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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, 1998
[_] 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, 1999, the aggregate market value of common stock
outstanding held by nonaffiliates of the registrant was approximately
$664,314,000 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 Outstanding at February 28, 1999
Common Stock, $1.00 Par Value 20,127,747
DOCUMENTS INCORPORATED BY REFERENCE
Company's 1999 Proxy Statement dated March 12, 1999--Part III
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INDEX
Item Page
---- ----
PART I
1. Business.................................................... 1
2. Properties.................................................. 4
3. Legal Proceedings........................................... 5
4. Submission of Matters to a Vote of Security Holders......... 5
PART II
Market for the Registrant's Common Equity and Related Stock-
5. holder Matters.............................................. 5
6. Selected Financial Data..................................... 5
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 5
7a. Quantitative and Qualitative Disclosure about Market Risk.... 5
8. Financial Statements and Supplementary Data................. 5
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 5
PART III
10. Directors and Executive Officers of the Registrant.......... 6
11. Executive Compensation...................................... 6
Security Ownership of Certain Beneficial Owners and Manage-
12. ment........................................................ 6
13. Certain Relationships and Related Transactions.............. 6
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
14. 8-K......................................................... 6-7
Signatures......................................................... 8
Financial Information.............................................. Appendix A
i
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 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 data services company and a trust
company.
The Company's 16 commercial banks are engaged in general commercial banking
business entirely in domestic markets. The banks, 11 located in Missouri, one
each in Kansas, Illinois, Colorado, Nebraska 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, 1998, is included on page A-52 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, 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.
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, Nebraska, Oklahoma 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, 1998, UMB Financial
Corporation and subsidiaries employed 4,070 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, such as mutual fund companies, brokerage
companies and insurance companies, 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 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.
1
Supervision and Regulation
As a bank holding company, the Company and its subsidiaries are subject to
extensive regulation. As a consequence of the regulation of the commercial
banking business in the United States, the business of the Company is affected
by the enactment of federal and state legislation. The Company is regulated by
the Federal Reserve Board and is subject to the Bank Holding Company Act of
1956, as amended (the "BHCA").
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 enactment 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. Banks may also merge across state lines, creating interstate
branches. Furthermore, a bank may open new branches in a state in which it
does not already have banking operations, if the law of that state does not
prohibit de novo branching by an out of state bank or if the state has not
"opted out" of interstate branching. As a result of the Interstate Banking
Act, the Company has many more opportunities for expansion and has potentially
greater competition in its market area from nationwide or regional banks.
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. It is Federal Reserve Board
policy that a bank holding company, such as the Company, should serve as a
source of managerial and financial strength for each of its subsidiaries, and
commit resources to them, even in circumstances in which it might not do so in
absence of such policy.
Four of the commercial 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 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 banks are chartered
under the state banking laws of Missouri and are subject to supervision and
regular examination by the Missouri Commissioner of Finance. 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.
Proposals to change the laws and regulations governing the banking industry
are periodically introduced in the United States Congress, state legislatures
and various bank regulatory agencies. Included within such proposals are those
introduced in the past two years, and those currently pending in Congress,
that would among other things permit some cross ownership of the banking,
insurance and securities industry. The likelihood and timing of any such
proposals or bills, and the impact, if any, that they might have on the
Company and its subsidiaries and their operations, cannot be determined at
this time.
2
Information regarding capital adequacy standards of the Federal banking
regulators is included on pages A-18, A-19, A-36 and A-37 of the attached
Appendix, and is incorporated herein by reference.
Information regarding dividend restrictions is on page A-36 of the attached
Appendix, incorporated herein by reference.
Statistical Disclosure
The information required by Guide 3, "Statistical Disclosure by Bank Holding
Companies," has been integrated throughout pages A-2 through A-24 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........ 72 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 through January, 1997.
Alexander C. Kemper..... 33 A son of R. Crosby Kemper. President of the Company
since January, 1995. President of UMB Bank, n.a. since
January, 1994, President and Chief Executive Officer
since January, 1996, and as Chairman, President and
Chief Executive Officer since January, 1997.
Peter J. Genovese....... 52 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. 48 A son of R. Crosby Kemper. 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. ..... 71 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........ 53 President and Chief Executive Officer of UMB Oklahoma
Bank (a subsidiary of the Company) since 1987.
Richard A. Renfro....... 64 President of UMB National Bank of America, Salina,
Kansas, (a subsidiary of the Company) since 1986.
James A. Sangster....... 44 Divisional Executive Vice President of UMB Bank, n.a.
since 1993. Executive Vice President prior thereto.
William C. Tempel....... 60 Divisional Executive Vice President of UMB Bank, n.a.
since 1997, having previously served as President and
Chief Executive Officer of UMB Bank Kansas (a former
subsidiary of the Company).
Douglas F. Page......... 55 Executive Vice President of the Company since 1984 and
Divisional Executive Vice President, Loan
Administration, of UMB Bank, n.a. since 1989.
3
Name Age Position with Registrant
- ---- --- ------------------------
Timothy M. Connealy..... 41 Chief Financial Officer since 1994. Chief Financial
Officer of UMB Bank Kansas prior thereto.
James C. Thompson....... 56 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........... 54 Executive Vice President of UMB Bank, n.a. since 1985.
James D. Matteoni....... 56 Chief Information Officer of UMB Bank, n.a. since 1996.
Dennis R. Rilinger...... 51 Divisional Executive Vice President and General Counsel
of UMB Bank, n.a. since 1996.
Mark A. Schmidtlein..... 39 Divisional Executive Vice President of UMB Bank, n.a.
since 1996. Senior Vice President prior thereto.
Dennis L. Triplett...... 52 Divisional Executive Vice President of UMB Bank, n.a.
since 1995. Regional Bank President prior thereto.
Shelia Kemper Dietrich.. 42 A daughter of R. Crosby Kemper. Executive Vice
President of UMB Bank, n.a. since 1993.
David D. Kling.......... 52 Divisional Executive Vice President of UMB Bank, n.a.
since 1997.
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 available for lease to third parties. The
Company's principal law firm and principal accounting firm are leasees.
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, 1998 the Company's affiliate banks operated a total of 16
main banking houses and 152 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 20 additional offices, which circle the metropolitan area.
The Company is in the process of constructing an 180,000 square foot
operations center in downtown Kansas City, Missouri. This building will house
the Company operational and item processing functions as well as management
information system. Occupancy is expected in the second quarter of 1999.
Additional information with respect to premises and equipment is presented
on page A-34 and A-35 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.
4
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company and its subsidiaries had
certain lawsuits pending against them at December 31, 1998. 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, 1998.
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, 1998, the Company had 2,489 shareholders.
Dividend and sale prices of stock information, by quarter, for the past two
years is contained on page A-24 of the attached Appendix and is hereby
incorporated by reference.
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-21 and A-22 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-24 of the attached
Appendix, which is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the "Financial Review" on pages A-19 to A-22 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-25 through A-47.
Summary of Operating Results by Quarter -- page A-24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
5
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is included in the Company's 1999 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 1999 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 1999 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 1999 Proxy Statement under the
caption "Stock Beneficially Owned by Directors and Nominees and Executive
Officers" and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included in the Company's 1999 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, 1998, 1997
and 1996................................................ A-25
Consolidated Statement of Income for the Three Years
Ended December 31, 1998................................. A-26
Consolidated Statement of Cash Flows for the Three Years
Ended December 31, 1998................................. A-27
Consolidated Statement of Shareholders' Equity for the
Three Years Ended December 31, 1998..................... A-28
Notes to Financial Statements............................ A-29-A-47
Independent Auditors' Report............................. A-48
6
Condensed financial statements for parent company only may be found on page
A-47. 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
1998.
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
$1.00 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.
(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 29, 1999
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.
Director
______________________
Paul D. Bartlett, Jr.
Thomas E. Beal* Director
______________________
Thomas E. Beal
Director
______________________
H. Alan Bell
David R. Bradley, Jr.* Director
______________________
David R. Bradley, Jr.
Director
______________________
Howard R. Fricke
Newton A. Campbell* Director
______________________
Newton A. Campbell
William Terry Fuldner* Director
______________________
William Terry Fuldner
Director
______________________
Jack T. Gentry
Peter J. Genovese* Director
______________________
Peter J. Genovese
C.N. Hoffman, III* Director
______________________
C.N. Hoffman, III
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.
Director
______________________
Mary Lynn Oliver
Director
______________________
W. L. Orscheln
8
Director
_______________________________
Robert W. Plaster
Alan W. Rolley* Director
_______________________________
Alan W. Rolley
Herman R. Sutherland* Director
_______________________________
Herman R. Sutherland
E. Jack Webster, Jr.* Director
_______________________________
E. Jack Webster, Jr.
Director
_______________________________
Joseph F. Ruysser
John E. Williams* Director
_______________________________
John E. Williams
Thomas D. Sanders* Director
_______________________________
Thomas D. Sanders
Jon Wefald* Director
_______________________________
Jon Wefald
L. Joshua Sosland* Director
_______________________________
L. Joshua Sosland
*/s/ R. Crosby Kemper
- -------------------------------------
R. Crosby Kemper
Attorney-in-Fact for each director
Date: March 29, 1999
9
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LEFT BLANK
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UMB FINANCIAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Pages
-----
Consolidated Balance Sheet........................................ A-25
Consolidated Statement of Income.................................. A-26
Consolidated Statement of Cash Flows.............................. A-27
Consolidated Statement of Shareholders' Equity.................... A-28
Notes to Financial Statements..................................... A-29 to A-47
Independent Auditors' Report...................................... A-48
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-24
A-1
UMB FINANCIAL CORPORATION
FIVE-YEAR FINANCIAL SUMMARY
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in thousands except per share data)
Earnings
Interest income......... $ 409,625 $ 393,329 $ 372,077 $ 357,055 $ 323,260
Interest expense........ 187,092 171,794 164,581 157,787 136,064
Net interest income..... 222,533 221,535 207,496 199,268 187,196
Provision for loan
losses................. 10,818 11,875 10,565 5,090 2,640
Noninterest income...... 156,535 139,419 128,245 111,220 115,968
Noninterest expense..... 292,274 259,278 239,646 227,775 230,125
Net income.............. 54,214 61,704 57,532 52,176 47,814
Average Balances
Assets.................. $7,017,417 $6,482,613 $6,137,232 $5,899,169 $6,372,607
Loans, net of unearned
interest............... 2,640,933 2,649,023 2,437,829 2,346,325 2,148,606
Securities*............. 3,005,330 2,538,690 2,487,641 2,382,248 2,844,306
Deposits................ 5,318,351 4,929,799 4,667,956 4,581,349 5,021,401
Long-term debt.......... 42,584 48,907 55,349 44,450 50,370
Shareholders' equity.... 650,078 598,631 574,343 597,401 572,446
Year-End Balances
Assets.................. $7,648,098 $7,054,007 $6,511,986 $6,281,328 $6,599,020
Loans, net of unearned
interest............... 2,559,136 2,786,031 2,557,641 2,406,138 2,269,617
Securities*............. 3,755,049 2,884,503 2,706,549 2,694,781 2,660,047
Deposits................ 5,896,804 5,546,997 5,190,534 4,813,683 5,132,834
Long-term debt.......... 39,153 44,550 51,350 40,736 46,330
Shareholders' equity.... 662,767 624,236 582,477 575,959 557,306
Per Share Data
Earnings--basic......... $ 2.66 $ 3.02 $ 2.75 $ 2.29 $ 2.05
Earnings--diluted....... 2.65 3.01 2.74 2.28 2.04
Cash dividends.......... 0.80 0.76 0.72 0.67 0.63
Dividend payout ratio... 30.08% 25.17% 26.18% 29.26% 30.73%
Book value.............. $ 32.68 $ 30.55 $ 28.13 $ 26.78 $ 24.18
Market price
High................... 64.50 54.50 39.76 41.05 28.49
Low.................... 40.75 36.19 30.61 24.73 24.32
Close.................. 45.88 54.50 38.57 31.97 25.77
Ratios
Return on average
assets................. 0.77% 0.95% 0.94% 0.88% 0.75%
Return on average
equity................. 8.34 10.31 10.02 8.73 8.35
Average equity to
assets................. 9.26 9.23 9.36 10.13 8.98
Total risk-based capital
ratio.................. 15.57 16.26 15.63 16.16 17.85
- --------
*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, 1998. It should be read in conjunction with
the accompanying consolidated financial statements, notes to financial
statements and other financial statistics appearing elsewhere in this report.
Estimates and forward-looking statements are included in this review and as
such are subject to certain risks, uncertainties and assumptions that are
beyond the Company's ability to control or estimate precisely. These
statements are based on current financial and economic data and management's
expectations concerning future developments and their effects. They include,
but are not limited to, statements relating to the Company's and various third
parties' year 2000 readiness efforts. There can be no assurance that results
or future developments will be in accordance with the Company's expectations
or that the effect of future developments on the Company will be those
anticipated by the Company.
Factors that could cause material differences in actual operating results
include, but are not limited to, the impact of competition; changes in
pricing, loan demand, consumer savings habits, employee costs and interest
rates; the ability of customers to repay loans; changes in U.S. or
international economic or political conditions, such as inflation or
fluctuation in interest or foreign exchange rates; disruptions in operations
due to failures of telecommunications systems, utility systems, security
clearing systems, or other elements of the financial industry infrastructure;
the unavailability or increased cost of certain resources, including, without
limitation, those associated year 2000 issues; the ability of third parties to
successfully deal with their year 2000 issues, the unanticipated costs and
disruption in operations due to year 2000 non-compliance of the Company and/or
its affiliates, customers, suppliers, counterparties, public utilities,
issuers of investment securities, and other entities. While the Company
periodically reassesses material trends and uncertainties affecting the
Company's results of operations and financial condition in connection with its
preparation of management's discussion and analysis contained in the Company's
annual and quarterly reports, the Company does not intend to review or revise
any particular forward-looking statement referenced herein in light of future
events.
OVERVIEW
The Company recorded consolidated net income of $54.2 million for the year
ended December 31, 1998. This represents a 12.2% decrease over 1997 net income
of $61.7 million. Net income for 1997 represented a 7.3% increase over 1996
results of $57.5 million. Earnings per share for the year ended December 31,
1998 was $2.66, compared to $3.02 in 1997 and $2.75 in 1996. Earnings per
share for 1998 decreased 11.9% over 1997 per share earnings, which was a 9.8%
increase over 1996. Both the net income and earnings per share results for
1998 were affected by a one-time charge for the termination and liquidation of
the Company's defined benefit pension plan. Excluding this one-time charge,
1998 net income was $59.0 million, or $2.90 per share. This represents a 4.0%
decrease in per share earnings, for 1998 as compared with 1997.
The decrease in the Company's earnings for 1998, excluding the impact of the
pension termination, was primarily the result of achieving only minimal growth
in net interest income. During 1998, net interest income increased only
marginally as compared with 1997, while the increase in noninterest income did
not offset the increase in operating cost. The Company's improvement in
earnings for 1997 and 1996 was the result of increases in both net interest
income and noninterest income, partially offset by increased operating
expenses. In 1996, however, increases in noninterest income drove a larger
percentage of the change. In addition, the Company more than doubled the
provision for loan losses in 1996, as compared to a 12.4% increase in 1997.
Return on average assets was 0.77%, 0.95% and 0.94% for each of the years in
the three year period ended December 31, 1998, respectively. Return on average
shareholders' equity was 8.34% for 1998, 10.31% for 1997 and 10.02% for 1996.
Excluding the pension termination charge, the Company's return on assets was
0.84% and return on equity was 9.07% for 1998.
