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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-4887
UMB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Missouri | 43-0903811 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
1010 Grand Boulevard, Kansas City, Missouri | 64106 | |
(Address of principal executive offices) | (ZIP Code) |
(Registrants telephone number, including area code): (816) 860-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | |
Non- accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
As of April 30, 2011, UMB Financial Corporation had 40,516,582 shares of common stock outstanding.
Table of Contents
FORM 10-Q
INDEX
3 | ||||||
ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) | 3 | ||||
3 | ||||||
4 | ||||||
STATEMENTS OF CHANGES IN CONDENSED CONSOLIDATED SHAREHOLDERS EQUITY |
5 | |||||
6 | ||||||
7 | ||||||
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
26 | ||||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 39 | ||||
ITEM 4. | CONTROLS AND PROCEDURES | 43 | ||||
44 | ||||||
ITEM 1. | LEGAL PROCEEDINGS | 44 | ||||
ITEM 1A. | RISK FACTORS | 44 | ||||
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 44 | ||||
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 44 | ||||
ITEM 4. | RESERVED | 44 | ||||
ITEM 5. | OTHER INFORMATION | 44 | ||||
ITEM 6. | EXHIBITS | 45 | ||||
46 | ||||||
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT |
||||||
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT |
||||||
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PART I FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands, except share and per share data)
March 31, 2011 |
December 31, 2010 |
|||||||
ASSETS |
||||||||
Loans: |
$ | 4,667,862 | $ | 4,583,683 | ||||
Allowance for loan losses |
(72,718 | ) | (73,952 | ) | ||||
Net loans |
4,595,144 | 4,509,731 | ||||||
Loans held for sale |
6,446 | 14,414 | ||||||
Investment Securities: |
||||||||
Available for sale |
5,604,318 | 5,613,047 | ||||||
Held to maturity (market value of $72,644 and $68,752, respectively) |
68,161 | 63,566 | ||||||
Trading securities |
54,060 | 42,480 | ||||||
Federal Reserve Bank stock and other |
22,772 | 23,011 | ||||||
Total investment securities |
5,749,311 | 5,742,104 | ||||||
Federal funds sold and securities purchased under agreements to resell |
3,793 | 235,176 | ||||||
Interest-bearing due from banks |
2,012,990 | 848,598 | ||||||
Cash and due from banks |
309,741 | 356,092 | ||||||
Bank premises and equipment, net |
219,438 | 219,727 | ||||||
Accrued income |
73,750 | 76,653 | ||||||
Goodwill |
211,114 | 211,114 | ||||||
Other intangibles |
88,291 | 92,297 | ||||||
Other assets |
82,302 | 99,026 | ||||||
Total assets |
$ | 13,352,320 | $ | 12,404,932 | ||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 3,627,918 | $ | 2,888,881 | ||||
Interest-bearing demand and savings |
5,294,235 | 4,445,798 | ||||||
Time deposits under $100,000 |
673,775 | 693,600 | ||||||
Time deposits of $100,000 or more |
776,828 | 1,000,462 | ||||||
Total deposits |
10,372,756 | 9,028,741 | ||||||
Federal funds purchased and repurchase agreements |
1,687,352 | 2,084,342 | ||||||
Short-term debt |
23,862 | 35,220 | ||||||
Long-term debt |
7,718 | 8,884 | ||||||
Accrued expenses and taxes |
145,112 | 145,458 | ||||||
Other liabilities |
36,531 | 41,427 | ||||||
Total liabilities |
12,273,331 | 11,344,072 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $1.00 par value; 80,000,000 shares authorized, 55,056,730 shares issued, and 40,526,355 and 40,430,081 shares outstanding, respectively |
55,057 | 55,057 | ||||||
Capital surplus |
718,158 | 718,306 | ||||||
Retained earnings |
646,383 | 623,415 | ||||||
Accumulated other comprehensive income |
19,811 | 25,465 | ||||||
Treasury stock, 14,530,375 and 14,626,649 shares, at cost, respectively |
(360,420 | ) | (361,383 | ) | ||||
Total shareholders equity |
1,078,989 | 1,060,860 | ||||||
Total liabilities and shareholders equity |
$ | 13,352,320 | $ | 12,404,932 | ||||
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands, except share and per share data)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
INTEREST INCOME |
||||||||
Loans |
$ | 53,989 | $ | 53,483 | ||||
Securities: |
||||||||
Taxable interest |
22,308 | 23,779 | ||||||
Tax-exempt interest |
8,238 | 7,317 | ||||||
Total securities income |
30,546 | 31,096 | ||||||
Federal funds and resell agreements |
15 | 61 | ||||||
Interest-bearing due from banks |
1,162 | 1,319 | ||||||
Trading securities |
261 | 142 | ||||||
Total interest income |
85,973 | 86,101 | ||||||
INTEREST EXPENSE |
||||||||
Deposits |
6,666 | 9,624 | ||||||
Federal funds purchased and repurchase agreements |
668 | 444 | ||||||
Other |
191 | 259 | ||||||
Total interest expense |
7,525 | 10,327 | ||||||
Net interest income |
78,448 | 75,774 | ||||||
Provision for loan losses |
7,100 | 8,310 | ||||||
Net interest income after provision for loan losses |
71,348 | 67,464 | ||||||
NONINTEREST INCOME |
||||||||
Trust and securities processing |
51,727 | 35,572 | ||||||
Trading and investment banking |
9,019 | 7,027 | ||||||
Service charges on deposit accounts |
18,608 | 20,519 | ||||||
Insurance fees and commissions |
1,204 | 1,699 | ||||||
Brokerage fees |
2,341 | 1,336 | ||||||
Bankcard fees |
14,442 | 12,020 | ||||||
Gain on sales of securities available for sale, net |
7,456 | 5,382 | ||||||
Other |
2,953 | 2,875 | ||||||
Total noninterest income |
107,750 | 86,430 | ||||||
NONINTEREST EXPENSE |
||||||||
Salaries and employee benefits |
72,900 | 62,253 | ||||||
Occupancy, net |
9,605 | 8,921 | ||||||
Equipment |
10,936 | 10,870 | ||||||
Supplies and services |
5,580 | 4,707 | ||||||
Marketing and business development |
4,122 | 3,705 | ||||||
Processing fees |
12,173 | 11,029 | ||||||
Legal and consulting |
2,617 | 1,622 | ||||||
Bankcard |
3,852 | 3,190 | ||||||
Amortization of other intangible assets |
4,006 | 2,091 | ||||||
Regulatory Fees |
3,716 | 3,238 | ||||||
Other |
6,009 | 5,752 | ||||||
Total noninterest expense |
135,516 | 117,378 | ||||||
Income before income taxes |
43,582 | 36,516 | ||||||
Income tax expense |
12,712 | 10,331 | ||||||
NET INCOME |
$ | 30,870 | $ | 26,185 | ||||
PER SHARE DATA |
||||||||
Net income basic |
$ | 0.77 | $ | 0.65 | ||||
Net income diluted |
0.76 | 0.65 | ||||||
Dividends |
0.195 | 0.185 | ||||||
Weighted average shares outstanding |
40,070,399 | 40,089,527 |
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(unaudited, dollars in thousands, except per share data)
Common Stock |
Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive Income |
Treasury Stock |
Total | |||||||||||||||||||
Balance January 1, 2010 |
$ | 55,057 | $ | 712,774 | $ | 562,748 | $ | 40,454 | $ | (355,482 | ) | $ | 1,015,551 | |||||||||||
Net income |
| | 26,185 | | | 26,185 | ||||||||||||||||||
Change in unrealized gains on securities |
| | | (3,823 | ) | | (3,823 | ) | ||||||||||||||||
Total comprehensive income |
22,362 | |||||||||||||||||||||||
Cash dividends ($0.185 per share) |
| | (7,490 | ) | | | (7,490 | ) | ||||||||||||||||
Purchase of treasury stock |
| | | | (2,961 | ) | (2,961 | ) | ||||||||||||||||
Issuance of equity awards |
| (1,374 | ) | | | 1,498 | 124 | |||||||||||||||||
Recognition of equity based compensation |
| 1,410 | | | | 1,410 | ||||||||||||||||||
Net tax benefit related to equity compensation plans |
| 48 | | | | 48 | ||||||||||||||||||
Sale of treasury stock |
| 113 | | | 63 | 176 | ||||||||||||||||||
Exercise of stock options |
| 91 | | | 140 | 231 | ||||||||||||||||||
Balance March 31, 2010 |
$ | 55,057 | $ | 713,062 | $ | 581,443 | $ | 36,631 | $ | (356,742 | ) | $ | 1,029,451 | |||||||||||
Balance January 1, 2011 |
$ | 55,057 | $ | 718,306 | $ | 623,415 | $ | 25,465 | $ | (361,383 | ) | $ | 1,060,860 | |||||||||||
Net income |
| | 30,870 | | | 30,870 | ||||||||||||||||||
Change in unrealized gains on securities |
| | | (5,654 | ) | | (5,654 | ) | ||||||||||||||||
Total comprehensive income |
25,216 | |||||||||||||||||||||||
Cash dividends ($0.195 per share) |
| | (7,902 | ) | | | (7,902 | ) | ||||||||||||||||
Purchase of treasury stock |
| | | | (1,373 | ) | (1,373 | ) | ||||||||||||||||
Issuance of equity awards |
| (1,918 | ) | | | 2,157 | 239 | |||||||||||||||||
Recognition of equity based compensation |
| 1,553 | | | | 1,553 | ||||||||||||||||||
Net tax benefit related to equity compensation plans |
| 127 | | | | 127 | ||||||||||||||||||
Sale of treasury stock |
| 21 | | | 18 | 39 | ||||||||||||||||||
Exercise of stock options |
| 69 | | | 161 | 230 | ||||||||||||||||||
Balance March 31, 2011 |
$ | 55,057 | $ | 718,158 | $ | 646,383 | $ | 19,811 | $ | (360,420 | ) | $ | 1,078,989 | |||||||||||
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Operating Activities |
||||||||
Net Income |
$ | 30,870 | $ | 26,185 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
7,100 | 8,310 | ||||||
Depreciation and amortization |
11,205 | 9,170 | ||||||
Deferred income tax benefit |
(354 | ) | (3,087 | ) | ||||
Net (increase) decrease in trading securities and other earning assets |
(11,580 | ) | 3,356 | |||||
Gains on sales of securities available for sale |
(7,456 | ) | (5,382 | ) | ||||
(Gains) losses on sales of assets |
(1 | ) | 92 | |||||
Amortization of securities premiums, net of discount accretion |
10,130 | 7,299 | ||||||
Originations of loans held for sale |
(55,800 | ) | (26,577 | ) | ||||
Net gains on sales of loans held for sale |
(480 | ) | (170 | ) | ||||
Proceeds from sales of loans held for sale |
64,248 | 26,564 | ||||||
Issuance of equity awards |
239 | 124 | ||||||
Equity based compensation |
1,553 | 1,410 | ||||||
Changes in: |
||||||||
Accrued income |
2,903 | 3,434 | ||||||
Accrued expenses and taxes |
2,687 | 640 | ||||||
Other assets and liabilities, net |
16,385 | (5,423 | ) | |||||
Net cash provided by operating activities |
71,649 | 45,945 | ||||||
Investing Activities |
||||||||
Proceeds from maturities of securities held to maturity |
1,556 | 2,626 | ||||||
Proceeds from sales of securities available for sale |
626,732 | 360,020 | ||||||
Proceeds from maturities of securities available for sale |
554,711 | 624,202 | ||||||
Purchases of securities held to maturity |
(6,104 | ) | (1,678 | ) | ||||
Purchases of securities available for sale |
(1,187,087 | ) | (865,300 | ) | ||||
Net (increase) decrease in loans |
(93,503 | ) | 19,334 | |||||
Net decrease in fed funds sold and resell agreements |
231,383 | 308,588 | ||||||
