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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: DECEMBER 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S Employer
incorporation or organization) Identification No.)
1010 GRAND AVENUE, 64106
KANSAS CITY, MISSOURI (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (816) 860-7000
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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
As of February 28, 1997, the aggregate market value of common stock
outstanding held by nonaffiliates of the registrant was approximately
$611,444,000 based on the NASDAQ closing price of that date.
Indicate the number of shares outstanding of the registrant's classes of
common stock, as of the latest practicable date.
Class
Common Stock, $1.00 Par Value
Outstanding at February 28, 1997
19,515,974
DOCUMENTS INCORPORATED BY REFERENCE
Company's 1997 Proxy Statement dated March 11, 1997--Part III
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PART I
ITEM 1. BUSINESS
GENERAL
UMB Financial Corporation (the "Company") was organized in 1967 under
Missouri law for the purpose of becoming a bank holding company registered
under the Bank Holding Company Act of 1956. The Company owns substantially all
of the outstanding stock of 16 commercial banks, a credit card bank, a bank
real estate corporation, a reinsurance company, a community development
corporation, a consulting company, a trust company and a discount brokerage
company.
The Company's 16 commercial banks are engaged in general commercial banking
business entirely in domestic markets. The banks, 11 located in Missouri, 2 in
Kansas, one each in Illinois, Colorado and Oklahoma, offer a full range of
banking services to commercial, retail, government and correspondent bank
customers. In addition to standard banking functions, the principal affiliate
bank, UMB Bank, n.a., provides international banking services, investment and
cash management services, data processing services for correspondent banks and
a full range of trust activities for individuals, estates, business
corporations, governmental bodies and public authorities. A table setting
forth the names and locations of the Company's affiliate banks as well as
their total assets, loans, deposits and shareholders' equity as of December
31, 1996, is included on page A-46 of the attached Appendix, and is
incorporated herein by reference.
UMB, U.S.A. n.a. is a credit card bank located in Nebraska. UMB, U.S.A. n.a.
services all incoming credit card requests, performs data entry services on
new card requests and evaluates new and existing credit lines.
Other subsidiaries of the Company are UMB Properties, Inc., United Missouri
Insurance Company, Scout Brokerage Services, Inc., UMB Community Development
Corporation, UMB Consulting Services, Inc. and UMB Data Corporation. UMB
Properties, Inc. is a real estate company that leases facilities to certain
subsidiaries and acquires and holds land and buildings for anticipated future
facilities. United Missouri Insurance Company, an Arizona corporation, is a
reinsurance company that reinsures credit life and disability insurance
originated by affiliate banks. Scout Brokerage Services, Inc. provides
transaction services in a variety of investment securities for the general
public. This subsidiary offers brokerage and custodial services to its
customers (including affiliate and correspondent banks) through the facilities
of National Financial Services Corporation, a wholly-owned subsidiary of
Fidelity Brokerage Services, Inc. UMB Community Development Corporation
provides low-cost mortgage loans to low- to moderate-income families for
acquiring or rehabing owner-occupied housing in Missouri, Kansas, Illinois and
Colorado. UMB Consulting Services, Inc. offers regulatory and compliance
assistance to regional banks. UMB Data Corporation provides complete
correspondent services to banks throughout the region.
On a full-time equivalent basis at December 31, 1996, UMB Financial
Corporation and subsidiaries employed 3,843 persons.
COMPETITION
The commercial banking business is highly competitive. Affiliate banks
compete with other commercial banks and with other financial institutions,
including savings and loan associations, finance companies, mutual funds,
mortgage banking companies and credit unions. In recent years, competition has
also increased from institutions not subject to the same geographical and
other regulatory restrictions as domestic banks and bank holding companies.
MONETARY POLICY AND ECONOMIC CONDITIONS
The operations of the Company's affiliate banks are affected by general
economic conditions as well as the monetary policy of the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") which affects the
supply of money available to commercial banks. Monetary policy measures by the
Federal
1
Reserve Board are effected through open market operations in U.S. Government
securities, changes in the discount rate on bank borrowings and changes in
reserve requirements.
SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to the Bank Holding
Company Act of 1956, as amended (the "BHCA") and to regulation by the Federal
Reserve Board.
The BHCA requires every bank holding company to obtain the prior approval of
the Federal Reserve Board before it may (i) acquire substantially all the
assets of any bank, (ii) acquire more than 5% of any class of voting stock of
a bank or bank holding company which is not already majority owned, or (iii)
merge or consolidate with another bank holding company.
Under the BHCA, a bank holding company is prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company which is not a bank and from
engaging in business other than that of banking, managing and controlling
banks or performing services for its banking subsidiaries. However, the BHCA
authorizes the Federal Reserve Board to permit bank holding companies to
engage in activities which are so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Federal Reserve
Board possesses cease and desist powers over bank holding companies if their
actions represent unsafe or unsound practices or violations of law.
As a result of the Interstate Banking and Branching Efficiency Act of 1994,
beginning in September, 1995, bank holding companies may acquire banks in any
state, subject to state deposit caps and a 10% nationwide cap. Interstate
branching by bank merger will be permitted beginning June 1, 1997. States may
"opt out" of interstate branching prior to June 1, 1997, and may "opt in"
prior to that date.
A bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit, with
limited exceptions. There are also various legal restrictions on the extent to
which a bank holding company and certain of its non-bank subsidiaries can
borrow or otherwise obtain credit from its bank subsidiaries. The Company and
its subsidiaries are also subject to certain restrictions on issuance,
underwriting and distribution of securities.
Three of the banks owned by the Company are national banks and are subject
to supervision and examination by the Comptroller of the Currency. UMB, U.S.A.
n.a., a credit card bank, is located in the state of Nebraska and is subject
to supervision and examination by the Comptroller of the Currency. One of the
affiliate banks is chartered under the state banking laws of Colorado and is
subject to supervision and regular examination by the Office of the State Bank
Commissioner of Colorado. One of the affiliate banks is chartered under the
state banking laws of Kansas and is subject to supervision and regular
examination by the Kansas Banking Department. One is chartered under the state
banking laws of Oklahoma and is subject to supervision and regular examination
by the Oklahoma State Banking Department. The remaining 9 banks are chartered
under the state banking laws of Missouri and are subject to supervision and
regular examination by the Office of the Commissioner of Finance of Missouri.
In addition, the national banks and one state bank that are members of the
Federal Reserve System are subject to examination by that agency. All
affiliate banks are members of and subject to examination by the Federal
Deposit Insurance Corporation.
Scout Brokerage Services, Inc. is subject to supervision and regulation by
the National Association of Securities Dealers. This subsidiary is also a
member of the Securities Investor Protection Corporation.
Information regarding capital adequacy standards of the Federal banking
regulators is included on pages A-17, A-18, A-33 and A-34 of the attached
Appendix, and is incorporated herein by reference.
Information regarding dividend restrictions is on page A-33 of the attached
Appendix, incorporated herein by reference.
2
STATISTICAL DISCLOSURE
The information required by Guide 3, "Statistical Disclosure by Bank Holding
Companies," has been integrated throughout pages A-2 through A-21 of the
attached Appendix under the captions of "Five-Year Financial Summary" and
"Financial Review," and such information is incorporated herein by reference.
EXECUTIVE OFFICERS
The following are the executive officers of the Company, each of whom is
elected annually, and there are no arrangements or understandings between any
of the persons so named and any other person pursuant to which such person was
elected as an officer.
NAME AGE POSITION WITH REGISTRANT
- ---- --- ------------------------
R. Crosby Kemper........ 70 Chairman of the Board and Chief Executive Officer since
1972. Chairman and Chief Executive Officer of UMB Bank,
n.a. (a subsidiary of the Company) from 1971 through
1995, and as Chairman since January, 1996.
Alexander C. Kemper..... 31 President of the Company since January, 1995. President
of UMB Bank, n.a. since January, 1994 and as President
and Chief Executive Officer since January, 1996. He
previously served as Divisional Executive Vice
President.
Peter J. Genovese....... 50 Vice Chairman of the Board since 1982. Chairman and
Chief Executive Officer of UMB Bank of St. Louis, n.a.
(a subsidiary of the Company) since 1979.
Rufus Crosby Kemper III. 46 Vice Chairman of the Board since January, 1995.
President of UMB Bank of St. Louis, n.a. since 1993.
Executive Vice President of UMB Bank, n.a. prior
thereto.
J. Lyle Wells, Jr. ..... 69 Vice Chairman of the Board of the Company since 1993.
Vice Chairman of the Board of UMB Bank, n.a. since
1982.
Royce M. Hammons........ 51 President and Chief Executive Officer of UMB Oklahoma
Bank (a subsidiary of the Company) since 1987.
Richard A. Renfro....... 62 President of UMB National Bank of America, Salina,
Kansas, (a subsidiary of the Company) since 1986.
James A. Sangster....... 42 Divisional Executive Vice President of UMB Bank, n.a.
since 1993. Executive Vice President prior thereto.
William C. Tempel....... 58 President and Chief Executive Officer of UMB Bank
Kansas (a subsidiary of the Company) since 1993, having
previously served as President, and a Divisional
Executive Vice President of UMB Bank, n.a.
Edward J. McShane, Jr. . 64 Executive Vice President and Senior Trust Officer of
UMB Bank, n.a. since 1989. Executive Vice President and
Head of Personal Trust and Custody Division prior
thereto.
Douglas F. Page......... 53 Executive Vice President of the Company since 1984 and
Divisional Executive Vice President, Loan
Administration, of UMB Bank, n.a. since 1989.
Timothy M. Connealy..... 39 Chief Financial Officer since 1994. Chief Financial
Officer of UMB Bank Kansas prior thereto.
3
NAME AGE POSITION WITH REGISTRANT
- ---- --- ------------------------
James C. Thompson... 54 Divisional Executive Vice President of UMB Bank, n.a.
since July, 1994. Executive Vice President of UMB Bank
of St. Louis, n.a. since 1989.
E. Frank Ware....... 52 Executive Vice President of UMB Bank, n.a. since 1985.
ITEM 2. PROPERTIES
The Company's headquarters building, the UMB Bank Building, is located at
1010 Grand Avenue in downtown Kansas City, Missouri, and was opened in July,
1986. Of the total 250,000 square feet, the offices of the parent company and
customer service functions of UMB Bank, n.a. comprise 175,000 square feet. The
remaining 75,000 square feet are leased to the Company's principal law firm
and principal accounting firm.
The banking facility of UMB Bank, n.a. at 928 Grand Avenue principally
houses that bank's operations, data processing and other support functions and
is connected to the headquarters building by an enclosed pedestrian walkway.
At December 31, 1996, the Company's affiliate banks operated a total of 16
main banking houses and 120 detached facilities, the majority of which are
owned by them or a non-bank subsidiary of the Company and leased to the
respective bank.
The Company's affiliate bank in St. Louis leases 40,000 square feet of space
in the Equitable Building in the heart of the downtown commercial sector. A
full service banking center, operations and administrative offices are housed
at this location. The St. Louis affiliate bank provides full service banking
at 19 additional offices, which circle the metropolitan area.
Additional information with respect to premises and equipment is presented
on page A-32 of the attached Appendix, which is incorporated herein by
reference.
In the opinion of the management of the Company, the physical properties of
the Company and its subsidiaries are suitable and adequate and are being fully
utilized.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company and its subsidiaries had
certain lawsuits pending against them at December 31, 1996. In the opinion of
management, after consultation with legal counsel, none of these suits will
have a significant effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders for a vote during the fourth
quarter ending December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's stock is traded on the NASDAQ National Market System under the
symbol "UMBF." As of December 31, 1996, the Company had 2,597 shareholders.
Dividend and sale prices of stock information, by quarter, for the past two
years is contained on page A-21 of the attached Appendix and is hereby
incorporated by reference.
4
Information concerning restrictions on the ability of Registrant to pay
dividends and Registrant's subsidiaries to transfer funds to Registrant is
contained on page A-20 of the attached Appendix and is hereby incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
See the "Five-Year Financial Summary" on page A-2 of the attached Appendix,
which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See the "Financial Review" on pages A-3 through A-21 of the attached
Appendix, which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data
appearing on the indicated pages of the attached Appendix are incorporated
herein by reference:
Consolidated Financial Statements -- pages A-22 through A-42.
Summary of Operating Results by Quarter -- page A-21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is included in the Company's 1997 Proxy
Statement under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" and is hereby
incorporated by reference.
Information regarding executive officers is included in Part I of this Form
10-K under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
This information is included in the Company's 1997 Proxy Statement under the
captions "Executive Compensation," "Report of the Officers Salary and Stock
Option Committee on Executive Compensation," "Director Compensation," "Salary
Committee Interlocks and Insider Participation," and "Performance Graph" and
is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
This information is included in the Company's 1997 Proxy Statement under the
caption "Principal Shareholders" and is hereby incorporated by reference.
SECURITY OWNERSHIP OF MANAGEMENT
This information is included in the Company's 1997 Proxy Statement under the
caption "Stock Beneficially Owned by Directors and Nominees and Executive
Officers" and is hereby incorporated by reference.
5
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included in the Company's 1997 Proxy Statement under the
caption "Certain Transactions" and is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Set forth below are the consolidated financial statements of the Company
appearing on the indicated pages of the attached Appendix, which are hereby
incorporated by reference.
PAGE REFERENCE IN
THE ATTACHED APPENDIX
---------------------
Consolidated Balance Sheet as of December 31, 1996, 1995
and 1994................................................ A-22
Consolidated Statement of Income for the Three Years
Ended December 31, 1996................................. A-23
Consolidated Statement of Cash Flows for the Three Years
Ended December 31, 1996................................. A-24
Consolidated Statement of Shareholders' Equity for the
Three Years Ended December 31, 1996..................... A-25
Notes to Financial Statements............................ A-26-A-42
Independent Auditors' Report............................. A-43
Condensed financial statements for parent company only may be found on page
A-42. All other schedules have been omitted because the required information
is presented in the financial statements or in the notes thereto, the amounts
involved are not significant or the required subject matter is not applicable.
REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the fourth quarter of
1996.
EXHIBITS
The following Exhibit Index lists the Exhibits to Form 10-K.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(3a) Articles of incorporation filed as Exhibit 3a to Form S-4,
Registration No. 33-56450*
(3b) Bylaws filed as Exhibit 3b to Form S-4, Registration No.
33-56450*
(4) Description of the Registrant's common stock in Amendment
No. 1 on Form 8 to its General Form for Registration of
Securities on Form 10, dated March 5, 1993.*
The Registrant's Articles of Incorporation and Bylaws are
attached as Exhibits 3(a) and 3(b), respectively, to the
Registrant's Registration Statement on Form S-4
(Commission file no. 33-56450) and are incorporated herein
by reference in response to Exhibit 3 above. The following
portions of those documents define some of the rights of
the holders of the Registrant's common stock, par value
$12.50 per share: Articles III (authorized shares), "X"
(amendment of the Bylaws) and XI (amendment of the
Articles of Incorporation) of the Articles of
Incorporation and Articles II (shareholder meetings),
Sections 2 (number and classes of directors) and 3
(Election and Removal of Directors) of Article III,
Section 1 (stock certificates) of Article VII and Section
4 (indemnification) of Article VIII of the Bylaws.
Note: No long-term debt instrument issued by the
Registrant exceeds 10% of the consolidated total assets of
the Registrant and its subsidiaries. In accordance with
paragraph 4 (iii) of Item 601 of Regulation S-K, the
Registrant will furnish to the Commission, upon request,
copies of long-term debt instruments and related
agreements.
6
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(10a) 1981 Incentive Stock Option Plan as amended November 27,
1985 and October 10, 1989, filed as Exhibit 10 to report
on Form 10-K for the fiscal year ended December 31, 1989*
(10b) 1992 Incentive Stock Option Plan filed as Exhibit 28 to
Form S-8, Registration No.
33-58312*
(10c) An Agreement and Plan of Merger between United Missouri
Bancshares, Inc. and CNB Financial Corporation filed as
Exhibit 2 to the Registrant's current report on Form 8-K
dated October 28, 1992*
(10d) Indenture between United Missouri Bancshares, Inc., Issuer
and NBD Bank, N.A., Trustee, filed as Exhibit 4a to Form
S-3, Registration No. 33-55394*
(11) Statement regarding computation of per share earnings
(12) Statement regarding computation of earnings to fixed
charges
(21) Subsidiaries of the Registrant
(23) Consent of Deloitte & Touche LLP
(24) Powers of Attorney
(27) Financial Data Schedule
- --------
* Exhibit has heretofore been filed with the Securities and Exchange Commission
and is incorporated herein as an exhibit by reference.
7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
UMB FINANCIAL CORPORATION
/s/ R. Crosby Kemper
_____________________________________
R. Crosby Kemper, Chairman of the
Board and Chief Executive Officer
/s/ Timothy M. Connealy
_____________________________________
Timothy M. Connealy,
Chief Financial Officer
Date: March 24, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES ON THE DATE INDICATED.
Paul D. Bartlett, Jr.* Director
______________________
Paul D. Bartlett, Jr.
Thomas E. Beal* Director
______________________
Thomas E. Beal
H. Alan Bell* Director
______________________
H. Alan Bell
David R. Bradley, Jr.* Director
______________________
David R. Bradley, Jr.
Newton A. Campbell* Director
______________________
Newton A. Campbell
Director
______________________
William Terry Fuldner
Director
______________________
Jack T. Gentry
Peter J. Genovese* Director
______________________
Peter J. Genovese
C.N. Hoffman, Jr.* Director
______________________
C.N. Hoffman, Jr.
Alexander C. Kemper* Director
______________________
Alexander C. Kemper
R. Crosby Kemper III* Director
______________________
R. Crosby Kemper III
Daniel N. League, Jr.* Director
______________________
Daniel N. League, Jr.
Director
______________________
William J. McKenna
Director
______________________
Roy E. Mayes
John H. Mize, Jr.* Director
______________________
John H. Mize, Jr.