A-3
The Company's consolidated asset total was $7.6 billion at December 31,
1998, compared to $7.1 billion at year-end 1997 and $6.5 billion at year-end
1996. Average assets for 1998, 1997 and 1996 were $7.0 billion, $6.5 billion
and $6.1 billion, respectively. The increase in year-end asset totals, as
compared to the average for the year, was primarily the result of year-end tax
receipts deposited by various state and local government entities. Average
totals are more indicative of the Company's asset base on an ongoing basis.
Average loans as a percentage of average assets were 37.6% in 1998, 40.9% in
1997 and 39.7% in 1996. Average deposits were $5.3 billion in 1998, $4.9
billion in 1997 and $4.7 billion in 1996.
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 exceeds 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 1994
through 1998 are presented on pages A-50 and A-51. 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.
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)
--------------------- ---------- --------------------------
1998 1997 1998 1997 1998 vs. 1997 Volume Rate Total
---------- ---------- ---- ---- ------------------------ ------- -------- -------
Change in interest
earned on:
$2,640,933 $2,649,023 8.66% 8.95% Loans.................. $ (722) $ (7,480) $(8,202)
Securities:
2,448,290 2,166,628 5.75 5.87 Taxable............... 16,230 (2,616) 13,614
557,040 372,062 6.43 6.61 Tax-exempt............ 11,919 (665) 11,254
Federal funds sold and
224,121 138,787 5.49 6.07 resell agreements..... 4,754 (868) 3,886
72,217 83,668 5.87 6.13 Other.................. (680) (207) (887)
---------- ---------- ---- ---- ------- -------- -------
$5,942,601 $5,410,168 7.10% 7.43% Total................. $31,501 $(11,836) $19,665
Change in interest
incurred on:
Interest-bearing
$3,616,069 $3,353,593 3.83% 3.82% deposits............... $10,043 $ 374 $10,417
Federal funds purchased
and repurchase
920,637 800,128 4.94 5.06 agreements............. 5,974 (983) 4,991
43,278 49,473 7.48 6.77 Other.................. (443) 333 (110)
---------- ---------- ---- ---- ------- -------- -------
$4,579,984 $4,203,194 4.08% 4.09% Total................. $15,574 $ (276) $15,298
========== ========== ==== ==== ------- -------- -------
Net interest income..... $15,927 $(11,560) $ 4,367
======= ======== =======
A-4
Average
Average Volume Rate Increase (Decrease)
--------------------- ---------- -------------------------
1997 1996 1997 1996 1997 vs. 1996 Volume Rate Total
---------- ---------- ---- ---- ------------------------ ------- ------- -------
Change in interest
earned on:
$2,649,023 $2,437,829 8.95% 9.09% Loans.................. $18,939 $(3,428) $15,511
Securities:
2,166,628 2,169,823 5.87 5.66 Taxable............... (181) 4,373 4,192
372,062 317,818 6.61 6.68 Tax-exempt............ 3,587 (229) 3,358
Federal funds sold and
138,787 185,624 6.07 5.39 resell agreements..... (2,738) 1,151 (1,587)
83,668 69,244 6.13 6.12 Other.................. 884 7 891
---------- ---------- ---- ---- ------- ------- -------
$5,410,168 $5,180,338 7.43% 7.33% Total................. $20,491 $ 1,874 $22,365
Change in interest
incurred on:
Interest-bearing
$3,353,593 $3,281,783 3.82% 3.75% deposits............... $ 2,720 $ 2,095 $ 4,815
Federal funds purchased
and repurchase
800,128 771,522 5.06 4.84 agreements............. 1,414 1,702 3,116
49,473 56,383 6.77 7.21 Other.................. (478) (240) (718)
---------- ---------- ---- ---- ------- ------- -------
$4,203,194 $4,109,688 4.09% 4.00% Total................. $ 3,656 $ 3,557 $ 7,213
========== ========== ==== ==== ------- ------- -------
Net interest income..... $16,835 $(1,683) $15,152
======= ======= =======
FTE interest income increased by $19.7 million during 1998 to $421.9 million
compared to $402.2 million for 1997. Interest income for 1997 represented a
$22.3 million increase over the total for 1996 of $379.9 million. Interest
expense in 1998 amounted to $187.1 million, a $15.3 million increase over 1997
expense of $171.8 million. Interest expense in 1997 increased by $7.2 million
from 1996 expense of $164.6 million. These changes resulted in an increase in
net interest income for 1998 of $4.4 million to $234.8 million compared to
$230.4 million for 1997 and $215.3 million in 1996.
Table 2: Analysis of Net Interest Margin
1998 1997 Change
---------- ---------- --------
(in thousands)
Average earning assets...................... $5,942,601 $5,410,168 $532,433
Interest-bearing liabilities................ 4,579,984 4,203,194 376,790
---------- ---------- --------
Interest-free funds......................... $1,362,617 $1,206,974 $155,643
========== ========== ========
Free funds ratio (free funds to earning as-
sets)...................................... 22.93% 22.31% 0.62%
===== ===== ====
Tax-equivalent yield on earning assets...... 7.10% 7.43% (0.33)%
Cost of interest-bearing liabilities........ 4.08 4.09 (0.01)
---- ---- -----
Net interest spread......................... 3.02% 3.34% (0.32)%
Benefit of interest-free funds.............. 0.93 0.92 0.01
---- ---- ----
Net interest margin......................... 3.95% 4.26% (0.31)%
==== ==== =====
Average earning assets increased by approximately 10.0% in 1998 compared to
4.0% in 1997. These assets totaled $5.9 billion in 1998 compared to $5.4
billion in 1997 and $5.2 billion in 1996. The increase in average earning
assets for 1998 was primarily attributable to the Company's investment
security portfolio, which increased by 18.4% as compared to 1997. Average
loans during 1998 decreased by 0.3% compared to the prior year. During 1997,
average loans increased by 8.7% compared to a 2.1% increase in average
investment securities. During 1996, the increase was evenly distributed to
both loans and investment securities. Increases in both interest bearing and
noninterest bearing deposits as well as repurchase agreements funded the
increase in earning assets for 1998. The increase in average earning assets
for 1997 was funded by an increase in both interest-bearing and noninterest-
bearing demand deposits. The increase in 1996 was funded by an increase in
federal funds purchased and an increase in deposits.
A-5
The Company's net interest spread was 3.02% in 1998, 3.34% in 1997 and 3.33%
in 1996. Net interest spread is calculated as the difference between the yield
earned on earning assets and the rate paid on interest-bearing liabilities. As
a result of the change in the earning asset mix and the related funding
source, the Company's net interest margin decreased to 3.95%, compared to
4.26% in 1997 and 4.16% in 1996. The decrease in both net interest spread and
margin for 1998 as compared to 1997 was the result of a lower rate earned on
total earning assets, which decreased to 7.10% from 7.43% in 1997. This change
was the result of both a decrease in interest rates and a change in the mix of
interest earning assets. During 1998, loans comprised 44% of earning assets,
as compared with 49% during 1997. In addition, the yield on both loans and
securities declined as a result of the decrease in market rates during the
year. The Company's funding mix and cost of funds was relatively unchanged in
1998 as compared to 1997. In 1997, as compared to 1996, loans comprised a
higher percentage of earning assets. In addition, non-interest-bearing
deposits represented a larger portion of total funding sources. The yield on
loans during 1997, as compared with 1996, decreased by 14 basis points, while
the yield on securities increased by 18 basis points. These factors resulted
in a 10 basis point improvement in net interest margin in 1997. The Company's
asset mix and funding costs were relatively unchanged in 1996 as compared to
1995. The rate earned on loans in 1996, as compared with 1995, decreased by 24
basis points, while the yield on the security portfolio increased by 27 basis
points. These changes had an offsetting effect, resulting in a flat net
interest margin in 1996 compared with 1995.
During both 1997 and 1996, the decrease in the rate earned on loans was at
least partially offset by an increase in the yield on the investment
portfolio. The rate pressure on the loan portfolio, resulting from declining
interest rates and a very competitive loan market, continued throughout 1998.
The Company was able to increase the yield on its very liquid investment
securities portfolio during 1997 and 1996 by reinvesting maturities at higher
yields and altering the mix of the portfolio. The Company was unable to
increase or maintain its yield on the investment portfolio during 1998. As a
result of extended pressure on short-term interest rates, the Company was
unable to reinvest maturing securities at comparable or higher yields.
The cause and level of the increase in net interest income in 1998 from that
experienced in 1997 can be seen in the information in Table 1. During 1998,
increases in core deposit and repurchase agreements funded the growth in
average earning assets. This growth was limited to increases in investment
securities. The spread earned on this growth was, for the most part, offset by
a reduced rate earned on earning assets, primarily loans. The average rate
earned on loans during 1998 decreased by 29 basis points as compared to 1997.
The Company's cost of funds during 1998 decreased by only 1 basis point. The
majority of the increase in net interest income for 1997 was the result of a
volume/mix change in earning assets. Over 90% of the increase in interest
income relating to volume changes for 1997 resulted from an increase in loans.
During 1997, the yield on earning assets increased 10 basis points from one
year earlier. This compares to a 9 basis point increase in the cost of funds
for the same period.
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 1998 1997 1996 1995 1994
- ------------- ------- ------- ------- ------- -------
(in thousands)
Commercial.............................. $16,000 $17,000 $17,300 $16,150 $16,000
Consumer................................ 16,300 15,400 15,000 13,500 13,400
Real estate............................. 750 750 1,000 2,500 2,500
Agricultural............................ 50 50 50 450 500
Leases.................................. 50 50 50 50 50
Unallocated............................. 19 24 14 35 77
------- ------- ------- ------- -------
Total allowance........................ $33,169 $33,274 $33,414 $32,685 $32,527
======= ======= ======= ======= =======
A-6
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 on affiliate bank risk levels, delinquencies, an internal ranking
system and overall credit exposure. In addition, loan requests are centrally
reviewed to ensure the consistent application of the loan policy and
standards.
The Company's allowance for loan losses was $33.2 million at December 31,
1998 compared to $33.3 million at year-end 1997 and $33.4 million at year-end
1996. This represents an allowance to total loans of 1.3%, 1.2% and 1.3% as of
December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 the
allowance for loan losses exceeded total nonperforming loans by $22.4 million.
Non-performing loans include nonaccrual loans and restructured loans. The
year-end 1998 allowance for loan losses was 304% of net credit losses incurred
during 1998.
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,
1998. Significant changes in general economic conditions and in the ability of
specific customers to repay loans will impact the level of the provision for
loan losses required in future years.
The Company recorded a provision for loan losses of $10.8 million during
1998, compared to $11.9 million in 1997 and $10.6 million in 1996. The
decrease in the loan loss provision in 1998 from the previous year was
primarily the result of lower charge-offs related to commercial loans. Losses
in the bankcard portfolio decreased as delinquencies and bankruptcies in this
area improved. The increased rate of losses on other consumer loans that began
in 1997, continued throughout 1998. A significant portion of these losses were
related to indirect automobile paper purchased prior to 1997. Purchasing
guidelines in this area were adjusted in 1997 and the rate of losses is
expected to decrease. Increased losses associated with the Company's bankcard
portfolio contributed to the higher provision for loan losses and net losses
in 1997, as compared with 1996. Management believes the losses and delinquency
levels of the bankcard portfolio will remain below industry averages. Bankcard
loan delinquencies over 30 days totaled 2.7% of total bankcard loans as of
year-end 1998. The Company will continue to closely monitor the bankcard loan
portfolio, the related collection efforts and underwriting in order to
minimize credit losses. Contributing to the increase in the 1996 provision for
loan losses was uncertainty concerning two of the Company's commercial loans.
These loans comprised over 80% of the Company's total nonaccrual loans as of
December 31, 1996.
A-7
Table 4 presents a five-year summary of the Company's allowance for loan
losses.
TABLE 4: Analysis of Allowance for Loan Losses
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in thousands)
Allowance -- beginning
of year................ $ 33,274 $ 33,414 $ 32,685 $ 32,527 $ 35,590
Provision for loan loss-
es..................... 10,818 11,875 10,565 5,090 2,640
Allowances of acquired
banks.................. -- -- -- 485 --
Charge-offs:
Commercial............. $ (322) $ (2,992) $ (2,668) $ (948) $ (2,833)
Consumer:
Bankcard.............. (7,554) (8,130) (7,592) (5,427) (4,236)
Other................. (6,182) (3,103) (1,904) (1,602) (1,018)
Real estate............ -- (98) (171) (113) (182)
Agricultural........... (25) (9) -- -- --
---------- ---------- ---------- ---------- ----------
Total charge-offs... $ (14,083) $ (14,332) $ (12,335) $ (8,090) $ (8,269)
Recoveries:
Commercial............. $ 647 $ 268 $ 391 $ 947 $ 573
Consumer:
Bankcard.............. 1,289 1,097 1,163 994 1,102
Other................. 1,049 684 532 569 528
Real estate............ 127 117 207 122 118
Agricultural........... 48 151 206 41 245
---------- ---------- ---------- ---------- ----------
Total recoveries.... $ 3,160 $ 2,317 $ 2,499 $ 2,673 $ 2,566
---------- ---------- ---------- ---------- ----------
Net charge-offs......... $ (10,923) $ (12,015) $ (9,836) $ (5,417) $ (5,703)
---------- ---------- ---------- ---------- ----------
Allowance -- end of
year................... $ 33,169 $ 33,274 $ 33,414 $ 32,685 $ 32,527
========== ========== ========== ========== ==========
Average loans, net of
unearned interest...... $2,640,933 $2,649,023 $2,437,829 $2,346,325 $2,148,606
Loans at end of year,
net of unearned
interest............... 2,559,136 2,786,031 2,557,641 2,406,138 2,269,617
Allowance to loans at
year-end............... 1.30% 1.19% 1.31% 1.36% 1.43%
Allowance as a multiple
of net charge-offs..... 3.04x 2.77x 3.40x 6.03x 5.70x
Net charge-offs to:
Provision for loan
losses................ 100.97% 101.18% 93.10% 106.42% 216.02%
Average loans.......... 0.41 0.45 0.40 0.23 0.27
Noninterest Income
A key objective of the Company is the growth of noninterest income to
enhance 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 provide the opportunity to offer
multiple products and services to customers and, therefore, more closely align
the customer with the Company. 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 40% in 1998 compared to 38% in
1997. 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 $156.5 million in 1998 compared to $135.5 million in 1997 and
$118.0 million in 1996. This represents a 15.5% increase in 1998 over
A-8
the prior year, compared to a growth rate of 14.8% during 1997. This growth in
1998 was driven by a 31.2% increase in security trading and investment banking
fees, a 5.8% increase in trust fees, a 25.5% increase in fees related to
securities processing and a 12.9% increase in service charges and fees. The
increase in fee income for 1997 was primarily the result of higher fee income
from trust services and increases in nondeposit service charges and 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 has a Private Client Services division, which offers full trust and
personal banking services to high net worth individuals.
Income from trust services totaled $47.9 million in 1998, $45.3 million in
1997 and $41.5 million in 1996. The largest contributor to the increase in
trust income for 1998 was from employee benefit services. Growth in this area
slowed slightly in 1998, as compared with 1997, as a result of dedicating
additional resources to the upgrade and conversion of processing systems. The
next largest contributor to trust income is the personal and custodial
business. This more traditional line of business generally experiences more
steady moderate growth and is more directly impacted by fluctuations in the
stock and bond markets. The increase in trust income in 1997 over that in 1996
was primarily a result of aggressive marketing efforts of employee benefit
services. The increase in trust fees for 1996 was partially the result of a
comprehensive review, performed during 1995, of the structure of trust fees
and services. Fee revenue in 1998 and 1997 also benefited from the
appreciation of assets under management. The aggregate value of managed trust
assets was $14.5 billion at December 31, 1998, compared to $12.7 billion at
year-end 1997 and $10.5 billion at year-end 1996.
