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 June 30, 1999
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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, 1999, UMB Financial Corporation had 19,666,259 shares of common
stock outstanding. This is the only class of stock of the Company.
UMB FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
As of June 30, 1999 and 1998 (unaudited) and
December 31, 1998 (audited) 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited) 5
Consolidated Statements of Shareholders' Equity for the Six Months
Ended June 30, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements 7-9
Supplemental Financial Data
Average Balances/ Yields and Rates 10
Analysis of Changes in Net Interest Income and Margin 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
UMB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
----------------------------- -------------
ASSETS 1999 1998 1998
------------- ------------- -------------
Loans:
Commercial, financial and agricultural $ 1,321,452 $ 1,324,595 $ 1,291,858
Consumer (net of unearned interest) 945,667 997,303 934,765
Real estate 321,650 343,901 327,796
Leases 4,770 3,415 4,717
Allowance for loan losses (32,392) (33,468) (33,169)
------------- ------------- -------------
Net loans $ 2,561,147 $ 2,635,746 $ 2,525,967
Securities available for sale:
U.S. Treasury and agencies $ 2,429,236 $ 2,222,495 $ 2,604,949
State and political subdivisions 2,792 5,040 2,547
Commercial paper and other 49,966 200,001 445,393
------------- ------------- -------------
Total securities available for sale $ 2,481,994 $ 2,427,536 $ 3,052,889
Securities held to maturity:
State and political subdivisions $ 736,742 $ 539,419 $ 702,160
------------- ------------- -------------
Total securities held to maturity (market value
of $732,810, $542,583 & $711,035, respectively) $ 736,742 $ 539,419 $ 702,160
Federal funds and resell agreements 162,753 202,446 61,369
Trading securities and other earning assets 56,684 79,394 36,000
------------- ------------- -------------
Total earning assets $ 5,999,320 $ 5,884,541 $ 6,378,385
Cash and due from banks 613,428 1,036,419 850,532
Bank premises and equipment, net 224,418 187,230 206,194
Accrued income 76,471 74,562 70,045
Premium on and intangibles of purchased banks 49,837 56,931 53,379
Other assets 73,035 64,279 89,563
------------- ------------- -------------
Total assets $ 7,036,509 $ 7,303,962 $ 7,648,098
============= ============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 1,654,055 $ 1,929,482 $ 2,045,074
Interest-bearing demand and savings 2,262,365 2,232,964 2,378,814
Time deposits under $100,000 857,167 876,256 868,490
Time deposits of $100,000 or more 388,793 556,189 604,426
------------- ------------- -------------
Total deposits $ 5,162,380 $ 5,594,891 $ 5,896,804
Federal funds and repurchase agreements 1,119,508 923,185 922,219
Short-term debt 1,097 1,162 31
Long-term debt 41,714 43,315 39,153
Accrued expenses and taxes 37,825 47,536 52,481
Other liabilities 29,003 50,265 74,643
------------- ------------- -------------
Total liabilities $ 6,391,527 $ 6,660,354 $ 6,985,331
------------- ------------- -------------
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; authorized 33,000,000
shares; issued 24,490,189 shares $ 24,490 $ 24,490 $ 24,490
Capital surplus 608,936 609,032 608,934
Retained earnings 199,637 158,534 175,005
Accumulated other comprehensive income/(loss) (2,406) 5,839 13,693
Unearned ESOP shares (8,742) (11,242) (9,992)
Treasury stock, 4,602,116, 3,721,618 and
3,957,218 shares, at cost, respectively (176,933) (143,045) (149,363)
------------- ------------- -------------
Total shareholders' equity $ 644,982 $ 643,608 $ 662,767
------------- ------------- -------------
Total liabilities and shareholders' equity $ 7,036,509 $ 7,303,962 $ 7,648,098
============= ============= =============
See Notes to Consolidated Financial Statements.
