(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2002
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
Incorporated pursuant to the Laws ofMissouri State
Internal Revenue Service - Employer Identification No.43-0903811
1010 Grand Avenue
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
At June 30, 2002, UMB Financial Corporation had 22,062,494 shares of common stock outstanding. This is the only class of stock of the Company.
| UMB FINANCIAL CORPORATION | ||
|---|---|---|
| FORM 10-Q | ||
| INDEX | ||
| Page | ||
| PART I. | Financial Information | |
| Item 1. | Financial Statements | |
| Consolidated Balance Sheets As of June 30, 2002 and 2001 and December 31, 2001 (unaudited) | 3 | |
| Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited) | 4 | |
| Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (unaudited) | 5 | |
| Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2002 and 2001 (unaudited) | 6 | |
| Notes to Consolidated Financial Statements | 7-10 | |
| Supplemental Financial Data | ||
| Average Balances/ Yields and Rates | 11 | |
| Analysis of Changes in Net Interest Income and Margin | 12 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13-17 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 16 |
| PART II. | Other Information | |
| Item 4. | Submissions of Matters to a Vote of Security Holders | 18 |
| Item 6. | Exhibits and Reports on Form 8-K | 18 |
| Signatures | 19 | |
UMB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited in thousands)
June 30, December 31,
ASSETS 2002 2001 2001
------------- ------------- ---------------
Loans:
Commercial, financial and agricultural $1,427,498 $1,548,403 $1,448,309
Consumer (net of unearned interest) 823,188 973,600 912,373
Real estate 443,278 414,657 445,622
Leases 7,057 7,344 7,454
Allowance for loan losses (38,608) (35,758) (35,637)
------------- ------------- ---------------
Net loans $2,662,413 $2,908,246 $2,778,121
Securities available for sale:
U.S. Treasury and agencies $2,570,001 $2,014,462 $3,421,231
State and political subdivisions 187,929 61,477 133,421
Commercial paper and other 291,535 472,608 424,824
------------- ------------- ---------------
Total securities available for sale $3,049,465 $2,548,547 $3,979,476
Securities held to maturity:
State and political subdivisions (market value
of $480,981, $618,613 and $553,207,
respectively) $ 466,089 $ 608,681 $ 542,447
Federal funds and resell agreements 147,171 130,456 121,845
Trading securities and other earning assets 79,400 76,432 84,962
------------- ------------- ---------------
Total earning assets $6,404,538 $6,272,362 $7,506,851
Cash and due from banks 496,919 551,612 790,672
Bank premises and equipment, net 232,295 237,070 240,656
Accrued income 57,651 66,883 60,661
Goodwill on purchased affiliates 54,761 55,912 52,974
Other intangibles 7,837 9,715 8,853
Other assets 55,966 89,423 70,265
------------- ------------- ---------------
Total assets $7,309,967 $7,282,977 $8,730,932
============= ============= ===============
LIABILITIES
Deposits:
Noninterest-bearing demand $1,764,509 $1,704,152 $2,087,314
Interest-bearing demand and savings 2,399,621 2,553,134 3,086,825
Time deposits under $100,000 896,216 815,456 870,280
Time deposits of $100,000 or more 252,634 279,271 331,092
------------- ------------- ---------------
Total deposits $5,312,980 $5,352,013 $6,375,511
Federal funds and repurchase agreements 970,455 878,113 1,288,638
Short-term debt 131,649 154,703 173,046
Long-term debt 28,077 29,037 27,388
Accrued expenses and taxes 55,081 60,141 55,710
Other liabilities 21,162 66,124 42,062
------------- ------------- ---------------
Total liabilities $6,519,404 $6,540,131 $7,962,355
------------- ------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; authorized 33,000,000
shares; issued 27,528,365, 26,472,039 and
27,528,365 shares respectively. $ 27,528 $ 26,472 $ 27,528
Capital surplus 726,389 683,231 726,347
Retained earnings 225,477 222,630 200,780
Accumulated other comprehensive income 22,907 16,896 22,526
Unearned ESOP shares (1,240) (3,741) (2,491)
Treasury stock, 5,429,248, 5,251,643 and
5,326,917 shares, at cost, respectively (210,498) (202,642) (206,113)
------------- ------------- ---------------
Total shareholders' equity $ 790,563 $ 742,846 $ 768,577
------------- ------------- ---------------
Total liabilities and shareholders' $7,309,967 $7,282,977 $8,730,932
equity ============= ============= ===============
See Notes to Consolidated Financial Statements.