The Company's securities processing and custody revenue is primarily related
to the mutual fund industry. Revenues from securities processing were $14.7
million in 1998, $11.8 million in 1997 and $9.5 million in 1996. The increase
in revenue for 1998 was the result of ongoing efforts to grow this business
line by expanding the Company's customer base. The significant growth in the
number and size of mutual funds has given the Company more opportunity to
develop new customer relationships and has fueled growth for existing
customers. The Company competes with companies many times its size in this
line of business. Though the Company may not have the scale and price
advantages of its much larger competitors, it can compete very effectively in
certain areas due to better attention to customer service and overall
flexibility related to services provided. Revenues from this business line are
subject to more volatility than other fee sources due to the relative size of
the customer base. Revenue for 1999 is expected to decrease as new business
growth will not offset the loss of revenue from customers that have indicated
they will move to a new provider during the year. The Company should be able
to adjust its expense structure accordingly so that this change should not
significantly impact operating results. Total trust assets under custody were
$119.5 billion at December 31, 1998, $109.5 billion at December 31, 1997 and
$97.4 billion at December 31, 1996.
Fees and service charges on deposit accounts were $41.1 million in 1998,
$36.6 million in 1997 and $33.4 million in 1996. The increases in fees for
1998 and 1997 were primarily related to corporate deposit accounts as a result
of new customer relationships and the sale of additional services. Both
corporate and retail deposit fees increased as a result of adjusting fee
schedules to changes in market pricing. The level of compensating balances
maintained by corporate customers and the earnings credit rate applied to the
balances also impacts the level of fee income received. The change of the
earnings credit rate in 1998 approximated changes in the interest rate on
short-term Treasury securities. Other service charges and fees increased to
$24.0 million in 1998 from $21.0 million in 1997 and $15.7 million in 1996.
Significant increases were achieved in both 1998 and 1997 as a result of
increased sale of cash management services, an increase in fees for home
banking services and the expansion of the Company's ATM network to 557
machines at year-end 1998, compared to 486 and 302 at year-end 1997 and 1996,
respectively. Bankcard fees, net of expenses, were $3.5 million in 1998, $1.5
million in 1997 and $(.9) million in 1996.
A-9
Trading and investment banking income totaled $18.0 million in 1998,
compared to $13.7 million in 1997 and $12.8 million in 1996. Approximately
half of the increase in 1998 resulted from an increase in retail brokerage
activity. The remaining improvement was the result of an increase in security
sales to corporate customers, primarily correspondent banks. This volume is
directly impacted by the funding levels and loan demand of the correspondent
bank customers. Results for 1997 and also 1996 were favorably impacted by
increased demand for mortgage-backed security products, which carry a higher
profit margin.
Other income was $7.3 million in 1998 compared to $7.2 million in 1997 and
$15.7 million in 1996. Included in income for 1997 was a $1.6 million gain on
the sale of the Company's mortgage servicing rights. The assets of this line
of business were sold because it had become a scale-driven commodity product
line that the Company did not believe was critical to attracting and
maintaining customer relationships. Included in 1996 income was 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.
Noninterest Expense
Total 1998 noninterest expense increased 12.7% to $292.3 million compared to
1997 expense of $259.3 million and 1996 expense of $239.7 million. Included in
1998 expenses was a $7.4 million charge related to the funding, liquidation
and termination of the Company's defined benefit pension plan. This item is
explained in more detail in the footnotes of the consolidated financial
statements. Net of this charge, operating expenses in 1998 increased by 9.8%
over 1997. During both 1998 and 1997 the Company experienced an increases in
staffing and other operating costs due to physical, operational and
technological expansion efforts. These costs were also impacted by efforts to
prepare for year 2000 readiness. See page A-22 for a fuller description of
these efforts.
Costs associated with staffing are the largest component of non-interest
expense as they approximate 55-56% of total costs. Salaries and employee
benefits expense, net of the pension termination charge, increased 10.6% to
$156.7 million in 1998 compared to $141.6 million in 1997 and $131.4 million
in 1996. Staffing levels at year-end 1998 were 4,070 compared to 4,056 at the
end of 1997 and 3,843 in 1996. The increase in staff and related expense for
1998 resulted from the expansion of the Company's branch network and the
strategic decision to add resources to certain critical areas of the Company.
During 1998 and 1997 the Company dedicated significant resources to improve
the infrastructure of its core operating systems. The level of investment in
both 1997 and 1998 was impacted by the decision in previous years to reduce or
delay spending on core operating systems and year 2000 readiness issues. This
spending has included both the upgrades of old legacy systems as well as
investments in new delivery and information systems. Some of the initiatives
under way or completed during 1998 and 1997 include the conversion of all
affiliate banks to a new deposit processing system, a consolidated call
center, expanded internet capabilities, an upgrade to the core mainframe
computer, a major upgrade of the customer information system, implementation
of integrated financial accounting system, new processing and information
systems for trust services and the creation of an enterprise data warehouse.
As the demand for qualified data processing staff continues to increase due to
the limited resources available in the marketplace to address the millennium
date change, the Company's costs in this area will continue to increase.
Staffing costs also continue to be impacted by a very competitive labor
market. This trend is expected to continue in 1999. During 1997, the Company
also added staffing resources due to increased demand for employee benefit
services and cash management services. Staffing levels and costs were also
impacted by the opening of 23 new facilities during 1998 and 14 in 1997. These
new facilities include both mini branches and grocery store branches as well
as full service branch facilities. The control of staffing costs has been and
will continue to be an important goal for the Company. 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. The growth rate of staffing costs is expected to moderate during
1999.
Occupancy expense increased to $21.9 million in 1998 from $19.0 million in
1997 and $17.9 million in 1996. Equipment expense increased to $30.6 million
in 1998 compared to $27.7 million in 1997 and $24.7
A-10
million in 1996. The increases in both 1998 and 1997 occupancy and equipment
expense were primarily the result of the expansion efforts noted previously.
Purchases of bank premises and equipment totaled $51 million in 1998, compared
with $37 million in 1997 and $22 million in 1996. The increase in spending for
1998 was impacted by costs associated with the Company's new operations and
technology center, scheduled for occupancy in the second quarter of 1999.
Costs in these areas will be managed based on the long-term needs of and
benefits to the Company.
Expenses for supplies and services were $20.4 million in both 1998 and 1997,
compared to $18.8 million in 1996. The increase in 1997 primarily resulted
from higher staffing levels. Courier costs also increased during 1997 due to
increased transaction and processing volumes.
Marketing and business development costs decreased in 1998 to $17.4 million
from $17.7 million in 1997, which had increased from $15.3 million in 1996.
The higher cost in 1997 was primarily the result of an increase in system-wide
advertising and expanded business development activities. During 1997 and
1996, there was significant change in the Company's market due to industry
consolidation. Contributing to the higher costs in 1998 and 1997 was
additional spending in new markets and additional promotions to take advantage
of consolidation within the Company's market. Other operating expenses
increased to $30.8 million in 1998, compared to $25.7 million in 1997 and
$24.2 million in 1996. The primary factors driving the higher costs in 1998
were increases in consulting fees related to system upgrades, additional
outsourcing of certain processing functions and an increase in losses from
fraud and deposit processing. The increase in 1997 was driven by higher
safekeeping fees related to custody services and increased interchange fees to
support home banking products.
Income Taxes
Income tax expense totaled $21.8 million in 1998, compared to $28.1 million
in 1997 and $28.0 million in 1996. These expense levels equate to effective
tax rates of 28.6%, 31.3% and 32.7% for 1998, 1997 and 1996, respectively. The
decrease in the effective tax rate for 1998 was primarily the result of an
increase in tax exempt securities and a reduction in state and local income
taxes. 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 largest source of interest income. At December
31, 1998 loans amounted to $2.6 billion compared to $2.8 billion in 1997 and
$2.6 billion in 1996. Average loans totaled $2.6 billion in 1998 and 1997,
compared with $2.4 billion in 1996. Both commercial and consumer loans
decreased during 1998. Year-end 1998 totals for both commercial and consumer
loans approximated the totals at year-end 1996. A primary factor in the lack
of growth in average loan totals for 1998 was the rate of pay-offs. A higher
than normal volume of loans paid off during 1998 as a result of acquisitions
of customers or private placement activity. The market for high quality
credits, that are consistent with the Company's underwriting standards,
remained very competitive, however, management anticipates that new loan
volume in 1999 will outpace loan reductions. In addition to a competitive loan
market, consumer loan totals in 1998 were also impacted by a less aggressive
marketing campaign throughout the Company's affiliate bank network. During
1998, emphasis was placed on controlling and reducing the level of losses in
the portfolio. The Company has and will continue its efforts to increase its
direct consumer lending. There is a much better opportunity to cross-sell
other products to a direct loan customer. In addition, these loans have a
better loss experience and yield than indirect loans.
The Parent Company's Credit Administration Department performs timely
reviews of loan quality and underwriting procedures in affiliate banks, which
experienced significant increases in consumer loans.
A-11
TABLE 5: Analysis of Loans by Type
December 31
----------------------------------------------------------
Amount 1998 1997 1996 1995 1994
- ------ ---------- ---------- ---------- ---------- ----------
(in thousands)
Commercial.............. $1,246,979 $1,325,988 $1,184,443 $1,092,292 $1,066,621
Agricultural............ 44,879 51,392 51,649 60,128 69,206
Leases.................. 4,717 3,991 2,596 2,057 2,157
Real estate -- commer-
cial................... 199,324 231,510 258,561 300,493 281,011
---------- ---------- ---------- ---------- ----------
Total business-relat-
ed................... $1,495,899 $1,612,881 $1,497,249 $1,454,970 $1,418,995
---------- ---------- ---------- ---------- ----------
Bankcard................ $ 163,197 $ 184,726 $ 183,301 $ 201,048 $ 188,374
Other consumer install-
ment................... 771,568 854,605 731,661 583,433 500,298
Real estate -- residen-
tial................... 128,472 133,819 145,478 167,077 163,554
---------- ---------- ---------- ---------- ----------
Total consumer-relat-
ed................... $1,063,237 $1,173,150 $1,060,440 $ 951,558 $ 852,226
---------- ---------- ---------- ---------- ----------
Total loans........... $2,559,136 $2,786,031 $2,557,689 $2,406,528 $2,271,221
Unearned interest....... -- -- (48) (390) (1,604)
Allowance for loan loss-
es..................... (33,169) (33,274) (33,414) (32,685) (32,527)
---------- ---------- ---------- ---------- ----------
Net loans............. $2,525,967 $2,752,757 $2,524,227 $2,373,453 $2,237,090
========== ========== ========== ========== ==========
As a % of total loans
- ---------------------
Commercial.............. 48.7% 47.6% 46.3% 45.4% 47.0%
Agricultural............ 1.8 1.9 2.0 2.5 3.0
Leases.................. 0.2 0.1 0.1 0.1 0.1
Real estate -- commer-
cial................... 7.8 8.3 10.1 12.5 12.4
---------- ---------- ---------- ---------- ----------
Total business-relat-
ed................... 58.5% 57.9% 58.5% 60.5% 62.5%
---------- ---------- ---------- ---------- ----------
Bankcard................ 6.4% 6.6% 7.2% 8.4% 8.3%
Other consumer install-
ment................... 30.1 30.7 28.6 24.2 22.0
Real estate -- residen-
tial................... 5.0 4.8 5.7 6.9 7.2
---------- ---------- ---------- ---------- ----------
Total consumer-relat-
ed................... 41.5% 42.1% 41.5% 39.5% 37.5%
---------- ---------- ---------- ---------- ----------
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 its large super-
regional and national competitors through superior service, attention to
detail, customer knowledge and responsiveness. The Company's size allows it to
meet this goal and at the same time offer the wide range of products most
customers need. This strategy has worked especially well during a period of
bank consolidation and should continue to be a benefit. The Company has
experienced very strong growth in the new markets it has entered during the
past three years. There has been a definite demand in these markets for bank
services delivered with the customer-driven focus that the Company practices.
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 $199 million at December 31,
1998 from $232 million at year-end 1997 and $259 million at year-end 1996. As
a percentage of total loans, commercial real estate loans now comprise only
7.8% of totals, compared to 8.3% and 10.1% in 1997 and 1996, respectively.
Generally, these loans are made for working capital or expansion purposes and
are primarily secured by real estate with a
A-12
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 as a percentage of total loans. They comprise
only 6.4% of total loans at year-end 1998 compared to 6.6% in 1997 and 7.2% in
1996. A significant portion of the decrease in bankcard loans in 1998 was
caused by a reduction in the private label portion of the portfolio. This type
of loan is generally less profitable than traditional bankcard loans and will
likely continue to decrease. The overall growth in the Company's bankcard
portfolio has been hampered by increased competition from banking and non-
banking card issuers. This competition frequently lessens its credit standards
and 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 1998 to $10.7 million at December 31, 1998, compared to
$4.1 million a year earlier. This increase was driven by one credit
relationship, the loss exposure on which is fully reserved. The level of
nonperforming loans at year-end 1998 represents 0.42% of total loans compared
to 0.15% in 1997 and 0.45% in 1996. The Company's nonperforming loans have not
exceeded 0.5% of total loans in any of the last six years.
At December 31, 1998, the Company had $0.7 million in other real estate
owned. Totals for year-end 1997 and 1996 were $2.0 million and $1.6 million,
respectively.
Loans past due more than 90 days totaled $7.9 million, $7.8 million and $6.7
million at December 31, 1998, 1997 and 1996, respectively. Bankcard loans
represented approximately 19% of these past due totals at December 31, 1998.
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 less than 10% 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 1998, $460,000 of interest due was not recorded as
earned, compared to $185,000 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 $22,000 of
additional interest would have been earned in 1998 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 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 $547,000 of interest due as earned for 1998. The comparative amount
for 1997 was $274,000.
A-13
TABLE 6: Loan Quality
December 31
-----------------------------------------
1998 1997 1996 1995 1994
------- ------ ------- ------ -------
(in thousands)
Nonaccrual loans.................... $ 9,454 $2,600 $10,953 $2,664 $ 3,131
Restructured loans.................. 1,292 1,520 523 985 2,149
------- ------ ------- ------ -------
Total nonperforming loans......... $10,746 $4,120 $11,476 $3,649 $ 5,280
Other real estate owned............. 728 1,968 1,646 626 5,388
------- ------ ------- ------ -------
Total nonperforming assets........ $11,474 $6,088 $13,122 $4,275 $10,668
======= ====== ======= ====== =======
Nonperforming loans as a % of loans. 0.42% 0.15% 0.45% 0.15% 0.23%
Allowance as a multiple of
nonperforming loans................ 3.09x 8.08x 2.91x 8.96x 6.16x
Nonperforming assets as a % of loans
plus other real estate owned....... 0.45% 0.22% 0.51% 0.18% 0.47%
Loans past due 90 days or more...... $ 7,915 $7,752 $ 6,704 $5,270 $ 4,779
As a % of loans..................... 0.31% 0.28% 0.26% 0.22% 0.21%
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 in only high-grade securities. The security portfolio
represents the Company's second largest source of interest income. Securities
available for sale and held to maturity comprised 58.9% of earning assets as
of December 31, 1998, compared to 50.0% and 50.4% at year-end 1997 and 1996,
respectively. The increase in 1998 resulted from a lack of growth in the loan
portfolio. Securities totaled $3.8 billion at December 31, 1998, compared to
$2.9 billion as of December 31, 1997 and $2.7 billion in 1996. Loan demand is
expected to be the primary factor impacting changes in the level of security
holdings.