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited in thousands)
Three Months Six Months
Ended June 30, Ended June 30,
INTEREST INCOME 1999 1998 1999 1998
------------ ------------ ------------ -----------
Loans $ 51,679 $ 58,008 $102,905 $117,665
Securities:
Taxable interest $ 37,607 $ 32,195 $ 79,283 $ 65,935
Tax-exempt interest 7,769 5,770 15,449 11,088
------------ ------------ ------------ -----------
Total securities income $ 45,376 $ 37,965 $ 94,732 $ 77,023
Federal funds and resell agreements 1,110 3,668 1,725 8,340
Trading securities and other 840 1,221 1,526 2,288
------------ ------------ ------------ -----------
Total interest income $ 99,005 $100,862 $200,888 $205,316
------------ ------------ ------------ -----------
INTEREST EXPENSE
Deposits $ 28,877 $ 33,591 $ 60,933 $ 68,497
Federal funds and repurchase
agreements 13,539 11,170 25,579 23,243
Short-term debt 5 6 55 13
Long-term debt 734 923 1,428 1,578
------------ ------------ ------------ -----------
Total interest expense $ 43,155 $ 45,690 $ 87,995 $ 93,331
------------ ------------ ------------ -----------
Net interest income $ 55,850 $ 55,172 $112,893 $111,985
Provision for loan losses 2,468 2,914 4,955 5,772
------------ ------------ ------------ -----------
Net interest income after provision $ 53,382 $ 52,258 $107,938 $106,213
------------ ------------ ------------ -----------
NONINTEREST INCOME
Trust income $ 13,556 $ 12,462 $ 26,405 $ 24,319
Securities processing 3,869 4,141 7,280 7,216
Trading and investment banking 5,474 4,542 11,254 8,891
Service charges on deposits 11,245 9,504 22,621 19,474
Other service charges and fees 7,238 5,990 13,463 11,568
Bankcard fees 1,524 1,163 2,682 1,493
Net investment security gains/(losses) 48 (6) 59 (5)
Other 1,534 1,757 3,239 3,420
------------ ------------ ------------ -----------
Total noninterest income $ 44,488 $ 39,553 $ 87,003 $ 76,376
------------ ------------ ------------ -----------
NONINTEREST EXPENSE
Salaries and employee benefits $ 41,270 $ 39,210 $ 81,823 $ 77,262
Occupancy, net 5,487 5,124 10,825 10,220
Equipment 9,069 7,587 17,539 14,903
Supplies and services 5,273 4,819 10,908 10,052
Marketing and business development 3,365 3,426 6,708 7,705
Amortization of premium on purchased banks 1,770 1,767 3,541 3,534
Other 9,223 9,239 18,212 16,545
------------ ------------ ------------ -----------
Total noninterest expense $ 75,457 $ 71,172 $149,556 $140,221
------------ ------------ ------------ -----------
Income before income taxes $ 22,413 $ 20,639 $ 45,385 $ 42,368
Income tax provision 6,132 6,271 12,687 12,844
------------ ------------ ------------ -----------
NET INCOME $ 16,281 $ 14,368 $ 32,698 $ 29,524
============ ============ ============ ===========
PER SHARE DATA
Net income - Basic $ 0.82 $ 0.71 $ 1.63 $ 1.45
Net income - Diluted $ 0.82 $ 0.70 $ 1.63 $ 1.44
Dividends $ 0.20 $ 0.20 $ 0.40 $ 0.40
Weighted average shares outstanding 19,881,472 20,405,843 20,029,539 20,421,691
See Notes to Consolidated Financial Statements.
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited in thousands)
Six Months Ended
June 30,
-----------------------------------
1999 1998
---------------- --------------
Operating Activities
Net Income $ 32,698 $ 29,524
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 4,955 5,772
Depreciation and amortization 12,842 12,147
Deferred income taxes (338) 771
Net increase in trading securities (20,684) (18,846)
(Gains) losses on sales of securities available for sale (59) 5
Amortization of securities premiums,
net of discount accretion (16,436) 379
Earned ESOP shares 1,250 1,318
Changes in:
Accrued income (6,426) (1,935)
Accrued expenses and taxes (5,484) (10,262)
Other, net (29,111) (21,092)
---------------- --------------
Net cash used in operating activities $ (26,793) $ (2,219)
---------------- --------------
Investing Activities
Proceeds from maturities of investment securities $ 44,101 $ 31,203
Proceeds from sales of securities available for sale 34,361 13,228
Proceeds from maturities of securities available for sale 6,031,150 3,840,374
Purchases of investment securities (80,637) (119,064)
Purchases of securities available for sale (5,501,100) (3,846,308)
Net (increase) decrease in loans (40,135) 111,239
Net increase in fed funds and resell agreements (101,384) (131,233)
Purchases of bank premises and equipment (27,525) (23,328)
Proceeds from sales of bank premises and equipment 0 281
---------------- --------------
Net cash provided by (used in) investing activities $ 358,831 $ (123,608)
---------------- --------------
Financing Activities
Net decrease in demand and savings deposits $ (507,468) $ (35,104)
Net increase (decrease) in time deposits (226,956) 82,998
Net increase in fed funds/ repurchase agreements 197,289 207,640
Net increase in short term borrowings 1,066 46
Proceeds from long term debt 3,900 0
Repayment of long term debt (1,339) (1,235)
Cash dividends (8,066) (8,220)
Proceeds from exercise of stock options 84 0
Purchases of treasury stock (27,652) (5,179)
---------------- --------------
Net cash provided by (used in) financing activities $ (569,142) $ 240,946
---------------- --------------
Increase (decrease) in cash and due from banks $ (237,104) $ 115,119
Cash and due from banks at beginning of year 850,532 921,300
================ ==============
Cash and due from banks at end of period $ 613,428 $ 1,036,419
================ ==============
See Notes to Consolidated Financial Statements.