3
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited in thousands)
Three Months Six Months
Ended June 30, Ended June 30,
INTEREST INCOME 2002 2001 2002 2001
------------- ------------ ------------ ------------
Loans $ 41,445 $ 59,174 $ 83,998 $123,100
Securities:
Taxable interest $ 26,632 $ 29,674 $ 55,632 $ 62,252
Tax-exempt interest 6,705 7,177 13,668 14,463
------------ ------------ ------------ ------------
Total securities income $ 33,337 $ 36,851 $ 69,300 $ 76,715
Federal funds and resell agreements 592 2,018 1,619 4,955
Trading securities and other 695 949 1,378 2,139
------------ ------------ ------------ ------------
Total interest income $ 76,069 $ 98,992 $156,295 $206,909
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits $ 15,922 $ 28,510 $ 33,041 $ 62,207
Federal funds and repurchase
agreements 3,679 8,568 8,256 20,944
Short-term debt 133 847 552 1,852
Long-term debt 465 505 930 983
------------ ------------ ------------ ------------
Total interest expense $ 20,199 $ 38,430 $ 42,779 $ 85,986
------------ ------------ ------------ ------------
Net interest income $ 55,870 $ 60,562 $113,516 $120,923
Provision for loan losses 3,440 5,011 6,546 7,974
------------ ------------ ------------ ------------
Net interest income after
provision $ 52,430 $ 55,551 $106,970 $112,949
------------ ------------ ------------ ------------
NONINTEREST INCOME
Trust income $ 10,412 $ 13,495 $ 23,028 $ 27,150
Securities processing 11,367 7,904 23,726 12,089
Trading and investment banking 5,295 5,245 11,094 11,602
Service charges on deposits 11,963 11,245 29,155 26,157
Other service charges and fees 10,318 9,471 15,566 14,874
Bankcard fees 4,736 4,676 9,137 8,765
Net investment security gains 54 - 2,470 21
Other 1,929 4,598 3,911 7,835
------------ ------------ ------------ ------------
Total noninterest income $ 56,074 $ 56,634 $118,087 $108,493
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits $ 51,235 $ 50,685 $102,566 $ 99,645
Occupancy, net 5,668 5,843 11,136 11,813
Equipment 10,901 12,203 22,159 25,622
Supplies and services 6,147 5,269 12,407 10,832
Marketing and business development 3,894 4,085 7,110 8,355
Processing fees 4,617 4,189 9,617 8,220
Legal and consulting 1,601 1,394 2,985 4,179
Amortization of goodwill on purchased affiliates - 1,411 - 2,813
Amortization of other intangibles 508 327 1,016 664
Other 5,587 7,022 10,743 12,831
------------ ------------ ------------ ------------
Total noninterest expense $ 90,158 $ 92,428 $179,739 $184,974
------------ ------------ ------------ ------------
Minority interest in loss of consolidated sub. $ - $ 3,747 $ - $ 11,800
------------ ------------ ------------ ------------
Income before income taxes $ 18,346 $ 23,504 $ 45,318 $ 48,268
Income tax provision 4,384 6,796 11,778 13,842
------------ ------------ ------------ ------------
NET INCOME $ 13,962 $ 16,708 $ 33,540 $ 34,426
============ ============ ============ ============
PER SHARE DATA
Net income - Basic $ 0.63 $ 0.75 $ 1.52 $ 1.55
Net income - Diluted $ 0.63 $ 0.75 $ 1.52 $ 1.55
Dividends $ 0.20 $ 0.18 $ 0.40 $ 0.36
Weighted average shares outstanding 22,055,524 22,163,830 22,072,125 22,176,950
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
4
UMB FINANCIAL COPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands)
Six Months Ended
June 30,
---------------------------------------
2002 2001
---------------- -----------------
Operating Activities
Net Income $ 33,540 $ 34,426
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 6,546 7,974
Depreciation and amortization 15,403 18,438
Minority interest in net loss of subsidiary - (11,800)
Deferred income taxes 3,195 (1,338)
Net decrease in trading securities and other earning assets 5,562 4,232
Gains on sales of securities available for sale (2,470) (21)
Gains on sales of disposition of interest in subsidiary - (1,699)
Amortization of securities premiums,
net of discount accretion (1,478) (9,154)
Earned ESOP shares 1,251 1,250
Changes in:
Accrued income 3,010 5,682
Accrued expenses and taxes (4,135) 6,461
Other assets and liabilities, net (9,548) (12,719)
---------------- -----------------
Net cash provided by operating activities $ 50,876 $ 41,732
---------------- -----------------
Investing Activities
Proceeds from maturities of investment securities $ 75,453 $ 86,242
Proceeds from sales of securities available for sale 206,708 -
Proceeds from maturities of securities available for sale 11,081,775 13,674,846
Purchases of investment securities (160) (975)
Purchases of securities available for sale (10,352,767) (13,766,847)
Net decrease in loans 109,162 125,739
Net (increase) decrease in fed funds and resell agreements (25,326) 28,589
Investment in consolidated subsidiary (1,787) -
Purchases of bank premises and equipment (7,988) (11,923)
Net change in unsettled securities transactions. 789 (35,832)
Deconsolidation of subsidiary - (390)
Purchase of financial organization, net of cash received - (25,839)
Proceeds from sales of bank premises and equipment 4,120 290
---------------- -----------------
Net cash provided by investing activities $ 1,089,979 $ 73,900
---------------- -----------------
Financing Activities
Net decrease in demand and savings deposits $(1,010,009) $ (473,816)
Net decrease in time deposits (52,522) (109,375)
Net increase in fed funds/ repurchase agreements (318,183) (31,642)
Net increase (decrease) in short term borrowings (41,397) 84,377
Proceeds from long term debt 2,400 3,700
Repayment of long term debt (1,711) (1,704)
Cash dividends (8,843) (8,501)
Proceeds from exercise of stock options and sales of treasury stock 383 176
Purchases of treasury stock (4,726) (2,559)
---------------- -----------------
Net cash used in financing activities $(1,434,608) $ (539,344)
---------------- -----------------
Decrease in cash and due from banks $ (293,753) $ (423,712)
Cash and due from banks at beginning of year 790,672 975,324
---------------- -----------------
Cash and due from banks at end of period $ 496,919 $ 551,612
================ =================
See Notes to Consolidated Financial Statements.