Mary Lynn Oliver* Director
______________________
Mary Lynn Oliver
Director
______________________
W. L. Orscheln
Robert W. Plaster* Director
______________________
Robert W. Plaster
8
Thomas A. Ward III Director
_______________________________
Thomas A. Ward III
Director
_______________________________
Alan W. Rolley
E. Jack Webster, Jr.* Director
_______________________________
E. Jack Webster, Jr.
Joseph F. Ruysser* Director
_______________________________
Joseph F. Ruysser
Director
_______________________________
Jon Wefald
Director
_______________________________
Thomas D. Sanders
Director
_______________________________
John E. Williams
Herman R. Sutherland* Director
_______________________________
Herman R. Sutherland
*/s/ R. Crosby Kemper
- -------------------------------------
R. Crosby Kemper
Attorney-in-Fact for each director
Date: March 24, 1997
9
UMB FINANCIAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
PAGES
-----
Consolidated Balance Sheet........................................ A-22
Consolidated Statement of Income.................................. A-23
Consolidated Statement of Cash Flows.............................. A-24
Consolidated Statement of Shareholders' Equity.................... A-25
Notes to Financial Statements..................................... A-26 to A-42
Independent Auditors' Report...................................... A-43
Selected Financial Data ("Five-Year Financial Summary")........... A-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations
("Financial Review")............................................. A-3 to A-21
A-1
UMB FINANCIAL CORPORATION
FIVE-YEAR FINANCIAL SUMMARY
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
EARNINGS
Interest income......... $ 372,077 $ 357,055 $ 323,260 $ 283,215 $ 253,367
Interest expense........ 164,581 157,787 136,064 119,718 123,786
Net interest income..... 207,496 199,268 187,196 163,497 129,581
Provision for loan loss-
es..................... 10,565 5,090 2,640 3,332 2,981
Noninterest income...... 135,407 117,001 119,102 115,792 101,304
Noninterest expense..... 246,808 233,556 233,259 214,708 172,789
Net income.............. 57,532 52,176 47,814 41,119 39,367
AVERAGE BALANCES
Assets.................. $6,137,232 $5,899,169 $6,372,607 $5,766,843 $4,622,968
Loans, net of unearned
interest............... 2,437,829 2,346,325 2,148,606 1,786,529 1,337,305
Securities*............. 2,487,641 2,382,248 2,844,306 2,729,270 2,109,121
Deposits................ 4,667,956 4,581,349 5,021,401 4,559,551 3,595,644
Long-term debt.......... 55,349 44,450 50,370 53,522 40,966
Shareholders' equity.... 574,343 597,401 572,446 502,614 385,988
YEAR-END BALANCES
Assets.................. $6,511,986 $6,281,328 $6,599,020 $6,528,826 $5,003,187
Loans, net of unearned
interest............... 2,557,641 2,406,138 2,269,617 2,159,761 1,483,048
Securities*............. 2,706,549 2,694,781 2,660,047 2,979,156 2,293,438
Deposits................ 5,190,534 4,813,683 5,132,834 5,161,729 3,843,166
Long-term debt.......... 51,350 40,736 46,330 51,529 33,531
Shareholders' equity.... 582,477 575,959 557,306 586,643 399,679
PER SHARE DATA
Earnings................ $ 2.89 $ 2.40 $ 2.15 $ 2.03 $ 2.24
Cash dividends.......... 0.76 0.70 0.66 0.63 0.63
Dividend payout ratio... 26.30% 29.17% 30.70% 31.03% 28.13%
Book value.............. $ 29.54 $ 28.12 $ 25.39 $ 26.19 $ 22.82
Market price
High................... 41.75 43.10 29.91 32.08 32.86
Low.................... 32.14 25.97 25.54 28.72 28.52
Close.................. 40.50 33.57 27.06 29.51 31.48
RATIOS
Return on average as-
sets................... 0.94% 0.88% 0.75% 0.71% 0.85%
Return on average equi-
ty..................... 10.02 8.73 8.35 8.18 10.20
Average equity to as-
sets................... 9.36 10.13 8.98 8.72 8.35
Total risk-based capital
ratio.................. 15.63 16.16 17.85 18.50 20.16
- --------
Per share information restated for 5% stock dividend paid January 2, 1997.
*Securities include investment securities and securities available for sale.
A-2
UMB FINANCIAL CORPORATION
FINANCIAL REVIEW
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 three-
year period ending December 31, 1996. 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. This
information is based on current financial and economic data and management's
expectations for the future. 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, loan
demand, the ability of customers to repay loans, consumer savings habits,
employment costs and interest rate changes.
OVERVIEW
The Company recorded consolidated net income of $57.5 million for the year
ended December 31, 1996. This represents a 10.3% increase over 1995 net income
of $52.2 million. Net income for 1995 represented a 9.1% increase over 1994
results of $47.8 million. As a result of ongoing common stock repurchases,
growth in earnings per share outpaced the gains in net income. Earnings per
share for the year ended December 31, 1996 were $2.89, compared with $2.40 in
1995 and $2.15 in 1994. Earnings per share for 1996 increased 20.4% over 1995
per share earnings, which was an 11.6% increase over 1994. The Company
continues to consider common stock repurchases based on availability, price
and alternative use of funds. All share and per share data has been restated
to give effect to a 5% stock dividend distributed to shareholders on January
2, 1997.
The Company's improved earnings for 1996 was a result of a continued
increase in net interest income as well as an increase in noninterest income.
Both of these improvements were partially offset by a higher loan loss
provision and increased operating expenses. The improvement in 1995 earnings
over that of 1994 was primarily driven by an increase in net interest income.
The Company's operating performance ratios have improved steadily over the
last three year period. Return on average assets was 0.94%, 0.88% and 0.75%
for each of the years in the three year period ended December 31, 1996,
respectively. Return on average shareholders' equity was 10.02% for 1996,
8.73% for 1995 and 8.35% for 1994.
The Company's consolidated asset total was $6.5 billion at December 31,
1996, compared to $6.3 billion at year-end 1995 and $6.6 billion at year-end
1994. Average assets for 1996, 1995 and 1994 were $6.1 billion, $5.9 billion
and $6.4 billion, respectively. Average loans as a percentage of average
assets were 39.7% in 1996, 39.8% in 1995 and 33.7% in 1994. Average deposits
were $4.7 billion in 1996, $4.6 billion in 1995 and $5.0 billion in 1994. The
change from the 1994 total was primarily related to the loss of short-term
deposits associated with the Company's mutual fund processing operation.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the Company's primary source of earnings and
represents the amount by which interest income on earning assets exceed the
interest expense paid on the liabilities. Net interest income is affected by
the volumes of interest-earning assets and the related funding sources, the
overall mix of these assets and liabilities and the rates paid on each. Table
1 summarizes the changes in net interest income resulting from changes in
volume and rates for the prior two years. Net interest margin is calculated as
net interest income on a fully tax-equivalent basis (FTE) as a percentage of
average earning assets. A critical component of net interest income and
related net interest margin is the percentage of earning assets funded by
interest-free funding sources. Net interest income, average balance sheet
amounts and the corresponding yields earned and rates paid for the years 1992
through 1996 are presented on pages A-44 and A-45. Net interest income is
presented on a tax-equivalent basis to adjust for the tax-exempt status of
earnings from certain loans and investments, primarily obligations of state
and local governments.
A-3
TABLE 1: TAX-EQUIVALENT RATE-VOLUME ANALYSIS (IN THOUSANDS)
This analysis attributes changes in net interest income on a tax-equivalent
basis either to changes in average balances or to changes in average rates for
earning assets and interest-bearing liabilities. The change in interest due
jointly to volume and rate has been allocated to volume and rate in proportion
to the relationship of the absolute dollar amount of change in each. All
information is presented on a tax-equivalent basis and gives effect to the
disallowance of interest expense, for federal income tax purposes, related to
certain tax-free assets.
AVERAGE
AVERAGE VOLUME RATE INCREASE (DECREASE)
--------------------- ---------- --------------------------
1996 1995 1996 1995 1996 VS. 1995 VOLUME RATE TOTAL
---------- ---------- ---- ---- ------------------------ -------- ------- -------
Change in interest
earned on:
$2,437,829 $2,346,325 9.09% 9.33% Loans................... $ 8,404 $(5,829) $ 2,575
Securities:
2,169,823 2,076,169 5.66 5.32 Taxable................. 5,119 7,215 12,334
317,818 306,079 6.68 6.83 Tax-exempt.............. 790 (455) 335
Federal funds sold and
resell
185,624 187,836 5.39 5.86 agreements............. (129) (861) (990)
69,244 60,239 6.12 6.19 Other................... 551 (41) 510
---------- ---------- ---- ---- -------- ------- -------
$5,180,338 $4,976,648 7.33% 7.34% Total................... $ 14,735 $ 29 $14,764
---------- ---------- ---- ---- -------- ------- -------
Change in interest
incurred on:
Interest-bearing
$3,281,783 $3,244,545 3.75% 3.75% deposits............... $ 1,397 $ 144 $ 1,541
Federal funds purchased
and repurchase
771,522 613,862 4.84 5.32 agreements............. 7,835 (3,140) 4,695
56,383 45,570 7.21 7.70 Other................... 791 (233) 558
---------- ---------- ---- ---- -------- ------- -------
$4,109,688 $3,903,977 4.00% 4.04% Total................... $ 10,023 $(3,229) $ 6,794
========== ========== ==== ==== -------- ------- -------
Net interest income..... $ 4,712 $ 3,258 $ 7,970
======== ======= =======
AVERAGE
AVERAGE VOLUME RATE INCREASE (DECREASE)
--------------------- ---------- --------------------------
1995 1994 1995 1994 1995 VS. 1994 VOLUME RATE TOTAL
---------- ---------- ---- ---- ------------------------ -------- ------- -------
Change in interest
earned on:
$2,346,325 $2,148,606 9.33% 8.06% Loans................... $ 16,857 $28,940 $45,797
Securities:
2,076,169 2,555,231 5.32 4.77 Taxable................. (24,498) 13,104 (11,394)
306,079 289,075 6.83 6.41 Tax-exempt.............. 1,124 1,241 2,365
Federal funds sold and
resell
187,836 337,958 5.86 4.03 agreements............. (7,410) 4,787 (2,623)
60,239 56,487 6.19 5.65 Other................... 220 315 535
---------- ---------- ---- ---- -------- ------- -------
$4,976,648 $5,387,357 7.34% 6.13% Total................... $(13,707) $48,387 $34,680
---------- ---------- ---- ---- -------- ------- -------
Change in interest
incurred on:
Interest-bearing
$3,244,545 $3,576,025 3.75% 2.99% deposits............... $(10,587) $25,223 $14,636
Federal funds purchased
and repurchase
613,862 664,499 5.32 3.77 agreements............. (2,032) 9,660 7,628
45,570 51,365 7.70 7.88 Other................... (448) (93) (541)
---------- ---------- ---- ---- -------- ------- -------
$3,903,977 $4,291,889 4.04% 3.17% Total................... $(13,067) $34,790 $21,723
========== ========== ==== ==== -------- ------- -------
Net interest income..... $ (640) $13,597 $12,957
======== ======= =======
A-4
FTE interest income increased by $14.8 million during 1996 to $379.9 million
compared to $365.1 million for 1995. Interest income for 1995 represented a
$34.7 million increase over the total for 1994 of $330.4 million. Interest
expense in 1996 amounted to $164.6 million, a $6.8 million increase over 1995
expense of $157.8 million. Interest expense in 1995 increased by $21.7 million
from 1994 expense of $136.1 million. These changes resulted in an increase in
net interest income for 1996 of $8 million to $215.3 million compared to
$207.3 million for 1995 and $194.3 million in 1994.
TABLE 2: ANALYSIS OF NET INTEREST MARGIN
1996 1995 CHANGE
---------- ---------- --------
(IN THOUSANDS)
Average earning assets...................... $5,180,338 $4,976,648 $203,690
Interest-bearing liabilities................ 4,109,688 3,903,977 205,711
---------- ---------- --------
Interest-free funds......................... $1,070,650 $1,072,671 $ (2,021)
========== ========== ========
Free funds ratio (free funds to earning as- 20.67% 21.55% (0.88)%
sets)...................................... ===== ===== =====
Tax-equivalent yield on earning assets...... 7.33% 7.34% (0.01)%
Cost of interest-bearing liabilities........ 4.00 4.04 (0.04)
----- ----- -----
Net interest spread......................... 3.33% 3.30% 0.03%
Benefit of interest-free funds.............. 0.83 0.87 (0.04)
----- ----- -----
Net interest margin......................... 4.16% 4.17% (0.01)%
===== ===== =====
Average earning assets increased only marginally in 1996 to $5.2 billion
from $5.0 billion in 1995. The 1995 total represented a decrease from the
total for 1994 of $5.4 billion. The increase in earning assets in 1996 was
evenly distributed to both loans and investment securities. This change was
funded by an increase in federal funds purchased and an increase in deposits.
The decrease in average earning assets in 1995 was primarily a result of a
reduction in investment securities which was used to fund a decrease in
deposits. The reduction in deposits was primarily related to short-term
balances associated with the Company's mutual fund processing.
The Company's net interest margin was 4.16% in 1996, compared to 4.17% in
1995 and 3.61% in 1994. Net interest spread was 3.33% in 1996, 3.30% in 1995
and 2.96% in 1994. There was very little change in the Company's net interest
margin during 1996 as earning assets and interest-bearing liabilities
increased by approximately the same amount. In addition, the yields on earning
assets and rates paid on liabilities remain relatively unchanged, resulting in
a fairly flat net interest spread. In comparing 1996 to 1995, the yield on
loans decreased by 24 basis points as a result of a very competitive loan
market. This decrease was offset by a 27 basis point increase in the yield on
investment securities. The Company improved the yield on its securities
portfolio by reinvesting maturities at a higher yield and slightly lengthening
the average life of the portfolio to 25 months at December 31, 1996 from 18
months a year earlier.
The increase in the Company's net interest margin in 1995 resulted from an
overall rise in interest rates during 1995 and a change in the mix of earning
assets. During 1995 loans comprised 47.1% of earning assets compared to 39.9%
during 1994. This change resulted from both an increase in lending activity
and a reduction in earning assets. During 1995 the yield on earning assets
increased by 121 basis points from the previous year compared to an increase
in cost of funds for the same period of 87 basis points. This resulting
improvement in net interest spread fueled the increase in 1995 net interest
margin to 4.17% from 3.61% for 1994.
As noted in Table 1, the increase in net interest income in 1996 as compared
to 1995 was significantly affected by both changes in the volume/mix of
earning assets and related funding sources and the rates paid on both. The
improvement in net interest income for 1995 over that of 1994 was attributable
to changes in interest rates.
A-5
TABLE 3: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
This table presents an allocation of the allowance for loan losses by loan
categories. The breakdown is based on a number of qualitative factors;
therefore, the amounts presented are not necessarily indicative of actual
future charge-offs in any particular category. The percent of loans in each
category to total loans is provided in Table 5.
DECEMBER 31
---------------------------------------
LOAN CATEGORY 1996 1995 1994 1993 1992
- ------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
Commercial.............................. $17,300 $16,150 $16,000 $17,500 $13,250
Consumer................................ 15,000 13,500 13,400 13,500 10,500
Real estate............................. 1,000 2,500 2,500 3,000 500
Agricultural............................ 50 450 500 1,000 100
Leases.................................. 50 50 50 50 50
Unallocated............................. 14 35 77 540 56
------- ------- ------- ------- -------
Total allowance........................ $33,414 $32,685 $32,527 $35,590 $24,456
======= ======= ======= ======= =======
PROVISION AND ALLOWANCE FOR LOAN LOSS
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 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 and
projected economic conditions, loan growth and characteristics 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 of 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's allowance for loan losses was $33.4 million at December 31,
1996 compared to $32.7 million at year-end 1995 and $32.5 million at year-end
1994. This represents an allowance to total loans of 1.3%, 1.4% and 1.4% as of
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 the
allowance for loan losses exceeded total nonperforming loans by $21.9 million.
Non-performing loans include nonaccrual loans and restructured loans. The
year-end 1996 allowance for loan losses was 340% of net credit losses incurred
during 1996.
As shown in Table 3, the ALL has been allocated to various loan portfolio
segments. The Company manages the ALL against the risk in the entire loan
portfolio and, therefore, the allocation of the ALL to a particular loan
segment may change in the future. In the opinion of management, the ALL is
adequate based on the inherent losses in the loan portfolio at December 31,
1996.
The Company recorded a provision for loan losses of $10.6 million during
1996, compared to $5.1 million in 1995 and $2.6 million in 1994. A primary
factor for the increase in the loan loss provision in 1996 as compared to 1995
was the increase in losses associated with the Company's bankcard portfolio.
Losses in this area have increased, as they have for the entire industry, as
consumer indebtedness has risen to record levels. Access to multiple credit
cards, many with low introductory rates, has fueled unprecedented levels of
consumer debt, which in many instances cannot be supported by the consumer.
Attitudes toward the use of bankruptcy have also changed, resulting in a
record level of such filings. Though the Company's losses in this area have
increased, management believes the losses and delinquency levels of the
bankcard portfolio will remain below industry averages. The bankcard portfolio
represents only 7.2% of the Company's total loans as of December 31, 1996.
Bankcard loan delinquencies over 30 days totaled 3.0% of total bankcard loans
as of year-end 1996. The Company will continue to closely monitor the bankcard
loan portfolio, the related collection efforts and underwriting in order to
minimize credit losses.
A-6
Contributing to the increase in the 1996 provision for loan losses was
uncertainty concerning two of the Company's commercial loans. These loans
comprise over 80% of the Company's total nonaccrual loans as of December 31,
1996. Based upon expected repayments and collateral, management does not
anticipate incurring future significant losses on these two credits, beyond
reserves previously provided. Based on an assessment of the estimated risk in
the total loan portfolio, management believes the allowance for loan losses is
more than adequate to absorb anticipated losses in the loan portfolio.
Significant changes in general economic conditions and in the ability of
specific customers to repay loans will impact the level of provision for loan
losses required in future years. The increase in the Company's 1996 provision
for loan losses was primarily driven by industry-wide deterioration in
bankcard credit quality and two commercial credits, and is not indicative of
any changes in credit standards or an overall deterioration in credit quality.
The increase in the Company's provision for loan losses in 1995 as compared to
1994 was the result of an increase in overall lending activity and higher
losses associated with the bankcard loan portfolio.
Table 4 presents a five-year summary of the Company's allowance for loan
losses.