Securities available for sale comprised 81% of the Company's securities
portfolio at December 31, 1998, compared to 84% at year-end 1997. This change
in the security portfolio mix was the result of an increase in holdings of
commercial paper and tax-exempt securities of state and political
subdivisions. Only bank-qualified securities of state and political
subdivisions and commercial paper are classified as held to maturity. U.S.
Treasury obligations comprised 40% of the available for sale portfolio as of
December 31, 1998, compared with 61% one year earlier. U.S. Agency obligations
represented an additional 37% of this portfolio at year-end 1998, compared
with 28% at year-end 1997. These changes were made to improve the yield of the
portfolio without compromising the quality of the investments or extending the
average life. Securities available for sale had a net unrealized gain of $21.2
million at year-end 1998 compared to $6.2 million the preceding year. These
amounts are reflected, on an after-tax basis, in the Company's shareholders'
equity as an unrealized gain of $13.7 million at year-end 1998 and $3.9
million for 1997.
The securities portfolio achieved an average yield on a tax-equivalent basis
of 5.87% for 1998 compared to 5.97% in 1997 and 5.79% in 1996. The yield on
the portfolio decreased by 10 basis point in 1998 as a result of continued
decreases in short-term interest rates. A significant portion of the
investment portfolio must be reinvested each year as a result of its
liquidity. The Company could not maintain the portfolio yield without
significantly impacting the average life or quality of the investment
portfolio. The Company was able to increase this yield in 1997 by increasing
the holdings of both tax-exempt securities and U.S. Agency securities without
extending the average life of the portfolio. The average life of the core
securities portfolio was 21 months at December 31, 1998, compared to 23 months
and 25 months at year-end 1997 and 1996, respectively.
A-14
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, 1998
U.S. Treasury...................................... $1,212,563 $1,228,927 5.75%
U.S. Agencies...................................... 1,123,961 1,126,703 5.26
Mortgage-backed.................................... 247,326 249,319 6.27
State and political subdivisions................... 2,541 2,547 5.59
Commercial paper................................... 439,380 439,380 5.31
Federal Reserve Bank Stock......................... 3,760 3,760
Equity and other................................... 2,163 2,253
---------- ----------
Total............................................ $3,031,694 $3,052,889
========== ==========
December 31, 1997
U.S. Treasury...................................... $1,475,537 $1,481,624 5.86%
U.S. Agencies...................................... 681,106 680,618 5.83
Mortgage-backed.................................... 248,384 248,892 6.47
State and political subdivisions................... 7,929 7,904 6.02
Commercial paper................................... 6,954 6,954 5.91
Federal Reserve Bank Stock......................... 3,760 3,760
Equity and other................................... 1,887 1,989
---------- ----------
Total............................................ $2,425,557 $2,431,741
========== ==========
Table 8: Investment Securities
Yield/
Amortized Fair Average
Cost Value Maturity
--------- -------- -----------
(in thousands)
December 31, 1998
Due in 1 year or less........................... $ 89,002 $ 89,326 6.27%
Due after 1 year through 5 years................ 378,041 384,348 6.35
Due after 5 years through 10 years.............. 235,117 237,361 6.18
-------- --------
Total......................................... $702,160 $711,035 3 yr. 9 mo.
======== ========
December 31, 1997
Due in 1 year or less........................... $ 71,725 $ 71,742 6.67%
Due after 1 year through 5 years................ 251,256 253,710 6.88
Due after 5 years through 10 years.............. 129,756 131,268 7.00
Due after 10 years.............................. 25 25 9.01
-------- --------
Total......................................... $452,762 $456,745 3 yr. 6 mo.
======== ========
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.
======== ========
A-15
Other Earning Assets
Federal funds transactions essentially are overnight loans between financial
institutions, which allow for either 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 1998 was $77.7 million, compared
to a net sold position of $13.6 million for year-end 1997. During 1998 and
1997, the Company was a net purchaser of federal funds, and this funding
source averaged $30.6 million in 1998, compared to $114.9 million during 1997.
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 $1,137.1 million in 1998 and $857.6 million in 1997.
At December 31, 1998, the Company had acquired securities under agreements
to resell of $52.8 million compared to $57.6 million at year-end 1997. 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 $113.0 million in 1998.
The Investment Banking Division also maintains an active securities trading
inventory. The average holdings in the securities trading inventory in 1998
were $70.8 million, compared to $82.1 million in 1997, and were recorded at
market value.
Table 9: Maturities of Time Deposits of $100,000 or More
December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Maturing within 3 months............................ $431,658 $356,604 $283,910
After 3 months but within 6......................... 89,435 47,822 27,143
After 6 months but within 12........................ 62,789 34,009 43,089
After 12 months..................................... 20,544 29,839 21,985
-------- -------- --------
Total............................................. $604,426 $468,274 $376,127
======== ======== ========
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 $5.9 billion at December 31, 1998 compared to $5.5 billion and $5.2
billion at year-end 1997 and 1996, respectively. Deposits averaged $5.3
billion, $4.9 billion and $4.7 billion in 1998, 1997 and 1996, respectively.
The increase in average deposits for 1998 was primarily related to commercial
and trust customers. The Company has continued to improve and promote its cash
management services in order to attract and retain commercial deposit
customers.
Noninterest-bearing demand deposits averaged $1.7 billion, $1.6 billion and
$1.4 billion during 1998, 1997 and 1996, respectively. These deposits
represented 32.0% of average deposits in 1998 and 1997 and 29.7% in 1996. 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 $836.0 million at
December 31, 1998 and $715.5 million at year-end 1997. This liability averaged
$778.9 million in 1998 and $617.9 million in 1997. 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-16
The Company's long-term debt includes three senior note issues totaling $28
million and $0.4 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 1998 1997 1996 1995 1994
- ------ ---------- ---------- ---------- ---------- ----------
(in thousands)
Noninterest-bearing
demand................. $1,702,282 $1,576,206 $1,386,173 $1,336,804 $1,445,376
Interest-bearing demand
and savings............ 2,260,240 2,143,869 2,056,681 2,059,661 2,365,024
Time deposits under
$100,000............... 875,480 898,910 948,626 963,878 1,003,784
---------- ---------- ---------- ---------- ----------
Total core deposits... $4,838,002 $4,618,985 $4,391,480 $4,360,343 $4,814,184
Time deposits of
$100,000 or more....... 480,349 310,814 276,476 221,006 207,217
---------- ---------- ---------- ---------- ----------
Total deposits........ $5,318,351 $4,929,799 $4,667,956 $4,581,349 $5,021,401
========== ========== ========== ========== ==========
As a % of total deposits
- ------------------------
Noninterest-bearing
demand................. 32.0% 32.0% 29.7% 29.2% 28.8%
Interest-bearing demand
and savings............ 42.5 43.5 44.1 45.0 47.1
Time deposits under
$100,000............... 16.5 18.2 20.3 21.0 20.0
---------- ---------- ---------- ---------- ----------
Total core deposits... 91.0% 93.7% 94.1% 95.2% 95.9%
Time deposits of
$100,000 or more....... 9.0 6.3 5.9 4.8 4.1
---------- ---------- ---------- ---------- ----------
Total deposits........ 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
Table 11: Short-Term Debt
1998 1997 1996
--------------- ------------- ---------------
Amount Rate Amount Rate Amount Rate
---------- ---- -------- ---- ---------- ----
(in thousands)
At year-end
- -----------
Federal funds purchased......... $ 86,250 4.85% $ 55 5.45% $ 15,180 6.45%
Repurchase agreements........... 835,969 4.12 715,490 4.97 599,215 4.74
Other........................... 31 5.04 1,116 4.39 911 4.00
---------- -------- ----------
Total......................... $ 922,250 4.19% $716,661 4.97% $ 615,306 4.90%
========== ======== ==========
Average for the year
- --------------------
Federal funds purchased......... $ 141,745 5.74% $182,138 5.62% $ 164,796 5.25%
Repurchase agreements........... 778,892 4.80 617,989 4.90 606,726 4.73
Other........................... 694 3.55 567 5.91 1,034 4.10
---------- -------- ----------
Total......................... $ 921,331 4.94% $800,694 5.06% $ 772,556 4.84%
========== ======== ==========
Maximum month-end balance
- -------------------------
Federal funds purchased......... $ 225,375 $246,524 $ 300,475
Repurchase agreements........... 854,337 715,140 771,856
Other........................... 1,162 1,549 2,020
---------- -------- ----------
Total......................... $1,080,874 $963,213 $1,074,351
========== ======== ==========
A-17
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 $662.8 million at December 31, 1998 compared
to $624.2 million one year earlier. The Company guarantees the debt of its
ESOP, the proceeds of which were used to acquire shares of the Company's
common stock. The shares acquired by the ESOP which have not been allocated to
plan participants are included as a reduction to shareholders' equity.
During each 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. During 1998 and 1997, the Company acquired 235,215
and 328,335 shares, respectively, of its common stock. As part of the same
transaction that generated the above ESOP debt, 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. 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 14.75% and Total capital
ratio of 15.57% 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-18
Table 12: Risk-Based Capital
The table below computes risk-based capital in accordance with current
regulatory guidelines. These guidelines as of December 31, 1998, 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.. $ -- $ 1,431 $108,120 $ 18,921 $ 128,472
All other............. -- 199,635 -- 2,231,029 2,430,664
---------- ---------- -------- ---------- ----------
Total loans.......... $ -- $ 201,066 $108,120 $2,249,950 $2,559,136
Securities available
for sale:
U.S. Treasury......... $1,212,563 $ -- $ -- $ -- $1,212,563
U.S. agencies and
mortgage-backed...... 715 1,370,572 -- -- 1,371,287
State and political
subdivisions......... -- 2,541 -- -- 2,541
Commercial paper and
other................ 3,760 -- -- 441,543 445,303
---------- ---------- -------- ---------- ----------
Total securities
available for sale.. $1,217,038 $1,373,113 $ -- $ 441,543 $3,031,694
Investment securities.. -- 650,227 51,933 -- 702,160
Trading securities..... 4,572 30,219 -- -- 34,791
Federal funds and re-
sell agreements....... -- 61,369 -- -- 61,369
Cash and due from
banks................. 216,420 635,321 -- -- 851,741
All other assets....... -- -- -- 366,375 366,375
---------- ---------- -------- ---------- ----------
Category totals...... $1,438,030 $2,951,315 $160,053 $3,057,868 $7,607,266
---------- ---------- -------- ---------- ----------
Risk-weighted totals... $ -- $ 590,263 $ 80,027 $3,057,868 $3,728,158
Off-balance-sheet items
(risk-weighted)....... -- 4,666 306 309,841 314,813
---------- ---------- -------- ---------- ----------
Total risk-weighted
assets.............. $ -- $ 594,929 $ 80,333 $3,367,709 $4,042,971
========== ========== ======== ========== ==========
Capital Tier 1 Tier 2 Total
- ------- -------- ---------- ----------
Shareholders' equity......................... $649,074 $ -- $ 649,074
Less premium on purchased banks.............. (52,801) -- (52,801)
Allowance for loan losses.................... -- 33,169 33,169
-------- ---------- ----------
Total capital.............................. $596,273 $ 33,169 $ 629,442
======== ========== ==========
Capital ratios
- --------------
Tier 1 capital to risk-weighted assets....... 14.75%
Total capital to risk-weighted assets........ 15.57
Leverage ratio (Tier 1 to total assets less
premium on purchased banks)................. 7.85
==========
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 13 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, 1999, the Company is in a positive gap position because assets
maturing or repricing during this time exceed liabilities.
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, approximately 94% 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
subject to repricing than assets. In addition, a static analysis ignores the
impact of changes in the mix and volume of interest-bearing assets and
A-19
liabilities. During 1998, the Company's loans decreased as a percentage of
total earning assets and noninterest-bearing demand deposit accounts
represented a smaller 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.
Table 13: Interest Rate Sensitivity Analysis
1-90 91- 181-
December 31, 1998 Days 180 Days 365 Days Total Over 365 Days Total
- ----------------- -------- -------- -------- -------- ------------- --------
(in millions)
Earning assets
Loans................... $1,314.5 $120.1 $181.3 $1,615.9 $ 943.2 $2,559.1
Securities*............. 1,443.9 227.7 445.6 2,117.2 1,637.8 3,755.0
Federal funds sold and
resell agreements...... 61.4 0.0 0.0 61.4 0.0 61.4
Other................... 36.0 0.0 0.0 36.0 0.0 36.0
-------- ------ ------ -------- -------- --------
Total earning assets.. $2,855.8 $347.8 $626.9 $3,830.5 $2,581.0 $6,411.5
-------- ------ ------ -------- -------- --------
% of total earning as-
sets................. 44.5% 5.4% 9.8% 59.7% 40.3% 100.0%
-------- ------ ------ -------- -------- --------
Funding sources
Interest-bearing demand
and savings............ $1,282.3 $ 0.0 $ 0.0 $1,282.3 $1,096.5 $2,378.8
Time deposits........... 680.6 271.0 258.3 1,209.9 263.0 1,472.9
Federal funds purchased
and repurchase agree-
ments.................. 922.2 0.0 0.0 922.2 0.0 922.2
Borrowed funds.......... 0.7 0.6 4.2 5.5 33.5 39.0
Noninterest-bearing
sources................ 0.0 0.0 0.0 0.0 1,598.6 1,598.6
-------- ------ ------ -------- -------- --------
Total funding sources. $2,885.8 $271.6 $262.5 $3,419.9 $2,991.6 $6,411.5
-------- ------ ------ -------- -------- --------
% of total earning as-
sets................. 45.0% 4.2% 4.1% 53.3% 46.7% 100.0%
-------- ------ ------ -------- -------- --------
Interest sensitivity
gap.................... $ (30.0) $ 76.2 $364.4 $ 410.6 $ (410.6)
Cumulative gap.......... (30.0) 46.2 410.6 410.6 --
As a % of total earning
assets................. 0.5% 0.7% 6.4% 6.4% --
Ratio of earning as-
sets to funding
sources.............. 0.99 1.28 2.39 1.12 0.86
Cumulative ratio--1998.. 0.99 1.01 1.12 1.12 1.00
- --1997.................. 0.86 0.92 1.05 1.05 1.00
- --1996.................. 0.86 0.89 1.00 1.00 1.00
- --------
*Includes securities available for sale based on scheduled maturity dates.
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 except for limited use of futures contracts to
offset interest rate risk on specific securities held in the trading
portfolio.
A-20
Table 14: Market Risk
Net Portfolio Value
-----------------------------
Rates in Basis Points (Rate Shock) Amount Change % Change
---------------------------------- ---------- -------- --------
(in thousands)
200......................................... $1,519,472 $ 48,641 3.31%
100......................................... 1,505,935 35,104 2.39
Static...................................... 1,470,831 -- --
(100)....................................... 1,390,732 (80,099) (5.45)
(200)....................................... 1,303,911 (166,921) (11.35)
The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change
in net portfolio value ("NPV") over a range of instantaneous and sustained
interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities, and off-balance sheet contracts. The assets and
liabilities of the Company are comprised primarily of financial instruments
which give rise to cash flows. By projecting the timing and amount of future
net cash flows, an estimated value of that asset or liability can be
determined. Market values of the Company's investment in loans and debt
securities fluctuate with movements in market interest rates. Prepayments of
principal are closely correlated with interest rates and affect future cash
flows. Certain deposits and other borrowings of the Company are also sensitive
to interest rate changes. Table 14 sets forth the Company's NPV as of December
31, 1998. Although the NPV measurements provide an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements
are not intended to and do not provide a precise forecast of the effect of
changes in market rates on the Company's net interest income and will differ
from actual results.