5
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited in thousands)
Accumulated
Other
Common Capital Retained Comprehensive Treasury Unearned
Stock Surplus Earnings Income Stock ESOP Total
Balance - January 1, 2001 $ 26,472 $ 683,220 $ 196,705 $ 1,776 $ (200,248) $ (4,991) $702,934
Net income - - 34,426 - - - 17,718
Comprehensive income, change
in unrealized gains on
securities of $23,793, net
of tax of $8,660 and the
reclassification adjustment for
gains included in net income of
$21 net of tax of $8. - - - 15,120 - - 15,120
------------
Total comprehensive income 49,546
Cash Dividends - - (8,501) - - - (8,501)
Earned ESOP shares - - - - - 1,250 1,250
Purchase of treasury stock - - - - (2,559) - (2,559)
Sale of treasury stock - - - - 7 - 7
Exercise of stock options - 11 - - 158 - 158
---------------------------------------------------------------------------------------------
Balance - June 30, 2001 $ 26,472 $ 683,231 $ 222,630 $ 16,896 $ (202,642) $ (3,741) $742,846
=============================================================================================
Balance - January 1, 2002 $ 27,528 $ 726,347 $ 200,780 $ 22,526 $ (206,113) $ (2,491) $768,577
Net income - - 33,540 - - - 33,540
Comprehensive income, change
in unrealized gains on securities
of $3,162, net of tax of $1,249 and
the reclassification adjustment
for gains included in net income
of $2,470 net of tax of $938. - - - 381 - - 381
-----------
Total comprehensive income 33,921
Cash dividends - - (8,844) - - - (8,844)
Earned ESOP shares - - - - - 1,251 1,251
Purchase of treasury stock - - - - (4,726) - (4,726)
Sale of treasury stock - - - - 15 - 15
Exercise of stock options - 42 - - 326 - 368
---------------------------------------------------------------------------------------------
Balance - June 30, 2002 $ 27,528 $ 726,389 $ 225,477 $ 22,907 $ (210,498) $ (1,240) $790,563
=============================================================================================
See Notes to Consolidated Financial
Statements.