Net decrease (increase) in interest bearing balances due from other financial institutions |
28,298 | (18,458 | ) | |||||
Purchases of bank premises and equipment |
(7,187 | ) | (3,096 | ) | ||||
Net cash paid for acquisitions |
| (12,386 | ) | |||||
Proceeds from sales of bank premises and equipment |
118 | 169 | ||||||
Net cash provided by investing activities |
148,917 | 414,021 | ||||||
Financing Activities |
||||||||
Net increase (decrease) in demand and savings deposits |
1,587,474 | (58,621 | ) | |||||
Net decrease in time deposits |
(243,459 | ) | (255,508 | ) | ||||
Net decrease in fed funds purchased and repurchase agreements |
(396,990 | ) | (616,311 | ) | ||||
Net decrease in short-term debt |
(10,158 | ) | (7,640 | ) | ||||
Repayment of long-term debt |
(2,366 | ) | (1,246 | ) | ||||
Cash dividends paid |
(7,751 | ) | (7,477 | ) | ||||
Net tax benefit related to equity compensation plans |
127 | 48 | ||||||
Proceeds from exercise of stock options and sales of treasury shares |
269 | 407 | ||||||
Purchases of treasury stock |
(1,373 | ) | (2,961 | ) | ||||
Net cash provided by (used in) financing activities |
925,773 | (949,309 | ) | |||||
Increase (decrease) in cash and due from banks |
1,146,339 | (489,343 | ) | |||||
Cash and cash equivalents at beginning of period |
1,033,617 | 1,229,645 | ||||||
Cash and cash equivalents at end of period |
$ | 2,179,956 | $ | 740,302 | ||||
Supplemental Disclosures: |
||||||||
Income taxes paid |
$ | 266 | $ | 783 | ||||
Total interest paid |
8,185 | 13,255 |
See Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
1. Financial Statement Presentation
The condensed consolidated financial statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after elimination of all significant intercompany transactions. In the opinion of management of the Company, all adjustments, which were of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations, have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year. The financial statements should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
2. Summary of Accounting Policies
The Company is a multi-bank financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices in the states of Missouri, Kansas, Colorado, Illinois, Oklahoma, Arizona, Nebraska, Pennsylvania, South Dakota, Indiana, Utah, and Wisconsin. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation is listed in the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Interest-bearing Due From Banks
Amounts due from the Federal Reserve Bank, which are interest-bearing for all periods presented, and amounts due from certificates of deposits held at other financial institutions are included in interest-bearing due from banks. The amount due from the Federal Reserve Bank totaled $1,870.2 million and $420.3 million at March 31, 2011 and March 31, 2010, respectively, and is considered cash and cash equivalents. The amounts due from certificates of deposit totaled $142.8 million and $304.1 million at March 31, 2011 and March 31, 2010, respectively.
This table provides a summary of cash and cash equivalents as presented on the Consolidated Statement of Cash Flows as of March 31, 2011 and March 31, 2010 (in thousands):
March 31, | ||||||||
2011 | 2010 | |||||||
Due from the Federal Reserve |
$ | 1,870,215 | $ | 420,336 | ||||
Cash and due from banks |
309,741 | 319,966 | ||||||
Cash and cash equivalents at end of period |
$ | 2,179,956 | $ | 740,302 | ||||
Per Share Data
Basic income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted income per share includes the dilutive effect of 289,718 and 285,268 shares issuable upon the exercise of stock options granted by the Company at March 31, 2011 and 2010, respectively.
Options issued under employee benefit plans to purchase 895,677 and 1,119,068 shares of common stock were outstanding at March 31, 2011 and 2010, respectively, but were not included in the computation of diluted EPS because the options were anti-dilutive.
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
3. New Accounting Pronouncements
Fair Value Measurements and Disclosures In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (ASU 2010-06), which amends ASC 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010. The Company adopted the provisions related to Level 1 and 2 disclosures on January 1, 2010 and adopted the provisions related to Level 3 disclosures on January 1, 2011 with no impact on its financial position or results of operations except for additional financial statement disclosures.
Credit Quality of Financing Receivables and the Allowance for Credit Losses In July 2010, the FASB issued ASU No. 2010-20, Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20), which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entitys financial receivables and its allowance for credit losses. ASU 2010-20 was effective for the Company for the annual reporting period ended December 31, 2010. The Company adopted this statement on December 31, 2010 with no impact on its financial position or results of operations except for additional financial statement disclosures. In January 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of Disclosures About Troubled Debt Restructurings in Update No. 2010-20, which temporarily defers the effective date in ASU 2010-20 for disclosures about TDRs by creditors until the FASB finalizes its project on determining what constitutes a TDR for a creditor.
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
4. Loans and Allowance for Loan Losses
Loan Origination/Risk Management
The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio. Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions. The Company maintains an independent loan review department that reviews and validates the credit risk program on a continual basis. Management regularly evaluates the results of the loan reviews. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Companys policies and procedures.
Commercial loans are underwritten after evaluating and understanding the borrowers ability to operate profitably and prudently expand its business. Commercial loans are made based on the identified cash flows of the borrower and on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers. Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans including an analysis of the borrowers cash flow, available business capital, and overall credit-worthiness of the borrower.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires an appraisal of the collateral be made at origination, on an as-needed basis, in conformity with current market conditions and regulatory requirements. The underwriting standards address both owner and non-owner occupied real estate.
Construction loans are underwritten using feasibility studies, independent appraisal reviews, sensitivity analysis or absorption and lease rates and financial analysis of the developers and property owners. Construction loans are based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term borrowers, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their repayment being sensitive to interest rate changes, governmental regulation of real property, economic conditions and the availability of long-term financing.
Underwriting standards for residential real estate and home equity loans are based on the borrowers loan-to-value percentage, collection remedies, and overall credit history.
Consumer loans are underwritten based on the borrowers repayment ability. The Company monitors delinquencies on all of its consumer loans and leases and periodically reviews the distribution of FICO scores relative to historical periods to monitor credit risk on its credit card loans. The underwriting and review practices, combined with the relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Consumer loans and leases that are 90 days past due or more are considered non-performing.
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
This table provides a summary of loan classes and an aging of past due loans at March 31, 2011 and December 31, 2010 (in thousands):
Three Months Ended March 31, 2011 |
||||||||||||||||||||||||
30-89 Days Past Due and Accruing |
Greater than 90 Days Past Due and Accruing |
Non- Accrual Loans |
Total Past Due |
Current | Total Loans |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 5,917 | $ | 664 | $ | 6,159 | $ | 12,740 | $ | 2,035,786 | $ | 2,048,526 | ||||||||||||
Commercial credit card |
1,283 | 267 | | 1,550 | 94,700 | 96,250 | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
716 | 65 | 600 | 1,381 | 126,220 | 127,601 | ||||||||||||||||||
Real estate commercial |
5,878 | 1,581 | 5,637 | 13,096 | 1,280,780 | 1,293,876 | ||||||||||||||||||
Real estate residential |
3,459 | 978 | 826 | 5,263 | 203,221 | 208,484 | ||||||||||||||||||
Real estate HELOC |
379 | | 277 | 656 | 478,781 | 479,437 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
3,361 | 3,112 | 4,834 | 11,307 | 292,345 | 303,652 | ||||||||||||||||||
Consumer other |
2,682 | 596 | 730 | 4,008 | 100,819 | 104,827 | ||||||||||||||||||
Leases |
6 | | | 6 | 5,203 | 5,209 | ||||||||||||||||||
Total loans |
$ | 23,681 | $ | 7,263 | $ | 19,063 | $ | 50,007 | $ | 4,617,855 | $ | 4,667,862 | ||||||||||||
Year Ended December 31, 2010 | ||||||||||||||||||||||||
30-89 Days Past Due and Accruing |
Greater than 90 Days Past Due and Accruing |
Non-Accrual Loans |
Total Past Due |
Current | Total Loans | |||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 9,585 | $ | 204 | $ | 11,345 | $ | 21,134 | $ | 1,915,918 | $ | 1,937,052 | ||||||||||||
Commercial credit card |
1,391 | 296 | | 1,687 | 82,857 | 84,544 | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
674 | 262 | 600 | 1,536 | 126,984 | 128,520 | ||||||||||||||||||
Real estate commercial |
10,682 | 340 | 6,753 | 17,775 | 1,277,122 | 1,294,897 | ||||||||||||||||||
Real estate residential |
4,802 | 153 | 1,094 | 6,049 | 187,108 | 193,157 | ||||||||||||||||||
Real estate HELOC |
1,318 | 62 | 75 | 1,455 | 474,602 | 476,057 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
3,892 | 3,731 | 4,424 | 12,047 | 310,161 | 322,208 | ||||||||||||||||||
Consumer other |
1,745 | 432 | 634 | 2,811 | 137,382 | 140,193 | ||||||||||||||||||
Leases |
| | | | 7,055 | 7,055 | ||||||||||||||||||
Total loans |
$ | 34,089 | $ | 5,480 | $ | 24,925 | $ | 64,494 | $ | 4,519,189 | $ | 4,583,683 | ||||||||||||
The Company sold $69.0 million and $26.6 million of loans during the periods ended March 31, 2011 and March 31, 2010, respectively.