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Other
Common Capital Retained Comprehensive Treasury Unearned
Stock Surplus Earnings Income (Loss) Stock ESOP Total
-------------------------------------------------------------------------------------------------
Balance - January 1, 1998 $24,490 $ 608,964 $ 137,230 $ 3,910 $ (137,866) $ (12,492) $ 624,236
Net income - - 29,524 - - - 29,524
Comprehensive income,net of tax
Unrealized gains on securities of
$1,934 net of reclassification adj.
for losses included in net income
of $5. - - - 1,929 - - 1,929
--------------
Total comprehensive income 31,453
Cash Dividends - - (8,220) - - - (8,220)
Earned ESOP shares - 68 - - - 1,250 1,318
Purchase of treasury stock - - - - (5,179) - (5,179)
Exercise of stock options - - - - - - -
-------------------------------------------------------------------------------------------------
Balance - June 30, 1998 $24,490 $ 609,032 $ 158,534 $ 5,839 $ (143,045) $ (11,242) $ 643,608
=================================================================================================
Balance - January 1, 1999 $24,490 $ 608,934 $ 175,005 $ 13,693 $ (149,363) $ (9,992) $ 662,767
Net income - - 32,698 - - - 32,698
Comprehensive income,net of tax
Unrealized loss on securities of
$16,158 net of reclassification adj.
for gains included in net income
of $59. - - - (16,099) - - (16,099)
--------------
Total comprehensive income 16,599
Cash dividends - - (8,066) - - - (8,066)
Earned ESOP shares - - - - - 1,250 1,250
Purchase of treasury stock - - - - (27,652) - (27,652)
Exercise of stock options - 2 - - 82 - 84
-------------------------------------------------------------------------------------------------
Balance - June 30, 1999 $24,490 $ 608,936 $ 199,637 $ (2,406) $ (176,933) $ (8,742) $ 644,982
=================================================================================================
See Notes to Consolidated Financial Statements.
UMB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
1. Financial Statement Presentation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries after elimination of all material intercompany transactions. In
the opinion of management of the Company, all adjustments, which were of a
normal recurring nature, necessary for a fair presentation of the financial
position and results of operations, have been made. The financial statements
should be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and results of Operations and with reference to the 1998
Annual Report to Shareholders.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates 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 these estimates.
2. Earnings:
Earnings per share are based on the weighted average number of shares of common
stock outstanding during the interim periods. Diluted earnings per share takes
into account the dilutive effect of 31,184 and 72,631 shares issuable under
options granted by the Company at June 30, 1999 and 1998, respectively.
3. Allowance for Loan Losses:
The following is a summary of the Allowance for Loan Losses for the six months
ended June 30, 1999 and 1998 (in thousands):
Six Months Ended June 30,
1999 1998
---- ----
Balance January 1 $33,169 $33,274
Additions:
Provision for loan losses 4,955 5,772
----- -----
Total Before Deductions 38,124 39,046
------ ------
Deductions:
Charge-offs (7,258) (6,893)
Less recoveries on loans previously charged-off 1,526 1,315
----- -----
Net charge-offs (5,732) (5,578)
------ ------
Balance, June 30 $32,392 $33,468
======= =======
At June 30, 1999 the amount of loans that are considered to be impaired under
SFAS No. 114 was $10,093,000 compared to $10,221,000 at December 31, 1998 and
$10,625,000 at June 30, 1998. At June 30, 1999 all of these loans are on a
non-accrual or restructured basis. Included in the impaired loans is $8,705,000
of loans for which the related allowance is $1,916,000. This specific allowance
is based on a comparison of the recorded loan value to either an estimate of the
present value of the loan's estimated cash flows, its estimated fair value, or
the fair value of the collateral securing the loan if the loan is collateral
dependent. The remaining $1,388,000 of impaired loans do not have an allowance
for loan losses as a result of write-downs and supporting collateral value. The
average recorded investment in impaired loans during the period ended June 30,
1999 was approximately $10,266,000.