6
| Six Months Ended June 30, | ||
|---|---|---|
| 2002 | 2001 | |
| Balance January 1 | $ 35,637 | $ 31,998 |
| Additions: | ||
| Provision for loan losses | 6,546 | 7,974 |
| ------------- | ------------- | |
| Total before deductions | 42,183 | 39,972 |
| ------------- | ------------- | |
| Deductions: | ||
| Charge-offs | (5,236) | (8,032) |
| Less recoveries on loans previously charged-off | 1,661 | 3,818 |
| ------------- | ------------- | |
| Net charge-offs | (3,575) | (4,214) |
| ------------- | ------------- | |
| Balance, June 30 | $ 38,608 | $ 35,758 |
| ======== | ======== | |
7
| Three Months Ended June 30, | ||
|---|---|---|
| 2002 | 2001 | |
| Revenues | ||
| Commercial Banking | $ 21,883 | $ 32,194 |
| Trust and Securities Processing | 23,161 | 21,826 |
| Investment Banking and Brokerage | 18,508 | 9,377 |
| Community Banking | 41,331 | 56,469 |
| Other | 6,649 | 4,069 |
| Less: Intersegment revenues | (3,028) | (11,750) |
| ------------- | ------------- | |
| Total | $ 108,504 | $ 112,185 |
| Net Income (loss) | ||
| Commercial Banking | $ 9,536 | $ 12,969 |
| Trust and Securities Processing | 3,052 | 4,279 |
| Investment Banking and Brokerage | 8,049 | (44) |
| Community Banking | (5,682) | (530) |
| Other | - | - |
| Intersegment gain (loss) | (993) | 34 |
| ------------- | ------------- | |
| Total | $ 13,962 | $ 16,708 |
| Total Average Assets | ||
| Commercial Banking | $1,497,916 | $1,704,886 |
| Trust and Securities Processing | 119,528 | 106,683 |
| Investment Banking and Brokerage | 3,850,304 | 3,453,237 |
| Community Banking | 2,422,754 | 2,734,022 |
| Other | 140,313 | 97,403 |
| Less: Intersegment assets | (322,239) | (823,904) |
| ------------- | ------------- | |
| Total | $7,708,576 | $7,272,327 |
| =========== | =========== | |
8
9
| For the Three Months Ended | For the Six Months Ended | |||
|---|---|---|---|---|
| June 30, | June 30, | |||
| 2002 | 2001 | 2002 | 2001 | |
| NET INCOME | ||||
| Reported net income | $13,962 | $16,708 | $33,540 | $34,426 |
| Goodwill amortization | - | 1,411 | - | 2,813 |
| -------------- | -------------- | -------------- | -------------- | |
| Adjusted net income | $13,962 | $18,119 | $33,540 | $37,239 |
BASIC EARNINGS PER SHARE | ||||
| Reported earnings per share | $0.63 | $0.75 | $1.52 | $1.55 |
| Goodwill amortization | - | 0.07 | - | 0.13 |
| -------------- | -------------- | -------------- | -------------- | |
| Adjusted basic earnings per share | $0.63 | $0.82 | $1.52 | $1.68 |
| ======= | ======= | ======= | ======= | |
| Community Banking | Trust and Securities Processing | Total | |
|---|---|---|---|
| Balances as of January 1, 2002 | $34,743 | $18,231 | $52,974 |
| Goodwill acquired during the period | - | 1,787 | 1,787 |
| -------------- | -------------- | -------------- | |
| Balance as of June 30, 2002 | $34,743 | $20,018 | $54,761 |
| ======== | ======== | ======== |
| As of June 30, 2002 | |||
|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |
| Amortized intangible assets | |||
| Core deposit intangible assets | $ 16,777 | $ 15,576 | $ 1,201 |
| Other Intangible assets | 7,200 | 564 | 6,636 |
| -------------- | -------------- | -------------- | |
| Total | $ 23,977 | $ 16,140 | $ 7,837 |
| ======== | ======== | ======== | |
| For the Three Months Ended | For the Six Months Ended | |||
|---|---|---|---|---|
| June 30, | June 30, | |||
| 2002 | 2001 | 2002 | 2001 | |
| Aggregate amortization expense | $508 | $327 | $1,016 | $664 |
| For the year ended December 31, 2002 | $2,032 | |
| For the year ended December 31, 2003 | 1,216 | |
| For the year ended December 31, 2004 | 740 | |
| For the year ended December 31, 2005 | 740 | |
| For the year ended December 31, 2006 | 740 |
10
UMB FINANCIAL CORPORATION
AVERAGE BALANCES/YIELDS AND RATES
(tax-equivalent basis) (unaudited in thousands)
Six Months Ended June 30,
2002 2001
Average Average Average Average
Assets Balance Yield/Rate Balance Yield/Rate
Loans, net of unearned interest $ 2,703,952 6.29 % $ 2,998,099 8.31 %
Securities:
Taxable $ 3,535,856 3.17 $ 2,264,599 5.84
Tax-exempt 668,574 6.15 671,132 6.35
--------------------------- --------------------------
Total securities $ 4,204,430 3.65 $ 2,935,731 5.73
Federal funds and resell agreements 184,101 1.77 194,543 5.11
Other earning assets 64,655 4.34 77,476 5.88
--------------------------- --------------------------
Total earning assets $ 7,157,138 4.60 $ 6,205,849 6.96
Allowance for loan losses (36,718) (33,237)
Other assets 927,419 1,115,261
--------------- -------------
Total assets $ 8,047,839 $ 7,287,873
=============== =============
Liabilities and Shareholders' Equity
Interest-bearing deposits $ 4,067,319 1.64 % $ 3,567,305 3.52 %
Federal funds and repurchase agreements 1,229,720 1.35 948,411 4.46
Borrowed funds 100,161 2.98 108,927 5.32
--------------------------- --------------------------
Total interest-bearing liabilities $ 5,397,200 1.60 $ 4,624,643 3.75