TABLE 4: ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Allowance -- beginning
of year................ $ 32,685 $ 32,527 $ 35,590 $ 24,456 $ 26,241
Provision for loan loss-
es..................... 10,565 5,090 2,640 3,332 2,981
Allowances of acquired
banks.................. -- 485 -- 12,076 207
Charge-offs:
Commercial............. $ (2,668) $ (948) $ (2,833) $ (1,717) $ (1,401)
Consumer:
Bankcard.............. (7,592) (5,427) (4,236) (3,983) (4,082)
Other................. (1,904) (1,602) (1,018) (836) (890)
Real estate............ (171) (113) (182) (578) (175)
Agricultural........... -- -- -- (21) --
---------- ---------- ---------- ---------- ----------
Total charge-offs... $ (12,335) $ (8,090) $ (8,269) $ (7,135) $ (6,548)
Recoveries:
Commercial............. $ 391 $ 947 $ 573 $ 1,051 $ 186
Consumer:
Bankcard.............. 1,163 994 1,102 1,144 956
Other................. 532 569 528 469 363
Real estate............ 207 122 118 138 70
Agricultural........... 206 41 245 59 --
---------- ---------- ---------- ---------- ----------
Total recoveries.... $ 2,499 $ 2,673 $ 2,566 $ 2,861 $ 1,575
---------- ---------- ---------- ---------- ----------
Net charge-offs......... $ (9,836) $ (5,417) $ (5,703) $ (4,274) $ (4,973)
---------- ---------- ---------- ---------- ----------
Allowance -- end of
year................... $ 33,414 $ 32,685 $ 32,527 $ 35,590 $ 24,456
========== ========== ========== ========== ==========
Average loans, net of
unearned interest...... $2,437,829 $2,346,325 $2,148,606 $1,786,529 $1,337,305
Loans at end of year,
net of unearned
interest............... 2,557,641 2,406,138 2,269,617 2,159,761 1,483,048
Allowance to loans at
year-end............... 1.31% 1.36% 1.43% 1.65% 1.65%
Allowance as a multiple
of net charge-offs 3.40x 6.03x 5.70x 8.33x 4.92x
Net charge-offs to:
Provision for loan
losses................ 93.10% 106.42% 216.02% 128.27% 166.82%
Average loans.......... 0.40 0.23 0.27 0.24 0.37
A-7
NONINTEREST INCOME
Management has stressed growth of noninterest income to enhance the
Company's profitability since fee-based services are non-credit related,
provide steady income and are not affected by fluctuations in interest rates.
These activities are also relatively low-risk and do not impact the Company's
regulatory capital needs. Fee-based services also provide the Company the
opportunity to offer additional products and services to its customers. A
primary strength of the Company is its relationship with its many long-term
customers. The Company's goal is to offer multiple products and services to
its customers, the quality of which will differentiate us from the
competition. Fee-based services that have been emphasized include trust and
securities processing, securities trading and cash management. Fee income,
exclusive of net security and asset gains, as a percent of adjusted operating
revenues, was 36.8% in 1996. Adjusted operating revenues is defined as tax-
equivalent net interest income plus noninterest income, excluding net security
and asset gains.
Noninterest income, exclusive of net security gains and gains on sale of
assets, was $125.1 million in 1996 compared to $113.1 million in 1995 and
$115.5 million in 1994. This represents a 10.9% increase in 1996 over the
prior year. This growth was fueled by a 15.8% increase in trust fees and a
39.3% increase in other service charges and fees. Fee income in 1995 was down
from the preceding year primarily as a result of a reduction in securities
processing income and bankcard fees.
The Company's most significant source of fee income is generated by the
Trust Division. Trust services have long been an identified strength of the
Company and are expected to continue to be the primary driver of fee income.
The Company offers a full range of trust services including personal and
custody services, investment management and employee benefits processing. The
Company plans to place increased emphasis on its Private Client Services,
which offers full trust and personal banking services to high net worth
individuals.
Income from trust services totaled $41.5 million in 1996, $35.9 million in
1995 and $35.0 million in 1994. The increase in trust fee income for 1996 over
the preceding year was partially the result of a comprehensive review,
performed during 1995, of the structure of trust fees and services. Fee
revenue in 1996 and 1995 also benefited from the appreciation of assets under
management. Efforts to increase fee revenues and efficiencies in this area
have been made and will continue. The aggregate value of managed trust assets
was $10.5 billion at December 31, 1996, compared to $10.0 billion at year-end
1995 and $8.7 billion at year-end 1994.
The Company's securities processing revenue is primarily related to the
mutual fund industry. Revenues from securities processing were $9.5 million in
1996, $10.5 million in 1995 and $12.5 million in 1994. The decline in revenues
for both 1996 and 1995 was primarily the result of the loss of what was the
Company's largest securities processing customer. During 1994 this customer
was acquired by a competitor of the Company and as a result, this processing
business began to transition away from the Company and was eliminated during
the second quarter of 1995. The transition of this business from the Company
was sufficient enough to allow for an orderly reduction in related operating
costs. The Company has viewed this change as an opportunity which, in the long
term, will benefit this business line as it will be less reliant on one
significant customer and now has the capacity to develop new relationships
with other customers in the industry. Fee revenue in 1996 was also impacted by
a change in accounting for fees for services provided by subservicers.
Customer fees for these services, approximately $800,000 in 1996, are now paid
directly to the subservicer and not recorded as both noninterest income and
expense by the Company. Total trust assets under custody were $97.4 billion at
December 31, 1996, $91.2 billion at December 31, 1995 and $189.8 billion at
December 31, 1994.
Fees and service charges on deposit accounts were $33.4 million in 1996,
$33.2 million in 1995 and $32.9 million in 1994. Income in this area has
remained relatively flat due to competitive pressures and lack of significant
growth in deposit totals. Other service charges and fees increased to $15.7
million in 1996 from $11.3 million in 1995 and $11.7 million in 1994. Income
from cash management services and from the Company's ATM network helped
produce the increase in 1996 fee income. Bankcard fees were $6.3 million in
1996, $6.8 million in 1995 and $8.2 million in 1994. During 1995, the Company
eliminated the annual fee on its primary bankcard products, resulting in flat
bankcard fees from 1995 to 1996 and the decrease in fees in 1995, as compared
with 1994.
A-8
Trading and investment banking income totaled $12.8 million in 1996, a 14.4%
increase over 1995 income of $11.2 million. Income for 1995 represented a
12.5% increase over 1994 income of $9.9 million. During 1996 and 1995 the
Company continued to benefit from an increase in liquidity of its
correspondent bank customers, which resulted in higher transaction volumes. In
addition, during 1996 there was more demand for mortgage-backed security
products, which carry a higher profit margin. The Company also increased its
sales to commercial non-bank customers in 1996. Also contributing to the
improved income in this area was an increase in sales, particularly mutual
funds, by the Company's brokerage subsidiary, Scout Brokerage Services, Inc.
Other income was $15.7 million in 1996 as compared with $6.8 million in 1995
and $5.3 million in 1994. Included in 1996 income is a $9.8 million gain on
the sale of the processing rights to the Company's merchant bankcard
portfolio. The Company decided to sell this processing because as a volume-
driven, commodity-priced product, it was not consistent with the Company's
goal to offer value-added products for its customers. Continued consolidation
in the merchant bankcard processing industry will increase pricing
competition. Included in other income for 1995 was a $2.5 million gain on the
sale of the Company's minority ownership in an unconsolidated subsidiary.
NONINTEREST EXPENSE
Total 1996 noninterest expense increased approximately 5.7% to $246.8
million over 1995 expense of $233.6 million and 1994 expense of $233.3
million. Increases in staffing and other operating costs, due to expansion
efforts, were partially offset by a reduction in premiums for deposit
insurance. Total expenses in 1995 approximated those in 1994 as the reduction
in deposit premiums offset nearly all other increases.
Costs associated with staffing are the largest component of non-interest
expense as they approximate 53% of the total for 1996, 1995 and 1994. Salaries
and employee benefits expense increased 7.2% to $131.4 million in 1996
compared to $122.6 million in 1995 and $121.3 million in 1994. Staffing levels
at year-end 1996 were 3,843 compared to 3,835 at the end of 1995. Several
factors resulted in the increase in staffing costs for 1996. During 1996, the
Company opened and staffed 11 new banking facilities. These facilities range
from full service banks to grocery store branches. During 1995 the Company
opened 10 new facilities, the cost of which impacted 1996 for an entire year
compared to only a partial year during 1995. Included in new facilities for
the prior year was the Company's December, 1995 acquisition of a bank in
Oklahoma with a staff of approximately 50. The new locations opened during
1995 and 1996 had a combined staffing of approximately 143 associates. Also
impacting staffing costs was the Company's decision to allocate additional
resources to data and information systems. The Company is in the process of
converting all affiliate banks to a new deposit processing system as well as
merging several affiliate banks. These, in addition to other major initiatives
that are underway or planned, have resulted in the hiring of additional
personnel, including high-level managers, as well as the use of contract
services to help complete various projects. The control of staffing costs has
been and will continue to be an important goal for the Company. This control
accounted for the minimal increase in such costs in 1995 as compared to 1994.
Control of these costs must be tempered with a view of the long-term strategy
of the Company. The Company will continue to allocate people and resources to
those areas that will best benefit the Company in the long term. At the same
time management will strive to gain efficiencies in its existing products,
services and processes.
Occupancy expense increased to $17.9 million in 1996 from $16.0 million in
1995 and $15.1 million in 1994. Equipment expense increased to $24.7 million
in 1996 compared to $22.3 million in 1995 and $20.7 million in 1994. The
increase in 1996 occupancy and equipment expense was primarily the result of
the expansion efforts noted previously. The Company has not only made
investments in new banking facilities, but also in new technology, including
network systems, software and operating platforms. Costs in these areas will
be managed based on the long-term needs of and benefits to the Company.
Occupancy and equipment costs in 1995 increased over 1994 levels due to both
expansion efforts and the outsourcing of certain functions which were
previously performed in-house.
Expenses for supplies and services have remained relatively consistent the
last three years at $18.8 million in 1996 and $19.2 million in 1995 and 1994.
Savings achieved from a new long distance provider have helped offset other
increases in postage, courier services and paper items.
A-9
Marketing and business development costs increased in 1996 to $15.3 million
from $13.1 million in 1995 and $12.5 million in 1994. The change in 1996
expense was primarily the result of an increase in systemwide advertising and
expanded business development activities. Other expenses increased to $22.9
million in 1996 from $20.0 million in 1995 and $22.0 million in 1994. The
increase in 1996 expense resulted from a higher level of purchased data
processing services, an increase in legal and professional expenses and a
general increase in costs associated with clearinghouse and transaction
processing services.
Bankcard processing expense totaled $7.2 million in 1996 compared to $5.8
million in 1995 and $3.1 million in 1994. In the first quarter of 1996 the
Company sold the servicing rights to its merchant bankcard portfolio and,
therefore, no longer received merchant processing discount and fees nor
incurred the related costs. In order to provide a meaningful and consistent
method of presentation, prior periods' income related to merchant processing
activities was netted against bankcard processing expense. The increase in
expense for 1995 compared to 1994 resulted from the use of a new bankcard
processor and cost associated with the conversion during 1995.
Expense associated with deposit insurance and regulatory fees decreased to
$1.3 million in 1996 from $7.6 million in 1995 and $12.2 million in 1994.
These decreases were the result of a 1995 mid-year reduction in the assessment
rate for deposit insurance. The Company was not significantly affected by
special assessments placed on deposit balances acquired through savings
institutions.
INCOME TAXES
Income tax expense totaled $28.0 million in 1996, compared to $25.4 million
in 1995 and $22.6 million in 1994. These expense levels equate to effective
tax rates of 32.7%, 32.8% and 32.1% for 1996, 1995 and 1994, respectively. The
primary reason for the difference between the Company's effective tax rate and
the statutory rate is the effect of nontaxable income, partially offset by
nondeductible goodwill amortization.
FINANCIAL CONDITION
LOANS
Loans represent the Company's primary source of interest income. At December
31, 1996 loans amounted to $2.6 billion compared to $2.4 billion in 1995 and
$2.3 billion in 1994. Loan totals for 1996 represent a 6.3% increase over
1995, which had increased 6.0% over year-end 1994 loans. The increases in
average loan balances for 1996 were slightly below the year-end totals.
Average loan balances for 1996 increased by 3.9% and 1995 average loans
increased by 9.2%. The major components of the change in 1996 loan totals were
an increase in both commercial and consumer installment loans, offset by a
decrease in commercial real estate loans. The largest percentage increase has
been in consumer installment loans, which made up 28.6% of total loans at
year-end 1996 compared to 24.2% and 22.0% at year-end 1995 and 1994,
respectively. This increase has been the result of a higher level of both
direct and indirect auto lending. During both 1996 and 1995 the Company
promoted a very competitive auto loan campaign with the purpose of increasing
direct loans. A direct loan customer has much more value and potential benefit
to the Company due to the potential for cross-sales of additional products or
services. Indirect auto loans also increased during 1996, especially outside
the market of the Company's lead bank. The Company maintained its strict
underwriting standards during this period of growth. The Parent Company's
Credit Administration Department performs timely reviews of loan quality and
underwriting procedures in affiliate banks which experience significant
increases in consumer loans.
A-10
TABLE 5: ANALYSIS OF LOANS BY TYPE
DECEMBER 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
AMOUNT (IN THOUSANDS)
- ------
Commercial.............. $1,184,443 $1,092,292 $1,066,621 $1,035,159 $ 777,205
Agricultural............ 51,649 60,128 69,206 68,148 28,880
Leases.................. 2,596 2,057 2,157 1,627 1,930
Real estate -- commer-
cial................... 258,561 300,493 281,011 280,060 140,278
---------- ---------- ---------- ---------- ----------
Total business-relat-
ed................... $1,497,249 $1,454,970 $1,418,995 $1,384,994 $ 948,293
---------- ---------- ---------- ---------- ----------
Bankcard................ $ 183,301 $ 201,048 $ 188,374 $ 180,345 $ 145,241
Other consumer install-
ment................... 731,661 583,433 500,298 411,037 282,726
Real estate -- residen-
tial................... 145,478 167,077 163,554 186,097 110,061
---------- ---------- ---------- ---------- ----------
Total consumer-relat-
ed................... $1,060,440 $ 951,558 $ 852,226 $ 777,479 $ 538,028
---------- ---------- ---------- ---------- ----------
Total loans........... $2,557,689 $2,406,528 $2,271,221 $2,162,473 $1,486,321
Unearned interest....... (48) (390) (1,604) (2,712) (3,273)
Allowance for loan loss-
es..................... (33,414) (32,685) (32,527) (35,590) (24,456)
---------- ---------- ---------- ---------- ----------
Net loans............. $2,524,227 $2,373,453 $2,237,090 $2,124,171 $1,458,592
========== ========== ========== ========== ==========
AS A % OF TOTAL LOANS
- ---------------------
Commercial.............. 46.3% 45.4% 47.0% 47.9% 52.3%
Agricultural............ 2.0 2.5 3.0 3.2 2.0
Leases.................. 0.1 0.1 0.1 0.1 0.1
Real estate -- commer-
cial................... 10.1 12.5 12.4 12.9 9.4
---------- ---------- ---------- ---------- ----------
Total business-relat-
ed................... 58.5% 60.5% 62.5% 64.1% 63.8%
---------- ---------- ---------- ---------- ----------
Bankcard................ 7.2% 8.4% 8.3% 8.3% 9.8%
Other consumer install-
ment................... 28.6 24.2 22.0 19.0 19.0
Real estate -- residen-
tial................... 5.7 6.9 7.2 8.6 7.4
---------- ---------- ---------- ---------- ----------
Total consumer-relat-
ed................... 41.5% 39.5% 37.5% 35.9% 36.2%
---------- ---------- ---------- ---------- ----------
Total loans........... 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
Included in Table 5 is a five-year breakdown of loans by type. Business-
related loans continue to represent the largest segment of the Company's loan
portfolio. The focus of the Company and each of its affiliate banks is on the
small to medium-sized commercial companies within their respective trade
areas. The Company targets customers that will utilize multiple banking
services and products. The ownership structure of the Company and the
continuity of its management and relationship officers are generally viewed by
customers as a significant strength of the Company and benefit to the
customer. The Company's goal is to differentiate itself from the 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 plan has worked especially well during the recent period
of bank consolidation and should continue to be a benefit. The Company has
established loan production offices in markets that have experienced
significant consolidation and has seen significant business development from
them. In the near term, the Company has tremendous potential to increase
market share as a result of the rapid consolidation of financial institutions
throughout the Midwest. The Company will continue to expand its efforts to
attract customers that understand and seek the advantages of banking with a
company headquartered in their market.
Commercial real estate loans have decreased to $259 million at December 31,
1996 from $300 million at year-end 1995 and $281 million at year-end 1994. As
a percentage of total loans, commercial real estate loans now comprise only
10.1% of totals, compared to 12.5% and 12.4% in 1995 and 1994, respectively.
Generally, these loans are made for working capital or expansion purposes and
are primarily secured by real estate with a
A-11
maximum loan-to-value of 80%. Many of these properties are owner-occupied and
have other collateral or guarantees as security.
Bankcard loans have decreased in total and as a percentage of total loans.
These loans decreased by 8.8% in 1996 and now comprise only 7.2% of total
loans compared to 8.4% in 1995 and 8.3% in 1994. This decrease was the result
of increased competition from banking and non-banking card issuers. This
competition frequently offers favorable introductory rates in an effort to
obtain transfer balances from other cards. The Company has elected not to seek
loan volume in such a manner. The Company's credit and underwriting standards
have become stricter as more consumers acquire multiple credit cards with
revolving balances.
LOAN QUALITY
The strength of the Company's credit standards is reflected in the credit
quality of the 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's nonperforming
loans increased during 1996 and totaled $11.5 million at December 31, 1996.
The level of nonperforming loans at year-end 1996 represents 0.45% of total
loans compared to 0.15% in 1995 and 0.23% in 1994. The total for 1996
represents a 26% reduction in such loans since June 30, 1996. During the year,
as questions arose concerning the ability of certain loan customers to repay
their credit, the Company aggressively undertook corrective actions to either
improve the quality of the credit or move it from the Company. It is worth
noting that over 80% of the total nonperforming loans at year-end 1996 are
represented by two credits. The Company is expecting a significant reduction
on one of these credits and the other recently returned from bankruptcy.
Management does not anticipate significant losses on either of these credits.
The Company's nonperforming loans have not exceeded 0.5% of total loans in any
of the last six years.
At December 31, 1996 the Company had $1.6 million in other real estate
owned. Totals for year-end 1995 and 1994 were $0.6 million and $5.4 million,
respectively.
Loans past due more than 90 days totaled $6.7 million, $5.3 million and $4.8
million at December 31, 1996, 1995 and 1994, respectively. Bankcard loans
represented approximately 32% of these past due totals at December 31, 1996
compared to 25% for 1995.
Key factors of the Company's loan quality program are a sound credit policy
combined with periodic and independent credit reviews. All affiliate banks
operate under written loan policies. Credit decisions continue to be based on
the borrower's cash flow and the value of underlying collateral, as well as
other relevant factors. Each bank is responsible for evaluating its loans by
using a ranking system. In addition, 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. Loan portfolios are also reviewed by
the respective regulatory authority of each affiliate bank.