Table 15: Rate Sensitivity and Maturity of Loans
The following table presents the rate sensitivity of certain loans maturing
after 1999, compared with the total loan portfolio as of December 31, 1998. Of
the $1,468,928,000 of loans due after 1999, $983,316,000 are to individuals
for the purchase of residential dwellings and other consumer goods including
automobiles. The remaining $458,612,000 is for all other purposes and reflects
maturities of $389,615,000 in 2000 through 2003 and $95,997,000 after 2003.
December 31, 1998
-----------------
(in thousands)
Loans due in 1999:
Residential homes and consumer goods......................... $ 79,921
All other.................................................... 1,010,287
----------
Total....................................................... $1,090,208
----------
Loans due after 1999
Variable interest rate....................................... $ 321,968
Fixed interest rate.......................................... 1,146,960
----------
Total....................................................... $1,468,928
----------
Unearned interest and allowance for loan losses............... (33,169)
----------
Net loans................................................... $2,525,967
==========
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 $3.1 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 nor its subsidiaries are active in
the debt market.
A-21
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 its current capacity. All such requests have been approved.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 readiness issue is the result of computer programs that have
been coded to define a year using two digits rather than four. For example, a
substantial number of programs have date sensitive coding which may recognize
a date using "00" as 1900 rather than 2000. If not corrected, this could
result in system failures or miscalculations causing disruptions to the
Company's operations, and a materially adverse effect on the Company's
operations, and a materially adverse effect on the Company's operations and
financial performance.
The Company has been actively working on this issue since 1996. A plan was
developed in which Year 2000 issues are divided into two areas--those
involving mission critical functions and those involving non-critical
functions. Within these two areas, applications were further divided into
those over which the Company had control and those which were controlled by
outside vendors.
A five-step plan was then developed involving 1) inventory, 2) solution
planning, 3) renovation, 4) testing, and 5) implementation. This plan
addresses both Information Technology systems and non-information technology
assets such as equipment containing embedded chips.
The approximate percentage of each type of mission critical application for
which the company has completed the respective step of the five-step plan is
set forth below:
Company-Controlled Vendor Controlled
Mission Critical Mission Critical
------------------ -----------------
Inventory.................................. 99% 99%
Solution Planning.......................... 99% 99%
Renovation................................. 99% 83%
Testing.................................... 99% 83%
Implementation............................. 90% 80%
Substantial progress has also been made on the completion of the five step
plan for non-mission critical items; as of January 31, 1999, 94% of all
identified company-controlled applications had been completed through the
testing stage, and 80% of the vendor-controlled applications had been
completed through the testing stage. Completion of testing is scheduled for
June 30, 1999.
The Company also has made significant steps toward assessing its hardware
and is making substantial progress toward replacing necessary equipment. All
mainframe and mid-range systems are in place, and an inventory of personal
computers has been concluded.
The Company estimates that the total cost of its Year 2000 project will be
approximately $24 million dollars. Of this amount, $10 million was spent in
1997; approximately $12 million was spent in 1998, and the
A-22
remaining $2 million is projected for 1999. While these numbers are
substantial, they include the cost of a significant number of system
replacements that would have been required in the near future regardless of
the Year 2000 issue. These costs are being funded through operating cash
flows. Financial institutions are heavily dependent on technology, and the
cost of Year 2000 efforts should be viewed in its context as a significant
portion of the company's annual Information Technology budget. Although the
priority given to Year 2000 issues may cause other Information Technology
projects to be delayed, such delay is not expected to have a material impact
on the Corporation's financial condition, business or operations.
Year 2000 issues can affect the company not only as a result of its own
internal systems, but also as a result of the success of third parties in
dealing with their year 2000 issues. The company has in place a program to
investigate and quantify the Year 2000 issues arising from its relationships
with third parties such as borrowers, vendors, counterparties, issuers of debt
and equity securities held by the Company's subsidiaries and their trust
departments, and service providers (e.g. the Federal Reserve system,
telecommunications providers and electric utilities). Interfaces and
connectivity with these parties and systems also present significant issues.
The Company has been contacting third-party vendors and other significant
third parties to determine their year 2000 plans and progress. The Company has
established a policy in which, as part of its affiliates' evaluation of
investment securities, they review the portions of the public filings of the
issuers of such investment securities describing their respective efforts and
status relating to their Year 2000 readiness. Such affiliates do not, however,
attempt to independently confirm or verify any of the representations of
restatements made by such issues in their public filings. There can be no
assurance that each third party will adequately address its Year 2000 issues.
A failure by the Company to successfully remediate its own Year 2000
problems, or a failure by counterparties, issuers of securities, significant
suppliers, customers with substantial relationships, or failures in the
payment system could have a substantial negative impact on the Company. In
addition, the Company could face significant disruptions of business and
financial losses if there were failures of telecommunications systems, utility
systems, security clearing systems or other elements of the financial industry
infrastructure. The Company's business, results of operations and financial
positions could be materially adversely affected as a result of any such
failures. Because of the range of possible issues associated with the
Company's and third parties' Year 2000 issues, and the large number of
variables involved, it is impossible to quantify the potential consequences or
cost of problems that may occur if respective remediation effort are not
successful.
All of the foregoing is based on management's current assessment of the
situation using information available to it. Other factors that might cause
material changes include, but are not limited to, the loss of key personnel
and the ability to respond to unforeseen complications. Because the Company's
Year 2000 efforts are not entirely complete, and due to its reliance on
business partners, vendors, customers, utilities, telecommunications providers
and others, the outcome of Year 2000 readiness is uncertain and such issues
may have a material adverse effect on the Company's future financial condition
and future operating results.
The Company continues to develop contingency plans to cover failures due to
Year 2000 issues relating to, among other things, its operations, systems,
physical locations, products, vendors and public infrastructure. The
contingency planning includes remediation contingency plans and business
resumption contingency plans. Remediation contingency plans are designed to
address alternative courses of action in the event remediation of a mission
critical system falls behind schedule or is not successfully remediated.
Remediation contingency planning is substantially complete. Business
resumption contingency plans are designed to address Year 2000 problems that
could arise even though the Company and third parties have completed
remediation. The Company's Year 2000 business resumption contingency planning
includes event plans for each functional department, documented back-up
procedures in the event of a failure, identification of supplies, materials
and processes that must be on hand in the event the plan is activated and
coordination of personnel. Business resumption planning is well underway and
will continue through the first two quarters of 1999. Notwithstanding
extensive contingency planning, the failure of certain mission critical third
parties, such as utilities, telecommunications providers, transportation
service providers or certain governmental entities could adversely affect the
Company
A-23
Table 16: Summary of Operating Results by Quarter (unaudited)
Three Months Ended
-----------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(in thousands except per share
data)
1998
Interest income............................ $104,454 $100,862 $103,609 $100,700
Interest expense........................... 47,641 45,690 48,603 45,158
-------- -------- -------- --------
Net interest income...................... $ 56,813 $ 55,172 $ 55,006 $ 55,542
Provision for loan losses.................. 2,858 2,914 2,538 2,508
Noninterest income......................... 36,823 38,661 38,498 42,553
Noninterest expense........................ 69,049 70,280 81,781 71,164
Income tax provision....................... 6,573 6,271 1,811 7,107
-------- -------- -------- --------
Net income............................... $ 15,156 $ 14,368 $ 7,374 $ 17,316
======== ======== ======== ========
1997
Interest income............................ $ 95,325 $ 97,655 $100,120 $100,229
Interest expense........................... 41,739 42,551 43,804 43,700
-------- -------- -------- --------
Net interest income........................ $ 53,586 $ 55,104 $ 56,316 $ 56,529
Provision for loan losses.................. 1,925 3,377 2,807 3,766
Noninterest income......................... 33,553 35,586 37,180 38,564
Noninterest expense........................ 63,061 65,734 68,571 67,376
Income tax provision....................... 7,192 6,801 7,002 7,102
-------- -------- -------- --------
Net income............................... $ 14,961 $ 14,778 $ 15,116 $ 16,849
======== ======== ======== ========
Three Months Ended
-----------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
Per Share 1998
Net income -- basic........................ $ 0.74 $ 0.71 $ 0.36 $ 0.85
Net income -- diluted...................... 0.74 0.70 0.36 0.85
Dividend................................... 0.20 0.20 0.20 0.20
Book value................................. 31.20 31.58 32.11 32.68
Market price:
High...................................... 61.63 64.50 51.50 48.50
Low....................................... 54.00 49.50 40.75 43.50
Close..................................... 61.00 49.50 47.44 45.88
Per Share 1997
Net income -- basic........................ $ 0.73 $ 0.72 $ 0.74 $ 0.82
Net income -- diluted...................... 0.73 0.72 0.74 0.82
Dividend................................... 0.19 0.19 0.19 0.19
Book value................................. 28.28 29.10 29.90 30.55
Market price:
High...................................... 40.71 41.90 51.67 54.50
Low....................................... 36.19 36.90 40.71 45.00
Close..................................... 37.62 41.07 48.57 54.50
A-24
UMB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
ASSETS (in thousands)
Loans:
Commercial, financial and agricultural... $1,291,858 $1,377,380 $1,236,092
Consumer................................. 934,765 1,039,331 914,962
Real estate.............................. 327,796 365,329 404,039
Leases................................... 4,717 3,991 2,596
Unearned interest........................ -- -- (48)
Allowance for loan losses................ (33,169) (33,274) (33,414)
---------- ---------- ----------
Net loans................................ $2,525,967 $2,752,757 $2,524,227
Securities available for sale:
U.S. Treasury and agencies............... $2,355,630 $2,162,242 $2,107,492
State and political subdivisions......... 2,547 7,904 2,464
Mortgage-backed.......................... 249,319 248,892 149,725
Commercial paper and other............... 445,393 12,703 127,641
---------- ---------- ----------
Total securities available for sale...... $3,052,889 $2,431,741 $2,387,322
Investment securities: State and political
subdivisions
(market value of $711,035, $456,745 and
$319,525, respectively).................. 702,160 452,762 319,227
Federal funds sold........................ 8,599 13,638 170
Securities purchased under agreements to
resell................................... 52,770 57,575 58,790
Trading securities and other.............. 36,000 60,548 81,383
---------- ---------- ----------
Total earning assets..................... $6,378,385 $5,769,021 $5,371,119
Cash and due from banks................... 850,532 921,300 771,062
Bank premises and equipment, net.......... 206,194 172,811 152,909
Accrued income............................ 70,045 72,627 72,717
Premiums on and intangibles of purchased
banks.................................... 53,379 60,464 67,474
Other assets.............................. 89,563 57,784 76,705
---------- ---------- ----------
Total assets............................. $7,648,098 $7,054,007 $6,511,986
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand............... $2,045,074 $1,906,627 $1,724,486
Interest-bearing demand and savings...... 2,378,814 2,290,923 2,171,938
Time deposits under $100,000............. 868,490 881,173 917,983
Time deposits of $100,000 or more........ 604,426 468,274 376,127
---------- ---------- ----------
Total deposits........................... $5,896,804 $5,546,997 $5,190,534
Federal funds purchased................... 86,250 55 15,180
Securities sold under agreements to
repurchase............................... 835,969 715,490 599,215
Short-term debt........................... 31 1,116 911
Long-term debt............................ 39,153 44,550 51,350
Accrued expenses and taxes................ 52,481 56,735 46,887
Other liabilities......................... 74,643 64,828 25,432
---------- ---------- ----------
Total liabilities........................ $6,985,331 $6,429,771 $5,929,509
---------- ---------- ----------
Common stock, $1.00 par. Authorized
33,000,000 shares; 24,490,189 shares
issued................................... $ 24,490 $ 24,490 $ 23,503
Capital surplus........................... 608,934 608,964 558,073
Retained earnings......................... 175,005 137,230 142,947
Accumulated other comprehensive income.... 13,693 3,910 (1,755)
Unearned ESOP shares...................... (9,992) (12,492) (15,003)
Treasury stock 3,957,218; 3,737,430; and
3,424,176 shares, at cost, respectively.. (149,363) (137,866) (125,288)
---------- ---------- ----------
Total shareholders' equity............... $ 662,767 $ 624,236 $ 582,477
---------- ---------- ----------
Total liabilities and shareholders'
equity.................................. $7,648,098 $7,054,007 $6,511,986
========== ========== ==========
See Notes to Financial Statements, pages A-29-A-48.