Noninterest-bearing demand deposits 1,800,926 1,814,683
Other liabilities 66,122 117,199
Shareholders' equity 783,591 731,348
--------------- -------------
Total liabilities and $ 8,047,839 $ 7,287,873
shareholders' equity =============== =============
Net interest spread 3.00 % 3.21 %
Net interest margin 3.40 4.16
11
UMB FINANCIAL CORPORATION
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN
(tax-equivalent basis) (in thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended Six Months Ended
June 30, 2002 vs. 2001 June 30, 2002 vs. 2001
Volume Rate Total Volume Rate Total
------------ ------------ ------------ ------------ ------------ ------------
Change in interest earned on:
Loans $ (5,746) $ (11,936) $ (17,682) $ (11,268) $ (27,808) $ (39,076)
Securities:
Taxable 10,552 (13,594) (3,042) 26,464 (33,084) (6,620)
Tax-exempt (114) (431) (545) (81) (680) (761)
Federal funds sold (427) (999) (1,426) (253) (3,083) (3,336)
Other (110) (196) (306) (336) (532) (868)
------------ ------------ ------------ ------------ ------------ ------------
Interest income $ 4,155 $ (27,156) $ (23,001) $ 14,526 $ (65,187) $ (50,661)
------------ ------------ ------------ ------------ ------------ ------------
Change in interest paid on:
Interest-bearing deposits $ 2,628 $ (15,216) $ (12,588) $ 7,751 $ (36,917) $ (29,166)
Federal funds purchased 1,438 (6,327) (4,889) 4,920 (17,608) (12,688)
Borrowed funds (553) (201) (754) (213) (1,140) (1,353)
------------ ------------ ------------ ------------ ------------ ------------
Interest expense $ 3,513 $ (21,744) $ (18,231) $ 12,458 $ (55,665) $ (43,207)
------------ ------------ ------------ ------------ ------------ ------------
Net interest income $ 642 $ (5,412) $ (4,770) $ 2,068 $ (9,522) $ (7,454)
============ ============ ============ ============ ============ ============
ANALYSIS OF NET INTEREST MARGIN
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 Change 2002 2001 Change
------------ ------------ ------------ ------------ ------------ ------------
Average earning assets $ 6,815,018 $ 6,167,303 $ 647,715 $ 7,157,138 $ 6,205,849 $ 951,289
Average interest-bearing liabilities 5,087,025 4,601,692 845,333 5,397,200 4,624,643 772,557
------------ ------------ ------------ ------------ ------------ ------------
Interest free funds $ 1,727,993 $ 1,565,611 $ 162,382 $ 1,759,938 $ 1,581,206 $ 178,732
============ ============ ============ ============ ============ ============
Free funds ratio 25.36% 25.39% (0.03)% 24.59% 25.48% (0.89)%
(free funds to earning assets)
Tax-equivalent yield on earning assets 4.68% 6.67% (1.99)% 4.60% 6.96% (2.36)%
Cost of interest-bearing liabilities 1.59 3.35 (1.76) 1.60 3.75 (2.15)
------------ ------------ ------------ ------------ ------------ ------------
Net interest spread 3.09% 3.32% (0.23)% 3.00% 3.21% (0.21)%
Benefit of interest free funds 0.40 0.85 (0.45) 0.40 0.95 (0.55)
------------ ------------ ------------ ------------ ------------ ------------
Net interest margin 3.49% 4.16% (0.67)% 3.40% 4 16% (0.76)%
============ ============ ============ ============ ============ ============
12
The following financial review presents management's discussion and analysis of the consolidated financial condition and results of operations of UMB Financial Corporation (the Company). This review highlights the material changes in the results of operations and changes in financial condition for the period ended June 30, 2002. It should be read in conjunction with the accompanying consolidated financial statements, notes to financial statements and other financial statistics appearing elsewhere in this report.
Forward Looking Statements
Estimates and forward looking statements are included in this review and as such are subject to certain risks, uncertainties and assumptions that are beyond the Company's ability to control or estimate precisely. These statements are based on current financial and economic data and management's expectations concerning future developments and their effects. Actual results could differ materially from management's current expectations. Factors that could cause material differences in actual operating results include, but are not limited to, the impact of competition; changes in pricing, loan demand, consumer savings habits, employee costs and interest rates; the ability of customers to repay loans; changes in U.S. or international economic or political conditions, such as inflation or fluctuation in interest or foreign exchange rates; disruptions in operations due to failures of telecommunications systems, utility systems, security clearing systems, or other elements of the financial industry infrastructure. While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with the preparation of management's discussion and analysis contained in the Company's annual and quarterly reports, the Company does not intend to review or revise any particular forward-looking statement referenced herein in light of future events.