10
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
The Company has ceased the recognition of interest on loans with a carrying value of $19.1 million and $24.9 million at March 31, 2011 and December 31, 2010, respectively. Restructured loans totaled $0.1 million and $0.2 million at March 31, 2011 and December 31, 2010, respectively. Loans 90 days past due and still accruing interest amounted to $7.3 million and $5.5 million at March 31, 2011 and December 31, 2010, respectively. There was an insignificant amount of interest recognized on impaired loans during 2011 and 2010.
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Companys loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans, net charge-offs, non-performing loans, and general economic conditions.
The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. The loan rankings are summarized into the following categories: Non-watch list, Watch, Special Mention, and Substandard. Any loan not classified in one of the categories described below is considered to be a Non-watch list loan. A description of the general characteristics of the loan ranking categories is as follows:
| Watch This rating represents credit exposure that presents higher than average risk and warrants greater than routine attention by Company personnel due to conditions affecting the borrower, the borrowers industry or the economic environment. These conditions have resulted in some degree of uncertainty that results in higher than average credit risk. |
| Special Mention This rating reflects a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institutions credit position at some future date. The rating is not adversely classified and does not expose an institution to sufficient risk to warrant adverse classification. |
| Substandard This rating represents an asset inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. This category may include loans where the collection of full principal is doubtful or remote. |
All other classes of loans are generally evaluated and monitored based on payment activity. Non-performing loans include restructured loans, impaired loans, and loans greater than 90 days past due.
11
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
This table provides an analysis of the credit risk profile of each loan class at March 31, 2011 and December 31, 2010 (in thousands):
Corporate Credit Exposure
Credit Risk Profile by Risk Rating
Commercial | Real estate- construction | |||||||||||||||
March 31, 2011 |
December 31, 2010 |
March 31, 2011 |
December 31, 2010 |
|||||||||||||
Non-watch list |
$ | 1,868,372 | $ | 1,718,691 | $ | 123,687 | $ | 127,709 | ||||||||
Watch |
58,817 | 77,201 | 3,223 | | ||||||||||||
Special Mention |
63,459 | 48,915 | 44 | 44 | ||||||||||||
Substandard |
57,878 | 92,245 | 647 | 767 | ||||||||||||
Total |
$ | 2,048,526 | $ | 1,937,052 | $ | 127,601 | $ | 128,520 | ||||||||
Real estate - commercial | ||||||||||||||||
March 31, 2011 |
December 31, 2010 |
|||||||||||||||
Non-watch list |
$ | 1,182,298 | $ | 1,196,679 | ||||||||||||
Watch |
16,776 | 18,917 | ||||||||||||||
Special Mention |
38,695 | 34,006 | ||||||||||||||
Substandard |
56,107 | 45,295 | ||||||||||||||
Total |
$ | 1,293,876 | $ | 1,294,897 | ||||||||||||
Corporate Credit Exposure
Credit Risk Profile Based on Payment Activity
Commercial credit card | Real estate- residential | |||||||||||||||
March 31, 2011 |
December 31, 2010 |
March 31, 2011 |
December 31, 2010 |
|||||||||||||
Performing |
$ | 95,983 | $ | 82,857 | $ | 206,680 | $ | 201,522 | ||||||||
Non-performing |
267 | 1,687 | 1,804 | 6,049 | ||||||||||||
Total |
$ | 96,250 | $ | 84,544 | $ | 208,484 | $ | 207,571 | ||||||||
Real estate - HELOC | Consumer credit card | |||||||||||||||
March 31, 2011 |
December 31, 2010 |
March 31, 2011 |
December 31, 2010 |
|||||||||||||
Performing |
$ | 479,160 | $ | 474,602 | $ | 295,706 | $ | 314,053 | ||||||||
Non-performing |
277 | 1,455 | 7,946 | 8,155 | ||||||||||||
Total |
$ | 479,437 | $ | 476,057 | $ | 303,652 | $ | 322,208 | ||||||||
Consumer - other | Leases | |||||||||||||||
March 31, 2011 |
December 31, 2010 |
March 31, 2011 |
December 31, 2010 |
|||||||||||||
Performing |
$ | 103,501 | $ | 139,127 | $ | 5,209 | $ | 7,055 | ||||||||
Non-performing |
1,326 | 1,066 | | | ||||||||||||
Total |
$ | 104,827 | $ | 140,193 | $ | 5,209 | $ | 7,055 | ||||||||
12
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents managements judgment of losses within the Companys loan portfolio as of the balance sheet date. The allowance is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Accordingly, the methodology is based on historical loss trends. The Companys process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.
The level of the allowance reflects managements continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that, in managements judgment, should be charged off. While management utilizes its best judgment and information available, the adequacy of the allowance is dependent upon a variety of factors beyond the Companys control, including, among other things, the performance of the Companys loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Companys allowance for loan losses consists of specific valuation allowances and general valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, general economic conditions and other qualitative risk factors both internal and external to the Company.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal risk grading process that evaluates the obligors ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. When a loan is considered impaired, the loan is analyzed to determine the need, if any, to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrowers ability to repay amounts owed, collateral deficiencies, the relative risk ranking of the loan and economic conditions affecting the borrowers industry.
General valuation allowances are calculated based on the historical loss experience of specific types of loans including an evaluation of the time span and volume of the actual charge-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated based on actual charge-off experience. A valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio, time span to charge-off, and the total dollar amount of the loans in the pool. The Companys pools of similar loans include similarly risk-graded groups of commercial loans, commercial real estate loans, commercial credit card, home equity loans, consumer real estate loans and consumer and other loans. The Company also considers a loan migration analysis for criticized loans. This analysis includes an assessment of the probability that a loan will move to a loss position based on its criticized category. In addition, a portion of the allowance is determined by a review of qualitative factors by Management.
13
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS (in thousands)
This table provides a rollforward of the allowance for loan losses by portfolio segment for three months ended March 31, 2011 (in thousands):
Three Months Ended March 31, 2011 | ||||||||||||||||||||
Commercial | Real estate | Consumer | Leases | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 39,138 | $ | 18,557 | $ | 16,243 | $ | 14 | $ | 73,952 | ||||||||||
Charge-offs |
(5,200 | ) | (67 | ) | (4,399 | ) | | (9,666 | ) | |||||||||||
Recoveries |
151 | | 1,181 | | 1,332 | |||||||||||||||
Provision |
2,082 | 3,873 | 1,148 | (3 | ) | 7,100 | ||||||||||||||
Ending Balance |
$ | 36,171 | $ | 22,363 | $ | 14,173 | $ | 11 | $ | 72,718 | ||||||||||
Ending Balance: individually evaluated for impairment |
$ | 1,898 | $ | 2,603 | $ | | $ | | $ | 4,501 | ||||||||||
Ending Balance: collectively evaluated for impairment |
34,273 | 19,760 | 14,173 | 11 | 68,217 | |||||||||||||||
Ending Balance: loans acquired with deteriorated credit quality |
| | | | | |||||||||||||||
Loans: |
||||||||||||||||||||
Ending Balance: loans |
$ | 2,059,062 | $ | 2,109,398 | $ | 494,193 | $ | 5,209 | $ | 4,667,862 | ||||||||||
Ending Balance: individually evaluated for impairment |
6,765 | 9,178 | | | 15,943 | |||||||||||||||
Ending Balance: collectively evaluated for impairment |
2,052,297 | 2,100,220 | 494,193 | 5,209 | 4,651,919 | |||||||||||||||
Ending Balance: loans acquired with deteriorated credit quality |
| | | | |
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Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
This table provides a rollforward of the allowance for loan losses for three months ended March 31, 2010 (in thousands):
Three Months Ended March 31, 2010 |
||||
Beginning allowance January 1 |
$ | 64,139 | ||
Additions (deductions): |
||||
Charge-offs |
(6,007 | ) | ||
Recoveries |
1,000 | |||
Net charge-offs |
(5,007 | ) | ||
Provision charged to expense |
8,310 | |||
Ending allowance March 31 |
$ | 67,442 | ||
Impaired Loans
This table provides an analysis of impaired loans by class at March 31, 2011 and December 31, 2010 (in thousands):
Three Months Ended March 31, 2011 | ||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment with No Allowance |
Recorded Investment with Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 8,744 | $ | 2,098 | $ | 4,667 | $ | 6,765 | $ | 1,898 | $ | 9,339 | ||||||||||||
Commercial credit card |
| | | | | | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
8 | 8 | | 8 | | 4 | ||||||||||||||||||
Real estate commercial |
8,025 | 865 | 6,674 | 7,539 | 2,293 | 7,295 | ||||||||||||||||||
Real estate residential |
2,118 | 343 | 1,288 | 1,631 | 310 | 1,733 | ||||||||||||||||||
Real estate HELOC |
| | | | | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
| | | | | | ||||||||||||||||||
Consumer other |
| | | | | 8 | ||||||||||||||||||
Leases |
| | | | | | ||||||||||||||||||
Total |
$ | 18,895 | $ | 3,314 | $ | 12,629 | $ | 15,943 | $ | 4,501 | $ | 18,379 | ||||||||||||
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
Year Ended December 31, 2010 | ||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment with No Allowance |
Recorded Investment with Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 13,497 | $ | 10,180 | $ | 1,733 | $ | 11,913 | $ | 798 | $ | 15,426 | ||||||||||||
Commercial credit card |
| | | | | | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
| | | | | 121 | ||||||||||||||||||
Real estate commercial |
7,415 | 439 | 6,612 | 7,051 | 1,475 | 4,092 | ||||||||||||||||||
Real estate residential |
2,071 | 612 | 1,223 | 1,835 | 287 | 2,535 | ||||||||||||||||||
Real estate HELOC |
| | | | | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
| | | | | | ||||||||||||||||||
Consumer other |
15 | 15 | | 15 | | 6 | ||||||||||||||||||
Leases |
| | | | | | ||||||||||||||||||
Total |
$ | 22,998 | $ | 11,246 | $ | 9,568 | $ | 20,814 | $ | 2,560 | $ | 22,180 | ||||||||||||
5. Securities
Securities Available for Sale
This table provides detailed information about securities available for sale at March 31, 2011 and December 31, 2010 (in thousands):
March 31, 2011 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. Treasury |
$ | 260,789 | $ | | $ | (1,411 | ) | $ | 259,378 | |||||||
U.S. Agencies |
2,099,941 | 8,257 | (9,055 | ) | 2,099,143 | |||||||||||
Mortgage-backed |
1,853,046 | 28,683 | (13,251 | ) | 1,868,478 | |||||||||||
State and political subdivisions |
1,320,180 | 22,065 | (4,194 | ) | 1,338,051 | |||||||||||
Corporates |
39,411 | 11 | (154 | ) | 39,268 | |||||||||||
Total |
$ | 5,573,367 | $ | 59,016 | $ | (28,065 | ) | $ | 5,604,318 | |||||||
December 31, 2010 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. Treasury |
$ | 482,912 | $ | 3,801 | $ | | $ | 486,713 | ||||||||
U.S. Agencies |
1,994,696 | 12,567 | (6,965 | ) | 2,000,298 | |||||||||||
Mortgage-backed |
1,813,023 | 33,718 | (13,266 | ) | 1,833,475 | |||||||||||
State and political subdivisions |
1,252,067 | 18,347 | (8,139 | ) | 1,262,275 | |||||||||||
Corporates |
30,453 | 7 | (174 | ) | 30,286 | |||||||||||
Total |
$ | 5,573,151 | $ | 68,440 | $ | (28,544 | ) | $ | 5,613,047 | |||||||
16
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
The following table presents contractual maturity information for securities available for sale at March 31, 2011 (in thousands):
Amortized Cost |
Fair Value |
|||||||
Due in 1 year or less |
$ | 658,795 | $ | 662,247 | ||||
Due after 1 year through 5 years |
2,649,362 | 2,660,747 | ||||||
Due after 5 years through 10 years |
380,297 | 381,964 | ||||||
Due after 10 years |
31,867 | 30,882 | ||||||
Total |
3,720,321 | 3,735,840 | ||||||
Mortgage-backed securities |
1,853,046 | 1,868,478 | ||||||
Total securities available for sale |
$ | 5,573,367 | $ | 5,604,318 | ||||
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.