A-25
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
-----------------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands except share and per
share data)
Interest Income
Loans.................................... $ 227,919 $ 236,031 $ 220,568
Securities available for sale............ 140,688 127,074 122,802
Investment securities:
Taxable interest........................ $ 943 $ 753 $ 904
Tax-exempt interest..................... 23,764 16,155 13,641
----------- ----------- -----------
Total investment securities income...... $ 24,707 $ 16,908 $ 14,545
----------- ----------- -----------
Federal funds and resell agreements...... 12,312 8,426 10,013
Trading securities and other............. 3,999 4,890 4,149
----------- ----------- -----------
Total interest income................... $ 409,625 $ 393,329 $ 372,077
----------- ----------- -----------
Interest Expense
Deposits................................. $ 138,367 $ 127,950 $ 123,135
Federal funds and repurchase agreements.. 45,487 40,496 37,380
Short-term debt.......................... 25 33 42
Long-term debt........................... 3,213 3,315 4,024
----------- ----------- -----------
Total interest expense.................. $ 187,092 $ 171,794 $ 164,581
----------- ----------- -----------
Net interest income...................... $ 222,533 $ 221,535 $ 207,496
Provision for loan losses................ 10,818 11,875 10,565
----------- ----------- -----------
Net interest income after provision..... $ 211,715 $ 209,660 $ 196,931
----------- ----------- -----------
Noninterest Income
Trust fees............................... $ 47,895 $ 45,279 $ 41,531
Securities processing.................... 14,748 11,753 9,486
Trading and investment banking........... 18,025 13,743 12,790
Service charges on deposit accounts...... 41,067 36,631 33,368
Other service charges and fees........... 23,982 21,009 15,705
Bankcard fees, net of expenses........... 3,477 1,532 (827)
Net security gains....................... -- 2,275 473
Other.................................... 7,341 7,197 15,719
----------- ----------- -----------
Total noninterest income................ $ 156,535 $ 139,419 $ 128,245
----------- ----------- -----------
Noninterest Expense
Salaries and employee benefits........... $ 164,031 $ 141,641 $ 131,411
Occupancy, net........................... 21,933 19,004 17,900
Equipment................................ 30,615 27,718 24,681
Supplies and services.................... 20,383 20,367 18,778
Marketing and business development....... 17,449 17,727 15,298
Amortization of intangibles of purchased
banks................................... 7,086 7,142 7,347
Other.................................... 30,777 25,679 24,231
----------- ----------- -----------
Total noninterest expense............... $ 292,274 $ 259,278 $ 239,646
----------- ----------- -----------
Income before income taxes............... $ 75,976 $ 89,801 $ 85,530
Income tax provision..................... 21,762 28,097 27,998
----------- ----------- -----------
Net income.............................. $ 54,214 $ 61,704 $ 57,532
=========== =========== ===========
Net income per share -- basic............ $ 2.66 $ 3.02 $ 2.75
Net Income per share -- diluted.......... 2.65 3.01 2.74
Dividends per share...................... 0.80 0.76 0.72
Average shares outstanding............... 20,362,914 20,439,975 20,925,544
=========== =========== ===========
See Notes to Financial Statements, pages A-29-A-48
A-26
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands)
Operating Activities
Net income............................. $ 54,214 $ 61,704 $ 57,532
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses.............. 10,818 11,875 10,565
Depreciation and amortization.......... 24,247 24,479 23,828
Deferred income taxes.................. 1,022 669 (4,022)
Net decrease in trading securities..... 24,548 20,835 4,628
Gains on sales of securities available
for sale.............................. (12) (2,293) (474)
Losses on sales of securities
available for sale.................... 12 18 1
Gain on sale of merchant bankcard
processing rights..................... -- -- (9,800)
Earned ESOP shares..................... 2,568 2,644 2,220
Amortization of securities premium,
net of discount accretion............. (10,762) 14,707 21,983
Changes in:
Accrued income........................ 2,582 90 6,370
Accrued expenses and taxes............ (9,215) 7,330 (10,603)
Other, net............................. 51 (95) (129)
----------- ----------- -----------
Net cash provided by operating
activities.......................... $ 100,073 $ 141,963 $ 102,099
----------- ----------- -----------
Investing Activities
Proceeds from sales of securities
available for sale.................... $ 18,643 $ 89,318 $ 10,657
Proceeds from maturities of:
Investment securities.................. 78,098 62,622 102,024
Securities available for sale.......... 9,152,912 1,882,873 1,892,878
Purchases of:
Investment securities.................. (330,355) (198,077) (111,633)
Securities available for sale.......... (9,764,076) (2,018,141) (1,935,820)
Net (increase) decrease in loans....... 215,972 (240,405) (161,339)
Net (increase) decrease in federal
funds sold and resell agreements...... 9,844 (12,253) 30,205
Proceeds from sale of merchant bankcard
processing rights..................... -- -- 9,800
Purchases of bank premises and
equipment............................. (50,880) (37,399) (22,028)
Proceeds from sales of bank premises
and equipment......................... 284 124 234
Other, net............................. (23,248) 56,849 (29,004)
----------- ----------- -----------
Net cash used in investing
activities.......................... $ (692,806) $ (414,489) $ (214,026)
----------- ----------- -----------
Financing Activities
Net increase in demand and savings
deposits.............................. $ 226,338 $ 301,126 $ 384,445
Net increase (decrease) in time
deposits.............................. 123,469 55,337 (7,594)
Net increase (decrease) in federal
funds purchased and repurchase
agreements............................ 206,674 101,150 (106,945)
Net increase (decrease) in short-term
debt.................................. (1,085) 205 410
Repayments of long-term debt........... (5,397) (6,800) (6,667)
Cash dividends......................... (16,439) (15,598) (15,216)
Purchases of treasury stock............ (11,930) (13,001) (62,234)
Proceeds from issuance of treasury
stock................................. 335 345 383
----------- ----------- -----------
Net cash provided by financing
activities.......................... $ 521,965 $ 422,764 $ 186,582
----------- ----------- -----------
Increase (decrease) in cash and due from
banks.................................. $ (70,768) $ 150,238 $ 74,655
Cash and due from banks at beginning of
year................................... 921,300 771,062 696,407
----------- ----------- -----------
Cash and due from banks at end of year.. $ 850,532 $ 921,300 $ 771,062
=========== =========== ===========
Supplemental disclosures:
Income taxes paid...................... $ 16,362 $ 29,412 $ 33,558
Total interest paid.................... 197,777 160,317 170,521
- --------
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 A-29-A-48
A-27
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other Repurchase
Common Capital Retained Comprehensive Treasury Commitment/
Stock Surplus Earnings Income Stock Unearned ESOP Total
------- -------- -------- ------------- --------- ------------- --------
(in thousands)
Balance--January 1,
1996................... $22,548 $522,892 $136,943 $ 3,612 $ (63,555) $(46,481) $575,959
Comprehensive Income:
Net income............. -- -- 57,532 -- -- -- 57,532
Other comprehensive
income, net of tax
Unrealized loss on
securities of $5,660,
net of
reclassification
adjustment for gains
included in net income
of $293............... -- -- -- (5,367) -- -- (5,367)
--------
Total comprehensive
income................ 52,165
Cash dividends ($0.72
per share)............. -- -- (15,216) -- -- -- (15,216)
Stock dividend (5%)..... 955 35,357 (36,312) -- -- -- --
Shares purchased by
ESOP................... -- -- -- -- -- 16,530 16,530
Guaranteed ESOP
obligation............. -- -- -- -- -- (17,281) (17,281)
Earned ESOP shares...... -- (58) -- -- -- 2,278 2,220
Purchase of treasury
stock.................. -- -- -- -- (62,234) 29,951 (32,283)
Exercise of stock
options................ -- (118) -- -- 501 -- 383
------- -------- -------- ------- --------- -------- --------
Balance--December 31,
1996................... $23,503 $558,073 $142,947 $(1,755) $(125,288) $(15,003) $582,477
Comprehensive Income:
Net income............. -- -- 61,704 -- -- -- 61,704
Other comprehensive
income, net of tax
Unrealized gains on
securities of $7,075,
net of
reclassification
adjustment for gains
included in net income
of $1,410............. -- -- -- 5,665 -- -- 5,665
--------
Total comprehensive
income................ 67,369
Cash dividends ($0.76
per share)............. -- -- (15,598) -- -- -- (15,598)
Stock dividend (5%)..... 987 50,836 (51,823) -- -- -- --
Earned ESOP shares...... -- 133 -- -- -- 2,511 2,644
Purchase of treasury
stock.................. -- -- -- -- (13,001) -- (13,001)
Exercise of stock
options................ -- (78) -- -- 423 -- 345
------- -------- -------- ------- --------- -------- --------
Balance--December 31,
1997................... $24,490 $608,964 $137,230 $ 3,910 $(137,866) $(12,492) $624,236
Comprehensive Income:
Net income............. -- -- 54,214 -- -- -- 54,214
Other comprehensive
income, net of tax
Unrealized gains on
securities............ -- -- -- 9,783 -- -- 9,783
--------
Total comprehensive
income................ 63,997
Cash dividends ($0.80
per share)............. -- -- (16,439) -- -- -- (16,439)
Earned ESOP shares...... -- 68 -- -- -- 2,500 2,568
Purchase of treasury
stock.................. -- -- -- -- (11,930) -- (11,930)
Exercise of stock
options................ -- (98) -- -- 433 -- 335
------- -------- -------- ------- --------- -------- --------
Balance--December 31,
1998................... $24,490 $608,934 $175,005 $13,693 $(149,363) $ (9,992) $662,767
======= ======== ======== ======= ========= ======== ========
See Notes to Financial Statements, pages A-29-A-48
A-28
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 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-29
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
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.
Pursuant to SFAS 128 diluted earnings per share takes into account the
dilutive effect of 61,441, 42,460 and 31,123 shares issuable under stock
options granted by the Company at December 31, 1998, 1997 and 1996,
respectively.
Reclassifications -- Certain reclassifications were made to the 1997 and
1996 financial statements to conform to the current year presentation.
ACCOUNTING CHANGES
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.
Accounting for Earnings Per Share -- In February 1997, the FASB issued SFAS
No. 128, "Earnings per Share." The Statement establishes standards for
computing and presenting earnings per share ("EPS"). It replaces the
presentation of primary EPS with a presentation of basic EPS. The Statement
was adopted for the Company's financial statements as of December 31, 1997.
Accounting for Reporting Comprehensive Income -- In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a
A-30
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
full set of general-purpose financial statements. This Statement requires that
all items that are to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This Statement
requires that the Company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
The Statement was adopted for the Company's financial statements as of
December 31, 1998.
Accounting for Disclosures About Segments and Related Information -- In June
1997, FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information." The Statement establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. The Statement was adopted for the Company's financial statements
as of December 31, 1998.
Accounting for Derivative Instruments -- In June, 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires entities to
recognize all derivatives as either assets or liabilities in its financial
statements and to measure such instruments at their fair value. The Statement
is effective for the Company's financial statements for the fiscal year
beginning January 1, 2000. The Company is in the process of evaluating the
potential impact of the new Statement.
ALLOWANCES FOR LOAN LOSSES
The table below provides an analysis of the allowance for loan losses for
the three years ended December 31, 1998 (in thousands):
Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
Allowance -- beginning of year................... $ 33,274 $ 33,414 $ 32,685
Additions (deductions):
Charge-offs..................................... $(14,083) $(14,332) $(12,335)
Recoveries...................................... 3,160 2,317 2,499
-------- -------- --------
Net charge-offs................................ $(10,923) $(12,015) $ (9,836)
Provision charged to expense..................... 10,818 11,875 10,565
-------- -------- --------
Allowance -- end of year......................... $ 33,169 $ 33,274 $ 33,414
======== ======== ========
The amount of loans considered to be impaired under SFAS No. 114 was
$10,221,000 at December 31, 1998 and $3,266,000 at December 31, 1997. All of
the loans were on a nonaccrual basis or had been restructured. Included in the
impaired loans, at December 31, 1998 was $8,022,000 of loans for which the
related allowance was $1,273,000. The remaining $2,199,000 of impaired loans
did not have an allowance for loan losses as a result of write-downs and
supporting collateral value. At December 31, 1997 there was $1,308,000 of
impaired loans with a related allowance of $417,000, and $1,958,000 of
impaired loans which did not have an allowance. The average recorded
investment in impaired loans was approximately $7,901,000 during the year
ended December 31, 1998 and $7,493,000 during the year ended December 31,
1997. The Company had no material amount recorded as interest income on
impaired loans for either year.
A-31
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, 1998, 1997 and 1996 (in thousands):
December 31
-------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
1998
U.S. Treasury....................... $1,212,563 $16,559 $ (195) $1,228,927
U.S. Agencies....................... 1,123,961 4,012 (1,270) 1,126,703
Mortgage-backed..................... 247,326 2,122 (129) 249,319
State and political subdivisions.... 2,541 19 (13) 2,547
Commercial paper.................... 439,380 -- -- 439,380
Federal Reserve Bank stock.......... 3,760 -- -- 3,760
Equity and other.................... 2,163 90 -- 2,253
---------- ------- ------- ----------
Total.............................. $3,031,694 $22,802 $(1,607) $3,052,889
========== ======= ======= ==========
1997
U.S. Treasury....................... $1,475,537 $ 7,539 $(1,452) $1,481,624
U.S. Agencies....................... 681,106 627 (1,115) 680,618
Mortgage-backed..................... 248,384 798 (290) 248,892
State and political subdivisions.... 7,929 4 (29) 7,904
Commercial paper.................... 6,954 -- -- 6,954
Federal Reserve Bank stock.......... 3,760 -- -- 3,760
Equity and other.................... 1,887 102 -- 1,989
---------- ------- ------- ----------
Total.............................. $2,425,557 $ 9,070 $(2,886) $2,431,741
========== ======= ======= ==========
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
========== ======= ======= ==========
A-32
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
The following table presents contractual maturity information for securities
available for sale at December 31, 1998. 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.................................... $1,480,650 $1,483,737
Due after 1 year through 5 years......................... 856,998 873,024
Due after 5 years through 10 years....................... 993 992
Due after 10 years....................................... 424 424
---------- ----------
Total................................................... $2,339,065 $2,358,177
---------- ----------
Mortgage-backed securities............................... 247,326 249,319
Commercial paper......................................... 439,380 439,380
Equity securities and other.............................. 5,923 6,013
---------- ----------
Total securities available for sale..................... $3,031,694 $3,052,889
========== ==========
Securities available for sale with a market value of $2,501,417,000 at
December 31, 1998, $2,278,156,000 at December 31, 1997, and $1,832,291,000 at
December 31, 1996, were pledged to secure U.S. Government deposits, other
public deposits and certain trust deposits as required by law.
During 1998, proceeds from the sales of securities available for sale were
$18,643,000 compared to $89,318,000 for 1997. Securities transactions resulted
in gross realized gains of $12,000 for 1998 and $2,293,000 for 1997. The gross
realized losses were $12,000 for 1998 and $18,000 for 1997.
The net unrealized holding gains on trading securities at December 31, 1998
and 1997, were $36,000 and $193,000, respectively, and were included in
trading and investment banking income.
INVESTMENT SECURITIES
The table below provides detailed information for investment securities at
December 31, 1998, 1997 and 1996 (in thousands):
December 31
----------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
1998
State and political subdivisions....... $702,160 $10,136 $(1,261) $711,035
======== ======= ======= ========
1997
State and political subdivisions....... $452,762 $ 4,514 $ (531) $456,745
======== ======= ======= ========
1996
State and political subdivisions....... $319,227 $ 1,722 $(1,424) $319,525
======== ======= ======= ========
A-33
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
The following table presents contractual maturity information for investment
securities at December 31, 1998. 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....................................... $ 89,002 $ 89,326
Due after 1 year through 5 years............................ 378,041 384,348
Due after 5 years through 10 years.......................... 235,117 237,361
-------- --------
Total investment securities............................... $702,160 $711,035
======== ========
There were no sales of investment securities during 1998, 1997 or 1996.
Investment securities with a market value of $147,988,000 at December 31,
1998, $116,864,000 at December 31, 1997 and $50,844,000 at December 31, 1996,
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 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
1997, 1996 and 1995, an analysis of activity with respect to such aggregate
loans to related parties appears below (in thousands):
Year Ended December 31
---------------------------------
1998 1997 1996
--------- ----------- ---------
Balance -- beginning of year................. $ 180,318 $ 183,691 $ 178,439
New loans................................... 923,855 1,895,657 892,558
Repayments.................................. (947,815) (1,899,030) (887,306)
--------- ----------- ---------
Balance -- end of year....................... $ 156,358 $ 180,318 $ 183,691
========= =========== =========
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
-------------------------------
1998 1997 1996
--------- --------- ---------
Land........................................... $ 36,829 $ 36,426 $ 33,033
Buildings and leasehold improvements........... 188,247 169,045 154,878
Equipment...................................... 190,625 167,010 149,350
--------- --------- ---------
$ 415,701 $ 372,481 $ 337,261
Accumulated depreciation....................... (209,507) (199,670) (184,352)
--------- --------- ---------
Bank premises and equipment, net............... $ 206,194 $ 172,811 $ 152,909
========= ========= =========
A-34
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
Consolidated rental and operating lease expenses were $3,884,000 in 1998,
$2,305,000 in 1997, and $2,722,000 in 1996. Minimum rental commitments as of
December 31, 1998, for all noncancelable operating leases are: 1999 --
$3,380,000; 2000 -- $3,088,000; 2001 -- $3,021,000; 2002 -- $2,913,000; 2003
- -- $2,756,000; and thereafter -- $32,391,000.
BORROWED FUNDS
The components of the Company's short-term and long-term debt were as
follows (in thousands):
December 31
-----------------------
1998 1997 1996
------- ------- -------
Short-term debt
U.S. Treasury demand notes and other................... $ 31 $ 1,116 $ 911
------- ------- -------
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............................ 3,000 6,000 9,000
7.50% notes maturing serially through 1997............. -- -- 1,546
8.00% note maturing serially through 2000.............. 359 461 556
ESOP debt guarantee.................................... 10,794 13,089 15,248
------- ------- -------
Total long-term debt................................. $39,153 $44,550 $51,350
------- ------- -------
Total borrowed funds................................. $39,184 $45,666 $52,261
======= ======= =======
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 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
$86,063,000 was available for the payment of dividends at December 31, 1998.
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,
1998, was $835,969,000 (with accrued interest payable of $401,000). Of that
amount, $21,869,000 represented sales of securities in which the securities
were obtained under reverse repurchase agreements ("resell agreements"). The
remainder of $814,100,000 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 Amount Value Liabilities Rate
Liabilities ------------ ------------ ------------ --------
On demand..................... $928,527,000 $928,406,000 $778,850,000 4.28%
2 to 30 days.................. 27,264,000 26,546,000 23,840,000 4.49
31 to 90 days................. 10,323,000 10,634,000 9,532,000 2.71
Over 90 days.................. 2,279,000 1,880,000 1,878,000 5.14
------------ ------------ ------------ ----
Total $968,393,000 $967,466,000 $814,100,000 4.27%
============ ============ ============ ====
A-35
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
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, 1998, approximately $17,491,000 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.