UMB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
4. Segment Reporting:
Public enterprises are required to report certain information concerning
operating segments in annual and interim financial statements. Beginning in
1998, the Company began preparing periodic reporting on its operating segments.
Operating segments are considered to be components of an enterprise for which
separate financial information is available and evaluated regularly by key
decision-makers for purposes of allocating resources and assessing performance.
The Company has defined its operations into the following segments: Commercial
Banking: Providing a full range of lending and cash management services to
commercial and governmental entities through the commercial division of the
Company's lead bank. Trust and Securities Processing: Providing estate planning,
trust, employee benefit, asset management and custodial services to individuals
and corporate customers. Investment Banking and Brokerage: Providing commercial
and retail brokerage, investment accounting and safekeeping services to
individuals and corporate customers. Community Banking: Providing a full range
of banking services to retail and corporate customers through the Company's
affiliate bank' and branch network. Other: The Other category consists primarily
of Overhead and Support departments of the Company. The net revenues and
expenses of these departments are allocated to the other segments of the
organization in the Company's periodic segment reporting. Reported segment
revenues, net income and average assets include revenue and expense
distributions for services performed for other segments within the Company as
well as balances due from other segments within the Company. Such intercompany
transactions and balances are eliminated in the Company's consolidated financial
statements. The table below lists selected financial information by business
segment (in thousands):
Three Months Ended June 30,
1999 1998
---- ----
Revenues
Commercial Banking $ 22,633 $ 21,737
Trust and Securities Processing 17,240 16,926
Investment Banking and Brokerage 7,887 6,492
Community Banking 58,552 53,594
Other 4,143 3,712
Less: Intersegment revenues (12,585) (10,650)
------- -------
Total $ 97,870 $ 91,811
========== ==========
Net Income
Commercial Banking $ 7,627 $ 6,748
Trust and Securities Processing 3,531 4,230
Investment Banking and Brokerage 893 621
Community Banking 4,395 3,991
Other - -
Less: Intersegment income (165) (1,222)
---- ----
Total $ 16,281 $ 14,368
========== ==========
Total Average Assets
Commercial Banking $1,683,580 $1,806,843
Trust and Securities Processing 19,263 12,456
Investment Banking and Brokerage 1,975,183 1,432,317
Community Banking 3,727,248 3,739,792
Other 286,714 224,160
Less: Intersegment assets (347,811) (319,094)
-------- --------
Total $7,344,177 $6,896,474
========== ==========
UMB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
5. Commitments and Contingencies: In the normal course of business, the Company
and its subsidiaries are named defendants in various lawsuits and counterclaims.
In the opinion of management, after consultation with legal counsel, none of the
suits will have a materially adverse effect on the financial position or results
of the Company
6. New Accounting Pronouncements: In June, 1998, The Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This standard requires entities to recognize all
derivatives as either assets or liabilities in its financial statements and to
measure such instruments at their fair value. The Statement is effective for the
Company's financial statements for the fiscal year beginning January 1, 2001.
The Company is in the process of evaluating the potential impact of the new
Statement.
UMB FINANCIAL CORPORATION
AVERAGE BALANCES/YIELDS AND RATES
(tax-equivalent basis) (in thousands)
Six Months Ended June 30,
1999 1998
Average Average Average Average
Assets Balance Yield/Rate Balance Yield/Rate
-------------------------- --------------------------
Loans, net of unearned interest $ 2,565,105 8.12 % $ 2,712,207 8.78 %
Securities:
Taxable $ 2,972,640 5.38 $ 2,269,851 5.86
Tax-exempt 722,571 6.30 493,833 6.63
-------------------------- --------------------------
Total securities $ 3,695,211 5.56 $ 2,763,684 6.00
Federal funds and resell agreements 76,746 4.53 299,625 5.61
Other earning assets 59,678 5.45 79,002 6.12
-------------------------- --------------------------
Total earning assets $ 6,396,740 6.57 $ 5,854,518 7.27
Allowance for loan losses (32,969) (33,157)
Other assets 1,075,305 1,144,399
--------------- --------------
Total assets $ 7,439,076 $ 6,965,760
=============== ==============
Liabilities and Shareholders' Equity
Interest-bearing deposits $ 3,651,561 3.37 % $ 3,529,030 3.91 %
Federal funds and repurchase agreements 1,215,576 4.24 918,073 5.11
Borrowed funds 43,043 6.95 44,633 7.19
-------------------------- --------------------------
Total interest-bearing liabilities $ 4,910,180 3.61 $ 4,491,736 4.19