For the three months ended March 31, 2011, proceeds from the sales of securities available for sale were $626.7 million compared to $360.0 million for the same period in 2010. Securities transactions resulted in gross realized gains of $7.5 million and $5.6 million for the three months ended March 31, 2011 and 2010. The gross realized losses for the three months ended March 31, 2011 and 2010 were $41.0 thousand and $228.0 thousand, respectively.
Trading Securities
The net unrealized gains on trading securities at March 31, 2011 and March 31, 2010 were $89.8 thousand and $283.4 thousand, respectively, and were included in trading and investment banking income.
Securities Held to Maturity
The table below provides detailed information for securities held to maturity at March 31, 2011 and December 31, 2010 (in thousands):
March 31, 2011 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
State and political subdivisions |
$ | 68,161 | $ | 4,483 | $ | | $ | 72,644 | ||||||||
December 31, 2010 |
||||||||||||||||
State and political subdivisions |
$ | 63,566 | $ | 5,186 | $ | | $ | 68,752 | ||||||||
The following table presents contractual maturity information for securities held to maturity at March 31, 2011 (in thousands):
Amortized Cost |
Fair Value |
|||||||
Due in 1 year or less |
$ | 3,994 | $ | 4,257 | ||||
Due after 1 year through 5 years |
11,171 | 11,906 | ||||||
Due after 5 years through 10 years |
7,314 | 7,795 | ||||||
Due after 10 years |
45,682 | 48,686 | ||||||
Total securities held to maturity |
$ | 68,161 | $ | 72,644 | ||||
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.
17
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
There were no sales of securities held to maturity during the first three months of 2011 and 2010.
Securities available for sale and held to maturity with a market value of $3.8 billion at March 31, 2011, and $4.6 billion at December 31, 2010, were pledged to secure U.S. Government deposits, other public deposits and certain Trust deposits as required by law.
The following table shows the Companys available for sale investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010 (in thousands).
March 31, 2011 |
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Description of Securities |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
U.S. Treasury Obligations |
$ | 148,638 | $ | (1,411 | ) | $ | | $ | | $ | 148,638 | $ | (1,411 | ) | ||||||||||
Direct obligations of U.S. government agencies |
1,003,318 | (9,055 | ) | | | 1,003,318 | (9,055 | ) | ||||||||||||||||
Federal agency mortgage backed securities |
715,946 | (13,251 | ) | | | 715,946 | (13,251 | ) | ||||||||||||||||
Municipal securities |
269,699 | (4,174 | ) | 3,268 | (20 | ) | 272,967 | (4,194 | ) | |||||||||||||||
Corporates |
33,592 | (154 | ) | | | 33,592 | (154 | ) | ||||||||||||||||
Total temporarily-impaired debt securities available for sale |
$ | 2,171,193 | $ | (28,045 | ) | $ | 3,268 | $ | (20 | ) | $ | 2,174,461 | $ | (28,065 | ) | |||||||||
December 31, 2010 |
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Description of Securities |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
U.S. Treasury Obligations |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Direct obligations of U.S. government agencies |
515,230 | (6,965 | ) | | | 515,230 | (6,965 | ) | ||||||||||||||||
Federal agency mortgage backed securities |
541,061 | (13,266 | ) | | | 541,061 | (13,266 | ) | ||||||||||||||||
Municipal securities |
374,350 | (8,139 | ) | | | 374,350 | (8,139 | ) | ||||||||||||||||
Corporates |
26,774 | (174 | ) | | | 26,774 | (174 | ) | ||||||||||||||||
Total temporarily-impaired debt securities available for sale |
$ | 1,457,415 | $ | (28,544 | ) | $ | | $ | | $ | 1,457,415 | $ | (28,544 | ) | ||||||||||
The unrealized losses in the Companys investments in direct obligations of U.S. treasury obligations, U.S. government agencies, federal agency mortgage-backed securities, and municipal securities were caused by changes in interest rates. Because the Company does not have the intent to sell these securities, it is more likely than not that the Company will not be required to sell these securities before a recovery of fair value. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at March 31, 2011.
18
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
6. Goodwill and Other Intangibles
Changes in the carrying amount of goodwill for the periods ended March 31, 2011 and December 31, 2010 by operating segment are as follows (in thousands):
Commercial Financial Services |
Institutional Financial Services |
Personal Financial Services |
Total | |||||||||||||
Balances as of January 1, 2010 |
$ | 42,845 | $ | 51,339 | $ | 37,172 | $ | 131,356 | ||||||||
Prairie Capital Management, LLC acquired during period |
| | 32,228 | 32,228 | ||||||||||||
Reams Asset Management, LLC acquired during period |
| 47,530 | | 47,530 | ||||||||||||
Balances as of December 31,2010 |
$ | 42,845 | $ | 98,869 | $ | 69,400 | $ | 211,114 | ||||||||
Balances as of January 1, 2011 |
$ | 42,845 | $ | 98,869 | $ | 69,400 | $ | 211,114 | ||||||||
Balances as of March 31, 2011 |
$ | 42,845 | $ | 98,869 | $ | 69,400 | $ | 211,114 | ||||||||
Following are the intangible assets that continue to be subject to amortization as of March 31, 2011 and December 31, 2010 (in thousands):
As of March 31, 2011 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Core deposit intangible assets |
$ | 36,497 | $ | 27,192 | $ | 9,305 | ||||||
Customer relationships |
97,410 | 20,490 | 76,920 | |||||||||
Other intangible assets |
3,247 | 1,181 | 2,066 | |||||||||
Total intangible assets |
$ | 137,154 | $ | 48,863 | $ | 88,291 | ||||||
As of December 31, 2010 | ||||||||||||
Core deposit intangible assets |
$ | 36,497 | $ | 26,700 | $ | 9,797 | ||||||
Customer relationships |
97,410 | 17,169 | 80,241 | |||||||||
Other intangible assets |
3,247 | 988 | 2,259 | |||||||||
Total intangible assets |
$ | 137,154 | $ | 44,857 | $ | 92,297 | ||||||
Following is the aggregate amortization expense recognized in each period (in thousands):
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Aggregate amortization expense |
$ | 4,006 | $ | 2,091 | ||||
19
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
Estimated amortization expense of intangible assets on future years (in thousands):
For the nine months ending December 31, 2011 |
$ | 11,271 | ||
For the year ending December 31, 2012 |
13,606 | |||
For the year ending December 31, 2013 |
12,159 | |||
For the year ending December 31, 2014 |
11,086 | |||
For the year ending December 31, 2015 |
8,491 |
7. Other Comprehensive Income
The Companys only component of other comprehensive income for the three months ended March 31, 2011 and 2010 was the net unrealized gains and losses on available for sale securities (in thousands):
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Change in unrealized holding gains, net |
$ | (1,490 | ) | $ | (670 | ) | ||
Less: Reclassification adjustments for gains included in income |
(7,456 | ) | (5,382 | ) | ||||
Net change in unrealized holdings |
(8,946 | ) | (6,052 | ) | ||||
Income tax benefit |
3,292 | 2,229 | ||||||
Other comprehensive income |
$ | (5,654 | ) | $ | (3,823 | ) | ||
8. Commitments, Contingencies and Guarantees
In the normal course of business, the Company is 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, futures contracts, forward foreign exchange contracts and spot foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. Many of the commitments expire without being drawn upon, therefore, the total amount of these commitments does not necessarily represent the future cash requirements of the Company.
The Companys exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The following table summarizes the Companys off-balance sheet financial instruments.
Contract or Notional Amount (in thousands):
March 31, 2011 |
December 31, 2010 |
|||||||
Commitments to extend credit for loans (excluding credit card loans) |
$ | 1,744,113 | $ | 1,729,011 | ||||
Commitments to extend credit under credit card loans |
1,999,395 | 1,970,508 | ||||||
Commercial letters of credit |
4,304 | 3,537 | ||||||
Standby letters of credit |
318,314 | 308,154 | ||||||
Futures contracts |
28,900 | 22,400 | ||||||
Forward foreign exchange contracts |
2,958 | 3,685 | ||||||
Spot foreign exchange contracts |
5,018 | 2,608 |
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
During 2010, two suits were filed against UMB Bank, N.A. (the Bank) in Missouri state court. The first suit was made by a customer alleging that the Banks checking account posting practices resulted in excessive overdraft fees in violation of Missouris consumer protection statute and the account agreement. The suit seeks class-action status for Bank customers who may have been similarly affected. The Bank removed this action to the U.S. District Court for the Western District of Missouri. This action was then transferred to the multidistrict litigation in the U.S. District Court for the Southern District of Florida, where similar claims against other financial institutions are pending. A second suit was filed in Missouri state court by another Bank customer alleging the substantially identical facts and also seeking class action status. During the first quarter of 2011, a third suit was filed in the U.S. District Court of Oklahoma by another bank customer alleging similar facts and also seeking class action status. At this early stage of the litigation, it is not possible for management of the Bank to determine the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.