Summary
The Company earned net income of $13,962,000 for the three months ended June 30, 2002, compared to $16,708,000 for the same period a year earlier. This represents per share earnings of $0.63 for the second quarter of 2002 compared to $0.75 for the second quarter of 2001. For the six-month period ended June 30, 2002 the Company reported net income of $33,540,000 compared with $34,426,000 for the same period in 2001. Earnings per share for the six months ended June 30, 2002 were $1.52, compared to $1.55 for the same period for the prior year.
The decline in earnings during both the three month period and six month period ending June 30, 2002 was primarily driven by lower net interest income. This was in large part caused by numerous interest rate decreases during 2001 and by decreases in average loan balances. Noninterest income for the first six months of 2002 was 8.8 percent greater than during the same period the previous year. The primary drivers for this improvement were increases in fees related to security sales, deposit service charges and security processing income. Increases in noninterest income were driven both by traditional business lines and as a result of the 2001 acquisitions of UMB Fund Services, Inc. (formerly known as Sunstone Financial Group, Inc.) and a corporate trust portfolio. The Company's noninterest expense decreased for both the three-month period and the six-month period ended June 30, 2002, compared with comparable periods in 2001. Included in this reduction of expense was the discontinuance of goodwill amortization, consistent with adoption of Statement of Accounting Standards No. 142 at the end of 2001, as well as good expense control. Through May 18, 2001 net interest income and non-interest income and expense include the results of operations of eScout LLC, a majority-owned subsidiary of the Company. Due to the terms of the eScout LLC charter document, the net results of its operations were eliminated from the Company's financial statements through an entry of minority interest in loss of consolidated subsidiary. On May 18, 2001, the Company reduced its ownership position in eScout LLC. such that the results of eScout LLC are no longer included in the consolidated results of the Company.
13
Results of Operations
For the three months ended June 30, 2002, the Company earned net interest income of $55,870,000 compared to $60,562,000 for the second quarter of 2001. On a year-to-date basis, net interest income decreased to $113,516,000 for the first six months of 2002, compared to $120,923,000 for the same period last year. During both periods the decreases were caused by reduced interest rates and by a reduction in loan volume and corresponding higher amounts of investment securities yielding a lower rate. Average loans for the six months ended June 30, 2002 totaled $2.704 billion (37.8% of total earning assets) compared with $2.998 billion (48.3% of earning assets) one year earlier. The rate earned on average earning assets during the first six months of 2002 was 236 basis points lower than the rate earned for the first six months of 2001, resulting in a decrease in net interest margin to 3.40% from 4.16% one year earlier. The decrease in the rate on earning assets was partially offset by a 215 basis point decline in the rate paid on interest bearing liabilities, for the six months ended June 30, 2002. For the three months ended June 30, 2002 net interest margin decreased to 3.49% from 4.16% for the same period in the prior year, as the rate earned on average earning assets decreased 199 basis points. For the three months ended June 30, 2002 the decline in the rate paid on interest bearing liabilities decreased 176 basis points from the prior year.
The Company's loan loss provision for the second quarter of 2002 was $3,440,000 compared to $5,011,000 for the same period of 2001. The year-to-date loan loss provision for the Company in 2002 was $6,546,000 compared to $7,974,000 for 2001. While the Company has seen an increase in non-accrual loans it has been able to decrease the loan loss provision due to decreasing net loan charge-offs for the six months ended June 30, 2002 and declining loan balances. For the three months ended June 30, 2002 the net loan charge-offs were $1,682,000, compared to $1,465,000 for the same period in 2001. Net loan charge-offs for the first six months of 2002 were $3,575,000 compared to $4,214,000 for the same period last year. The majority of the net charge-offs in both periods was from bankcard and consumer loans. The Company will continue to closely monitor its loan positions and related underwriting efforts in order to minimize credit losses.
Non-interest income totaled $56,074,000 for the second quarter of 2002 compared to $56,634,000 for the same period of 2001. For the first six months of 2002, non-interest income increased to $118,087,000 from $108,493,000 for the prior year, an increase of 8.8%. One of the primary drivers of the improvement in non-interest income on a year-to-date basis was the increase in securities processing income. The increase in securities processing was associated with the Company's acquisition of UMB Fund Services, Inc. (formerly Sunstone Financial Group, Inc.) in the second quarter of 2001. Despite the acquisition, however, securities processing income was restricted in 2002 due to reduced market values of securities on which this fee income is based. Reduction in the market value of securities also contributed to reduced trust fee income for 2002. Fee income from deposit services and cash management services also increased during the first half of 2002.
Non-interest expense was $90,158,000 for the three months ended June 30, 2002 compared to $92,428,000 for the same period of 2001, and $179,739,000 for the first six months of 2002 compared to $184,974,000 for the first six months of 2001. The decrease in noninterest expense in both periods was caused in large part by the adoption of a new accounting principle, which resulted in a discontinuance of goodwill amortization. Staffing for the Company's many growth initiatives, coupled with a tight labor market and increasing medical expenses have contributed to the increase in salaries and employee benefits for the three and six month periods ended June 30, 2002. Also contributing to increased non-interest expenses were increased processing charges. The prudent management of non-interest expense will continue to be a priority for the Company.