Noninterest-bearing demand deposits 1,792,100 1,741,064
Other liabilities 75,739 91,809
Shareholders' equity 661,057 641,151
--------------- --------------
Total liabilities and shareholders' equity $ 7,439,076 $ 6,965,760
=============== ==============
Net interest spread 2.96 % 3.08 %
Net interest margin 3.80 4.05
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, 1999 vs. 1998 June 30, 1999 vs. 1998
----------------------------------------------- -----------------------------------------------
Volume Rate Total Volume Rate Total
Change in interest earned on:
Loans $ (2,434) $ (3,908) $ (6,342) $ (6,204) $ (8,604) $ (14,808)
Securities:
Taxable 8,312 (2,900) 5,412 19,153 (5,805) 13,348
Tax-exempt 3,346 (392) 2,954 7,186 (837) 6,349
Federal funds sold (1,915) (643) (2,558) (5,255) (1,360) (6,615)
Other (286) (119) (405) (542) (244) (786)
-------------- -------------- ------------- -------------- -------------- ------------
Interest income $ 7,023 $ (7,962) $ (939) $ 14,338 $ 16,850) $ (2,512)
-------------- -------------- ------------- -------------- -------------- ------------
Change in interest paid on:
Interest-bearing deposits $ 473 $ (5,186) $ (4,713) $ 2,312 $ (9,876) $ (7,564)
Federal funds purchased 4,462 (2,094) 2,368 6,696 (4,360) 2,336
Borrowed funds (32) (158) (190) (56) (52) (108)
-------------- -------------- ------------- -------------- -------------- ------------
Interest expense $ 4,903 $ (7,438) $ (2,535) $ 8,952 $(14,288) $ (5,336)
-------------- -------------- ------------- -------------- -------------- ------------
Net interest income $ 2,120 $ (524) $ 1,596 $ 5,386 $ (2,562) $ 2,824
============== ============== ============= ============== ============== ============
ANALYSIS OF NET INTEREST MARGIN
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
----------------------------------------------- -----------------------------------------------
1999 1998 Change 1999 1998 Change
Average earning assets $ 6,269,595 $ 5,745,611 $ 523,984 $ 6,396,741 $ 5,854,518 $ 542,223
Interest-bearing liabilities 4,862,768 4,414,408 448,360 4,910,180 4,491,736 418,444
-------------- -------------- ------------- -------------- -------------- ------------
Interest free funds $ 1,406,827 $ 1,331,203 $ 75,624 $ 1,486,561 $ 1,362,782 $ 123,779
============== ============== ============= ============== ============== ============
Free funds ratio 22.44 % 23.17 % (0.73)% 23.24 % 23.28 % (0.04)%
(free funds to earning assets)
Tax-equivalent yield on earning assets 6.58 % 7.27 % (0.69)% 6.57 % 7.27 % (0.70)%
Cost of interest-bearing liabilities 3.56 4.16 (0.60) 3.61 4.19 (0.58)
-------------- -------------- ------------- -------------- -------------- ------------
Net interest spread 3.02 % 3.11 % (0.09)% 2.96 % 3.08 % (0.12)%
Benefit of interest free funds 0.80 0.95 (0.15) 0.84 0.97 (0.13)
-------------- -------------- ------------- -------------- -------------- ------------
Net interest margin 3.82 % 4.06 % (0.24)% 3.80 % 4.05 % (0.25)%
============== ============== ============= ============== ============== ============
UMB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
The following financial review presents management's discussion and analysis of
UMB Financial Corporation's consolidated financial condition and results of
operations. This review highlights the major factors affecting results of
operations and any significant changes in financial condition for the period
ended June 30, 1999. 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.
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. They include, but are not limited to
statements relating to the Company's and various third parties' Year 2000
readiness efforts. There can be no assurance that results or future developments
will be in accordance with the Company's expectations or that the effect of
future developments on the Company will be those anticipated by the Company.
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; the unavailability or increased cost of
certain of certain resources, including, without limitation, those associated
with Year 2000 issues; the ability of third parties to successfully deal with
their Year 2000 issues, the unanticipated costs and disruption in operations due
to Year 2000 non-compliance of the Company and/or its affiliates, customers,
suppliers, counterparties, public utilities, issuers of investment securities,
and other entities. While the Company periodically reassesses material trends
and uncertainties affecting the Company's results of operations and financial
condition in connection with the preparation and 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
UMB Financial Corporation (the Company) earned net income of $16,281,000 for the
three months ended June 30, 1999, compared to $14,368,000 for the same period a
year earlier. This represents per share earnings of $0.82 for the second quarter
of 1999 compared to $0.71 for the second quarter of 1998, an increase of 15.49%.