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. Commercial real
estate loans comprise 10.1% of total loans, with a history of no significant
losses. The Company has no significant exposure to highly leveraged
transactions and has no foreign credits in its loan portfolio.
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. At year-end 1996, $983,000 of interest due was not recorded as
earned, compared to $227,000 for the prior year.
Certain loans are restructured to provide a reduction or deferral of
interest or principal due to deterioration in the financial condition of the
respective borrowers. Management estimates that approximately $3,000 of
additional interest would have been earned in 1996 if the terms of these loans
had been performing in accordance with their original contracts. In certain
instances, the Company continues to accrue interest on loans past due 90
A-12
days or more. Though the loan payments are delinquent, collection of interest
and principal is expected to resume and sufficient collateral is believed to
exist to protect the Company from significant loss. Consequently, management
considers the ultimate collection of these loans to be reasonable and has
recorded $221,000 of interest due as earned for 1996. The comparative amount
for 1995 was $217,000.
TABLE 6: LOAN QUALITY
DECEMBER 31
------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------- ------- -------
(IN THOUSANDS)
Nonaccrual loans................... $10,953 $2,664 $ 3,131 $ 4,639 $ 1,887
Restructured loans................. 523 985 2,149 2,553 1,205
------- ------ ------- ------- -------
Total nonperforming loans........ $11,476 $3,649 $ 5,280 $ 7,192 $ 3,092
Other real estate owned............ 1,646 626 5,388 7,187 6,932
------- ------ ------- ------- -------
Total nonperforming assets....... $13,122 $4,275 $10,668 $14,379 $10,024
======= ====== ======= ======= =======
Nonperforming loans as a % of
loans............................. 0.45% 0.15% 0.23% 0.33% 0.21%
Allowance as a multiple of
nonperforming loans............... 2.91x 8.96x 6.16x 4.95x 7.91x
Nonperforming assets as a % of
loans plus other real estate
owned............................. 0.51% 0.18% 0.47% 0.66% 0.67%
Loans past due 90 days or more..... $ 6,704 $5,270 $ 4,779 $ 6,359 $ 4,507
As a % of loans.................... 0.26% 0.22% 0.21% 0.29% 0.30%
SECURITIES
The Company's security portfolio provides significant liquidity as a result
of the composition and average life of the underlying securities. This
liquidity can be used to fund loan growth or to offset the outflow of
traditional funding sources. In addition to providing potential liquidity, the
security portfolio is 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. Historically, the Company has maintained very high liquidity
levels while investing primarily in U.S. Treasury obligations. The security
portfolio represents the Company's second largest source of interest income.
Securities available for sale and held to maturity investment securities
comprised 50.4% of earning assets as of December 31, 1996, compared to 51.4%
and 48.7% at year-end 1995 and 1994, respectively. Securities totaled $2.7
billion as of December 31, 1996, 1995 and 1994. Loan demand is expected to be
the primary factor impacting changes in the level of security holdings.
In December 1995, the Company adopted Financial Accounting Standards Board's
"A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The implementation guide allows
for, among other things, the one-time reclassification of securities from the
held to maturity portfolio to the available for sale portfolio, without
affecting the classification or accounting treatment for the remainder of the
investment portfolio. As a result, the Company reclassified mortgage-backed
securities that had previously been included in the held to maturity portfolio
to available for sale. The securities included in this reclassification had a
book value of $86.2 million and a market value of $85.2 million. At December
31, 1996, only bank-qualified securities of state and political subdivisions
were classified as held to maturity.
Securities available for sale comprised 88% of the Company's securities
portfolio at December 31, 1996 and 1995. U.S. Treasury obligations comprised
73% of the available for sale portfolio as of December 31, 1996. U.S. Agency
obligations represented an additional 15% of this portfolio. Securities
available for sale had a net unrealized loss of $2.8 million at year-end 1996
compared to a net unrealized gain of $5.8 million the preceding year. These
amounts are reflected, on an after-tax basis, in the Company's shareholders'
equity as an unrealized loss of $1.8 million at year-end 1996 and an
unrealized gain of $3.6 million for 1995.
A-13
The securities portfolio achieved an average yield on a tax-equivalent basis
of 5.79% for 1996 compared to 5.52% in 1995 and 4.94% in 1994. The Company was
able to increase this yield in both 1996 and 1995 through the reinvestment of
maturities and the slight lengthening of the average life of the portfolio.
The average life of the securities portfolio was 25 months at December 31,
1996 and 18 months at year-end 1995. Included in Tables 7 and 8 are analyses
of the cost, fair value and average yield of securities available for sale and
securities held to maturity.
TABLE 7: SECURITIES AVAILABLE FOR SALE
AMORTIZED
COST FAIR VALUE YIELD
---------- ---------- -----
(IN THOUSANDS)
DECEMBER 31, 1996
U.S. Treasury...................................... $1,751,544 $1,749,308 5.79%
U.S. Agencies...................................... 359,416 358,184 5.66
Mortgage-backed.................................... 150,462 149,725 5.96
State and political subdivisions................... 2,476 2,464 5.84
Commercial paper................................... 120,707 120,707 5.83
Federal Reserve Bank Stock......................... 3,610 3,610
Equity and other................................... 1,902 3,324
---------- ----------
Total............................................ $2,390,117 $2,387,322
========== ==========
DECEMBER 31, 1995
U.S. Treasury...................................... $1,679,881 $1,686,316 5.53%
U.S. Agencies...................................... 498,310 498,067 5.77
Mortgage-backed.................................... 147,194 145,781 5.33
Commercial paper................................... 46,450 46,450 5.82
Federal Reserve Bank Stock......................... 3,656 3,656
Equity and other................................... 1,726 2,754
---------- ----------
Total............................................ $2,377,217 $2,383,024
========== ==========
TABLE 8: INVESTMENT SECURITIES
AMORTIZED FAIR YIELD/AVERAGE
COST VALUE MATURITY
--------- -------- -------------
(IN THOUSANDS)
DECEMBER 31, 1996
Due in 1 year or less.......................... $ 53,768 $ 53,657 6.82%
Due after 1 year through 5 years............... 194,833 195,403 6.87
Due after 5 years through 10 years............. 70,601 70,438 6.99
Due after 10 years............................. 25 27 9.52
-------- --------
Total........................................ $319,227 $319,525 3 yr. 2 mo.
======== ========
DECEMBER 31, 1995
Due in 1 year or less.......................... $ 95,686 $ 95,586 7.65%
Due after 1 year through 5 years............... 168,755 169,800 6.96
Due after 5 years through 10 years............. 46,917 47,360 7.25
Due after 10 years............................. 399 427 8.79
-------- --------
Total........................................ $311,757 $313,173 2 yr. 9 mo.
======== ========
DECEMBER 31, 1994
Due in 1 year or less.......................... $ 99,081 $ 98,564 6.23%
Due after 1 year through 5 years............... 243,800 235,357 7.35
Due after 5 years through 10 years............. 41,485 39,270 7.17
Due after 10 years............................. 468 453 9.01
-------- --------
Total........................................ $384,834 $373,644 2 yr. 5 mo.
======== ========
A-14
OTHER EARNING ASSETS
Federal funds transactions essentially are overnight loans between financial
institutions which allow for either the daily investment of excess funds or
borrowing another institution's funds in order to meet short-term liquidity
needs. The net purchased position at year-end 1996 was $15.0 million, compared
to a net sold position of $6.9 million for year-end 1995. During 1996 and
1995, the Company was a net purchaser of federal funds, and this funding
source averaged $99.3 million in 1996, compared to $55.1 million during 1995.
The Investment Banking Division of the Company's principal affiliate bank
buys and sells federal funds as agent for nonaffiliated banks. Due to the
agency arrangement, these transactions do not appear on the balance sheet and
averaged $830.3 million in 1996 and $744.9 million in 1995.
At December 31, 1996 the Company had acquired securities under an agreement
to resell of $58.8 million compared to $33.9 million at year-end 1995. The
Company uses these instruments as short-term secured investments, in lieu of
selling federal funds, or to acquire securities required for a repurchase
agreement. These investments averaged $120.1 million in 1996.
The Investment Banking Division also maintains an active securities trading
inventory. The average holdings in the securities trading inventory in 1996
were $69.2 million, compared to $60.1 million in 1995, and were recorded at
market value.
TABLE 9: MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Maturing within 3 months............................ $283,910 $208,828 $ 95,514
After 3 months but within 6......................... 27,143 54,454 39,756
After 6 months but within 12........................ 43,089 28,534 27,124
After 12 months..................................... 21,985 32,222 29,085
-------- -------- --------
Total............................................. $376,127 $324,038 $191,479
======== ======== ========
DEPOSITS AND BORROWED FUNDS
Deposits represent the Company's primary funding source for its asset base.
Deposits are gathered from various sources including commercial customers,
individual retail consumers and mutual fund and trust customers. Deposits
totaled $5.2 billion at December 31, 1996 compared to $4.8 billion and $5.1
billion at year-end 1995 and 1994, respectively. Deposits averaged $4.7
billion, $4.6 billion and $5.0 billion in 1996, 1995 and 1994, respectively.
Over the prior two years there has been a flow of funds from the banking
system to other investment vehicles, including mutual funds. For customers
seeking an alternative investment to bank deposits the Company offers its own
mutual fund group, the Scout Funds, as well as various annuity products. The
primary reason for the decrease in balances from 1994 to 1995 was deposits
associated with a mutual fund processing customer which historically averaged
between $200 and $300 million.
Noninterest-bearing demand deposits averaged $1.4 billion, $1.3 billion and
$1.4 billion during 1996, 1995 and 1994, respectively. These deposits
represented 29.7% of average deposits in 1996 compared to 29.2% in 1995 and
28.8% in 1994. The Company's large commercial base of customers provides a
significant source of noninterest-bearing deposits. Many of these commercial
accounts, though they do not earn interest, receive an earnings credit to
offset the cost of other services provided by the Company.
Securities sold under agreements to repurchase totaled $599.2 million at
December 31, 1996 and $672.9 million at year-end 1995. This liability averaged
$606.7 million in 1996 and $485.9 million in 1995. 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. The Company enters into these
transactions with its downstream correspondent banks, commercial customers,
and various trust, mutual fund and local government relationships.
A-15
The Company's long-term debt includes three senior note issues totaling $34
million and $2.1 million in installment notes. The senior notes include $25
million borrowed in 1993 under a medium-term program to fund bank
acquisitions. Of this total, $10.0 million had an original maturity of seven
years at 6.81% and $15.0 million was issued with a ten-year maturity at 7.30%.
Also included in long-term debt is the Company's guarantee of a loan incurred
in January, 1996 by its Employee Stock Ownership Plan. Principal and interest,
at 6.10%, are due quarterly over seven years. The Plan is using Company
contributions to service this debt.
TABLE 10: ANALYSIS OF AVERAGE DEPOSITS
AMOUNT 1996 1995 1994 1993 1992
- ------ ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Noninterest-bearing de-
mand................... $1,386,173 $1,336,804 $1,445,376 $1,273,672 $ 938,322
Interest-bearing demand
and savings............ 2,056,681 2,059,661 2,365,024 2,092,048 1,559,004
Time deposits under
$100,000............... 948,626 963,878 1,003,784 957,677 904,970
---------- ---------- ---------- ---------- ----------
Total core deposits... $4,391,480 $4,360,343 $4,814,184 $4,323,397 $3,402,296
Time deposits of
$100,000 or more....... 276,476 221,006 207,217 236,154 193,348
---------- ---------- ---------- ---------- ----------
Total deposits........ $4,667,956 $4,581,349 $5,021,401 $4,559,551 $3,595,644
========== ========== ========== ========== ==========
AS A % OF TOTAL DEPOSITS
- ------------------------
Noninterest-bearing de-
mand................... 29.7% 29.2% 28.8% 27.9% 26.1%
Interest-bearing demand
and savings............ 44.1 45.0 47.1 45.9 43.3
Time deposits under
$100,000............... 20.3 21.0 20.0 21.0 25.2
---------- ---------- ---------- ---------- ----------
Total core deposits... 94.1% 95.2% 95.9% 94.8% 94.6%
Time deposits of
$100,000 or more....... 5.9 4.8 4.1 5.2 5.4
---------- ---------- ---------- ---------- ----------
Total deposits........ 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
TABLE 11: SHORT-TERM DEBT
1996 1995 1994
--------------- ------------- -------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---- -------- ---- -------- ----
(IN THOUSANDS)
AT YEAR-END
- -----------
Federal funds purchased........... $ 15,180 6.45% $ 48,400 5.75% $139,800 4.80%
Repurchase agreements............. 599,215 4.74 672,940 3.76 661,203 2.77
Other............................. 911 4.00 501 5.02 872 3.71
---------- -------- --------
Total........................... $ 615,306 4.90% $721,841 4.53% $801,875 3.13%
========== ======== ========
AVERAGE FOR THE YEAR
- --------------------
Federal funds purchased........... $ 164,796 5.25% $127,949 5.77% $166,084 4.04%
Repurchase agreements............. 606,726 4.73 485,913 5.21 498,415 3.68
Other............................. 1,034 4.10 1,121 4.31 994 3.26
---------- -------- --------
Total........................... $ 772,556 4.84% $614,983 5.32% $665,493 3.77%
MAXIMUM MONTH-END BALANCE
- -------------------------
Federal funds purchased........... $ 300,475 $196,000 $222,000
Repurchase agreements............. 771,856 727,393 699,216
Other............................. 2,020 2,104 1,975
---------- -------- --------
Total........................... $1,074,351 $925,497 $923,191
========== ======== ========
A-16
CAPITAL
The Company places a significant emphasis on the maintenance of a strong
capital position, which helps safeguard our customers' funds, 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. Capital is managed for each subsidiary based upon
its respective risks and growth opportunities, as well as regulatory
requirements.
Total shareholders' equity was $582.5 million at December 31, 1996 compared
to $576.0 million one year earlier. Included as a reduction to shareholders'
equity at December 31, 1995 was $46.5 million which represented a commitment
to repurchase 1,068,533 shares of common stock. Those shares were acquired by
the Company and its ESOP in January, 1996. The shares acquired by the ESOP
which have not been allocated to plan participants are included as a reduction
to year-end 1996 shareholders' equity. See Common Stock Repurchase Commitment
on page 49 for further details. As part of the same transaction that generated
the above stock repurchase commitment, the Company acquired an additional
512,600 shares of common stock during the first half of 1996. In unrelated
transactions during 1996 the Company acquired 268,658 additional shares of
common stock. During the year, management had the opportunity to repurchase
shares of the Company's stock at prices which, in management's opinion, would
enhance overall shareholder value. Depending on availability, price and cash
flow requirements, management will continue to consider treasury stock
purchases.
Risk-based capital guidelines established by regulatory agencies establish
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 capital ratio of 14.68% and Total capital
ratio of 15.63% substantially exceed the regulatory minimums.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
Due to the nature of the Company's business, some degree of interest rate
risk is inherent and appropriate. Management's objective in this area is to
limit the level of earnings exposure arising from interest rate movements.
This analysis is related to liquidity due to the impact of maturing assets and
liabilities. Many of the Company's financial instruments reprice prior to
maturity.
Interest rate sensitivity is measured by "gaps," which are the differences
between interest-earning assets and interest-bearing liabilities which reprice
or mature within a specific time interval. A positive gap indicates that
interest-earning assets exceed interest-bearing liabilities within a given
interval. A positive gap position results in increased net interest income
when rates increase and the opposite when rates decline.
A-17
TABLE 12: RISK-BASED CAPITAL
The table below computes risk-based capital in accordance with current
regulatory guidelines. These guidelines as of December 31, 1996, excluded net
unrealized gains or losses on securities available for sale from the
computation of regulatory capital and the related risk-based capital ratios.
RISK-WEIGHTED CATEGORY
-----------------------------------------------------
RISK-WEIGHTED ASSETS 0% 20% 50% 100% TOTAL
- -------------------- ---------- ---------- -------- ---------- ----------
(IN THOUSANDS)
Loans:
Residential mortgage... $ -- $ 1,752 $126,750 $ -- $ 128,502
All other.............. -- 55,388 -- 2,373,751 2,429,139
---------- ---------- -------- ---------- ----------
Total loans.......... $ -- $ 57,140 $126,750 $2,373,751 $2,557,641
Securities available for
sale:
U.S. Treasury.......... $1,751,544 $ -- $ -- $ -- $1,751,544
U.S. agencies and mort-
gage-backed........... 6,660 503,218 -- -- 509,878
State and political
subdivisions.......... -- 2,476 -- -- 2,476
Commercial paper and
other................. 3,610 -- -- 122,609 126,219
---------- ---------- -------- ---------- ----------
Total securities
available for sale.. $1,761,814 $ 505,694 $ -- $ 122,609 $2,390,117
Investment securities... -- 302,099 17,128 -- 319,227
Trading securities...... 39,830 39,694 -- 290 79,814
Federal funds and resell
agreements............. -- 58,960 -- -- 58,960
Cash and due from banks. 235,418 537,213 -- -- 772,631
All other assets........ -- -- -- 302,331 302,331
---------- ---------- -------- ---------- ----------
Category totals...... $2,037,062 $1,500,800 $143,878 $2,798,981 $6,480,721
---------- ---------- -------- ---------- ----------
Risk-weighted totals.... $ -- $ 300,160 $ 71,939 $2,798,981 $3,171,080
Off-balance-sheet items
(risk-weighted)........ -- 1,713 2 347,958 349,673
---------- ---------- -------- ---------- ----------
Total risk-weighted
assets.............. $ -- $ 301,873 $ 71,941 $3,146,939 $3,520,753
========== ========== ======== ========== ==========
CAPITAL TIER 1 TIER 2 TOTAL
- ------- -------- ---------- ----------
Shareholders'equity........................... $584,232 $ -- $ 584,232
Less premium on purchased banks............... (67,474) -- (67,474)
Allowance for loan losses..................... -- 33,414 33,414
-------- ---------- ----------
Total capital.............................. $516,758 $ 33,414 $ 550,172
======== ========== ==========
CAPITAL RATIOS
- --------------
Tier 1 capital to risk-weighted assets........ 14.68%
Total capital to risk-weighted assets......... 15.63
Leverage ratio (Tier 1 to total assets less
premium on purchased banks).................. 8.02
==========
Management attempts to structure the balance sheet to provide for the
repricing of approximately equal amounts of assets and liabilities within
specific time intervals. Table 14 is a static gap analysis which presents the
Company's assets and liabilities based on their repricing or maturity
characteristics. This analysis shows that for the 180-day interval beginning
January 1, 1997, the Company is in a negative gap position because liabilities
maturing or repricing during this time exceed assets. At the one-year period
the Company is evenly matched as repricing or maturing assets approximate
liabilities. At December 31, 1995 the Company had a positive cumulative gap at
the one-year interval of $564.8 million. The change to an evenly-matched
position at year-end 1996 was primarily due to an increase in the average life
of the securities portfolio by seven months.