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Financial Condition
Total assets at June 30, 2002 were $7.310 billion compared to $7.283 billion at June 30, 2001 and $8.731 billion at December 31, 2001. Moreover, there was a shift in asset categories, out of loans and into investment securities. Loans, net of unearned interest, decreased to $2.701 billion as of June 30, 2002 compared to $2.944 billion at June 30, 2001 and $2.814 billion at December 31, 2001. Uncertainties in the economy and declines in certain lines of credit have contributed to the decline in the commercial loan balances. Consumer loan balances have also declined, especially in the indirect auto loans, due to the strong financing incentives offered by auto companies. Total investment securities increased to $3.516 billion as of June 30, 2002 compared to $3.157 billion at June 30, 2001 and decreased from $4.522 billion at December 31, 2001. Total deposits decreased to $5.313 billion at June 30, 2002 compared to $5.352 billion at June 30, 2001 and $6.376 billion at December 31, 2001. The decrease of deposit and investment securities balances from year-end totals was caused by the outflow of public funds and commercial balances.
Non accrual and restructured loans totaled $21,276,000 (0.79% of loans) at June 30, 2002 compared to $6,533,000 (0.22% of loans) at June 30, 2001, and $7,279,000 (0.26% of loans) at December 31, 2001. Loans past due 90 days or more were $10,451,000 (0.39% of loans) at June 30, 2002, compared to $6,955,000 (0.23% of loans) at June 30, 2001. The Company's loan quality remains strong by industry standards. The largest increase in non-accrual loans was to one commercial credit, for which the Company has already established reserves to cover potential losses. At June 30, 2002 the Company's allowance for loan losses was $38,608,000 (1.43% of outstanding loans) compared to $35,758,000 (1.22% of outstanding loans) at June 30, 2001. The adequacy of the Company's allowance for loan losses is evaluated based on reserves for specific loans, and reserves on homogeneous groups of loans based on historical loss experience and current loss trends. The Company has a well-diversified loan portfolio with no foreign loans and no significant credit exposure to commercial real estate.
The Company's liquidity position continues to be strong. At June 30, 2002, the Company's average loan to deposit ratio was 45.9% compared to 55.5% at June 30, 2001. At June 30, 2002, the average life of the securities portfolio was 14 months with 54% of the portfolio maturing during the next twelve months. The Company has access to various borrowing markets should there be a need for additional funding.
Shareholders' equity totaled $791 million at June 30, 2002 compared to $743 million at June 30, 2001 and $769 million at year-end 2001. During the twelve months ended June 30, 2002 the Company increased its treasury stock holdings by $7.9 million. At June 30, 2002, the net unrealized gain on securities available for sale was $22.9 million, compared to $16.9 million at June 30, 2001 and $22.5 million at December 31, 2001.
The Company's capital position is summarized in the table below and exceeds regulatory requirements.
| Six Months Ended June 30, | |||
|---|---|---|---|
| RATIOS | 2002 | 2001 | |
| Return on average assets | 0.84 % | 0.96 % | |
| Return on average equity | 8.63 | 9.49 | |
| Average equity to assets | 9.74 | 10.07 | |
| Tier 1 risk-based capital ratio | 18.02 | 14.75 | |
| Total risk-based capital ratio | 19.00 | 15.55 | |
| Leverage ratio | 9.22 | 9.18 | |
Per Share Data | |||
| Earnings Basic | $ 1.52 | $ 1.55 | |
| Earnings Diluted | $ 1.52 | $ 1.55 | |
| Cash Dividends | $ 0.40 | $ 0.38 | |
| Dividend payout ratio | 26.32 % | 24.52 % | |
| Book value | $ 35.83 | $ 33.50 | |
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Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of these 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 financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgements, including those related to customers and suppliers, allowance for loan losses, bad debts, investments, financing operations, intangible assets, goodwill and contingencies and litigation. Management bases its estimates and judgements 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 judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from the estimates under different assumptions or conditions.
Of the issues that are of a subjective nature, Management believes that the only items for a critical accounting policy would be the allowance for loan losses and the impairment testing for goodwill and other intangibles. The allowance for loan loss represents management's judgement of the losses inherent in the Company's loan portfolio. The adequacy is reviewed quarterly, considering such items as historical trends, a review of individual loans, current and projected economic conditions, loan growth and characteristics, industry or segment concentration, and other factors. Bank regulatory agencies require that the adequacy of the allowance for loan losses be maintained on a bank-by-bank basis, however the Company uses a centralized credit administration function, which provides information on affiliate bank risk levels, delinquencies, an internal ranking system and bank risk levels. With the new accounting policies regarding the stoppage of goodwill amortization and the classification of intangible assets the Company is also responsible for the impairment testing for write downs of these assets. The Company has developed the methodology for future impairment testing and has already performed this testing on the remaining goodwill with no adjustments to the assets needed.