9. Business Segment Reporting
The Company has strategically aligned its operations into the following three reportable segments (collectively, Business Segments): Commercial Financial Services, Institutional Financial Services, and Personal Financial Services. The management accounting system assigns balance sheet and income statement items to each business segment using methodologies that are refined on an ongoing basis. For comparability purposes, amounts in all periods are based on methodologies in effect at March 31, 2011.
The following summaries provide information about the activities of each segment:
Commercial Financial Services serves the commercial lending and leasing, capital markets, and treasury management needs of the Companys mid-market businesses and governmental entities by offering various products and services. Such services include commercial loans, letters of credit, loan syndication services, consultative services, and a variety of financial options for companies that need non-traditional banking services. Capital markets services include asset-based financing, asset securitization, equity and mezzanine financing, factoring, private and public placement of senior debt, as well as merger and acquisition consulting. Treasury management services include depository services, account reconciliation services, electronic fund transfer services, controlled disbursements, lockbox services, and remote deposit capture services.
Institutional Financial Services is a combination of Banking Services, Fund Services, and Asset Management services provided to institutional clients. This segment also includes consumer credit card services, and commercial credit card. Healthcare services, mutual fund cash management and international payments, previously included in Payment and Technology Solutions, are also included in this segment. Institutional Financial Services includes businesses such as the Companys institutional investment services functions, Scout Investment Advisors, UMB Fund Services, corporate trust and escrow services as well as correspondent banking, investment banking, and UMB Healthcare Services. Products and services include bond trading transactions, cash letter collections, FiServ account processing, investment portfolio accounting and safekeeping, reporting for asset/liability management, and Fed funds transactions. UMB Fund Services provides fund administration and accounting, investor services and transfer agency, marketing and distribution, custody and alternative investment services.
Personal Financial Services combines Consumer Services and Asset Management services provided to personal clients. This segment combines the Companys consumer bank with the individual investment and wealth management solutions. The range of services offered to UMB clients extends from a basic checking account to estate planning and trust services. Products and services include the Companys bank branches, call center, internet banking and ATM network, deposit accounts, private banking, installment loans, home equity lines of credit, residential mortgages, small business loans, brokerage services, and insurance services in addition to a full spectrum of investment advisory, trust, and custody services.
Treasury and Other Adjustments includes asset and liability management activities and miscellaneous other items of a corporate nature not allocated to specific business lines. The assets within this segment include the Companys investment portfolio. Corporate eliminations are also allocated to this segment.
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
Business Segment Information
Segment financial results were as follows (in thousands):
Three Months Ended March 31, | ||||||||||||||||
Commercial
Financial Services |
Institutional
Financial Services |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net interest income |
$ | 39,048 | $ | 38,374 | $ | 13,305 | $ | 11,439 | ||||||||
Provision for loan losses |
4,548 | 2,858 | 2,399 | 4,756 | ||||||||||||
Noninterest income |
9,743 | 9,060 | 65,537 | 50,752 | ||||||||||||
Noninterest expense |
30,216 | 30,439 | 58,088 | 46,126 | ||||||||||||
Net income before tax |
$ | 14,027 | $ | 14,137 | $ | 18,355 | $ | 11,309 | ||||||||
Average assets |
$ | 4,544,000 | $ | 3,512,000 | $ | 1,029,000 | $ | 616,000 | ||||||||
Depreciation and amortization |
2,327 | 2,455 | 5,049 | 3,334 | ||||||||||||
Expenditures for additions to premises and equipment |
959 | 448 | 3,427 | 1,733 | ||||||||||||
Personal
Financial Services |
Treasury and Other Adjustments |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net interest income |
$ | 25,517 | $ | 25,961 | $ | 578 | $ | | ||||||||
Provision for loan losses |
152 | 696 | 1 | | ||||||||||||
Noninterest income |
25,849 | 22,457 | 6,621 | 4,161 | ||||||||||||
Noninterest expense |
47,585 | 41,358 | (373 | ) | (545 | ) | ||||||||||
Net income before tax |
$ | 3,629 | $ | 6,364 | $ | 7,571 | $ | 4,706 | ||||||||
Average assets |
$ | 1,000,000 | $ | 776,000 | $ | 6,033,000 | $ | 6,108,000 | ||||||||
Depreciation and amortization |
3,400 | 2,924 | 429 | 457 | ||||||||||||
Expenditures for additions to premises and equipment |
2,783 | 903 | 18 | 12 | ||||||||||||
Total Consolidated Company | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Net interest income |
$ | 78,448 | $ | 75,774 | ||||||||||||
Provision for loan losses |
7,100 | 8,310 | ||||||||||||||
Noninterest income |
107,750 | 86,430 | ||||||||||||||
Noninterest expense |
135,516 | 117,378 | ||||||||||||||
Net income before tax |
$ | 43,582 | $ | 36,516 | ||||||||||||
Average assets |
$ | 12,606,000 | $ | 11,012,000 | ||||||||||||
Depreciation and amortization |
11,205 | 9,170 | ||||||||||||||
Expenditures for additions to premises and equipment |
7,187 | 3,096 |
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
10. Fair Value Measurements
The following table presents information about the Companys assets measured at fair value on a recurring basis as of March 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Assets measured at fair value on a recurring basis as of March 31, 2011 (in thousands):
March 31, 2011 |
Fair Value Measurement at Reporting Date Using | |||||||||||||||
Description |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
U.S. Treasury |
412 | 412 | | | ||||||||||||
U.S. Agencies |
23,936 | 23,936 | | | ||||||||||||
Mortgage-backed |
12,763 | | 12,763 | | ||||||||||||
State and political subdivisions |
3,482 | | 3,482 | | ||||||||||||
Trading other |
13,467 | 13,337 | 130 | | ||||||||||||
Trading securities |
54,060 | 37,685 | 16,375 | | ||||||||||||
U.S. Treasury |
259,378 | 259.378 | | | ||||||||||||
U.S. Agencies |
2,099,143 | 2,099,143 | | | ||||||||||||
Mortgage-backed |
1,868,478 | | 1,868,478 | | ||||||||||||
State and political subdivisions |
1,338,051 | | 1,338,051 | | ||||||||||||
Corporates |
39,268 | 39,268 | | | ||||||||||||
Available for sale securities |
5,604,318 | 2,397,789 | 3,206,529 | | ||||||||||||
Total |
5,658,378 | 2,435,474 | 3,222,904 | | ||||||||||||
The fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis is required to be disclosed. 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 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), 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.
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
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 rating and for the same remaining maturities.
Deposit Liabilities The fair value of demand deposits and savings accounts is the amount payable on demand at March 31, 2011 and December 31, 2010. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are 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 value because of the short-term nature of their maturities.
Long-Term Debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Other Off-Balance Sheet Instruments The fair value of loan commitments and letters of credit are 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 on these instruments nor their fair values at March 31, 2011 are significant to the Companys consolidated financial position.
Assets measured at fair value on a non-recurring basis as of March 31, 2011 (in thousands):
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Description |
March 31, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Impaired loans |
$ | 8,128 | $ | | $ | | $ | 8,128 | ||||||||
Other real estate owned |
990 | | | 990 | ||||||||||||
Total |
$ | 9,118 | $ | | $ | | $ | 9,118 | ||||||||
Valuation methods for instruments measured at fair value on a nonrecurring basis
The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a non-recurring basis:
Impaired loans While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans to reflect partial write-downs that are based on the value of the underlying collateral. In determining the value of real estate collateral, the Company relies on external appraisals and assessment of property values by its internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Because many of these inputs are not observable, the measurements are classified as Level 3.
Other real estate owned Other real estate owned consists of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, recreational and marine vehicles. Other real estate owned is recorded as held for sale initially at the lower of the loan balance or fair value of the collateral. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements may be classified as Level 2. Other fair value measurements may be based on internally developed pricing methods, and those measurements may be classified as Level 3.
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UMB FINANCIAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
The estimated fair value of the Companys financial instruments at March, 31, 2011 and December 31, 2010 are as follows (in millions):
March 31 2011 |
December 31 2010 |
|||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
FINANCIAL ASSETS |
||||||||||||||||
Cash and short-term investments |
$ | 2,326.5 | $ | 2,326.5 | $ | 1,439.9 | $ | 1,439.9 | ||||||||
Securities available for sale |
5,604.3 | 5,604.3 | 5,613.0 | 5,613.0 | ||||||||||||
Securities held to maturity |
68.2 | 68.2 | 63.6 | 68.8 | ||||||||||||
Federal Reserve Bank and other stock |
22.8 | 22.8 | 23.0 | 23.0 | ||||||||||||
Trading securities |
54.1 | 54.1 | 42.5 | 42.5 | ||||||||||||
Loans (exclusive of allowance for loan loss) |
4,674.3 | 4,748.6 | 4,524.1 | 4,666.8 | ||||||||||||
FINANCIAL LIABILITIES |
||||||||||||||||
Demand and savings deposits |
8,922.2 | 8,922.2 | 7,334.7 | 7,334.7 | ||||||||||||
Time deposits |
1,450.6 | 1,454.6 | 1,694.1 | 1,705.9 | ||||||||||||
Federal funds and repurchase agreements |
1,687.4 | 1,687.3 | 2,084.3 | 2,084.2 | ||||||||||||
Short-term debt |
23.9 | 23.9 | 35.2 | 35.2 | ||||||||||||
Long-term debt |
7.7 | 8.2 | 8.9 | 9.5 | ||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS |
||||||||||||||||
Commitments to extend credit for loans |
1.2 | 5.6 | ||||||||||||||
Commercial letters of credit |
0.1 | 0.3 | ||||||||||||||
Standby letters of credit |
381.3 | 0.5 | 308.2 | 2.0 |
The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2011 and December 31, 2010. The estimated market values have not been updated since March 31, 2011; therefore current estimates of fair value may differ significantly from the amounts presented above.