In management's opinion the static gap report tends to overstate the
interest rate risk of the Company due to certain factors which are not
measured on a static or snapshot analysis. A static gap analysis assumes that
all liabilities reprice based on their contractual term. However, the effect
of rate increases on core deposits,
A-18
approximately 94.1% of total deposits, tends to lag behind the change in
market rates. This lag generally lessens the negative impact of rising
interest rates when the Company has more liabilities repricing than assets. In
addition, a static analysis ignores the impact of changes in the mix and
volume of interest-bearing assets and liabilities. During 1996, the Company's
loans increased as a percentage of total earning assets and noninterest-
bearing demand deposit accounts represented a larger component of total
funding sources. Due to the limitations of a static gap analysis, the Company
also monitors and manages interest rate risk through the use of simulation
models. These models allow for input of various factors and assumptions which
influence interest rate risk. This method presents a more realistic view of
the impact on the Company's earnings resulting from movement in interest
rates.
The Company will continue to manage its interest rate risk using static gap
analysis along with other tools which help measure the impact of various
interest rate scenarios. The Company does not use off-balance-sheet hedges or
swaps to manage this risk.
TABLE 13: RATE SENSITIVITY AND MATURITY OF LOANS
The following table presents the rate sensitivity of certain loans maturing
after 1997, compared with the total loan portfolio as of December 31, 1996. Of
the $1,491,395,000 of loans due after 1997, $990,110,000 are to individuals
for the purchase of residential dwellings and other consumer goods including
automobiles. The remaining $501,285,000 is for all other purposes and reflects
maturities of $362,004,000 in 1998 through 2001 and $139,281,000 after 2001.
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
Loans due in 1997:
Residential homes and consumer goods......................... $ 64,447
All other.................................................... 1,001,847
----------
Total..................................................... $1,066,294
----------
Loans due after 1997:
Variable interest rate....................................... $ 460,143
Fixed interest rate.......................................... 1,031,252
----------
Total..................................................... $1,491,395
----------
Unearned interest and allowance for loan losses............... (33,462)
----------
Net loans.................................................. $2,524,227
==========
A-19
TABLE 14: INTEREST RATE SENSITIVITY ANALYSIS
1-90
DECEMBER 31, 1996 DAYS 91-180 DAYS 181-365 DAYS TOTAL OVER 365 DAYS TOTAL
- ----------------- -------- ----------- ------------ -------- ------------- --------
(IN MILLIONS)
Earning assets
Loans................... $1,382.5 $174.2 $254.4 $1,811.1 $ 746.5 $2,557.6
Securities*............. 448.9 123.1 291.0 863.0 1,843.6 2,706.6
Federal funds sold and
resell
agreements............. 59.0 -- -- 59.0 -- 59.0
Other................... 79.8 -- -- 79.8 -- 79.8
-------- ------ ------ -------- -------- --------
Total earning assets.. $1,970.2 $297.3 $545.4 $2,812.9 $2,590.1 $5,403.0
-------- ------ ------ -------- -------- --------
% of total earning as-
sets................. 36.5% 5.5% 10.1% 52.1% 47.9% 100.0%
-------- ------ ------ -------- -------- --------
Funding sources
Interest-bearing demand
and
savings................ $1,179.9 $ -- $ -- $1,179.9 $ 992.0 $2,171.9
Time deposits........... 497.5 245.1 262.1 1,004.7 289.4 1,294.1
Federal funds purchased
and repurchase agree-
ments.................. 614.4 -- -- 614.4 -- 614.4
Borrowed funds.......... 1.5 .5 5.6 7.6 44.7 52.3
Noninterest-bearing
sources................ -- -- -- -- 1,270.3 1,270.3
-------- ------ ------ -------- -------- --------
Total funding sources. $2,293.3 $245.6 $267.7 $2,806.6 $2,596.4 $5,403.0
-------- ------ ------ -------- -------- --------
% of total earning as-
sets................. 42.4% 4.5% 5.0% 51.9% 48.1% 100.0%
-------- ------ ------ -------- -------- --------
Interest sensitivity
gap.................... $ (323.1) $ 51.7 $277.7 $ 6.3 $ (6.3)
Cumulative gap.......... (323.1) (271.4) 6.3 6.3 --
As a % of total earn-
ing assets........... 6.0% 5.0% .1% .1% --%
Ratio of earning assets
to funding sources..... .86 1.21 2.04 1.00 1.00
Cumulative ratio--1996.. .86 .89 1.00 1.00 1.00
- --1995.................. 1.00 1.05 1.20 1.20 1.00
- --1994.................. .89 .95 1.12 1.12 1.00
- --------
*Includes securities available for sale based on scheduled maturity dates.
LIQUIDITY
Liquidity represents the Company's ability to meet financial commitments
through the maturity and sale of existing assets or availability of additional
funds. The primary source of liquidity for the Company is regularly scheduled
payments on and maturities of assets along with $2.4 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 Parent Company or its subsidiaries are active in
the debt market. The traditional funding source for the Company's subsidiary
banks has been core deposits. The Parent Company has not issued any debt since
1993 when $25 million of medium-term notes were issued to fund bank
acquisitions. These notes are rated A3 by Moody's Investor Service and A- by
Standard & Poors. Based upon regular contact with brokerage firms, management
is confident in its ability to raise debt or equity capital on favorable
terms, should the need arise.
The parent 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 in the future. The Company's
subsidiary banks are subject to various rules, depending on their location and
primary regulator, regarding the payment of dividends to the Parent 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 their current capacity. All such requests have been approved.
A-20
TABLE 15: SUMMARY OF OPERATING RESULTS BY QUARTER (UNAUDITED)
THREE MONTHS ENDED
--------------------------------
SEPT.
MARCH 31 JUNE 30 30 DEC. 31
-------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
1996
Interest income............................ $93,419 $91,823 $93,390 $93,445
Interest expense........................... 41,686 41,154 40,757 40,984
------- ------- ------- -------
Net interest income...................... $51,733 $50,669 $52,633 $52,461
Provision for loan losses.................. 4,827 1,828 1,821 2,089
Noninterest income......................... 39,986 32,000 31,191 32,230
Noninterest expense........................ 59,217 59,172 61,291 67,128
Income tax provision....................... 9,679 7,126 6,678 4,515
------- ------- ------- -------
Net income............................... $17,996 $14,543 $14,034 $10,959
======= ======= ======= =======
1995
Interest income............................ $88,574 $88,862 $88,560 $91,059
Interest expense........................... 40,426 39,208 38,689 39,464
------- ------- ------- -------
Net interest income...................... $48,148 $49,654 $49,871 $51,595
Provision for loan losses.................. 926 925 1,181 2,058
Noninterest income......................... 30,615 28,952 27,589 29,845
Noninterest expense........................ 58,643 59,847 57,810 57,256
Income tax provision....................... 6,339 5,739 6,189 7,180
------- ------- ------- -------
Net income............................... $12,855 $12,095 $12,280 $14,946
======= ======= ======= =======
THREE MONTHS ENDED
--------------------------------
SEPT.
MARCH 31 JUNE 30 30 DEC. 31
-------- ------- ------- -------
PER SHARE 1996
Net income................................. $ 0.89 $ 0.72 $ 0.71 $ 0.56
Dividend................................... 0.19 0.19 0.19 0.19
Book value................................. 28.10 28.09 28.72 29.54
Market price:
High...................................... 40.24 38.33 38.33 41.75
Low....................................... 32.14 32.86 33.57 37.14
Close..................................... 36.67 35.00 36.19 40.50
PER SHARE 1995
Net income................................. $ 0.59 $ 0.55 $ 0.56 $ 0.70
Dividend................................... 0.17 0.17 0.17 0.17
Book value................................. 26.68 27.67 28.18 28.12
Market price:
High...................................... 27.28 31.82 36.80 43.10
Low....................................... 25.97 25.97 30.95 31.43
Close..................................... 25.97 31.60 36.80 33.57
- --------
Per share information restated for the 5% stock dividend paid January 2, 1997.
A-21
UMB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
ASSETS
Loans:
Commercial, financial and agricultural.... $1,236,092 $1,152,420 $1,135,827
Consumer.................................. 914,962 784,481 688,672
Real estate............................... 404,039 467,570 444,565
Leases.................................... 2,596 2,057 2,157
Unearned interest......................... (48) (390) (1,604)
Allowance for loan losses................. (33,414) (32,685) (32,527)
---------- ---------- ----------
Net loans................................. $2,524,227 $2,373,453 $2,237,090
Securities available for sale:
U.S. Treasury and agencies................ $2,107,492 $2,184,383 $2,211,711
State and political subdivisions.......... 2,464 -- --
Mortgage-backed........................... 149,725 145,781 55,477
Commercial paper and other................ 127,641 52,860 8,025
---------- ---------- ----------
Total securities available for sale....... $2,387,322 $2,383,024 $2,275,213
Investment securities:
State and political subdivisions.......... $ 319,227 $ 311,757 $ 298,556
Mortgage-backed........................... -- -- 86,278
---------- ---------- ----------
Total investment securities (market value
of $319,525, $313,173 and $373,644, re-
spectively).............................. $ 319,227 $ 311,757 $ 384,834
Federal funds sold......................... 170 55,300 289,414
Securities purchased under agreements to
resell.................................... 58,790 33,865 244,685
Trading securities and other............... 79,814 86,011 30,982
---------- ---------- ----------
Total earning assets...................... $5,369,550 $5,243,410 $5,462,218
Cash and due from banks.................... 772,631 696,407 770,813
Bank premises and equipment, net........... 152,909 147,576 130,261
Accrued income............................. 72,717 79,087 81,219
Premiums on and intangibles of purchased
banks..................................... 67,474 74,739 78,091
Other assets............................... 76,705 40,109 76,418
---------- ---------- ----------
Total assets.............................. $6,511,986 $6,281,328 $6,599,020
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand................ $1,724,486 $1,636,145 $1,570,478
Interest-bearing demand and savings....... 2,171,938 1,875,834 2,421,149
Time deposits under $100,000.............. 917,983 977,666 949,728
Time deposits of $100,000 or more......... 376,127 324,038 191,479
---------- ---------- ----------
Total deposits............................ $5,190,534 $4,813,683 $5,132,834
Federal funds purchased.................... 15,180 48,400 139,800
Securities sold under agreements to repur-
chase..................................... 599,215 672,940 661,203
Short-term debt............................ 911 501 872
Long-term debt............................. 51,350 40,736 46,330
Accrued expenses and taxes................. 46,887 63,135 38,638
Other liabilities.......................... 25,432 19,493 22,037
---------- ---------- ----------
Total liabilities......................... $5,929,509 $5,658,888 $6,041,714
---------- ---------- ----------
Common stock repurchase commitment......... $ -- $ 46,481 $ --
---------- ---------- ----------
Common stock, $1.00 par. Authorized
33,000,000 shares; 23,503,084 shares is-
sued...................................... $ 23,503 $ 22,548 $ 20,678
Capital surplus............................ 558,073 522,892 442,606
Retained earnings.......................... 142,947 136,943 182,159
Net unrealized gain (loss) on securities
available for sale........................ (1,755) 3,612 (35,211)
Unearned ESOP shares....................... (15,003) -- --
Treasury stock 3,424,176; 1,972,239; and
1,676,451 shares, at cost, respectively... (125,288) (63,555) (52,926)
Common stock repurchase commitment,
1,068,533 shares at December 31, 1995..... -- (46,481) --
---------- ---------- ----------
Total shareholders' equity................ $ 582,477 $ 575,959 $ 557,306
---------- ---------- ----------
Total liabilities and shareholders' equi-
ty....................................... $6,511,986 $6,281,328 $6,599,020
========== ========== ==========
See Notes to Financial Statements, pages A26-A-42.
A-22
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
INTEREST INCOME
Loans......................... $ 220,568 $ 217,701 $ 171,905
Securities available for sale. 122,883 110,549 121,943
Investment securities:
Taxable interest............. $ 904 $ 974 $ 954
Tax-exempt interest.......... 13,641 13,276 11,743
--------------- --------------- ---------------
Total investment securities
income...................... $ 14,545 $ 14,250 $ 12,697
Federal funds and resell
agreements................... 10,013 11,003 13,626
Trading securities and other.. 4,068 3,552 3,089
--------------- --------------- ---------------
Total interest income........ $ 372,077 $ 357,055 $ 323,260
--------------- --------------- ---------------
INTEREST EXPENSE
Deposits...................... $ 123,135 $ 121,594 $ 106,958
Federal funds and repurchase
agreements................... 37,380 32,685 25,057
Short-term debt............... 42 48 33
Long-term debt................ 4,024 3,460 4,016
--------------- --------------- ---------------
Total interest expense....... $ 164,581 $ 157,787 $ 136,064
--------------- --------------- ---------------
Net interest income........... $ 207,496 $ 199,268 $ 187,196
Provision for loan losses..... 10,565 5,090 2,640
--------------- --------------- ---------------
Net interest income after
provision................... $ 196,931 $ 194,178 $ 184,556
--------------- --------------- ---------------
NONINTEREST INCOME
Trust fees.................... $ 41,531 $ 35,864 $ 34,992
Securities processing......... 9,486 10,494 12,460
Trading and investment bank-
ing.......................... 12,790 11,178 9,932
Service charges on deposit ac-
counts....................... 33,368 33,177 32,855
Other service charges and
fees......................... 15,705 11,272 11,695
Bankcard fees................. 6,335 6,757 8,202
Net security gains............ 473 1,416 3,632
Other......................... 15,719 6,843 5,334
--------------- --------------- ---------------
Total noninterest income..... $ 135,407 $ 117,001 $ 119,102
--------------- --------------- ---------------
NONINTEREST EXPENSE
Salaries and employee bene-
fits......................... $ 131,411 $ 122,556 $ 121,304
Occupancy, net................ 17,900 15,963 15,096
Equipment..................... 24,681 22,283 20,727
Supplies and services......... 18,778 19,165 19,189
Bankcard processing........... 7,162 5,781 3,134
Marketing and business devel-
opment....................... 15,298 13,079 12,465
FDIC and regulatory fees...... 1,309 7,636 12,225
Amortization of intangibles of
purchased banks.............. 7,347 7,120 7,128
Other......................... 22,922 19,973 21,991
--------------- --------------- ---------------
Total noninterest expense.... $ 246,808 $ 233,556 $ 233,259
--------------- --------------- ---------------
Income before income taxes.... $ 85,530 $ 77,623 $ 70,399
Income tax provision.......... 27,998 25,447 22,585
--------------- --------------- ---------------
Net income................... $ 57,532 $ 52,176 $ 47,814
=============== =============== ===============
Per Share Data
Net income.................... $ 2.89 $ 2.40 $ 2.15
Dividends..................... $ 0.76 $ 0.70 $ 0.66
Average shares outstanding.... 19,938,439 21,635,818 22,031,313
=============== =============== ===============
See Notes to Financial Statements, pages A26-A-42.
A-23
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
----------- ----------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income............................... $ 57,532 $ 52,176 $ 47,814
Adjustments to reconcile net income to
net cash provided by operating activi-
ties:
Provision for loan losses................ 10,565 5,090 2,640
Depreciation and amortization............ 23,828 23,436 22,291
Deferred income taxes.................... (4,022) (3,955) 390
Net (increase) decrease in trading secu-
rities.................................. 6,197 (55,029) 42,860
Gains on sales of securities available
for sale................................ (474) (3,734) (3,719)
Losses on sales of securities available
for sale................................ 1 2,318 87
Gain on sale of merchant bankcard
processsing rights...................... (9,800) -- --
Earned ESOP shares....................... 2,220 -- --
Amortization of securities premium, net
of discount accretion................... 21,983 32,725 44,368
Changes in:
Accrued income.......................... 6,370 3,415 (8,668)
Accrued expenses and taxes.............. (10,603) 20,631 (7,013)
Other, net............................... (129) (678) 371
----------- ----------- ---------
Net cash provided by operating activi-
ties.................................... $ 103,668 $ 76,395 $ 141,421
----------- ----------- ---------
INVESTING ACTIVITIES
Proceeds from sales of securities avail-
able for sale........................... $ 10,657 $ 411,351 $ 150,570
Proceeds from maturities of:
Investment securities.................... 102,024 112,173 133,721
Securities available for sale............ 1,892,878 1,582,810 844,237
Purchases of:
Investment securities.................... (111,633) (117,406) (242,492)
Securities available for sale............ (1,935,820) (1,922,546) (687,722)
Net increase in loans.................... (161,339) (93,440) (115,559)
Net (increase) decrease in federal funds
sold and resell agreements.............. 30,205 449,134 (194,924)
Proceeds from sale of merchant bankcard
processing rights....................... 9,800 -- --
Purchases of bank premises and equipment. (22,028) (27,884) (16,741)
Proceeds from sales of bank premises and
equipment............................... 234 551 216
Purchases of financial organizations, net
of cash received........................ -- (11,147) --
Other, net............................... (29,004) 14,728 (13,765)
----------- ----------- ---------
Net cash provided by (used in) investing
activities.............................. $ (214,026) $ 398,324 $(142,459)
----------- ----------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in demand and
savings deposits........................ $ 384,445 $ (530,827) $ 130,852
Net increase (decrease) in time deposits. (7,594) 101,852 (167,903)
Net increase (decrease) in federal funds
purchased and repurchase agreements..... (106,945) (88,320) 175,921
Net increase (decrease) in short-term
debt.................................... 410 (371) (581)
Repayments of long-term debt............. (6,667) (5,594) (5,199)
Cash dividends........................... (15,216) (15,114) (14,669)
Purchases of treasury stock.............. (62,234) (11,098) (13,318)
Proceeds from issuance of treasury stock. 383 347 380
----------- ----------- ---------
Net cash provided by (used in) financing
activities.............................. $ 186,582 $ (549,125) $ 105,483
----------- ----------- ---------
Increase (decrease) in cash and due from
banks.................................... $ 76,224 $ (74,406) $ 104,445
Cash and due from banks at beginning of
year..................................... 696,407 770,813 666,368
----------- ----------- ---------
Cash and due from banks at end of year.... $ 772,631 $ 696,407 $ 770,813
=========== =========== =========
Supplemental disclosures:
Income taxes paid........................ $ 33,558 $ 28,717 $ 27,983
Total interest paid...................... 170,521 153,758 134,575
- --------
Note: Certain noncash transactions regarding the adoption of SFAS No. 115, and
guaranteed ESOP debt transactions and common stock issued for
acquisitions or subject to repurchase commitment are disclosed in the
accompanying financial statements and notes to financial statements.