Certain affiliate banks maintain reserve balances with the Federal Reserve
Bank as required by law. During 1998, this amount averaged $127,219,000.
The Company is required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by the banking regulators. At December 31,
1998, 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 14.75% and 15.57%, respectively. The Company's leverage ratio at December
31, 1998, was 7.85%.
As of December 31, 1998 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-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.
Actual capital amounts as well as required and well capitalized Tier 1,
Total and Tier 1 Leverage ratios as of December 31 for the Company and its
largest banks are as follows:
1998
---------------------------------------------------
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
-------------- -------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- ---------- --------
(Dollars in Thousands)
Tier 1 Capital:
UMB Financial Corporation.. $596,273 14.75% $161,719 4.00% $ 242,578 6.00%
UMB Bank, n.a. ............ 330,794 13.17 100,492 4.00 150,739 6.00
UMB Bank of St. Louis,
n.a....................... 68,678 12.88 21,326 4.00 31,989 6.00
UMB National Bank of
America................... 54,401 16.68 13,048 4.00 19,572 6.00
Total Capital:
UMB Financial Corporation.. 629,442 15.57 323,438 8.00 404,297 10.00
UMB Bank, n.a. ............ 348,537 13.87 200,985 8.00 251,231 10.00
UMB Bank of St. Louis,
n.a....................... 71,864 13.48 42,652 8.00 53,316 10.00
UMB National Bank of
America................... 56,457 17.31 26,096 8.00 32,620 10.00
Tier 1 Leverage
UMB Financial Corporation.. 596,273 7.85 303,812 4.00 379,765 5.00
UMB Bank, n.a. ............ 330,794 7.72 171,393 4.00 214,241 5.00
UMB Bank of St. Louis,
n.a....................... 68,678 5.94 46,211 4.00 57,764 5.00
UMB National Bank of
America................... 54,401 6.30 34,513 4.00 43,142 5.00
A-36
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
1997
---------------------------------------------
Tier 1 Capital:
UMB Financial Corporation....... $560,774 15.35% $146,172 4.00% $219,258 6.00%
UMB Bank, n.a................... 326,296 14.57 89,564 4.00 134,346 6.00
UMB Bank of St. Louis, n.a. .... 65,268 15.23 17,140 4.00 25,711 6.00
UMB National Bank of America.... 47,938 19.07 10,057 4.00 15,086 6.00
Total Capital:
UMB Financial Corporation....... 594,048 16.26 292,344 8.00 365,430 10.00
UMB Bank, n.a................... 343,424 15.34 179,128 8.00 223,910 10.00
UMB Bank of St. Louis, n.a. .... 68,511 15.99 34,281 8.00 42,851 10.00
UMB National Bank of America.... 50,586 20.12 20,114 8.00 25,143 10.00
Tier 1 Leverage
UMB Financial Corporation....... 560,774 8.02 279,778 4.00 349,723 5.00
UMB Bank, n.a................... 326,296 8.25 158,131 4.00 197,664 5.00
UMB Bank of St. Louis, n.a. .... 65,268 6.79 38,476 4.00 48,096 5.00
UMB National Bank of America.... 47,938 5.85 32,793 4.00 40,992 5.00
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 1998, 1997 and 1996
were $3,052,000, $4,200,000, and $5,000,000, 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 $1,671,000 for 1998 and $447,000 for
1997.
Substantially all officers and employees were 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 was to contribute
annually the maximum amount that could be deducted for federal income tax
purposes. Contributions were 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.
During 1998 the Company received approval to terminate the pension plan.
Termination and liquidation of the defined benefit plan occurred during 1998
with a pretax charge of $7.4 million. This one-time charge was required to
fully fund the plan and distribute the assets to plan participants. The
Company elected to fund and liquidate the pension plan and replace it with a
benefit plan more closely tied to Company performance. The distribution of
plan assets will also give participants discretion over investment decisions.
All employees previously covered by the pension plan are now eligible to
receive a partial matching contribution to the Company's qualified 401(k)
plan, as amended.
A-37
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
The following items are components of the net periodic pension expense
(income) for the two years ended December 31, 1997 (in thousands):
1997 1996
------- -------
Service costs -- benefits earned during the year.............. $ 1,036 $ 1,606
Interest cost on projected benefit obligation................. 1,705 2,110
Actual return on plan assets.................................. (1,373) (1,485)
Net amortization and deferral................................. 1,724 269
------- -------
Net periodic pension expense................................ $ 3,092 $ 2,500
======= =======
Assumptions used in accounting for the plan were as follows:
1997 1996
---- ----
Weighted average discount rate...................................... 7.00% 7.00%
Rate of increase in future compensation levels...................... N/A 3.81
Expected long-term rate of return on assets......................... 8.00 8.00
During 1998, certain assumptions used to calculate the final plan
liquidation liability were changed after the Company made the final
determination and received final regulatory approval to terminate the plan.
The following table sets forth the pension plan's funded status, using
valuation dates of September 30, 1997 and 1996 (in thousands):
1997 1996
-------- --------
Actuarial present value of benefit obligation:
Vested benefits........................................... $(23,309) $(23,126)
Nonvested benefits........................................ (2,292) (2,118)
-------- --------
Accumulated benefit obligation............................ $(25,601) $(25,244)
Additional benefits based on estimated future salary
levels................................................... -- (6,723)
-------- --------
Projected benefit obligation............................. $(25,601) $(31,967)
Plan assets at fair value, primarily U.S. obligations...... 25,234 28,598
-------- --------
Projected benefit obligation in excess of plan assets...... $ (367) $ (3,369)
Unrecognized net loss from past experience different from
that assumed.............................................. 198 6,502
Prior service cost not yet recognized in net periodic
pension cost.............................................. 169 666
Unrecognized net transition asset being recognized over
10.66 years............................................... -- (707)
-------- --------
Prepaid pension cost included in other assets............ $ -- $ 3,092
======== ========
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. Of the options granted prior to 1998, 40% are exercisable two years
from the date of the grant and are thereafter exercisable in 20% increments
annually, or for such periods or vesting increments 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. None of the options granted in 1998 are exercisable until five
years after the grant date. 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.
A-38
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
Activity in the 1992 Plan for the three years ended December 31, 1998, 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, 1996...... 75,058 $25.91 to $39.68 $30.67
Granted............................ 27,649 34.95 to 38.54 35.40
Canceled........................... (3,201) 26.07 to 36.08 30.16
------- ---------------- ------
Outstanding -- December 31, 1996.... 99,506 $25.91 to $39.68 $32.00
Granted............................ 32,080 49.88 to 55.37 50.63
Canceled........................... (1,241) 25.95 to 36.07 33.92
Exercised.......................... (4,616) 25.95 to 35.91 30.00
------- ---------------- ------
Outstanding -- December 31, 1997.... 125,729 $25.91 to $55.37 $36.82
Granted............................ 41,025 44.93 to 49.43 45.18
Canceled........................... (5,548) 25.91 to 50.35 38.62
Exercised.......................... (4,364) 25.91 to 35.86 30.51
------- ---------------- ------
Outstanding -- December 31, 1998.... 156,842 $25.91 to $55.37 $39.11
------- ---------------- ------
Exercisable -- December 31, 1998.... 58,065 $25.91 to $39.68 $30.90
======= ================ ======
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 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, 1998, is summarized in the following table:
Number of Option Price Weighted Average
Stock Options Under the 1991 Plan Shares Per Share Price Per Share
- --------------------------------- --------- ---------------- ----------------
Outstanding -- January 1, 1996...... 75,246 $17.49 to $26.56 $19.44
Canceled........................... (1,255) 17.49 to 21.65 19.30
Exercised.......................... (19,651) 17.49 to 26.56 19.51
------- ---------------- ------
Outstanding -- December 31, 1996.... 54,340 $17.49 to $24.14 $19.43
Exercised.......................... (11,164) 17.49 to 21.66 20.40
------- ---------------- ------
Outstanding -- December 31, 1997.... 43,176 $17.52 to $24.14 $19.62
Canceled........................... (448) 17.53 to 21.59 18.91
Exercised.......................... (11,063) 17.52 to 21.67 18.20
------- ---------------- ------
Outstanding -- December 31, 1998.... 31,665 $17.68 to $24.14 $20.13
------- ---------------- ------
Exercisable -- December 31, 1998.... 31,665 $17.68 to $24.14 $20.13
======= ================ ======
A-39
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
---------------- ----------- ----------- -------- ----------- --------
$21.59 to $21.67 11,341 1 year $21.63 11,341 $21.63
17.68 to 17.74 15,335 2 years 17.71 15,335 17.71
24.14 to 24.14 4,989 3 years 24.14 4,989 24.14
27.69 to 27.82 9,534 4 years 27.75 9,534 27.75
27.89 to 28.10 11,419 5 years 28.02 11,419 28.02
25.91 to 28.67 17,020 6 years 26.65 13,616 26.65
35.86 to 39.68 22,275 7 years 36.52 13,365 36.52
34.95 to 38.54 25,328 8 years 35.43 10,131 35.43
49.88 to 55.37 30,241 9 years 50.65 -- --
44.93 to 49.43 41,025 10 years 45.18 -- --
------- ------
188,507 89,730
======= ======
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,
$54,030 and $2.65 for the year ended December 31, 1998, $61,573 and $3.01 for
the year ended December 31, 1997 and $57,351 and $2.88 for the year ended
December 31, 1996.
For options granted during the year ended December 31, 1998, the estimated
fair value of options granted using the Black-Scholes pricing model under the
Company's plans was based on a weighted average risk-free interest rate of
4.79%, expected option life of 8.75 years, expected volatility of 18.20% and
an expected dividend yield of 1.81%. For options granted during the year ended
December 31, 1997, the estimated fair value of options granted under the
Company's plans was based on a weighted average risk-free interest rate of
6.08%, expected option life of 8.75 years, expected volatility of 16.00% and
an expected dividend yield of 1.42%. For options granted during the year ended
December 31, 1996, the estimated fair value of options granted 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 yield of 1.92%.
SEGMENT REPORTING
Public enterprises are required to report certain information concerning its
operating segments in annual and interim financial statements. Beginning in
1998, the Company began preparing periodic reporting on its operating
segments. Operating segments are considered to be components of or enterprises
for which separate financial information is available and evaluated regularly
by key decision-makers for purposes of allocating resources and assessing
performance. The Company has defined its operations into the following
segments:
Commercial Banking--Providing a full range of lending and cash management
services to commercial and governmental entities through the commercial
division of the Company's lead bank.
Trust & Securities Processing--Providing estate planning, trust, employee
benefit, asset management and custodial services to individuals and corporate
customers.
A-40
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
Investment Banking and Brokerage--Providing commercial and retail brokerage,
investment accounting and safekeeping services to individuals and corporate
customers.
Community Banking--Providing a full range of banking services to retail and
corporate customers through the Company's affiliate bank and branch network.
Other--The Other category consists primarily of Overhead and Support
departments of the Company. The net revenues and expenses of these departments
are allocated to the other segments of the organization in the Company's
periodic segment reporting.
Reported segment revenues, net income and average assets include revenue and
expense distributions for services performed of other segments within the
Company as well as balances due from other segments within the Company. Such
intercompany transactions and balances are eliminated in the Company's
consolidated financial statements.
The table below lists selected financial information by business segment as
of and for the year ended December 31, 1998 (in thousands):
Revenues
Commercial......................................................... $ 85,986
Trust/Securities Processing........................................ 60,907
Investment Banking/Brokerage....................................... 33,798
Community Banking.................................................. 207,960
Other.............................................................. 1,831
Less: Intersegment revenues........................................ (22,232)
----------
Total............................................................. $ 368,250
==========
Net Income
Commercial......................................................... $ 20,998
Trust/Securities Processing........................................ 11,495
Investment Banking/Brokerage....................................... 8,979
Community Banking.................................................. 28,863
Other.............................................................. --
Less: Intersegment net income...................................... (16,121)
----------
Total............................................................. $ 54,214
==========
Total Average Assets
Commercial......................................................... $1,455,770
Trust/Securities Processing........................................ 185,348
Investment Banking/Brokerage....................................... 1,588,869
Community Banking.................................................. 3,840,280
Other.............................................................. 104,554
Less: Intersegment balances........................................ (157,404)
----------
Total............................................................. $7,017,417
==========
A-41
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
COMMON STOCK
The following table summarizes the share transactions for the three years
ended December 31, 1998:
Shares
Shares Shares in Subject to
Issued Treasury Repurchase
---------- ---------- ----------
Balance -- January 1, 1996................... 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) --
Stock dividend (5%)......................... 987,105 -- --
Purchase of treasury stock.................. -- (328,335) --
Issued in stock options..................... -- 15,081 --
---------- ---------- ----------
Balance -- December 31, 1997................. 24,490,189 (3,737,430) --
Purchase of treasury stock.................. -- (235,215) --
Issued in stock options..................... -- 15,427 --
---------- ---------- ----------
Balance -- December 31, 1998................. 24,490,189 (3,957,218) --
========== ========== ==========
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 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.
A-42
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
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 $41.4 million and
$59.0 million during the years ended December 31, 1998 and 1997, respectively.
Net futures activity resulted in losses of $1.0 million for 1998 and losses of
$1.2 million for 1997.
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 1998 contracts
to purchase and to sell foreign currency averaged approximately $1.4 million,
compared to $2.4 million during 1997. The gain or loss on these foreign
exchange contracts for 1998 and 1997 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, Nebraska and Illinois. At December 31, 1998, 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
------------------------------
1998 1997 1996
---------- ---------- --------
(in thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit for loans
(excluding credit card loans)................ $1,539,463 $1,226,141 $943,895
Commitments to extend credit under credit card
loans........................................ 698,514 786,456 815,367
Commercial letters of credit.................. 22,024 18,593 8,466
Standby letters of credit..................... 88,233 72,293 68,634
Financial instruments whose notional or
contract amounts exceed the amount of credit
risk:
Futures contracts............................. $ 18,900 $ 46,900 $ 54,600
Foreign exchange contracts.................... -- -- 6,041
A-43
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 27.26% in 1998, 30.80% in 1997, and 31.10% in 1996. 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
-----------------------
1998 1997 1996
------- ------- -------
Federal
Currently payable...................................... $19,401 $27,277 $29,148
Deferred............................................... 918 184 (3,180)
------- ------- -------
Total federal tax provision.......................... $20,319 $27,461 $25,968
State
Currently payable...................................... $ 1,340 $ 151 $ 2,872
Deferred............................................... 103 485 (842)
------- ------- -------
Total state tax provision............................ $ 1,443 $ 636 $ 2,030
------- ------- -------
Total tax provision.................................... $21,762 $28,097 $27,998
======= ======= =======
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
-------------------------
1998 1997 1996
------- ------- -------
Provision at statutory rate......................... $26,592 $31,430 $29,936
Tax-exempt interest income.......................... (9,219) (6,487) (5,660)
Disallowed interest expense......................... 1,148 807 695
State and local income taxes, net of federal tax
benefits........................................... 938 414 1,320
Amortization of intangibles of purchased banks...... 1,901 1,926 1,945
Other............................................... 402 7 (238)
------- ------- -------
Total tax provision............................... $21,762 $28,097 $27,998
======= ======= =======
Deferred taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities.