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Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This review highlights the material changes in the results of operations and changes in financial condition for the three-month period ended March 31, 2011. It should be read in conjunction with the accompanying condensed consolidated financial statements, notes to condensed consolidated financial statements and other financial statistics appearing elsewhere in this report. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The information included or incorporated by reference in this report contains forward-looking statements of expected future developments within the meaning of and pursuant to the safe harbor provisions established by Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may refer to financial condition, results of operations, plans, objectives, future financial performance and business of the Company, including, without limitation:
| Statements that are not historical in nature; |
| Statements preceded by, followed by or that include the words believes, expects, may, should, could, anticipates, estimates, intends, or similar words or expressions; |
Forward-looking statements are not guarantees of future performance or results. You are cautioned not to put undue reliance on any forward-looking statement which speaks only as of the date it was made. Forward-looking statements reflect managements expectations and are based on currently available data; however, they involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
| General economic and political conditions, either nationally, internationally or in the Companys footprint, may be less favorable than expected; |
| Legislative or regulatory changes; |
| Changes in the interest rate environment; |
| Changes in the securities markets impacting mutual fund performance and flows; |
| Changes in operations; |
| Changes in accounting rules; |
| The ability to successfully and timely integrate acquisitions; |
| Competitive pressures among financial services companies may increase significantly; |
| Changes in technology may be more difficult or expensive than anticipated; |
| Changes in the ability of customers to repay loans; |
| Changes in loan demand may adversely affect liquidity needs; and |
| Changes in employee costs. |
Any forward-looking statements should be read in conjunction with information about risks and uncertainties set forth in this report and in documents incorporated herein by reference. Forward-looking statements speak only as of the date they are made, and the Company does not intend to review or revise any particular forward-looking statement in light of events that occur thereafter or to reflect the occurrence of unanticipated events.
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Overview
The Company focuses on the following four core strategies. Management believes these strategies will continue to improve net income and strengthen the balance sheet.
The first strategy is to grow the Companys fee-based businesses. The emphasis on fee-based operations helps reduce the Companys exposure to changes in interest rates. During the first quarter of 2011, noninterest income increased $21.3 million, or 24.7 percent, compared to the same period of 2010. The Company continues to emphasize its asset management, brokerage, bankcard services, health care services, and treasury management businesses. In particular, during the first quarter of 2011, the increase in noninterest income is primarily attributable to increased trust and securities processing income of $16.2 million, or 45.4 percent, for the three months ended March 31, 2011 compared to the same period in 2010. The increase in trust and securities processing income was primarily due to a $4.7 million, or 45.1 percent, increase in advisory fee income from the Scout Funds, a $2.4 million, or 15.8 percent, increase in fund administration and custody services, and a $7.0 million, or 631.1 percent, increase in fees related to institutional and personal investment management services. Bankcard fees increased $2.4 million, or 20.1 percent, compared to the first quarter of 2010 from increased processing fee income. Also during the first quarter of 2011, the Company sold securities available for sale at a pre-tax gain of $7.5 million compared to $5.4 million during the same period in 2010.
The second strategy is a focus on net interest income through loan and deposit growth. Net interest income increased $2.7 million, or 3.5 percent, for the three months ended March 31, 2011, as compared to one year ago. Total deposits increased $2.2 billion, or 26.2 percent, as compared to first quarter of 2010, which positions the Company well to fund customer credit needs when the demand for loans returns. This increase in deposits funded an increase in earning assets. Average earning assets increased by $1.4 billion, or 14.3 percent, compared to the first quarter of 2010. This earning asset growth was represented by an increase of $268.2 million, or 6.1 percent, in average total loans and a $914.8 million, or 19.2 percent, increase in average total securities, including trading.
The third strategy is a focus on improving operating efficiencies. At March 31, 2011, the Company had 128 branches. The Company continues to emphasize increasing its primary retail customer base by providing a broad offering of services through our existing branch network. These efforts have resulted in the total deposits growth previously discussed. Throughout 2010, the Company invested in technological advances that will help management drive operating efficiencies through improved data analysis and automation. On January 3, 2011, the Company has converted to a new financial and human resource software that is integrated and enterprise wide. In addition to the use of automation technology, the Company will continue to evaluate its cost structure for opportunities to moderate expense growth without sacrificing growth initiatives.
The fourth strategy is a focus on capital management. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Companys ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, investing in acquisitions, evaluating increased dividends over time and utilizing a share buy-back strategy when appropriate. At March 31, 2011, the Company had $1.1 billion in total shareholders equity. This is an increase of $49.5 million, or 4.8 percent, compared to total shareholders equity at March 31, 2010. At March 31, 2011, the Company had a total risk-based capital ratio of 12.68 percent, which is higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 33,337 shares at an average price of $41.17 per share during the first quarter of 2011.
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Earnings Summary
The Company recorded consolidated net income of $30.9 million for the three-month period ended March 31, 2011, compared to $26.2 million for the same period a year earlier. This represents a 17.9 percent increase over the three-month period ended March 31, 2010. Basic earnings per share for the first quarter of 2011 were $0.77 per share ($0.76 per share fully-diluted) compared to $0.65 per share ($0.65 per share fully-diluted) for the first quarter of 2010. Return on average assets and return on average common shareholders equity for the three-month period ended March 31, 2011 were 0.99 and 11.63 percent, respectively, compared to 0.96 and 10.25 percent for the three-month period ended March 31, 2010.
Net interest income for the three month period ended March 31, 2011 increased $2.7 million, or 3.5 percent, compared to the same period in 2010. Average earning assets increased by $1.4 billion, or 14.3 percent, compared to the first quarter of 2010. Net interest margin, on a tax-equivalent basis, decreased to 2.90 percent or a 29 basis point decline for the three months ended March 31, 2011, compared to 3.19 percent for the same period in 2010.
The provision for loan losses decreased by $1.2 million for the three month period ended March 31, 2011, compared to the same period in 2010. With the decreased provision, the allowance for loan losses as a percentage of total loans decreased by 1 basis point to 1.56 percent as of March 31, 2011, compared to March 31, 2010. For a description of the Companys methodology for computing the allowance for loan losses, please see the summary discussion of the Allowance for Loan Losses within the Critical Accounting Policies and Estimates subsection of the Managements Discussion and Analysis of Financial Condition and Results of Operations section on the Companys 2010 Annual Report on Form 10-K.
Noninterest income increased by $21.3 million, or 24.7 percent, for the three-month period ended March 31, 2011, compared to the same period one year ago. For the three month period, the increases are primarily due to increases in trust and securities processing income, bankcard fees and gains on the sales of securities available for sale. These changes are discussed in greater detail below under Noninterest Income.
Noninterest expense increased by $18.1 million, or 15.5 percent, for the three-month period ended March 31, 2011, compared to the same period in 2010. For the three month period, the increases were primarily due to increases in salaries and employee benefits, processing fees and amortization of intangible assets. These changes are discussed in greater detail below under Noninterest Expense.
Net Interest Income
Net interest income is a significant source of the Companys earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. For the three-month period ended March 31, 2011, net interest income increased by $2.7 million, or 3.5 percent, as compared to the same period in 2010.
Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. The Company continues to experience a repricing of these earning assets and interest-bearing liabilities during the recent interest rate cycle. As illustrated on this table, net interest spread for the three months ended March 31, 2011 decreased by 22 basis points and net interest margin decreased by 29 basis points compared to the same period in 2010. These results are primarily due to the interest-bearing liabilities repricing slower or incrementally less than the earning assets. The increase of $319.7 million from noninterest-bearing demand deposits, as compared to the first quarter of 2010, continues to be a positive impact. However, with the rate on interest-bearing liabilities decreasing to 0.37 percent as compared to 0.59 percent one year ago, the contribution from free funds is diminished. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and rates have resulted in the flattening of net interest income.
28
Table of Contents
Table 1
AVERAGE BALANCES/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)
The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax equivalent basis adjustment would have been 3.00 percent for the three-month period ended March 31, 2011 and 3.44 percent for the same period in 2010.
Three Months Ended March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Average Balance |
Average Yield/Rate |
Average Balance |
Average Yield/Rate |
|||||||||||||
Assets |
||||||||||||||||
Loans, net of unearned interest |
$ | 4,632,581 | 4.74 | % | $ | 4,364,423 | 4.98 | % | ||||||||
Securities: |
||||||||||||||||
Taxable |
4,288,742 | 2.11 | 3,736,919 | 2.58 | ||||||||||||
Tax-exempt |
1,325,316 | 3.84 | 980,953 | 4.68 | ||||||||||||
Total securities |
5,614,058 | 2.52 | 4,717,872 | 3.02 | ||||||||||||
Federal funds and resell agreements |
25,916 | 0.23 | 88,555 | 0.28 | ||||||||||||
Interest-bearing due from banks |
1,276,091 | 0.37 | 947,374 | 0.56 | ||||||||||||
Other earning assets |
54,827 | 2.14 | 36,193 | 1.76 | ||||||||||||
Total earning assets |
11,603,473 | 3.16 | 10,154,417 | 3.60 | ||||||||||||
Allowance for loan losses |
(75,096 | ) | (64,992 | ) | ||||||||||||
Other assets |
1,077,259 | 922,399 | ||||||||||||||
Total assets |
$ | 12,605,636 | $ | 11,011,824 | ||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Interest-bearing deposits |
$ | 6,435,500 | 0.42 | % | $ | 5,666,615 | 0.69 | % | ||||||||
Federal funds and repurchase agreements |
1,824,087 | 0.15 | 1,390,408 | 0.13 | ||||||||||||
Borrowed funds |
36,012 | 2.16 | 47,722 | 2.20 | ||||||||||||
Total interest-bearing liabilities |
8,295,599 | 0.37 | 7,104,745 | 0.59 | ||||||||||||
Noninterest-bearing demand deposits |
3,066,930 | 2,747,217 | ||||||||||||||
Other liabilities |
167,006 | 123,582 | ||||||||||||||
Shareholders equity |
1,076,101 | 1,036,280 | ||||||||||||||
Total liabilities and shareholders equity |
$ | 12,605,636 | $ | 11,011,824 | ||||||||||||
Net interest spread |
2.79 | % | 3.01 | % | ||||||||||||
Net interest margin |
2.90 | 3.19 |
Table 2 presents the dollar amount of change in net interest income and margin due to volume and rate. Table 2 also reflects the effect that interest-free funds have on net interest margin. Although the average balance of interest free funds (total earning assets less interest-bearing liabilities) increased $258.2 million for the three-month period ended March 31, 2011 compared to the same period in 2010, the benefit from interest free funds declined by 7 basis points from the three months ended March 31, 2010.