On a year-to-date basis earnings were $32,698,000, or $1.63 per share, compared
to $29,524,000, or $1.45 per share, for the prior year.
The Company's improved performance has been primarily driven by an increase in
non-interest income on both a quarterly and year-to-date basis. The Company has
continued to experience strong growth in its substantial trust operations,
particularly in employee benefit services. The Company also posted double-digit
growth from securities and retail brokerage activity, service charges, cash
management business and fees related to bankcard services. For the six-month
period ended June 30, 1999 fee income increased by nearly 14 percent over the
prior year.
UMB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Results of Operations
For the three months ended June 30, 1999 the Company earned net interest income
of $55,850,000 compared to $55,172,000 for the second quarter of 1998. On a
year-to-date basis net interest income increased to $112,893,000 for the first
half of 1999, compared to $111,985,000 for the same period last year. Loan
volume and continued decreases in interest rates have impacted the growth rate
of net interest income. While the average earning assets increased, the
Company's net interest margin decreased to 3.80% compared to 4.05% for the same
period of 1998. This decrease primarily resulted from continued pressure on
short-term interest rates, which negatively impacted the yield on loans. The
yield on the Company's investment portfolio for 1999 also decreased from the
same period a year earlier. The Company is not willing to jeopardize the quality
or liquidity of the investment portfolio by changing its long-term, prudent
investment philosophy.
The Company's loan loss provision for the second quarter of 1999 was $2,468,000
compared to $2,914,000 for the same period of 1998. The year-to-date loan loss
provision for the Company in 1999 was $4,955,000 compared to $5,772,000 for
1998. The decrease in provision for loan loss was due to a decrease in net
loans. Net loan charge-offs in the first six months of 1999 were $5,732,000
compared to $5,578,000 for the same period last year. The majority of the
charge-offs in both periods were 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 $44,488,000 for the second quarter of 1999 compared
to $39,553,000 for the same period of 1998. For the first half of 1999,
non-interest income increased to $87,003,000 from $76,376,000 for the prior
year, an increase of 13.9%. Nearly all categories of fee income experienced
double-digit growth for the quarter. The largest area of increase was from
securities sales and retail brokerage activities that showed an increase of more
than 26% from the same period one year earlier. Fee income from deposit
services, cash management services and trust services increased as the Company
continues its efforts to grow this revenue source, which does not carry the
credit and interest rate risk of interest-based revenue. Non interest expense
was $75,457,000 for the three months ended June 30, 1999 compared to $71,172,000
for the same period of 1998. For the first six months of 1999 non-interest
expense was $149,556,000 compared to $140,221,000 for the first six months of
1998. In comparing the year-to-date increase the Company incurred higher
staffing and equipment related expenses. Staffing for the Company's many growth
initiatives, coupled with a tight labor market, has contributed to the increase.
Equipment expense also increased as a result of technology and conversion costs
related to the replacement and upgrade of core operating systems. The prudent
management of non-interest expense will continue to be a priority for the
Company.
Financial Condition
Total assets at June 30, 1999 were $7.037 billion compared to $7.304 billion at
June 30, 1998 and $7.648 billion at December 31, 1998. Loans, net of unearned
interest, decreased to $2.594 billion as of June 30, 1999 compared to $2.669
billion at June 30, 1998, yet increased from $2.559 billion at December 31,
1998. This decrease in loans from prior year reflects a very competitive loan
market in which the Company operates. The increase from prior year-end shows the
Company's continuing efforts to expand loan growth. Total investment securities
increased to $3.219 billion as of June 30, 1999 compared to $2.967 billion at
June 30, 1998. The increase in investment securities resulted from the combined
effect of a decrease in loans and a decrease in federal funds and resell
transactions. Total deposits decreased to $5.162 billion at June 30, 1999
compared to $5.594 billion at June 30, 1998 and $5.897 billion at December 31,
1998.
Non accrual and restructured loans totaled $11,393,000, 0.44% of loans, at June
30, 1999 compared to $12,321,000, 0.46% of loans, at June 30, 1998, and
$10,746,000 at December 31, 1998, 0.42% of loans. Loans past due 90 days or more
were $7,082,000, 0.27% of loans at June 30, 1999, compared to $9,071,000, 0.34%
of loans at June 30, 1998, and $7,915,000 at December 31,1998, 0.31% of loans.
The Company's loan quality remains strong by industry standards. The total
non-performing loans and loans past due 90 days or more were less than 1.0% of
total loans. At June 30, 1999 the Company's allowance for loan losses was
$32,392,000 or 1.25% of outstanding loans. 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.