A-44
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
Temporary differences which comprise a significant portion of deferred tax
assets and liabilities at December 31, 1998, 1997 and 1996 were as follows (in
thousands):
1998 1997 1996
-------- -------- --------
Deferred tax liabilities
Net unrealized gain on securities available for
sale............................................ $ 7,499 $ 2,276 $ --
Asset revaluations on purchased banks............ 4,556 5,228 6,098
Depreciation..................................... 8,340 7,615 6,463
Pension.......................................... -- -- 1,153
Miscellaneous.................................... -- 496 441
-------- -------- --------
Total deferred tax liabilities................. $ 20,395 $ 15,615 $ 14,155
-------- -------- --------
Deferred tax assets
Net unrealized loss on securities available for
sale............................................ $ -- $ -- $ (1,041)
Allowance for loan losses........................ (12,346) (12,422) (12,848)
Nondeductible accruals........................... (382) (1,814) (2,288)
Miscellaneous.................................... (984) (931) (1,517)
-------- -------- --------
Total deferred tax assets...................... $(13,712) $(15,167) $(17,694)
-------- -------- --------
Net deferred tax liability (asset)............... $ 6,683 $ 448 $ (3,539)
======== ======== ========
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, 1998, 1997 and 1996. 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.
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.
A-45
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
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, 1998, 1997, and 1996 are as follows (in millions):
1998 1997 1996
------------------ ------------------ ------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- -------- -------- -------- -------- --------
Financial assets:
Cash and short-term
investments........... $ 911.9 $ 911.9 $ 992.5 $ 992.5 $ 830.0 $ 830.0
Securities available
for sale.............. 3,052.9 3,052.9 2,431.7 2,431.7 2,387.3 2,387.3
Investment securities.. 702.1 711.0 452.8 456.7 319.2 319.5
Trading securities..... 36.0 36.0 60.5 60.5 81.4 81.4
Loans.................. $2,559.2 $2,557.9 $2,786.1 $2,771.1 $2,557.6 $2,537.1
Less: allowance for
loan losses........... (33.2) -- (33.3) -- (33.4) --
-------- -------- -------- -------- -------- --------
Net loans............. $2,526.0 $2,557.9 $2,752.8 $2,771.1 $2,524.2 $2,537.1
-------- -------- -------- -------- -------- --------
Total financial
assets............... $7,228.9 $7,269.7 $6,690.3 $6,712.5 $6,142.1 $6,155.3
======== ======== ======== ======== ======== ========
Financial liabilities:
Demand and savings
deposits.............. $4,423.9 $4,423.9 $4,197.6 $4,197.6 $3,896.4 $3,896.4
Time deposits.......... 1,472.9 $1,479.6 1,349.5 1,340.9 1,294.1 1,291.9
Federal funds and
repurchase............ 922.2 922.2 715.5 715.5 614.4 614.4
Short-term debt........ -- -- 1.0 1.0 .9 .9
Long-term debt......... 39.2 38.4 44.6 42.4 51.4 47.1
-------- -------- -------- -------- -------- --------
Total financial
liabilities.......... $6,858.2 $6,864.1 $6,308.2 $6,297.4 $5,857.2 $5,850.7
======== ======== ======== ======== ======== ========
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998, 1997 and 1996. 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-46
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
PARENT COMPANY FINANCIAL INFORMATION
December 31
-----------------------------
1998 1997 1996
--------- -------- --------
(in thousands)
Balance Sheet
Assets:
Investment in subsidiaries:
Banks.......................................... $ 641,952 $633,224 $585,925
Non-banks...................................... 7,481 7,387 8,675
--------- -------- --------
Total investment in subsidiaries............. $ 649,433 $640,611 $594,600
Premiums on purchased banks.................... 9,299 9,991 11,258
Securities available for sale and other........ 51,205 23,499 33,348
--------- -------- --------
Total assets................................. $ 709,937 $674,101 $639,206
========= ======== ========
Liabilities and Shareholders' Equity:
Dividends payable.............................. $ 4,106 $ 4,012 $ 3,869
Long-term debt................................. 39,153 44,550 50,794
Accrued expenses and other..................... 3,911 1,303 2,066
--------- -------- --------
Total........................................ $ 47,170 $ 49,865 $ 56,729
Shareholders' equity........................... 662,767 624,236 582,477
--------- -------- --------
Total liabilities and shareholders' equity... $ 709,937 $674,101 $639,206
========= ======== ========
Statement of Income
Income:
Dividends and income received from affiliate
banks......................................... $ 51,132 $ 32,593 $ 58,503
Service fees from subsidiaries................. 12,041 10,310 9,433
Net security gains............................. 10 2,246 45
Other.......................................... 859 706 510
--------- -------- --------
Total income................................. $ 64,042 $ 45,855 $ 68,491
--------- -------- --------
Expense:
Salaries and employee benefits................. $ 5,017 $ 4,375 $ 3,852
Interest on long-term debt..................... 3,213 3,277 3,972
Services from affiliate banks.................. 652 671 652
Other.......................................... 14,537 13,250 12,185
--------- -------- --------
Total expense................................ $ 23,419 $ 21,573 $ 20,661
--------- -------- --------
Income before income taxes and equity in
undistributed earnings of subsidiaries........ $ 40,623 $ 24,282 $ 47,830
Income tax benefit............................. (2,893) (2,164) (2,836)
--------- -------- --------
Income before equity in undistributed earnings
of subsidiaries............................... $ 43,516 $ 26,446 $ 50,666
Equity in undistributed earnings of
subsidiaries:.................................
Banks.......................................... 10,607 35,409 6,883
Non-banks...................................... 91 (151) (17)
--------- -------- --------
Net income................................... $ 54,214 $ 61,704 $ 57,532
========= ======== ========
Statement of Cash Flows
Operating Activities:
Net income..................................... $ 54,214 $ 61,704 $ 57,532
Equity in earnings of subsidiaries............. (61,073) (66,958) (64,350)
Gains from sales of securities available for
sale.......................................... (10) (2,246) (45)
Earned ESOP shares............................. 2,568 2,644 2,220
Other.......................................... (535) 5,206 (14,225)
--------- -------- --------
Net cash provided by (used in) operating
activities.................................. $ (4,836) $ 350 $(18,868)
--------- -------- --------
Investing Activities:
Proceeds from sales of securities available for
sale.......................................... $ 25 $ 3,022 $ 96
Proceeds from maturities of securities held to
maturity...................................... 99,145 22,049 47,455
Purchases of securities available for sale..... (109,926) (7,071) (15,026)
Net (increase) decrease in repurchase
agreements.................................... 6,858 (8,120) 7,500
Net capital investment in affiliate banks...... -- (3,981) 5,211
Dividends received from subsidiaries........... 61,360 31,700 57,484
Net capital expenditures for premises and
equipment..................................... (166) (320) (34)
--------- -------- --------
Net cash provided by investing activities.... $ 57,296 $ 37,279 $102,686
--------- -------- --------
Financing Activities:
Repayments of long-term debt................... $ (5,397) $ (6,704) $ (6,580)
Cash dividends paid............................ (16,439) (15,598) (15,216)
Net purchase of treasury stock................. (11,595) (12,656) (61,851)
--------- -------- --------
Net cash used in financing activities........ $ (33,431) $(34,958) $(83,647)
--------- -------- --------
Net increase in cash............................ $ 19,029 $ 2,671 $ 171
========= ======== ========
A-47
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, 1998, 1997 and 1996,
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, 1998, 1997 and 1996, 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 21, 1999
A-48
[THIS PAGE INTENTIONALLY LEFT BLANK]
A-49
UMB FINANCIAL CORPORATION
FIVE-YEAR AVERAGE BALANCE SHEETS/YIELDS AND RATES
1998 1997
---------------------------- ----------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1)
-------- ---------- ------- -------- --------- -------
(in millions)
(unaudited)
Assets
Loans, net of unearned
interest (FTE) (2)..... $2,640.9 $228.8 8.66% $2,649.0 $237.0 8.95%
Securities:
Taxable................ $2,448.3 $140.7 5.75 $2,166.6 $127.1 5.87
Tax-exempt (FTE)....... 557.0 35.8 6.43 372.1 24.6 6.61
-------- ------ ---- -------- ------ ----
Total securities...... $3,005.3 $176.5 5.87 $2,538.7 $151.7 5.97
Federal funds sold and
resell agreements...... 224.1 12.3 5.49 138.8 8.4 6.07
Other earning assets
(FTE).................. 72.3 4.3 5.87 83.7 5.1 6.13
-------- ------ ---- -------- ------ ----
Total earning assets
(FTE)................ $5,942.6 $421.9 7.10 $5,410.2 $402.2 7.43
Allowance for loan loss-
es..................... (33.2) (32.9)
Cash and due from banks. 723.7 724.8
Other assets............ 384.3 380.5
-------- --------
Total assets.......... $7,017.4 $6,482.6
======== ========
Liabilities and
Shareholders' Equity
Interest-bearing demand
and savings deposits... $2,260.3 $ 69.5 3.07% $2,143.9 $ 65.8 3.07%
Time deposits under
$100,000............... 875.5 44.7 5.11 898.9 46.7 5.20
Time deposits of
$100,000 or more....... 480.3 24.2 5.04 310.8 15.4 4.95
-------- ------ ---- -------- ------ ----
Total interest-bearing
deposits............. $3,616.1 $138.4 3.83 $3,353.6 $127.9 3.82
Short-term borrowings... 0.7 -- 3.55 0.6 -- 5.91
Long-term debt.......... 42.6 3.2 7.54 48.9 3.4 6.78
Federal funds purchased
and repurchase
agreements............. 920.6 45.5 4.94 800.1 40.5 5.06
-------- ------ ---- -------- ------ ----
Total interest-bearing
liabilities.......... $4,580.0 $187.1 4.08 $4,203.2 $171.8 4.09
Noninterest-bearing
demand deposits........ 1,702.3 1,576.2
Other................... 85.0 104.6
-------- --------
Total................. $6,367.3 $5,884.0
-------- --------
Total shareholders'
equity................. $ 650.1 $ 598.6
-------- --------
Total liabilities and
shareholders' equity. $7,017.4 $6,482.6
======== ========
Net interest income
(FTE).................. $234.8 $230.4
Net interest spread..... 3.02% 3.34%
Net interest margin..... 3.95 4.26
- --------
(1) Interest income and yields are stated on a fully tax-equivalent (FTE)
basis, using a rate of 35%. 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-50
1996 1995 1994 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
-------- ---------- ------- -------- ---------- ------- -------- ---------- ------- --------
$2,437.8 $221.5 9.09% $2,346.3 $218.9 9.33% $2,148.6 $173.1 8.06% 8.13%
$2,169.8 $122.9 5.66 $2,076.1 $110.6 5.32 $2,555.2 $122.0 4.77 (0.17)
317.8 21.2 6.68 306.1 20.9 6.83 289.1 18.5 6.41 16.42
-------- ------ ---- -------- ------ ---- -------- ------ ---- ------
$2,487.6 $144.1 5.79 $2,382.2 $131.5 5.52 $2,844.3 $140.5 4.94 1.95
185.6 10.0 5.39 187.9 11.0 5.86 338.0 13.6 4.03 (6.90)
69.3 4.3 6.12 60.2 3.7 6.19 56.5 3.2 5.65 4.47
-------- ------ ---- -------- ------ ---- -------- ------ ---- ------
$5,180.3 $379.9 7.33 $4,976.6 $365.1 7.34 $5,387.4 $330.4 6.13 3.96
(34.0) (32.1) (34.2) 0.80
646.5 616.9 675.3 3.67
344.4 337.8 344.1 5.08
-------- -------- -------- ------
$6,137.2 $5,899.2 $6,372.6 4.00%
======== ======== ======== ======
$2,056.7 $ 59.8 2.91% $2,059.7 $ 61.3 2.98% $2,365.0 $ 58.6 2.48% 1.56%
948.6 49.3 5.21 963.8 49.0 5.08 1,003.8 40.8 4.06 (2.19)
276.5 14.0 5.05 221.0 11.3 5.12 207.2 7.6 3.62 16.12
-------- ------ ---- -------- ------ ---- -------- ------ ---- ------
$3,281.8 $123.1 3.75 $3,244.5 $121.6 3.75 $3,576.0 $107.0 2.99 1.93
1.0 -- 4.10 1.1 -- 4.31 1.0 -- 3.26 (12.94)
55.4 4.0 7.27 44.5 3.5 7.79 50.4 4.0 7.97 (4.45)
771.5 37.5 4.84 613.9 32.7 5.32 664.5 25.1 3.77 9.64
-------- ------ ---- -------- ------ ---- -------- ------ ---- ------
$4,109.7 $164.6 4.00 $3,904.0 $157.8 4.04 $4,291.9 $136.1 3.17 3.15
1,386.2 1,336.8 1,445.4 5.97
67.0 61.0 62.9 4.38
-------- -------- -------- ------
$5,562.9 $5,301.8 $5,800.2 3.88
-------- -------- -------- ------
$ 574.3 $ 597.4 $ 572.4 5.28
-------- -------- -------- ------
$6,137.2 $5,899.2 $6,372.6 4.00%
======== ======== ======== ======
$215.3 $207.3 $194.3
3.33% 3.30% 2.96%
4.16 4.17 3.61
A-51
UMB FINANCIAL CORPORATION
SELECTED FINANCIAL DATA OF AFFILIATE BANKS
December 31, 1998
--------------------------------------------------------
Loans
Number of Total Net of Total Shareholders'
Locations Assets Unearned Deposits Equity
--------- ---------- ---------- ---------- -------------
(in thousands)
Western Missouri
UMB Bank, n.a. (Kansas
City).................. 59 $4,312,277 $1,493,996 $3,409,304 $364,426
UMB Bank, Cass County
(Peculiar)............. 1 29,781 8,451 25,554 2,998
UMB Bank, Northwest (St.
Joseph)................ 9 171,420 56,188 156,436 12,716
Eastern Missouri and
Illinois
UMB Bank of St. Louis,
n.a.................... 32 $1,174,859 $ 312,196 $ 739,152 $ 70,704
UMB Bank, Northeast
(Monroe City).......... 3 72,044 30,275 61,874 5,956
UMB First State Bank of
Morrisonville
(Illinois)............. 1 12,171 4,468 11,144 941
Southwestern Missouri
UMB Bank, Southwest
(Springfield).......... 14 $ 342,185 $ 129,348 $ 244,282 $ 24,972
UMB Bank, Warsaw........ 4 71,848 22,609 57,974 4,945
Central Missouri
UMB Bank, Boonville..... 2 $ 40,904 $ 14,809 $ 32,901 $ 2,868
UMB Bank, Jefferson
City................... 1 48,516 25,829 31,265 3,779
UMB Bank, North Central
(Brookfield)........... 5 74,149 24,927 53,653 5,787
UMB Bank, Warrensburg... 4 104,853 22,873 89,891 7,768
Colorado
UMB Bank Colorado....... 12 $ 328,905 $ 160,775 $ 266,498 $ 25,079
Kansas
UMB National Bank of
America................ 13 $ 874,441 $ 138,724 $ 761,141 $ 69,049
Nebraska
UMB Bank Omaha, n.a..... 5 $ 37,319 $ 33,588 $ 28,892 $ 5,086
Oklahoma
UMB Oklahoma Bank....... 3 $ 142,495 $ 82,624 $ 109,259 $ 16,286
Banking-Related
Subsidiaries
UMB Properties, Inc.....
UMB Community
Development
Corporation............
UMB Banc Leasing
Corporation............
UMB, U.S.A. n.a.........
UMB Scout Brokerage
Services, Inc..........
UMB Scout Insurance
Company................
UMB Capital Corporation.
United Missouri
Insurance Company......
United Missouri Trust
Company of New York....
UMB Trust Company of
South Dakota...........
UMB Consulting Services,
Inc....................
UMB Data Corporation....
A-52