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Table 2
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended March 31, 2011 and 2010 |
||||||||||||
Volume | Rate | Total | ||||||||||
Change in interest earned on: |
||||||||||||
Loans |
$ | 3,081 | $ | (2,575 | ) | $ | 506 | |||||
Securities: |
||||||||||||
Taxable |
2,870 | (4,341 | ) | (1,471 | ) | |||||||
Tax-exempt |
3,073 | (2,152 | ) | 921 | ||||||||
Federal funds sold and resell agreements |
(36 | ) | (10 | ) | (46 | ) | ||||||
Interest-bearing due from banks |
299 | (456 | ) | (157 | ) | |||||||
Trading |
88 | 31 | 119 | |||||||||
Interest income |
9,375 | (9,503 | ) | (128 | ) | |||||||
Change in interest incurred on: |
||||||||||||
Interest-bearing deposits |
796 | (3,754 | ) | (2,958 | ) | |||||||
Federal funds purchased and repurchase agreements |
159 | 65 | 224 | |||||||||
Other borrowed funds |
(62 | ) | (5 | ) | (67 | ) | ||||||
Interest expense |
893 | (3,694 | ) | (2,801 | ) | |||||||
Net interest income |
$ | 8,482 | $ | (5,809 | ) | $ | 2,673 | |||||
ANALYSIS OF NET INTEREST MARGIN
Three Months Ended March 31, | ||||||||||||
2011 | 2010 | Change | ||||||||||
Average earning assets |
$ | 11,603,473 | $ | 10,154,417 | $ | 1,449,056 | ||||||
Interest-bearing liabilities |
8,295,599 | 7,104,745 | 1,190,854 | |||||||||
Interest-free funds |
$ | 3,307,874 | $ | 3,049,672 | $ | 258,202 | ||||||
Free funds ratio (free funds to earning assets) |
28.51 | % | 30.03 | % | (1.52 | )% | ||||||
Tax-equivalent yield on earning assets |
3.16 | % | 3.60 | % | (0.44 | )% | ||||||
Cost of interest-bearing liabilities |
0.37 | 0.59 | (0.22 | ) | ||||||||
Net interest spread |
2.79 | % | 3.01 | % | (0.22 | )% | ||||||
Benefit of interest-free funds |
0.11 | 0.18 | (0.07 | ) | ||||||||
Net interest margin |
2.90 | % | 3.19 | % | (0.29 | )% | ||||||
Provision and Allowance for Loan Losses
The allowance for loan losses (ALL) represents managements judgment of the losses inherent in the Companys loan portfolio as of the balance sheet date. An analysis is performed quarterly to determine the appropriate balance of the ALL. This analysis considers items such as historical loss trends, a review of individual loans, migration analysis, current economic conditions, loan growth and characteristics, industry or segment concentration and other factors. This analysis is performed separately for each bank as regulatory agencies require that the adequacy of the ALL be maintained on a bank-by-bank basis. After the balance sheet analysis is performed for the ALL, the provision for loan losses is computed as the amount required to adjust the ALL to the appropriate level.
Based on the factors above, management of the Company expensed $7.1 million related to the provision for loan losses for the three month period ended March 31, 2011, compared to $8.3 million for the same period in 2010. As illustrated in Table 3 below, the ALL decreased to 1.56 percent of total loans as of March 31, 2011, compared to 1.57 percent of total loans as of the same period in 2010.
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Table 3 presents a summary of the Companys ALL for the three months ended March 31, 2011 and 2010 and for the year ended December 31, 2010. Net charge-offs were $8.3 million for the first three months of 2011, compared to $5.0 million for the same period in 2010. See Credit Risk Management under Item 3. Quantitative and Qualitative Disclosures About Market Risk in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.
Table 3
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)
Three Months Ended March 31, |
Year Ended December 31, |
|||||||||||
2011 | 2010 | 2010 | ||||||||||
Allowance-January 1 |
$ | 73,952 | $ | 64,139 | $ | 64,139 | ||||||
Provision for loan losses |
7,100 | 8,310 | 31,510 | |||||||||
Charge-offs: |
||||||||||||
Commercial |
(5,200 | ) | (1,308 | ) | (6,644 | ) | ||||||
Consumer: |
||||||||||||
Credit card |
(3,617 | ) | (3,636 | ) | (15,606 | ) | ||||||
Other |
(782 | ) | (1,055 | ) | (2,979 | ) | ||||||
Real estate |
(67 | ) | (8 | ) | (258 | ) | ||||||
Total charge-offs |
(9,666 | ) | (6,007 | ) | (25,487 | ) | ||||||
Recoveries: |
||||||||||||
Commercial |
151 | 129 | 637 | |||||||||
Consumer: |
||||||||||||
Credit card |
625 | 269 | 1,327 | |||||||||
Other |
556 | 602 | 1,797 | |||||||||
Real estate |
| | 29 | |||||||||
Total recoveries |
1,332 | 1,000 | 3,790 | |||||||||
Net charge-offs |
(8,334 | ) | (5,007 | ) | (21,697 | ) | ||||||
Allowance-end of period |
72,718 | 67,442 | 73,952 | |||||||||
Average loans, net of unearned interest |
$ | 4,624,166 | $ | 4,348,734 | $ | 4,478,377 | ||||||
Loans at end of period, net of unearned interest |
4,667,862 | 4,301,965 | 4,583,683 | |||||||||
Allowance to loans at end of period |
1.56 | % | 1.57 | % | 1.61 | % | ||||||
Allowance as a multiple of net charge-offs |
2.15 | x | 3.32 | x | 3.41 | x | ||||||
Net charge-offs to: |
||||||||||||
Provision for loan losses |
117.38 | % | 60.25 | % | 68.86 | % | ||||||
Average loans |
0.73 | 0.47 | 0.48 |
Noninterest Income
A key objective of the Company is the growth of noninterest income to enhance profitability and provide steady income. Fee-based services are typically non-credit related and not generally affected by fluctuations in interest rates.
The Companys fee-based services provide the opportunity to offer multiple products and services, which management believes will more closely align the customer with the Company. The Company is currently emphasizing fee-based services including trust and securities processing, bankcard, brokerage, health care services, and treasury management. Management believes it can offer these products and services both efficiently and profitably, as most share common platforms and support structures.
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Table 4
SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)
Three Months Ended March 31, | ||||||||||||||||
Dollar Change |
Percent Change |
|||||||||||||||
2011 | 2010 | 11-10 | 11-10 | |||||||||||||
Trust and securities processing |
$ | 51,727 | $ | 35,572 | $ | 16,155 | 45.41 | % | ||||||||
Trading and investment banking |
9,019 | 7,027 | 1,992 | 28.35 | ||||||||||||
Service charges on deposit accounts |
18,608 | 20,519 | (1,911 | ) | (9.31 | ) | ||||||||||
Insurance fees and commissions |
1,204 | 1,699 | (495 | ) | (29.13 | ) | ||||||||||
Brokerage fees |
2,341 | 1,336 | 1,005 | 75.22 | ||||||||||||
Bankcard fees |
14,442 | 12,020 | 2,422 | 20.15 | ||||||||||||
Gains on sales of securities available for sale, net |
7,456 | 5,382 | 2,074 | 38.54 | ||||||||||||
Other |
2,953 | 2,875 | 78 | 2.71 | ||||||||||||
Total noninterest income |
$ | 107,750 | $ | 86,430 | $ | 21,320 | 24.67 | % | ||||||||
Fee-based, or noninterest income (summarized in Table 4), increased by $21.3 million, or 24.7 percent, during the three months ended March 31, 2011, compared to the same period in 2010. Table 4 above summarizes the components of noninterest income and the respective year-over-year comparison for each category.
Trust and securities processing consists of fees earned on personal and corporate trust accounts, custody of securities, trust investments and money management services, and servicing of mutual fund assets. The increase in trust and securities processing income was primarily due to a $4.7 million, or 45.1 percent, increase in advisory fee income from the Scout Funds, a $2.4 million, or 15.8 percent, increase in fund administration and custody services, and a $7.0 million, or 631.1 percent, increase in fees related to institutional and personal investment management services. Trust and securities processing fees are asset-based. As such, they are highly correlated to the change in market value of the assets. Thus, the related income for the remainder of the year will be affected by changes in the securities markets. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels.
Bankcard fees increased $2.4 million, or 20.1 percent, compared to the first quarter of 2010 from increased processing fee income.
In the first quarter of 2011, $7.5 million in pre-tax gains were recognized on the sales of securities available for sale, as compared to $5.4 million one year ago. These sales are part of an objective to monitor and control the Companys interest rate sensitivity and duration in an anticipated rising interest rate environment.
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Noninterest Expense
The components of noninterest expense are shown below on Table 5.
Table 5
SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)
Three Months Ended March 31, | ||||||||||||||||
Dollar Change |
Percent Change |
|||||||||||||||
2011 | 2010 | 11-10 | 11-10 | |||||||||||||
Salaries and employee benefits |
$ | 72,900 | $ | 62,253 | $ | 10,647 | 17.10 | %% | ||||||||
Occupancy, net |
9,605 | 8,921 | 684 | 7.67 | ||||||||||||
Equipment |
10,936 | 10,870 | 66 | 0.61 | ||||||||||||
Supplies and services |
5,580 | 4,707 | 873 | 18.55 | ||||||||||||
Marketing and business development |
4,122 | 3,705 | 417 | 11.26 | ||||||||||||
Processing fees |
12,173 | 11,029 | 1,144 | 10.37 | ||||||||||||
Legal and consulting |
2,617 | 1,622 | 995 | 61.34 | ||||||||||||
Bankcard |
3,852 | 3,190 | 662 | 20.75 | ||||||||||||
Amortization of other intangible assets |
4,006 | 2,091 | 1,915 | 91.58 | ||||||||||||
Regulatory fees |
3,716 | 3,238 | 478 | 14.76 | ||||||||||||
Other |
6,009 | 5,752 | 257 | 4.47 | ||||||||||||
Total noninterest expense |
$ | 135,516 | $ | 117,378 | $ | 18,138 | 15.45 | % | ||||||||
Noninterest expense increased by $18.1 million, or 15.5 percent, for the three months ended March 31, 2011 compared to the same period in 2010. Table 5 above summarizes the components of noninterest expense and the respective year-over-year comparison for each category.
Salaries and employee benefits increased by $10.6 million, or 17.1 percent, for the three months ended March 31, 2011, compared to the same period in 2010. These increases are primarily due to a $4.5 million increase in salaries, a $2.9 million increase in commissions and bonuses, and a $3.2 million increase in employee benefits for the three months ended March 31, 2011. These increases are directly correlated to the financial performance during 2010 and the addition of associates from acquisition activity.