See Notes to Financial Statements, pages A26-A42.
A-24
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
NET
UNREALIZED REPURCHASE
COMMON CAPITAL RETAINED HOLDING GAINS TREASURY COMMITMENT/
STOCK SURPLUS EARNINGS (LOSSES) STOCK UNEARNED ESOP
--------- -------- -------- ------------- --------- -------------
Balance -- January 1,
1994................... $ 236,579 $167,368 $208,557 $ 14,333 $ (40,194) $ --
Net income.............. -- -- 47,814 -- -- --
Cash dividends ($0.66
per share)............. -- -- (14,669) -- -- --
Adjust stock par value.. (217,652) 217,652 -- -- -- --
Stock dividend (10%).... 1,751 57,792 (59,543) -- -- --
Purchase of treasury
stock.................. -- -- -- -- (13,318) --
Exercise of stock op-
tions.................. -- (206) -- -- 586 --
Net change in unrealized
gain/loss on securities
available for sale..... -- -- -- (49,544) -- --
--------- -------- -------- -------- --------- --------
Balance -- December 31,
1994................... $ 20,678 $442,606 $182,159 $(35,211) $ (52,926) $ --
Net income.............. -- -- 52,176 -- -- --
Cash dividends ($0.70
per share)............. -- -- (15,114) -- -- --
Stock dividend (10%).... 1,870 80,408 (82,278) -- --
Purchase of treasury
stock.................. -- -- -- -- (11,098) --
Exercise of stock op-
tions.................. -- (122) -- -- 469 --
Net change in unrealized
gain/loss on securities
available for sale..... -- -- -- 38,823 -- --
Common stock repurchase
commitment............. -- -- -- -- -- (46,481)
--------- -------- -------- -------- --------- --------
Balance -- December 31,
1995................... $ 22,548 $522,892 $136,943 $ 3,612 $ (63,555) $(46,481)
Net income.............. -- -- 57,532 -- -- --
Cash dividends ($0.76
per share)............. -- -- (15,216) -- -- --
Stock dividend (5%)..... 955 35,357 (36,312) -- -- --
Shares purchased by
ESOP................... -- -- -- -- -- 16,530
Guaranteed ESOP obliga-
tion................... -- -- -- -- -- (17,281)
Earned ESOP shares...... -- (58) -- -- -- 2,278
Purchase of treasury
stock.................. -- -- -- -- (62,234) 29,951
Exercise of stock op-
tions.................. -- (118) -- -- 501 --
Net change in unrealized
gain/loss on securities
available for sale..... -- -- -- (5,367) -- --
--------- -------- -------- -------- --------- --------
Balance -- December 31,
1996................... $ 23,503 $558,073 $142,947 $ (1,755) $(125,288) $(15,003)
========= ======== ======== ======== ========= ========
See Notes to Financial Statements, pages A26-A42.
A-25
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES
UMB Financial Corporation is a multi-bank holding company which offers a
wide range of banking services to its customers through its branches and
offices in the states of Missouri, Kansas, Colorado, Illinois, Oklahoma, Iowa
and Nebraska. The preparation of financial statements in conformity with
generally accepted accounting principles 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. Following is a summary of the more significant
accounting policies to assist the reader in understanding the financial
presentation.
CONSOLIDATION -- All subsidiaries are included in the consolidated financial
statements. Intercompany accounts and transactions have been eliminated where
significant.
ACQUISITIONS -- Banks acquired and recorded under the purchase method are
recorded at the fair value of the net assets acquired at the acquisition date,
and results of operations are included from that date. Excess of purchase
price over the value of net assets acquired is recorded as premiums on
purchased banks. Premiums on purchases prior to 1982 are being amortized
ratably over 40 years. Premiums on purchases in 1982 and after are being
amortized ratably over 15 years. Core deposit intangible assets are being
amortized ratably over 10 years.
LOANS -- Interest on discount loans is recorded on a method that
approximates income at a level rate of return on the principal amount
outstanding over the term of the loan. Interest on all other loans is
recognized based on the rate times the principal amount outstanding. Interest
accrual is discontinued when, in the opinion of management, the likelihood of
collection becomes doubtful.
Affiliate banks enter into lease financing transactions that are generally
recorded under the financing method of accounting. Income is recognized on a
basis that results in an approximately level rate of return over the life of
the lease.
Annual bankcard fees are recognized on a straight-line basis over the period
that cardholders may use the card.
A loan is considered to be impaired when management believes it is probable
that it will be unable to collect all principal and interest due according to
the contractual terms of the loan. If a loan is impaired, the Company records
a loss valuation allowance equal to the carrying amount of the loan in excess
of the present value of the estimated future cash flows discounted at the
loan's effective rate based on the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Real estate and
consumer loans are collectively evaluated for impairment. Commercial loans are
evaluated for impairment on a loan-by-loan basis.
The adequacy of the allowance for loan losses is based on management's
continuing evaluation of the pertinent factors underlying the quality of the
loan portfolio, including actual loan loss experience, current and anticipated
economic conditions, detailed analysis of individual loans for which full
collectibility may not be assured and determination of the existence and
realizable value of the collateral and guarantees securing such loans. The
actual losses, notwithstanding such considerations, however, could differ
significantly from the amounts estimated by management.
SECURITIES AVAILABLE FOR SALE -- Debt securities available for sale include
principally U.S. Treasury and agency securities and mortgage-backed
securities. Securities classified as available for sale are measured at fair
value. Unrealized holding gains and losses are excluded from earnings and
reported as a separate component of shareholders' equity until realized.
Realized gains and losses on sales are computed by the specific identification
method at the time of disposition and are shown separately as a component of
noninterest income.
A-26
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
In conjunction with the adoption of the Implementation Guide for SFAS No.
115 issued by the Financial Accounting Standards Board, the Company reassessed
its intent to hold a portion of its mortgage-backed securities portfolio to
maturity. Accordingly, on December 22, 1995, the Company reclassified its
mortgage-backed securities portfolio, with a book value of $86.2 million and a
market value of $85.2 million, to available for sale.
INVESTMENT SECURITIES -- Investment securities are carried at amortized
historical cost based on management's intention, and the Company's ability, to
hold them to maturity. The Company classifies most securities of state and
political subdivisions as investment securities. Certain significant
unforeseeable changes in circumstances may cause a change in the intent to
hold these securities to maturity. For example, such changes may include a
deterioration in the issuer's creditworthiness that is expected to continue or
a change in tax law that eliminates the tax-exempt status of interest on the
security.
TRADING SECURITIES -- Trading securities, generally acquired for subsequent
sale to customers, are carried at market value. Market adjustments, fees and
gains or losses on the sale of trading securities are considered to be a
normal part of operations and are included in trading and investment banking
income. Interest income on trading securities is included in income from
earning assets.
TAXES -- The Company recognizes certain income and expenses in different
time periods for financial reporting and income tax purposes. The provision
for deferred income taxes is based on the liability method and represents the
change in the deferred income tax accounts during the year, including the
effect of enacted tax rate changes.
PER SHARE DATA -- Earnings per share are computed based on the weighted
average number of shares of common stock outstanding during each period. All
per share presentations have been restated to give effect to the 5% stock
dividend paid January 2, 1997 to the shareholders of record as of December 11,
1996. The dilutive effect of shares issuable under stock options granted by
the Company is immaterial.
RECLASSIFICATIONS -- Certain reclassifications were made to the 1995 and
1994 financial statements to conform to the current year presentation.
INDUSTRY SEGMENT REPORTING -- The Company operates principally in a single
business segment offering general commercial banking services.
ACCOUNTING CHANGES
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -- On January 1, 1995, the
Company implemented SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." This Statement 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 the fair value of
collateral if the loan is collateral-dependent. SFAS No. 118 was issued as an
amendment to SFAS No. 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan. The implementation of these
Statements did not have a significant effect on the Company's financial
position or results of operation.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS -- The Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets." This Statement, which was effective for the Company on January
1, 1996, establishes accounting standards for the impairment of long-lived
assets, certain intangibles, and goodwill related to those assets. This
Statement did not have a material effect on the consolidated financial
statements.
A-27
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
ACCOUNTING FOR TRANSFER AND SERVICING OF FINANCIAL ASSETS -- On January 1,
1995, the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights," which is an amendment to SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." This Statement established accounting standards
for originated mortgage servicing rights. The adoption of this statement did
not have a significant effect on the Company's financial position or results
of operation.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which will
become effective for the Company for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
This Statement supersedes SFAS No. 122, "Accounting for Mortgage Servicing
Rights." For each servicing contract in existence before January 1, 1997,
previously recognized servicing rights and "excess servicing" receivables
shall be combined, net of any previously recognized servicing obligations
under that contract, as a servicing asset or liability. The Statement provides
that servicing assets and other retained interests in transferred assets be
measured by allocating the previous carrying amount between the assets sold,
if any, and retained interests, if any, based on their relative fair values at
the date of the transfer, and servicing assets and liabilities be subsequently
measured by (1) amortization in proportion to and over the period of estimated
net servicing income or loss, and (2) assessment for asset impairment or
increased obligation based on their fair values. The company does not
anticipate that the implementation of this Statement will have a material
impact on the consolidated financial statements.
In December 1996, the Financial Accounting Standards Board issued SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125."
This Statement defers implementation requirements of SFAS No. 125 relating to
repurchase agreements, securities lending and similar transactions until
transactions entered into after December 31, 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- Effective as of January 1, 1996,
SFAS No. 123, "Accounting for Stock-Based Compensation," requires increased
disclosure of compensation expense arising from both fixed and performance
stock compensation plans. Compensation is measured as the fair value of the
award at the date it is granted using an option-pricing model that takes into
account the exercise price and expected term of the option, the current price
of the underlying stock, its expected volatility, expected dividends on the
stock and the expected risk-free rate of return during the term of the option.
The compensation cost is recognized over the service period, usually the
period from the grant date to the vesting date. SFAS No. 123 encourages rather
than requires companies to adopt a new method that accounts for stock
compensation awards based on their estimated fair value at the date they are
granted. Companies are permitted, however, to continue accounting under APB
Opinion No. 25, which requires compensation cost for stock-based employee
compensation plans be recognized based on the difference, if any, between the
quoted market price of the stock and the amount an employee must pay to
acquire the stock. The Company continues to apply APB Opinion No. 25 in its
financial statements and discloses pro forma net income and earnings per share
in a footnote to the financial statements, determined as if the Company
applied the new method.
ACQUISITIONS
On December 13, 1995, the Company acquired First Sooner Bancshares, the one-
bank holding company of The Oklahoma Bank, Oklahoma City, Oklahoma (now UMB
Oklahoma Bank), for $12.7 million. The acquisition was funded with existing
working capital. The acquisition of this $139 million bank was recorded as a
purchase, with $3.3 million recorded as premium on purchased bank. This
acquisition was not deemed to be material in relation to the consolidated
results of the Company.
A-28
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
ALLOWANCE FOR LOAN LOSSES
The table below provides an analysis of the allowance for loan losses for
the three years ended December 31, 1996 (in thousands):
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- ------- -------
Allowance -- beginning of year..................... $ 32,685 $32,527 $35,590
Allowances of acquired banks....................... -- 485 --
Additions (deductions):
Charge-offs....................................... $(12,335) $(8,090) $(8,269)
Recoveries........................................ 2,499 2,673 2,566
-------- ------- -------
Net charge-offs.................................. $ (9,836) $(5,417) $(5,703)
Provision charged to expense....................... 10,565 5,090 2,640
-------- ------- -------
Allowance -- end of year........................... $ 33,414 $32,685 $32,527
======== ======= =======
The amount of loans considered to be impaired under SFAS No. 114 was
$9,325,000 at December 31, 1996 and $1,069,000 at December 31, 1995. All of
the loans were on a nonaccrual basis or had been restructured. Included in the
impaired loans, at December 31, 1996 was $8,064,000 of loans for which the
related allowance was $1,203,000. The remaining $1,261,000 of impaired loans
did not have an allowance for loan losses as a result of write-downs and
supporting collateral value. At December 31, 1995 there was $385,000 of
impaired loans with a related allowance of $141,000, and $684,000 of impaired
loans which did not have an allowance. The average recorded investment in
impaired loans was approximately $8,192,000 during the year ended December 31,
1996 and $1,008,000 during the year ended December 31, 1995. The Company had
no material amount recorded as interest income on impaired loans for either
year.
A-29
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
SECURITIES AVAILABLE FOR SALE
The table below provides detailed information for securities available for
sale at December 31, 1996, 1995 and 1994 (in thousands):
DECEMBER 31
-------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
1996
U.S. Treasury....................... $1,751,544 $ 4,329 $ (6,565) $1,749,308
U.S. Agencies....................... 359,416 127 (1,359) 358,184
Mortgage-backed..................... 150,462 88 (825) 149,725
State and political subdivisions.... 2,476 -- (12) 2,464
Commercial paper.................... 120,707 -- -- 120,707
Federal Reserve Bank Stock.......... 3,610 -- -- 3,610
Equity and other.................... 1,902 1,422 -- 3,324
---------- ------- -------- ----------
Total.............................. $2,390,117 $ 5,966 $ (8,761) $2,387,322
========== ======= ======== ==========
1995
U.S. Treasury....................... $1,679,881 $ 8,928 $ (2,493) $1,686,316
U.S. Agencies....................... 498,310 679 (922) 498,067
Mortgage-backed..................... 147,194 162 (1,575) 145,781
Commercial paper.................... 46,450 -- -- 46,450
Federal Reserve Bank Stock.......... 3,656 -- -- 3,656
Equity and other.................... 1,726 1,028 -- 2,754
---------- ------- -------- ----------
Total.............................. $2,377,217 $10,797 $ (4,990) $2,383,024
========== ======= ======== ==========
1994
U.S. Treasury....................... $2,197,912 $ 76 $(55,571) $2,142,417
U.S. Agencies....................... 69,774 115 (595) 69,294
Mortgage-backed..................... 57,969 57 (2,549) 55,477
Federal Reserve Bank Stock.......... 3,656 -- -- 3,656
Equity and other.................... 2,885 1,544 (60) 4,369
---------- ------- -------- ----------
Total.............................. $2,332,196 $ 1,792 $(58,775) $2,275,213
========== ======= ======== ==========
The following table presents contractual maturity information for securities
available for sale at December 31, 1996. Securities may be disposed of before
contractual maturities due to sales by the Company or because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
Due in 1 year or less.................................... $ 624,567 $ 624,836
Due after 1 year through 5 years......................... 1,485,265 1,481,595
Due after 5 years through 10 years....................... 2,652 2,574
Due after 10 years....................................... 952 951
---------- ----------
Total................................................... $2,113,436 $2,109,956
---------- ----------
Mortgage-backed securities............................... 150,462 149,725
Commercial paper......................................... 120,707 120,707
Equity securities and other.............................. 5,512 6,934
---------- ----------
Total securities available for sale..................... $2,390,117 $2,387,322
========== ==========
A-30
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Securities available for sale with a market value of $1,832,291,000 at
December 31, 1996, $1,784,018,000 at December 31, 1995, and $1,476,231,000 at
December 31, 1994, were pledged to secure U.S. Government deposits, other
public deposits and certain trust deposits as required by law.
During 1996, proceeds from the sales of securities available for sale were
$10,657,000 compared to $411,351,000 for 1995. Securities transactions
resulted in gross realized gains of $474,000 for 1996 and $3,734,000 for 1995.
The gross realized losses were $1,000 for 1996 and $2,318,000 for 1995.
The net unrealized holding gains (losses) on trading securities at December
31, 1996 and 1995, were $(34,000) and $77,000, respectively, and were included
in trading and investment banking income.
INVESTMENT SECURITIES
The table below provides detailed information for investment securities at
December 31, 1996, 1995 and 1994 (in thousands):
DECEMBER 31
----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
1996
State and political subdivisions....... $319,227 $1,722 $ (1,424) $319,525
======== ====== ======== ========
1995
State and political subdivisions....... $311,757 $2,435 $ (1,019) $313,173
======== ====== ======== ========
1994
Mortgage-backed........................ $ 86,278 $ -- $ (5,340) $ 80,938
State and political subdivisions....... 298,556 823 (6,673) 292,706
-------- ------ -------- --------
Total................................ $384,834 $ 823 $(12,013) $373,644
======== ====== ======== ========
The following table presents contractual maturity information for investment
securities at December 31, 1996. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
Due in 1 year or less....................................... $ 53,768 $ 53,657
Due after 1 year through 5 years............................ 194,833 195,403
Due after 5 years through 10 years.......................... 70,601 70,438
Due after 10 years.......................................... 25 27
-------- --------
Total investment securities............................... $319,227 $319,525
======== ========
There were no sales of investment securities during 1996, 1995 or 1994.
Investment securities with a market value of $50,844,000 at December 31,
1996, $36,627,000 at December 31, 1995 and $1,190,000 at December 31, 1994,
were pledged to secure U.S. Government deposits, other public deposits and
certain trust deposits as required by law.
LOANS TO MANAGEMENT
Certain Company and principal affiliate bank executive officers and
directors, including companies in which those persons are principal holders of
equity securities or are general partners, borrow in the normal course of
business from affiliate banks of the Company. All such loans have been made on
the same terms, including
A-31
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
interest rates and collateral, as those prevailing at the same time for
comparable transactions with unrelated parties. In addition, all such loans
are current as to repayment terms. For the years 1996, 1995 and 1994, an
analysis of activity with respect to such aggregate loans to related parties
appears below (in thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
Balance -- beginning of year................... $ 178,439 $ 158,330 $ 111,921
New loans..................................... 892,558 798,688 458,400
Repayments.................................... (887,306) (778,579) (411,991)
--------- --------- ---------
Balance -- end of year......................... $ 183,691 $ 178,439 $ 158,330
========= ========= =========
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation, which is computed primarily on accelerated methods. Bank
premises are depreciated over 20 to 40 year lives, while equipment is
depreciated over lives of 3 to 20 years. Bank premises and equipment consisted
of the following (in thousands):
DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
Land.............................................. $ 33,033 $ 31,975 $ 29,873
Buildings and leasehold improvements.............. 154,878 146,411 134,401
Equipment......................................... 149,350 138,558 122,025
-------- -------- --------
$337,261 $316,944 $286,299
Accumulated depreciation.......................... (184,352) (169,368) (156,038)
-------- -------- --------
Bank premises and equipment, net.................. $152,909 $147,576 $130,261
======== ======== ========
Consolidated rental and operating lease expenses were $2,722,000 in 1996,
$2,820,000 in 1995, and $2,522,000 in 1994. Minimum rental commitments as of
December 31, 1996, for all noncancelable operating leases are: 1997 --
$2,268,000; 1998 -- $2,197,000; 1999 -- $1,804,000; 2000 -- $1,023,000; 2001
- -- $1,000,000; and thereafter -- $12,061,000.