Liquidity and Capital Resources
The Company's liquidity position continues to be strong. At June 30, 1999, the
Company's average loan to deposit ratio was 47.1% compared to 51.5% at June 30,
1998. At June 30, 1999, the average life of the securities portfolio was 19
months with 45% 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 $645 million at June 30, 1999 compared to $644
million at June 30, 1998 and $663 million at year-end 1998. During the twelve
months ended June 30, 1999 the Company increased its treasury stock holdings by
$33.9 million. Management will continue to consider treasury stock purchases
depending on price, availability and alternative use of funds. At June 30, 1999,
the net unrealized loss on securities available for sale was $2.4 million,
compared to net unrealized gains of $5.8 million at June 30, 1998 and $13.7
million at December 31, 1998.
The Company will continue to manage its interest rate risk using static gap
analysis along with other tools that help measure the impact of various interest
rate scenarios. One of these tools is a model that internally generates
estimates of the change in net portfolio value (NPV). NPV is the present value
of expected cash flows from assets, liabilities and off-balance sheet contracts.
By projecting the timing and amount of future net cash flows an estimated value
of that asset or liability can be determined. The following table sets forth the
Company's NPV as of June 30, 1999.
Net Portfolio Value
Rates in
Basis Points Dollar Percentage
(Rate Shock) Amount Change Change
200 $1,359,905 $3,901 0.29 %
100 1,366,028 10,024 0.74 %
Static 1,356,004 - -%
(100) 1,296,730 (59,273) (4.37)%
(200) 1,233,125 (122,879) (9.06)%
The Company's capital position is summarized in the table below and far exceeds
regulatory requirements.
Six Months Ended
June 30,
RATIOS 1999 1998
Return on average assets 0.89 % 0.85 %
Return on average equity 9.97 9.25
Average equity to assets 8.89 9.20
Tier 1 risk-based capital ratio 15.84 16.01
Total risk-based capital ratio 16.69 16.94
Leverage ratio 8.14 8.26
Per Share Data
Earnings Basic $ 1.63 $ 1.45
Earnings Diluted $ 1.63 $ 1.44
Cash Dividends $ 0.40 $ 0.40
Dividend payout ratio 24.54 % 27.59 %
Book value $ 32.80 $ 31.58
UMB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
YEAR 2000 READINESS DISCLOSURES
The year 2000 readiness issue is the result of computer programs that have been
coded to define a year using two digits rather than four. For example, a
substantial number of programs have date sensitive coding which may recognize a
date using "00" as 1900 rather than 2000. If not corrected this could result in
system failures or miscalculations causing disruptions to the Company's
operations, and a material adverse effect on the Company's operations and
financial performance.
The Company has been actively working on this issue since 1996. A plan was
developed in which Year 2000 issues are divided into two areas - those involving
mission critical functions and those involving non-critical functions. Within
these two areas, applications were further divided into those over which the
Company had control and those which were controlled by outside vendors.
A five-step plan was then developed involving 1) inventory, 2) solution
planning, 3) renovation, 4) testing, and 5) implementation. This plan addresses
both Information Technology systems and non-information technology assets such
as equipment containing embedded chips. The approximate percentage of each type
of mission critical application for which the Company has completed the
respective step of the five-step plan is set forth below:
Company-Controlled Vendor-Controlled
Mission Critical Mission Critical
Inventory 100% 100%
Solution Planning 100% 100%
Renovation 100% 100%
Testing 100% 100%
Implementation 96% 92%
Substantial progress has been made on the completion of the five step plan for
non-mission critical items: as of June 30, 1999, 99% of all identified
company-controlled applications had been completed through the testing stage,
and 91% of the vendor-controlled applications had been completed through the
testing stage. Implementation for non-mission critical items was 99% for
company-controlled applications and 88% for vendor controlled items,
The Company has made significant steps toward assessing its hardware and is
making substantial progress toward replacing necessary equipment. All mainframe
and mid-range systems are in place, and an inventory of personal computers has
been concluded. The Company has already replaced or upgraded a substantial
number of personal computers that may not be year 2000 ready, and completion of
such process is scheduled for early November, 1999.
The Company estimates that the total cost of its Year 2000 project will be
approximately $24 million dollars. Of this amount, $10 million was spent in
1997; $12 million was spent in 1998, and the remaining $2 million is projected
for 1999. While these numbers are substantial, they include the cost of a
significant number of system replacements that would have been required in the
near future regardless of the Year 2000 issue. These costs are being funded
through operating cash flows. Financial institutions are heavily dependent on
technology, and the cost of Year 2000 efforts should be viewed in its context as
a significant portion of the Company's annual Information Technology budget.
