and standards. The Company has an internal loan review staff that operates independently of the affiliate banks. This review team performs periodic examinations of each bank’s loans for credit quality, documentation and loan administration. The respective regulatory authority of each affiliate bank also reviews loan portfolios.

 

Another means of ensuring loan quality is diversification. By keeping its loan portfolio diversified, the Company has avoided problems associated with undue concentrations of loans within particular industries. The Company has no significant exposure to highly leveraged transactions and has no foreign credits in its loan portfolio.

 

A primary indicator of credit quality and risk management is the level of nonperforming loans. Nonperforming loans include both nonaccrual loans and restructured loans. The Company had nonperforming loans of $6.1 million at September 30, 2005. A decrease of $3.5 million at September 30, 2005, compared to September 30, 2004 and a decrease of $4.0 million compared to December 31, 2004.

 

The Company had other real estate owned as of September 30, 2005 of $35,000 as compared to none as of September 30, 2004 and December 31, 2004. Loans past due more than 90 days totaled $3.6 million as of September 30, 2005, compared to $3.0 million as of September 30, 2004 and $3.0 million as of December 31, 2004.

 

A loan is generally placed on nonaccrual status when payments are past due 90 days or more and/or when management has considerable doubt about the borrower’s ability to repay on the terms originally contracted. The accrual of interest is discontinued and recorded thereafter only when actually received in cash.

 

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TABLE 11

LOAN QUALITY (unaudited, dollars in thousands)

 

     September 30,

   

December 31,

2004


 
     2005

    2004

   

Nonaccrual loans

   $ 6,086     $ 9,282     $ 9,752  

Restructured loans

     —         313       298  
    


 


 


Total nonperforming loans

     6,086       9,595       10,050  

Other real estate owned

     35       —         —    
    


 


 


Total nonperforming assets

   $ 6,121     $ 9,595     $ 10,050  
    


 


 


Loans past due 90 days or more

   $ 3,635     $ 3,034     $ 3,028  

Allowance for Loans Losses

     39,715       45,070       42,723  
    


 


 


Ratios

                        

Nonperforming loans as a % of loans

     0.18 %     0.34 %     0.35 %

Nonperforming assets as a % of loans plus other real estate owned

     0.18       0.34       0.35  

Nonperforming assets as a % of total assets

     0.09       0.14       0.13  

Loans past due 90 days or more as a % of loans

     0.11       0.11       0.11  

Allowance for loan losses as a % of loans

     1.18       1.60       1.49  

Allowance for loan losses as a multiple of nonperforming loans

     6.53 x     4.70 x     4.25 x
    


 


 


 

Liquidity Risk

 

Liquidity represents the Company’s ability to meet financial commitments through the maturity and sale of existing assets or availability of additional funds. The most important factor in the preservation of liquidity is maintaining public confidence in the Company’s operations that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. The primary source of liquidity for the Company is regularly scheduled payments on and maturity of assets, which include $2.5 billion of high-quality securities available for sale. The liquidity of the Company and its affiliate banks is also enhanced by its activity in the federal funds market and by its core deposits. Neither the Company nor its subsidiaries are active in the debt market. The traditional funding source for the Company’s subsidiary banks has been core deposits. The Company has not issued any debt since 1993 when $25 million of medium-term notes were issued to fund bank acquisitions. Prior to being paid off in February 2003 these notes were rated A3 by Moody’s Investor Service and A- by Standard and Poor’s. Based upon regular contact with investment banking firms, management is confident in its ability to raise debt or equity capital on favorable terms, should the need arise.

 

The Company also has other commercial commitments that may impact liquidity. These commitments include unused commitments to extend credit, standby letters of credit and financial guarantees, and commercial letters of credit. The total amount of these commercial commitments at September 30, 2005 was $2.4 billion. Since many of these commitments expire without being drawn upon, the total amount of these commercial commitments does not necessarily represent the future cash requirements of the Company.

 

The Company’s cash requirements consist primarily of dividends to shareholders, debt service and treasury stock purchases. Management fees and dividends received from subsidiary banks traditionally have been sufficient to satisfy these requirements and are expected to be sufficient in the future. The Company’s subsidiary banks are subject to various rules regarding payment of dividends to the Company. For the most part, all banks can pay dividends at least equal to their current year’s earnings without seeking prior regulatory approval. From time to time, approvals have been requested to allow a subsidiary bank to pay a dividend in excess of its current earnings. All such requests have been approved.