BORROWED FUNDS
The components of the Company's short-term and long-term debt were as
follows (in thousands):
DECEMBER 31
-----------------------
1996 1995 1994
------- ------- -------
SHORT-TERM DEBT
U.S. Treasury demand notes and other................... $ 911 $ 501 $ 872
------- ------- -------
LONG-TERM DEBT
6.81% senior notes due 2000............................ $10,000 $10,000 $10,000
7.30% senior notes due 2003............................ 15,000 15,000 15,000
9.15% senior notes due 1999............................ 9,000 12,000 15,000
7.50% notes maturing serially through 1997............. 1,546 3,093 4,639
8.00% note maturing serially through 2000.............. 556 643 724
8.83% senior notes due 1996............................ -- -- 890
7.50% note maturing serially through 2015.............. -- -- 77
ESOP debt guarantee.................................... 15,248 -- --
------- ------- -------
Total long-term debt................................. $51,350 $40,736 $46,330
------- ------- -------
Total borrowed funds................................. $52,261 $41,237 $47,202
======= ======= =======
A-32
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Long-term debt represents direct, unsecured obligations of the parent
company and a guarantee by the Company of debt of the Company's ESOP plan. The
senior notes due in 2000 and 2003 cannot be redeemed prior to stated maturity.
The senior notes due in 1999 require annual redemptions of $3,000,000 which
began in 1995. The 7.50% notes that mature in 1997 require annual principal
payments of $1,546,000. The ESOP installment note, secured by shares of the
Company's stock, bears interest at a rate of 6.10% and requires quarterly
principal and interest payments of $763,000 through December 31, 2002. The
senior notes contain financial covenants relating to the issuance of
additional debt, payment of dividends, reacquisition of common stock and
maintenance of minimum tangible capital. Under the most restrictive covenant,
approximately $68,634,000 was available for the payment of dividends at
December 31, 1996.
The Company enters into sales of securities with simultaneous agreements to
repurchase ("repurchase agreements"). The amounts received under these
agreements represent short-term borrowings and are reflected as a separate
item in the consolidated balance sheet. The amount outstanding at December 31,
1996, was $599,215,000 (with accrued interest payable of $490,000). Of that
amount, $19,364,000 represented sales of securities in which the securities
were obtained under reverse repurchase agreements ("resell agreements"). The
remainder of $579,851,000 represented sales of U.S. Treasury and agency
securities obtained from the Company's securities portfolio. The carrying
amounts and market values of the securities and the related repurchase
liabilities and weighted average interest rates of the repurchase liabilities
(grouped by maturity of the repurchase agreements) were as follows (in
thousands):
SECURITIES
-----------------
WEIGHTED
AVERAGE
CARRYING MARKET REPURCHASE INTEREST
MATURITY OF THE REPURCHASE LIABILITIES AMOUNT VALUE LIABILITIES RATE
- -------------------------------------- -------- -------- ----------- --------
On demand............................... $455,561 $471,663 $430,464 5.16%
2 to 30 days............................ 99,418 102,098 95,347 5.17
31 to 90 days........................... 40,522 40,941 38,146 5.03
Over 90 days............................ 15,764 16,229 15,894 5.49
-------- -------- -------- ----
Total.................................. $611,265 $630,931 $579,851 5.16%
======== ======== ======== ====
REGULATORY REQUIREMENTS
Payment of dividends by the affiliate banks to the parent company is subject
to various regulatory restrictions. For national banks, state banks that are
Federal Reserve members and state banks in Colorado and Oklahoma, the
governing regulatory agency must approve the declaration of any dividends
generally in excess of the sum of net income for that year and retained net
income for the preceding two years. The state banks in Missouri, Kansas and
Illinois are subject to state laws permitting dividends to be declared from
retained earnings, provided certain specified capital requirements are met. At
December 31, 1996, approximately $18,115,000 of the equity of the affiliate
banks was available for distribution as dividends to the parent company
without prior regulatory approval or without reducing the capital of the
respective affiliate banks below prudent levels.
The Company is required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by the banking regulators. At December 31,
1996, the Company is required to have minimum Tier 1 and Total capital ratios
of 4.00% and 8.00%, respectively. The Company's actual ratios at that date
were 14.68% and 15.63%, respectively. The Company's leverage ratio at December
31, 1996, was 8.02%.
As of December 31, 1996 the most recent notification from the Office of
Comptroller of the Currency categorized the Company's most significant
affiliate banks as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the affiliate banks
must maintain total risk-
A-33
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
based, Tier 1 risk-based and Tier 1 leverage ratios of 10.0%, 6.0% and 5.0%,
respectively. There are no conditions or events since that notification that
management believes have changed the affiliate banks' category.
Certain affiliate banks maintain reserve balances with the Federal Reserve
Bank as required by law. During 1996, this amount averaged $145,394,000.
EMPLOYEE BENEFITS
The Company has a noncontributory profit sharing plan, which features an
employee stock ownership plan. These plans are for the benefit of
substantially all eligible officers and employees of the Company and its
subsidiaries. Contributions to these plans for the years 1996, 1995 and 1994
were $5,000,000, $5,000,000, and $3,983,000, respectively. In 1996, the
Employee Stock Ownership Plan (ESOP) borrowed $17 million to purchase Common
Stock of the Company. The loan obligation of the ESOP is considered unearned
employee benefit expense and, as such, is recorded as a reduction of the
Company's shareholders' equity. Both the loan obligation and the unearned
benefit expense are reduced by the amount of the loan principal repayments
made by the ESOP. The portion of the Company's ESOP contribution which funded
principal repayments and the payment of interest expense was recorded
accordingly in the consolidated financial statements.
The Company has a qualified 401(k) profit sharing plan that permits
participants to make contributions by salary reduction. The Company made a
matching contribution to this plan of $266,000 for 1996 and $144,000 for 1995.
Substantially all officers and employees are covered by a noncontributory
defined benefit pension plan. Under the plan, retirement benefits are based on
years of service and the average of the employee's highest 120 consecutive
months of compensation. The Company's funding policy is to contribute annually
the maximum amount that can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. To the
extent that these requirements are fully covered by assets in the plan, a
contribution may not be made in a particular year.
The pension plan was amended in January 1995 whereby the plan would not
accept any new participants. This change was made with consideration given to
discontinuing the current plan at a future date. New employees of the Company
that are not eligible to participate in the pension plan receive a partial
matching contribution to the qualified 401(k) plan, as amended.
The following items are components of the net periodic pension expense
(income) for the three years ended December 31, 1996 (in thousands):
YEAR ENDED DECEMBER
31
----------------------
1996 1995 1994
------ ------ ------
Service costs -- benefits earned during the year........ $1,606 $2,234 $1,998
Interest cost on projected benefit obligation........... 2,110 2,330 2,100
Actual return on plan assets............................ (1,485) (2,130) 70
Net amortization and deferral........................... 269 (789) (3,343)
------ ------ ------
Net periodic pension expense.......................... $2,500 $1,645 $ 825
====== ====== ======
Assumptions used in accounting for the plan were as follows:
1996 1995 1994
---- ---- ----
Weighted average discount rate................................ 7.00% 7.00% 7.50%
Rate of increase in future compensation levels................ 3.81 4.25 4.25
Expected long-term rate of return on assets................... 8.00 8.00 8.00
A-34
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The following table sets forth the pension plan's funded status, using
valuation dates of September 30, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
-------- -------- --------
Actuarial present value of benefit obligation:
Vested benefits................................. $(23,126) $(26,588) $(24,395)
Nonvested benefits.............................. (2,118) (1,008) (1,198)
-------- -------- --------
Accumulated benefit obligation.................. $(25,244) $(27,596) $(25,593)
Additional benefits based on estimated future
salary levels.................................. (6,723) (7,738) (6,677)
-------- -------- --------
Projected benefit obligation................... $(31,967) $(35,334) $(32,270)
Plan assets at fair value, primarily U.S. obliga-
tions........................................... 28,598 31,109 31,874
-------- -------- --------
Projected benefit obligation in excess of plan
assets.......................................... $ (3,369) $ (4,225) $ (396)
Unrecognized net loss from past experience dif-
ferent from that assumed........................ 6,502 11,268 10,120
Prior service cost not yet recognized in net pe-
riodic pension cost............................. 666 327 361
Unrecognized net transition asset being recog-
nized over 10.66 years.......................... (707) (1,778) (2,848)
-------- -------- --------
Prepaid pension cost included in other assets.... $ 3,092 $ 5,592 $ 7,237
======== ======== ========
On April 16, 1992, the shareholders of the Company approved the 1992
Incentive Stock Option Plan ("the 1992 Plan"), which provides incentive
options to certain key employees for up to 500,000 common shares of the
Company. The options are not exercisable for two years from the date of the
grant and are thereafter exercisable for such periods as the Board of
Directors, or a committee thereof, specify (which may not exceed 10 years),
provided that the optionee has remained in the employment of the Company or
its subsidiaries. The Board or the committee may accelerate the exercise
period for an option upon the optionee's disability, retirement or death. All
options expire at the end of the exercise period. The Company makes no
recognition in the balance sheet of the options until such options are
exercised and no amounts applicable thereto are reflected in net income.
Options are granted at not less than 100% of fair market value at date of
grant.
Activity in the 1992 Plan for the three years ended December 31, 1996, is
summarized in the following table:
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
STOCK OPTIONS UNDER THE 1992 PLAN SHARES PER SHARE PRICE PER SHARE
- --------------------------------- --------- ---------------- ----------------
Outstanding -- January 1, 1994...... 37,814 $29.11 to $32.34 $29.80
Granted............................ 18,782 27.37 to 30.11 27.91
Canceled........................... (5,336) 29.11 to 29.41 29.25
------ ---------------- ------
Outstanding -- December 31, 1994.... 51,260 $27.37 to $32.35 $29.16
Granted............................ 23,758 37.87 to 41.66 38.30
Canceled........................... (3,604) 27.37 to 32.35 28.84
------ ---------------- ------
Outstanding -- December 31, 1995.... 71,414 $27.37 to $41.66 $32.20
Granted............................ 26,332 36.79 to 40.47 37.17
Canceled........................... (3,049) 27.37 to 37.88 31.67
------ ---------------- ------
Outstanding -- December 31, 1996.... 94,697 $27.25 to $41.66 $33.60
------ ---------------- ------
Exercisable -- December 31, 1996.... 26,574 $30.52 to $32.35 $33.60
====== ================ ======
All figures have been restated to reflect the 5% stock dividend paid January
2, 1997.
The 1981 Incentive Stock Option Plan ("the 1981 Plan") was adopted by the
Company on October 22, 1981, and amended November 27, 1985, and October 10,
1989. No further options may be granted under the
A-35
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1981 Plan. Provisions of the 1981 Plan regarding option price, term and
exercisability are generally the same as that described for the 1992 Plan.
Activity in the 1981 Plan for the three years ended December 31, 1996, is
summarized in the following table:
NUMBER
OF OPTION PRICE WEIGHTED AVERAGE
STOCK OPTIONS UNDER THE 1981 PLAN SHARES PER SHARE PRICE PER SHARE
- --------------------------------- ------- ---------------- ----------------
Outstanding -- January 1, 1994....... 149,390 $11.44 to $27.89 $19.13
Canceled............................ (26,693) 16.16 to 23.07 19.85
Exercised........................... (24,709) 11.44 to 24.98 15.52
------- ---------------- ------
Outstanding -- December 31, 1994..... 97,988 $16.22 to $27.89 $19.85
Canceled............................ (19,321) 16.24 to 25.35 18.92
Exercised........................... (6,998) 16.22 to 20.46 17.94
------- ---------------- ------
Outstanding -- December 31, 1995..... 71,669 $18.36 to $27.89 $20.41
Canceled............................ (1,195) 18.36 to 22.73 20.27
Exercised........................... (18,715) 18.36 to 27.89 20.49
------- ---------------- ------
Outstanding -- December 31, 1996..... 51,759 $18.36 to $25.35 $20.40
------- ---------------- ------
Exercisable -- December 31, 1996..... 51,759 $18.36 to $25.35 $20.40
======= ================ ======
All figures have been restated to reflect the 5% stock dividend paid January
2, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- ----------- -------- ----------- --------
$19.06 6,624 1 years $19.06 6,624 $19.06
18.36 9,025 2 years 18.36 9,025 18.36
22.67 14,187 3 years 22.67 14,187 22.67
18.57 17,171 4 years 18.57 17,171 18.57
25.34 4,752 5 years 25.34 4,752 25.34
29.08 to 32.03 13,147 6 years 29.82 10,518 29.82
29.19 to 32.35 15,345 7 years 29.89 9,207 29.89
27.25 to 30.11 17,123 8 years 27.86 6,849 27.86
37.71 to 41.66 22,739 9 years 38.17 -- --
36.43 to 40.47 26,343 10 years 36.85 -- --
------- ------
146,456 78,333
======= ======
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation costs for the Company's plans been determined
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been respectively,
$57,351 and $2.88 for the year ended December 31, 1996 and $52,004 and $2.40
for the year ended December 31, 1995.
For options granted during the year ended December 31, 1996, the estimated
fair value of options granted utilizing the Black-Scholes pricing model under
the Company's plans was based on a weighted average risk-free interest rate of
6.47%, expected option life of 8.59 years, expected volatility of 15.00% and
an expected dividend
A-36
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
yield of 1.92%. For options granted during the year ended December 31, 1995,
the estimated fair value of options granted under the Company's plans was
based on a weighted average risk-free interest rate of 5.84%, expected option
life of 8.60 years, expected volatility of 15.00% and an expected dividend
yield of 1.92%.
COMMON STOCK
The following table summarizes the share transactions for the three years
ended December 31, 1996:
SHARES
SHARES SHARES IN SUBJECT TO
ISSUED TREASURY REPURCHASE
---------- ---------- ----------
Balance -- January 1, 1994................... 18,926,307 (1,300,346) --
Stock dividend (10%)........................ 1,751,251 -- --
Purchase of treasury stock.................. -- (396,984) --
Issued in stock options..................... -- 20,879 --
---------- ---------- ----------
Balance -- December 31, 1994................. 20,677,558 (1,676,451) --
Stock dividend (10%)........................ 1,869,963 -- --
Purchase of treasury stock.................. -- (312,517) --
Issued in stock options..................... -- 16,729 --
Common share repurchase commitment.......... -- -- (1,068,533)
---------- ---------- ----------
Balance -- December 31, 1995................. 22,547,521 (1,972,239) (1,068,533)
Stock dividend (5%)......................... 955,563 -- --
Purchase of treasury stock.................. -- (1,469,791) 688,533
Issued in stock options..................... -- 17,854 --
Shares purchased by ESOP.................... -- -- 380,000
---------- ---------- ----------
Balance -- December 31, 1996................. 23,503,084 (3,424,176) --
========== ========== ==========
COMMITMENTS AND CONTINGENCIES
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. Those 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 amounts of those instruments reflect
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 instrument 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. The Company controls the credit risk of
its futures contracts through credit approvals, limits and monitoring
procedures.
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 or floating 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 any 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 amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on an
A-37
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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 to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. 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 movements 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 $50.1 million and
$42.6 million during the years ended December 31, 1996 and 1995, respectively.
Net futures activity resulted in gains of $0.6 million for 1996 and losses of
$3.4 million for 1995.
The Company also enters into foreign exchange contracts on a limited basis.
For operating purposes the Company maintains certain balances in 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 1996 contracts
to purchase and to sell foreign currency averaged approximately $3.4 million,
compared to $1.7 million during 1995. The gain or loss on these foreign
exchange contracts for 1996 and 1995 was not significant.
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 and Illinois. At December 31, 1996, 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 counterclaims. In the opinion of
management, after consultation with legal counsel, none of these lawsuits will
have a materially adverse effect on the financial position or results of
operations of the Company.
CONTRACT OR NOTIONAL
AMOUNT DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Financial instruments whose contract amounts repre-
sent credit risk:
Commitments to extend credit for loans (excluding
credit card loans)............................... $943,895 $637,696 $568,017
Commitments to extend credit under credit card
loans............................................ 815,367 850,006 729,417
Commercial letters of credit...................... 8,466 14,864 16,047
Standby letters of credit......................... 68,634 69,492 72,718
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Futures contracts................................. $ 54,600 $ 59,100 $ 36,000
Foreign exchange contracts........................ 6,041 4,519 --
A-38
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
COMMON STOCK REPURCHASE COMMITMENT
On December 14, 1995, the Company and its Employee Stock Option Plan (ESOP)
entered into a commitment to repurchase 1,581,133 shares of common stock of
the Company at a price of $43.50 per share. On January 2, 1996, a total of
1,068,533 of those shares were acquired from the Seller. The Company acquired
688,533 of such shares for treasury stock purposes using existing working
capital. The remaining 380,000 shares were purchased by the ESOP and funded by
a seven-year, 6.1% fixed rate loan, which is guaranteed by the Company. The
accompanying balance sheet at December 31, 1995 reflects the shares acquired
in January as temporary equity with a corresponding reduction of stockholders'
equity. The remaining 512,600 common shares were purchased, by the Company, in
equal installments in March and June of 1996.
INCOME TAXES
Income taxes as set forth below produce effective federal income tax rates
of 31.10% in 1996, 30.77% in 1995, and 29.78% in 1994. These percentages are
computed by dividing total federal income tax by the sum of such tax and net
income. Income taxes include the following components (in thousands):
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
Federal
Currently payable.................................... $29,148 $26,885 $19,512
Deferred............................................. (3,180) (3,698) 770
------- ------- -------
Total federal tax provision........................ $25,968 $23,187 $20,282
State
Currently payable.................................... 2,872 2,517 2,683
Deferred............................................. (842) (257) (380)
------- ------- -------
Total tax provision................................ $27,998 $25,447 $22,585
======= ======= =======
Tax effect of security gains included above.......... $ 166 $ 496 $ 1,271
The reconciliation between the income tax provision and the amount computed
by applying the statutory federal tax rate of 35% to income before income
taxes is as follows (in thousands):
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
Provision at statutory rate......................... $29,936 $27,168 $24,640
Tax-exempt interest income.......................... (5,660) (5,698) (5,016)
Disallowed interest expense......................... 695 642 484
State and local income taxes, net of federal tax
benefits........................................... 1,320 1,470 1,497
Amortization of intangibles of purchased banks...... 1,945 1,877 1,881
Other............................................... (238) (12) (901)
------- ------- -------
Total tax provision............................... $27,998 $25,447 $22,585
======= ======= =======
Deferred taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities.