Quantitative and Qualitative Disclosures about Market Risk.
Due to the nature of the Company's business, a degree of interest rate risk is inherent and appropriate. As described in the Company's 2001 Annual Report on Form 10K (to which reference is hereby made), Management attempts to limit the level of exposure arising from interest rate movements, by structuring the Company's balance sheet to provide for the repricing of approximately equal amounts of assets and liabilities within specific time intervals. The Company also uses simulation tools to measure and manage its interest rate risk. The Company does not use off-balance sheet hedges or swaps to manage this risk except for the use of future contracts to offset interest rate risk on specific securities held in its trading portfolio. One tool used by the Company is a model that internally generates estimates of the changes in the net portfolio value (NPV) of interest rate risk sensitive instruments (investment securities, notes, deposits, loans and all other instruments) resulting from selected scenario changes in interest rates. By projecting the timing and amounts of future net cash flows, an estimated value of that asset or liability can be determined. The following table sets forth such changes in NPV, assuming each of the following changes in interest rates: an immediate increase of 200 basis points, an immediate increase of 100 basis points, and an immediate decrease of 100 basis points. The NPV under each scenario is projected below as of June 30, 2002, as well as of December 31, 2001.
| Net Portfolio Value | ||||
|---|---|---|---|---|
| June 30, 2002 | December 31, 2001 | |||
| Change in Interest Rates | Dollar Change | % Change | Dollar Change | % Change |
| +200 basis point | $222,383 | 20.64 % | $160,564 | 13.19 % |
| +100 basis point | 115,455 | 10.71 % | 92,500 | 7.60 % |
| -100 basis point | (16,567) | (1.54)% | (14,869) | (1.22)% |
| -200 basis point | NA | NA | NA | NA |
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The greater positive change in NPV associated with the increase of interest rate scenarios as of June 30, 2002 (as compared with similar increases as of December 31, 2001) is caused mostly by the increase in a positive static gap analysis. Since year-end the Company has seen an increase in interest-earning assets compared to interest-bearing liabilities that reprice within one year.
Qualitative Risks:
The Company's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize "in-market" lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The credit administration function employs extensive risk management techniques including forecasting, to ensure that loans adhere to corporate policy and problem loans are properly identified. These procedures provide executive management with the information necessary to implement policy adjustments where necessary, and take corrective actions on a proactive basis. For further understanding of non-performing loans and the adequacy of allowance for loan losses please reference the Company's 2001 Annual Report, and management's discussion and analysis of financial condition contained in this 10Q.
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PART II. Other Information
Item 4: Submission of Matters to a Vote of Security Holders
UMB Financial Corporation held its annual meeting of shareholders on April 18, 2002. Proxies for the meeting were solicited pursuant to Regulation 14 of the Securities Exchange Act of 1934, and there was no solicitation in opposition to the management's nominees listed in the proxy statement. At that meeting shareholders approved the following management proposals:
1. Election of Class II Directors
| Votes For | Votes Withheld | |
|---|---|---|
| Miriam M. Allison | 19,185,479 | 101,391 |
| Thomas E. Beal | 19,289,461 | 101,391 |
| Richard Harvey | 18,888,461 | 101,391 |
| R. Crosby Kemper | 19,301,668 | 101,391 |
| Tom J. McDaniel | 18,629,564 | 101,391 |
| William J. McKenna | 19,292,287 | 101,391 |
| Robert W. Plaster | 19,310,862 | 101,391 |
| Paul Uhlmann, III | 19,315,762 | 101,391 |
| E. Jack Webster | 19,303,429 | 101,391 |
| John E. Williams | 19,289,881 | 101,391 |
| Thomas J. Wood, III | 19,303,364 | 101,391 |
2. Ratification of Board of Directors' selection of Deloitte and Touche LLP to serve as the Company's independent auditors and to examine and audit the consolidated financial statements of the Company for fiscal year 2002.
| For | 19,175,006 |
| Against | 48,175 |
| Abstain | 70,048 |
3. Approval of the UMB Financial Corporation 2002 Incentive Stock Option Plan
| For | 16,027,283 |
| Against | 3,089,078 |
| Abstain | 176,868 |
Item 6. Exhibits and Reports on form 8-K
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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/R, Crosby Kemper III
R. Crosby Kemper III
Chairman and Chief Executive Officer
/s/Daniel C. Stevens
Daniel C. Stevens
Chief Financial Officer
Date: August 14, 2002
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