 

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Operational Risk

 

The Company is exposed to numerous types of operational risk. Operational risk generally refers to the risk of loss resulting from the Company’s operations, including, but not limited to: the risk of fraud by employees or persons outside the Company; the execution of unauthorized transactions by employees or others; errors relating to transaction processing and systems; and breaches of the internal control system and compliance requirements. This risk of loss also includes the potential legal or regulatory actions that could arise as a result of an operational deficiency, or as a result of noncompliance with applicable regulatory standards. Included in the legal and regulatory issues with which the Company must comply are a number of recently imposed rules resulting from the enactment of the Sarbanes-Oxley Act of 2002.

 

The Company operates in many markets and places reliance on the ability of its employees and systems to properly process a high number of transactions. In the event of a breakdown in the internal control systems, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation. In order to address this risk, management maintains a system of internal controls with the objective of providing proper transaction authorization and execution, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other data.

 

The Company maintains systems of controls that provide management with timely and accurate information about the Company’s operations. These systems have been designed to manage operational risk at appropriate levels given the Company’s financial strength, the environment in which it operates, and considering factors such as competition and regulation. The Company has also established procedures that are designed to ensure that policies relating to conduct, ethics and business practices are followed on a uniform basis. In certain cases, the Company has experienced losses from operational risk. Such losses have included the effects of operational errors that the Company has discovered and included as expense in the statement of income. While there can be no assurance that the Company will not suffer such losses in the future, management continually monitors and works to improve its internal controls, systems and corporate-wide processes and procedures. Furthermore, management believes the plans to streamline the organization through further systems integration and policies enacted to push down reporting accountabilities further in the organization have improved the Company’s ability to identify and limit operational risk.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

The Sarbanes-Oxley Act of 2002 requires Chief Executive Officers and Chief Financial Officers to make certain certifications with respect to this report and to the Company’s disclosure controls and procedures and internal control over financial reporting. The Company has a Code of Ethics that expresses the values that drive employee behavior and maintains the Company’s commitment to the highest standards of ethics.

 

Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “Disclosure Controls and Procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective for recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files under the Exchange Act. Disclosure Controls and Procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

While the Company believes that its existing disclosure controls and procedures have been effective to accomplish the Company’s objectives, the Company intends to continue to examine, refine, and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.

 

Internal Control Over Financial Reporting

 

There have not been any significant changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table provides information about purchases by the Company during the quarter ended September 30, 2005, of equity securities that are registered by the Company:

 

ISSUER PURCHASE OF EQUITY SECURITIES

 

Period


  

(a) Total
Number of
Shares

(or Units)
Purchased


   (b)
Average
Price Paid
per Share
(or Unit)


   ( c ) Total
Number of Shares
(or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs


  

(d) Maximum
Number (or

Approximate Dollar
Value) of Shares (or
Units) that May Yet
Be Purchased Under
the Plans or Programs


July 1-July 31, 2005

   71    $ 61.13    71    880,544

August 1-August 31, 2005

   13,677      64.05    13,677    866,867

September 1-September 30, 2005

   2,250      64.95    2,250    864,617

 

On April 29, 2004, the Company announced a plan to purchase up to one million shares of common stock. This plan terminated on April 29, 2005. On April 26, 2005 the Company announced a plan to repurchase up to one million shares of common stock. This plan will terminate on April 26, 2006. The Company has not made any repurchases other than through these two plans. The Company typically executes all share repurchases in accordance with the safe-harbor provisions of Rule 10b-18 of the Exchange Act. Rule 10b-18 provides a safe harbor for purchases in a given day if the Company satisfies the manner, timing and volume conditions of the rule when purchasing its own common shares. Management of the Company continues to work with brokers so that future trades typically are executed in accordance with the safe-harbor provisions of Rule 10b-18.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

a) The following exhibits are filed herewith:

 

3.1 Articles of Incorporation restated as of March 6, 2003, and filed with the Missouri Secretary of State on April 2, 2003, incorporated by reference to Exhibit 3(i) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, and filed with the Commission on May 12, 2003.

 

3.2 Bylaws, restated as of January 25, 2005 incorporated by reference to Exhibit 3.2 to the Company’s annual report on form 10-K for the year ended December 31, 2004 and filed with the Commission on March 14, 2005.

 

4 Description of the Registrant’s common stock in Amendment No. 1 on Form 8, incorporated by reference to its General Form for Registration of Securities on Form 10 dated March 5, 1993.

 

31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

38


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    UMB FINANCIAL CORPORATION
   

/s/ Christopher G. Treece


    Christopher G. Treece
    Senior Vice President, Controller
    (Authorized Officer and Chief Accounting Officer)
    Date: November 8, 2005

 

39