Although the priority given to Year 2000 issues may cause other Information
Technology projects to be delayed, such delay is not expected to have a material
impact on the Corporation's financial condition, business or operations.
UMB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Year 2000 issues can affect the Company not only as a result of its own internal
systems, but also as a result of the success or failure of third parties in
dealing with their Year 2000 issues. The Company has in place a program to
investigate and quantify the Year 2000 issues arising from its relationships
with a number of such third parties, such as borrowers, vendors, counterparties,
issuers of debt and equity securities held by the Company's subsidiaries and
their trust departments, and service providers (e.g. the Federal Reserve system,
telecommunications providers and electric utilities). The relationships that the
Company has with such third parties are important to the Company's operations
and financial condition, and their failure to achieve year 2000 readiness in a
timely manner could have a material adverse impact on the Company. Interfaces
and connectivity with these parties and systems also present significant issues.
The Company has been contacting certain third party vendors and other
significant third parties to determine the status of their Year 2000 plans and
progress, but due to the limited quantity of detailed information that many of
such parties make available to the public regarding their year 2000 readiness
efforts and status (as well as the year 2000 readiness status and efforts of
entities with whom they conduct business), the Company cannot be assured that
all of them will achieve year 2000 readiness in a timely fashion. The Company
has established a policy in which, as part of its affiliates' evaluation of
investment securities, they review the portions of the public filings of the
issuers of such investment securities describing their respective efforts and
status relating to their Year 2000 readiness. Such affiliates do not, however,
attempt to independently confirm or verify any of the representations or
statements made by such issuers in their public filings. Moreover, the public
filings are normally updated only quarterly, and the information that the
Company obtains through its review of such filings may not be current as of any
given time. There can be no assurance that each third party will adequately
address its Year 2000 issues.
A failure by the Company to successfully remediate its own Year 2000 problems,
or a failure by counterparties, issuers of securities, significant suppliers, or
customers with substantial relationships, or failures in the payment system
could have a substantial negative impact on the Company. In addition, the
Company could face significant disruptions of business as well as financial
losses if there were failures of telecommunications systems, utility systems,
security clearing systems or other elements of the industry infrastructure. The
Company's business, results of operations and financial positions could be
materially adversely affected as a result of any such failures. Because of the
range of possible issues associated with the Company's and third parties' Year
2000 issues, and the large number of variables involved, it is impossible to
quantify the potential consequence or costs of problems that may occur if
respective remediation efforts are not successful.
All of the foregoing is based on management's current assessment of the
situation using information available to it. Other factors that might cause
material changes include, but are not limited to, the loss of key personnel and
the ability to respond to unforeseen complications. Because the Company's Year
2000 efforts are not entirely complete, and due to its reliance on business
partners, vendors, customers, utilities, telecommunications providers and
others, the outcome of Year 2000 readiness is uncertain, and such issues may
have a material adverse effect on the Company's future financial condition and
future operating results.
The Company continues to develop contingency plans to address failures due to
Year 2000 issues relating to, among other things, its operations, systems,
physical locations, products, vendors and public infrastructure. The Company's
contingency planning includes remediation contingency plans and business
resumption contingency plans. Remediation contingency plans are designed to
address alternative courses of action in the event remediation of a mission
critical system falls behind schedule or is not successfully remediated.
Business resumption contingency plans are designed to address Year 2000 problems
that could arise even though the Company and third parties have completed
remediation. The Year 2000 business resumption contingency planning includes
event plans for each functional department, documented back-up procedures in the
event of a failure, identification of supplies, materials and processes that
must be on hand in the event the plan is activated and coordination of
personnel. Business resumption planning is well under way and will continue
through the third quarter of 1999. Notwithstanding extensive contingency
planning, the failure of certain mission critical third parties, such as
utilities, telecommunications providers, transportation service providers or
certain governmental entities could adversely affect the Company.
UMB FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
PART II. Other Information
Item 6. Exhibits and Reports on form 8-K
a) The following exhibit is filed herewith: 27-Article 9 of Regulation S-X
Financial Data Schedule for June 30, 1999 Form 10-Q.
b) Reports on Form 8-K: The Company filed no reports on Form 8-K during the
quarter ended June 30, 1999.
UMB FINANCIAL CORPORATION
FORM 10-Q
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/ R. Crosby Kemper
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R. Crosby Kemper
Chairman
/s/ Timothy M. Connealy
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Timothy M. Connealy
Chief Financial Officer
Date: August 13, 1999