A-39
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Temporary differences which comprise a significant portion of deferred tax
assets and liabilities at December 31, 1996, 1995 and 1994 were as follows (in
thousands):
1996 1995 1994
-------- -------- --------
Deferred tax liabilities:
Net unrealized gain of securities available for
sale............................................. $ -- $ 2,195 $ --
Asset revaluations on purchased banks............ 6,098 6,981 6,557
Depreciation..................................... 6,463 5,262 5,269
Pension.......................................... 1,153 2,106 2,765
Insurance........................................ 51 1 1,945
Tax allowance for loan losses.................... 100 346 823
Miscellaneous.................................... 290 93 165
-------- -------- --------
Total deferred tax liabilities................. $ 14,155 $ 16,984 $ 17,524
-------- -------- --------
Deferred tax assets:
Net unrealized loss on securities available for
sale............................................. $ (1,041) $ -- $(21,771)
Allowance for loan losses........................ (12,848) (12,390) (12,349)
Nondeductible accruals........................... (2,288) -- --
Miscellaneous.................................... (1,517) (875) (849)
-------- -------- --------
Total deferred tax assets...................... $(17,694) $(13,265) $(34,969)
-------- -------- --------
Net deferred tax liability (asset)............... $ (3,539) $ 3,719 $(17,445)
======== ======== ========
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND SHORT-TERM INVESTMENTS -- The carrying amounts of cash and due from
banks, federal funds sold and resell agreements are reasonable estimates of
their fair values.
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES -- Fair values are
based on quoted market prices or dealer quotes, if available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
TRADING SECURITIES -- Fair values for trading securities (including
financial futures), which also are the amounts recognized in the balance
sheet, are based on quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices for
similar securities.
LOANS -- Fair values are estimated for portfolios with similar financial
characteristics. Loans are segregated by type, such as commercial, real
estate, consumer, and credit card. Each loan category is further segmented
into fixed and variable interest rate categories. The fair value of loans is
estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
DEPOSIT LIABILITIES -- The fair value of demand deposits and savings
accounts is the amount payable on demand at December 31, 1996, 1995 and 1994.
The fair value of fixed-maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.
A-40
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
SHORT-TERM DEBT -- The carrying amounts of federal funds purchased,
repurchase agreements and other short-term debt are reasonable estimates of
their fair values.
LONG-TERM DEBT -- Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
OTHER OFF-BALANCE-SHEET INSTRUMENTS -- The fair value of a loan commitment
and a letter of credit is determined based on the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreement and the present creditworthiness of the counterparties. Neither the
fees earned during the year or these instruments or their fair value at year-
end are significant to the Company's consolidated financial position.
The estimated fair values of the Company's financial instruments at December
31, 1996, 1995, and 1994 are as follows (in millions):
1996 1995 1994
------------------ ------------------ ------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------- -------- --------
Financial assets:
Cash and short-term in-
vestments............. $ 831.6 $ 831.6 $ 785.6 $ 785.6 $1,305.0 $1,305.0
Securities available
for sale.............. 2,387.3 2,387.3 2,383.0 2,383.0 2,275.2 2,275.2
Investment securities.. 319.2 319.5 311.8 313.2 384.8 373.6
Trading securities..... 79.8 79.8 86.0 86.0 31.0 31.0
Loans.................. $2,557.6 $2,537.1 $2,406.1 $2,391.8 $2,269.6 $2,209.6
Less: allowance for
loan losses........... (33.4) -- (32.7) -- (32.5) --
-------- -------- -------- -------- -------- --------
Net loans............ $2,524.2 $2,537.1 $2,373.4 $2,391.8 $2,237.1 $2,209.6
-------- -------- -------- -------- -------- --------
Total financial as-
sets................ $6,142.1 $6,155.3 $5,939.8 $5,959.6 $6,233.1 $6,194.4
======== ======== ======== ======== ======== ========
Financial liabilities:
Demand and savings de-
posits................ $3,896.4 $3,896.4 $3,512.0 $3,512.0 $3,991.6 $3,991.6
Time deposits.......... 1,294.1 1,291.9 1,301.7 1,299.9 1,141.2 1,132.9
Federal funds and re-
purchase.............. 614.4 614.4 721.4 721.4 801.0 801.0
Short-term debt........ .9 .9 .5 .5 .9 .9
Long-term debt......... 51.4 47.1 40.7 39.0 46.3 45.6
-------- -------- -------- -------- -------- --------
Total financial lia-
bilities............ $5,857.2 $5,850.7 $5,576.3 $5,572.8 $5,981.0 $5,972.0
======== ======== ======== ======== ======== ========
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996, 1995 and 1994. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
A-41
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
PARENT COMPANY FINANCIAL INFORMATION
DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
BALANCE SHEET
Assets:
Investment in subsidiaries:
Banks........................................... $585,925 $589,846 $567,381
Non-banks....................................... 8,675 8,692 8,336
-------- -------- --------
Total investment in subsidiaries.............. $594,600 $598,538 $575,717
Premiums on purchased banks..................... 11,258 12,768 14,278
Securities available for sale and other......... 33,348 69,349 21,530
-------- -------- --------
Total assets.................................. $639,206 $680,655 $611,525
======== ======== ========
Liabilities and Shareholders' Equity:
Dividends payable............................... $ 3,869 $ 3,789 $ 3,804
Long-term debt.................................. 50,794 40,093 45,529
Accrued expenses and other...................... 2,066 14,333 4,886
-------- -------- --------
Total......................................... $ 56,729 $ 58,215 $ 54,219
Common stock repurchase commitment.............. -- 46,481 --
Shareholders' equity............................ 582,477 575,959 557,306
-------- -------- --------
Total liabilities and shareholders' equity.... $639,206 $680,655 $611,525
======== ======== ========
STATEMENT OF INCOME
Income:
Dividends and income received from affiliate
banks.......................................... $ 58,503 $ 53,114 $ 38,781
Service fees from subsidiaries.................. 9,433 9,790 4,882
Net security gains.............................. 45 426 618
Other........................................... 510 762 298
-------- -------- --------
Total income.................................. $ 68,491 $ 64,092 $ 44,579
-------- -------- --------
Expense:
Salaries and employee benefits.................. $ 3,852 $ 3,834 $ 3,624
Interest on notes payable:
Affiliate bank.................................. -- 21 9
Other........................................... 3,972 3,399 3,952
Services from affiliate banks................... 652 654 662
Other........................................... 12,185 11,149 11,624
-------- -------- --------
Total expense................................. $ 20,661 $ 19,057 $ 19,871
-------- -------- --------
Income before income taxes and equity in undis-
tributed earnings of subsidiaries.............. $ 47,830 $ 45,035 $ 24,708
Income tax benefit.............................. (2,836) (2,356) (4,417)
-------- -------- --------
Income before equity in undistributed earnings
of subsidiaries................................ $ 50,666 $ 47,391 $ 29,125
Equity in undistributed earnings of subsidiar-
ies:
Banks........................................... 6,883 5,031 18,220
Non-banks....................................... (17) (246) 469
-------- -------- --------
Net income.................................... $ 57,532 $ 52,176 $ 47,814
======== ======== ========
STATEMENT OF CASH FLOWS
Operating Activities:
Net income...................................... $ 57,532 $ 52,176 $ 47,814
Equity in earnings of subsidiaries.............. (64,350) (57,899) (57,470)
Gains from sales of securities available for
sale........................................... (45) (426) (618)
Earned ESOP shares.............................. 2,220 -- --
Other........................................... (14,225) 477 1,329
-------- -------- --------
Net cash used in operating activities......... $(18,868) $ (5,672) $ (8,945)
-------- -------- --------
Investing Activities:
Proceeds from sales of securities available for
sale........................................... $ 96 $ 1,665 $ 1,687
Proceeds from maturities of securities held to
maturity....................................... 47,455 12,650 --
Purchases of securities available for sale...... (15,026) (60,096) --
Net increase (decrease) in repurchase agree-
ments.......................................... 7,500 (4,000) (5,500)
Net capital investment in affiliate banks....... 5,211 32,778 6,819
Dividends received from subsidiaries............ 57,484 53,114 38,781
Net capital expenditures for premises and equip-
ment........................................... (34) (80) (211)
-------- -------- --------
Net cash provided by investing activities..... $102,686 $ 36,031 $ 41,576
-------- -------- --------
Financing Activities:
Repayments of long-term debt.................... $ (6,580) $ (5,436) $ (5,118)
Cash dividends paid............................. (15,216) (15,114) (14,669)
Net purchase of treasury stock.................. (61,851) (10,751) (12,938)
-------- -------- --------
Net cash used in financing activities......... $(83,647) $(31,301) $(32,725)
-------- -------- --------
Net increase (decrease) in cash.................. $ 171 $ (942) $ (94)
======== ======== ========
A-42
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of UMB Financial Corporation:
We have audited the accompanying consolidated balance sheets of UMB
Financial Corporation and subsidiaries as of December 31, 1996, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of UMB Financial Corporation and
subsidiaries as of December 31, 1996, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche llp
Kansas City, Missouri
January 14, 1997
A-43
UMB FINANCIAL CORPORATION
FIVE-YEAR AVERAGE BALANCE SHEETS/YIELDS AND RATES
1996 1995
---------------------------- ----------------------------
(IN MILLIONS)
(UNAUDITED)
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1)
-------- ---------- ------- -------- ---------- -------
ASSETS
Loans, net of unearned
interest (FTE) (2)..... $2,437.8 $221.5 9.09% $2,346.3 $218.9 9.33%
Securities:
Taxable................ $2,169.8 $122.9 5.66 $2,076.1 $110.6 5.32
Tax-exempt (FTE)....... 317.8 21.2 6.68 306.1 20.9 6.83
-------- ------ ---- -------- ------ ----
Total securities...... $2,487.6 $144.1 5.79 $2,382.2 $131.5 5.52
Federal funds sold and
resell agreements...... 185.6 10.0 5.39 187.9 11.0 5.86
Other earning assets
(FTE).................. 69.3 4.3 6.12 60.2 3.7 6.19
-------- ------ ---- -------- ------ ----
Total earning assets
(FTE)................ $5,180.3 $379.9 7.33 $4,976.6 $365.1 7.34
Allowance for loan
losses................. (34.0) (32.1)
Cash and due from banks. 646.5 616.9
Other assets............ 344.4 337.8
-------- --------
Total assets.......... $6,137.2 $5,899.2
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing demand
and savings deposits... $2,056.7 $ 59.8 2.91% $2,059.7 $ 61.3 2.98%
Time deposits under
$100,000............... 948.6 49.3 5.21 963.8 49.0 5.08
Time deposits of
$100,000 or more....... 276.5 14.0 5.05 221.0 11.3 5.12
-------- ------ ---- -------- ------ ----
Total interest-bearing
deposits............. $3,281.8 $123.1 3.75 $3,244.5 $121.6 3.75
Short-term borrowings... 1.0 -- 4.10 1.1 -- 4.31
Long-term debt.......... 55.4 4.0 7.27 44.5 3.5 7.79
Federal funds purchased
and repurchase
agreements............. 771.5 37.5 4.84 613.9 32.7 5.32
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities.......... $4,109.7 $164.6 4.00 $3,904.0 $157.8 4.04
Noninterest-bearing
demand deposits........ 1,386.2 1,336.8
Other................... 67.0 61.0
-------- --------
Total................. $5,562.9 $5,301.8
-------- --------
Total shareholders'
equity................. $ 574.3 $ 597.4
-------- --------
Total liabilities and
shareholders' equity. $6,137.2 $5,899.2
======== ========
------ ------
Net interest income
(FTE).................. $215.3 $207.3
====== ======
Net interest spread..... 3.33% 3.30%
Net interest margin..... 4.16 4.17
- --------
(1) Interest income and yields are stated on a fully tax-equivalent (FTE)
basis, using a rate of 34% for 1992 and 35% for 1993 through 1996. The
tax-equivalent interest income and yields give effect to the disallowance
of interest expense, for federal income tax purposes, related to certain
tax-free assets. Rates earned/paid may not compute to the rates shown due
to presentation in millions.
(2) Loan fees and income from loans on nonaccrual status are included in loan
income.
A-44
1994 1993 1992 AVERAGE
---------------------------------------------------------- ---------------------------- BALANCE
FIVE-
YEAR
INTEREST RATE INTEREST RATE INTEREST RATE COMPOUND
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ GROWTH
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1) RATE
-------- ---------- ------- -------- ---------- ------- -------- ---------- ------- --------
$2,148.6 $173.1 8.06% $1,786.5 $144.0 8.06% $1,337.3 $120.8 9.03% 12.45%
$2,555.2 $122.0 4.77 $2,468.8 $116.0 4.70 $1,868.6 $102.5 5.48 7.22
289.1 18.5 6.41 260.5 17.0 6.53 240.5 17.8 7.41 2.15
-------- ------ ---- -------- ------ ---- -------- ------ ---- ------
$2,844.3 $140.5 4.94 $2,729.3 $133.0 4.88 $2,109.1 $120.3 5.70 6.49
338.0 13.6 4.03 320.4 9.9 3.09 405.3 14.7 3.63 (10.02)
56.5 3.2 5.65 58.1 3.1 5.24 70.5 4.5 6.42 (1.24)
-------- ------ ---- -------- ------ ---- -------- ------ ---- ------
$5,387.4 $330.4 6.13 $4,894.3 $290.0 5.92 $3,922.2 $260.3 6.63 7.78
(34.2) (31.9) (26.1) 5.35
675.3 604.4 494.1 9.85
344.1 300.0 232.8 9.03
-------- -------- -------- ------
$6,372.6 $5,766.8 $4,623.0 8.07%
======== ======== ======== ======
$2,365.0 $ 58.6 2.48% $2,092.1 $ 50.9 2.43% $1,559.0 $ 51.1 3.28% 10.04%
1,003.8 40.8 4.06 957.7 41.4 4.32 905.0 44.8 4.95 .39
207.2 7.6 3.62 236.1 6.8 2.91 193.3 7.1 3.69 1.76
-------- ------ ---- -------- ------ ---- -------- ------ ---- ------
$3,576.0 $107.0 2.99 $3,285.9 $ 99.1 3.02 $2,657.3 $103.0 3.88 5.95
1.0 -- 3.26 1.4 -- 2.08 28.3 1.0 3.66 (51.52)
50.4 4.0 7.97 53.5 4.4 8.23 41.0 3.6 8.65 3.63
664.5 25.1 3.77 581.1 16.2 2.78 511.1 16.2 3.17 10.86
-------- ------ ---- -------- ------ ---- -------- ------ ---- ------
$4,291.9 $136.1 3.17 $3,921.9 $119.7 3.05 $3,237.7 $123.8 3.82 6.47
1,445.4 1,273.7 938.3 13.65
62.9 68.6 61.0 (1.45)
-------- -------- -------- ------
$5,800.2 $5,264.2 $4,237.0 7.88
-------- -------- -------- ------
$ 572.4 $ 502.6 $ 386.0 10.06
-------- -------- -------- ------
$6,372.6 $5,766.8 $4,623.0 8.07%
======== ======== ======== ======
------ ------ ------
$194.3 $170.3 $136.5
====== ====== ======
2.96% 2.87% 2.81%
3.61 3.48 3.48
A-45
UMB FINANCIAL CORPORATION
SELECTED FINANCIAL DATA OF AFFILIATE BANKS
DECEMBER 31, 1996
--------------------------------------------------------
LOANS
NUMBER OF TOTAL NET OF TOTAL SHAREHOLDERS'
LOCATIONS ASSETS UNEARNED DEPOSITS EQUITY
--------- ---------- ---------- ---------- -------------
(IN THOUSANDS)
WESTERN MISSOURI
UMB Bank, n.a. (Kansas
City).................. 37 $3,254,129 $1,247,215 $2,658,150 $239,374
UMB Bank, Cass County
(Peculiar)............. 1 29,419 9,912 26,442 2,328
UMB Bank, Northwest (St.
Joseph)................ 9 177,600 49,459 151,843 12,872
EASTERN MISSOURI AND IL-
LINOIS
UMB Bank of St. Louis,
n.a.................... 20 $ 773,631 $ 292,976 $ 598,089 $ 61,939
UMB Bank, Northeast
(Monroe City).......... 2 60,243 28,332 50,201 5,116
UMB First State Bank of
Morrisonville
(Illinois)............. 1 10,496 2,485 8,659 820
SOUTHWESTERN MISSOURI
UMB Bank, Southwest
(Springfield).......... 10 $ 313,704 $ 171,791 $ 217,815 $ 22,917
UMB Bank, Warsaw........ 3 61,188 20,713 48,820 4,807
CENTRAL MISSOURI
UMB Bank, Boonville..... 2 $ 37,940 $ 16,352 $ 30,974 $ 3,286
UMB Bank, Jefferson
City................... 1 49,030 34,549 31,645 4,005
UMB Bank, North Central
(Brookfield)........... 4 82,340 28,242 54,989 6,130
UMB Bank, Warrensburg... 4 100,335 24,871 86,473 7,702
COLORADO
UMB Bank Colorado....... 10 $ 261,687 $ 136,400 $ 214,060 $ 20,945
KANSAS
UMB Bank Kansas......... 16 $ 863,606 $ 253,128 $ 659,257 $100,761
UMB National Bank of
America................ 13 426,059 153,594 354,144 56,435
OKLAHOMA
UMB Oklahoma Bank....... 3 $ 147,057 $ 70,445 $ 98,243 $ 15,921
BANKING-RELATED SUBSIDI-
ARIES
UMB Properties, Inc.....
UMB Community
Development
Corporation............
United Missouri Banc
Leasing Corporation....
UMB, U.S.A. na..........
Scout Brokerage Servic-
es, Inc................
United Missouri Capital
Corporation............
United Missouri Insur-
ance Company...........
UMB Mortgage Company....
United Missouri Trust
Company of New York....
UMB Consulting Services,
Inc....................
UMB Data Corporation....
A-46