Processing fees increased $1.1 million, or 10.4 percent, for the three months ended March 31, 2011, compared to the same period in 2010. These increases are due to increased third-party custodian fees related to international transactions from mutual fund clients and fees paid by the advisor to third-party distributors of the Scout Funds.
Amortization of other intangibles increased $1.9 million, or 91.6 percent, compared to the first quarter of 2010. This increase is due to acquisition activity during the last two quarters of 2010.
Income Tax Expense
The effective tax rate is 29.2% for the three months ended March 31, 2011, compared to 28.3% for the same period in 2010. The increase in the effective tax rate is primarily a result of tax-exempt income representing a smaller percentage of pre-tax net income in 2011 compared to 2010.
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Strategic Lines of Business
Table 6
NET INCOME (LOSS) BEFORE TAXES BY SEGMENT (in thousands):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Segment |
||||||||
Commercial Financial Services |
$ | 14,027 | $ | 14,137 | ||||
Institutional Financial Services |
18,355 | 11,309 | ||||||
Personal Financial Services |
3,629 | 6,364 | ||||||
Treasury and Other Adjustments |
7,571 | 4,706 | ||||||
Total Consolidated Company |
$ | 43,582 | $ | 36,516 | ||||
Commercial Financial Services net income before taxes decreased $0.1 million, or 0.8 percent, to $14.0 million from the prior year. The slight decrease in net income was driven primarily by an increase in provision for loan losses, offset by increases in net interest income and noninterest income and a decrease in noninterest expense. Total earning asset balances are up over the prior year by $181.5 million, or 5.3 percent; additionally, deposits and repurchase agreements increased by $201.9 million, or 7.8 percent. Net interest income increased by $0.7 million, or 1.8 percent, due to the balance sheet increases. Noninterest income increased $0.7 million, or 7.5 percent, due to increased fees from the sales of commercial credit cards, deposit service charges, and letters of credit. Noninterest expense decreased by $0.2 million, or 0.7 percent, primarily due to a decline in allocated expenses. Provision for loan loss increased by $1.7 million, or 59.1 percent, primarily due to loan growth in this segment and additional allocation of provision to ensure the allowance for loan loss is maintained at an appropriate level given the inherent risk in the loan portfolio in this segment.
Institutional Financial Services net income before taxes increased $7.0 million, or 62.3 percent, to $18.4 million from the first quarter of 2010. Noninterest income increased $14.8 million, net interest income increased $1.9 million, and provision decreased by $2.4 million, offset by a $12.0 million increase in noninterest expense. Noninterest income increased due to a $4.7 million increase in advisory fees from Scout Investments, $2.4 million increase in fund administration and custody services income, $1.9 million increase in bond trading, $4.1 million increase in institutional management fee income and a $1.8 million increase in card services income. Fee income increased due largely to acquisitions and net inflows of $0.5 billion for the quarter. Fee income from new sales and market appreciation are the drivers of the increase in fund administration and alternative investments. Card services income increased from our credit card portfolio acquisitions in 2010 and due to increased sales volume in commercial card, healthcare services and debit card. Credit card balances increased by $101.4 million compared to the prior year primarily from the acquisition of two credit card portfolios totaling approximately $78.0 million over the past year. Bond trading fee income increased $1.8 million due to increased sales. Salary and benefit expense increased $6.0 million related to the increase to staffing primarily due to acquisitions and growth in the fund servicing businesses. Amortization of intangibles expense increased by $1.4 million. Bankcard and third party custodial fees increased $1.2 million related to the volume growth in these areas. Overhead allocations increased to this segment of $2.8 million due to the increases in revenue. Net interest income increased by $1.9 million due to an increase in deposits of $0.7 billion and loans of $101 million.
Personal Financial Services net income before taxes decreased by $2.7 million to $3.6 million compared to the prior year. Net interest income decreased $0.4 million, or 1.7 percent, over 2010 due to a decrease in earning assets of $27.0 million. Consumer loan balances decreased by $83.1 million due to the continued runoff of the indirect automobile portfolio and was partially offset by the growth in the home equity loan portfolio. Deposit balances have also increased in this segment compared to 2010, by $206.1 million, primarily in demand and money market accounts offset by decreases in time deposits. Noninterest income increased $3.4 million, or 15.1 percent, from 2010. This increase was due primarily to an increase in investment management fee income related to the acquisitions and growth in personal trust fee income. This increase was offset by a reduction in overdraft and insufficient fund fees. Noninterest expense increased $6.2 million, or 15.1 percent, over 2010. The increase was primarily due to salary and benefit costs and amortization of intangibles related to acquisitions and an increase in allocated costs to this segment.
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The net income before tax for the Treasury and Other Adjustments category was $7.6 million for the first three months of 2011, compared to net income before tax of $4.7 million for the same period in 2010. The primary driver of this category is security gains. There were $7.5 million of gains in 2011 compared to $5.4 million in 2010.
Balance Sheet Analysis
Total assets of the Company increased $947.4 million as of March 31, 2011, compared to December 31, 2010, or 7.6 percent, and increased $2.6 billion, or 24.5 percent, compared to March 31, 2010. The increase in total assets from March 2010 to March 2011 is a result of increased due from Federal Reserve balances of $1.4 billion, or 344.9 percent, an increase in investment securities of $895.5 million, or 18.5 percent, and an increase in loans of $365.9 million, or 8.5 percent. The increase in total assets from December to March is primarily result of increased due from Federal Reserve balances of $1.2 billion, or 176.0 percent. The overall increase in total assets is directly related to a corresponding increase in deposit balances between the respective periods of $2.2 billion, or 26.2 percent, for the period March 2010 to March 2011 and $1.3 billion, or 14.9 percent, for the period December 2010 to March 2011.
Table 7
SELECTED BALANCE SHEET INFORMATION (unaudited, dollars in thousands)
March 31, | December
31, 2010 |
|||||||||||
2011 | 2010 | |||||||||||
Total assets |
$ | 13,352,320 | $ | 10,724,056 | $ | 12,404,932 | ||||||
Loans, net of unearned interest |
4,667,862 | 4,301,965 | 4,583,683 | |||||||||
Total investment securities |
5,749,311 | 4,853,763 | 5,742,104 | |||||||||
Interest-bearing due from banks |
2,012,990 | 724,437 | 848,598 | |||||||||
Total earning assets |
12,367,684 | 9,851,606 | 11,350,023 | |||||||||
Total deposits |
10,372,756 | 8,220,509 | 9,028,741 | |||||||||
Total borrowed funds |
1,718,932 | 1,357,382 | 2,128,446 |
Loans and Loans Held For Sale
Loans represent the Companys largest source of interest income. In addition to growing the commercial loan portfolio, management believes its middle market commercial business and its consumer business, including home equity and credit card loan products, are the market niches that represent its best opportunity to cross-sell fee-related services.
Total loan balances increased $84.2 million, or 1.8 percent, to $4.7 billion at March 31, 2011 compared to December 31, 2010 and increased $365.9 million, or 8.5 percent, compared to March 31, 2010. Compared to December 31, 2010, commercial loans increased $111.5 million, or 5.8 percent, offset by a decrease in consumer loans of $35.4 million, or 25.2 percent. Compared to March 31, 2010, commercial loans increased $195.5 million, or 10.6 percent, commercial real estate increased $116.1 million, or 9.86 percent, consumer credit cards increased $61.2 million, or 25.2 percent, offset by a decrease in consumer loans of $83.8 million, or 44.4 percent. During the third quarter of 2007, the Company made the decision to phase out its indirect consumer loan portfolio. This is part of an objective to enhance asset yields. The Company will continue to service existing loans until maturity or payoff.
Nonaccrual, past due and restructured loans are discussed under Credit Risk Management within Item 3. Quantitative and Qualitative Disclosures About Market Risk in this report.
Investment Securities
The Companys security portfolio provides 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 a potential source of liquidity, the security portfolio can be used as a tool to manage interest rate sensitivity. The Companys goal in the management of its security portfolio is to maximize return within the Companys parameters of liquidity goals, interest rate risk and credit risk. The Company maintains strong liquidity levels while investing in only high-grade securities. The security portfolio generates the Companys second largest component of interest income.
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Investment securities totaled $5.7 billion at March 31, 2011, compared to $4.9 billion at March 31, 2010, and $5.7 billion at December 31, 2010. Management expects collateral pledging requirements for public funds, loan demand, and deposit funding to be the primary factors impacting changes in the level of security holdings. Investment securities comprised 46.5 percent, 50.6 percent, and 49.3 percent, respectively, of the earning assets as of March 31, 2011, December 31, 2010, and March 31, 2010. There were $3.8 billion of these securities pledged to secure U.S. Government deposits, other public deposits, securities sold under repurchase agreements, and certain trust deposits as required by law at March 31, 2011.
Investment securities had an average tax-equivalent yield of 2.52 percent for the first three months of 2011 compared to 3.02 percent for the same period in 2010, or a decrease of 50 basis points. The average life of the securities portfolio was 36.2 months at March 31, 2011 compared to 28.7 months at December 31, 2010 and 23.5 months at March 31, 2010. The increase in average life from March 31, 2010 and December 31, 2010 was primarily related to an increase in the percentage of investments invested in the core portfolio resulting in a lower percentage of short term investments held compared to the same period last year due to excess liquidity being retained in the continued low rate environment.
Deposits and Borrowed Funds
Deposits increased $1.3 billion, or 14.9 percent, from December 31, 2010 to March 31, 2011 and increased $2.2 billion, or 26.2 percent, from March 31, 2010. Noninterest-bearing deposits increased $739.0 million and interest-bearing deposits increased $605.0 million from December 31, 2010. Noninterest-bearing deposits increased $911.4 million and interest-bearing deposits increased $1.2 billion from March 31, 2010. The increase in noninterest-bearing deposits from March 31, 2010 and December 31, 2010 came primarily from our public funds, mutual fund processing and treasury management businesses. The increase in interest-bearing deposits is primarily related to increases in money market accounts.
Deposits represent the Companys primary funding source for its asset base. In addition to the core deposits garnered by the Companys retail branch structure, the Company continues to focus on its cash management services, as well as its trust and mutual fund servicing segments, in order to attract and retain additional core deposits. Management believes a strong core deposit composition is one of the Companys key competencies given its competitive product mix.
Borrowed funds decreased $409.5 million from December 31, 2010. Borrowed funds are typically higher at year end due to repurchase agreements related to public funds. Borrowings, other than repurchase agreements, are a function of the source and use of funds and will fluctuate to cover short term gaps in funding. Borrowed funds increased $361.6 million from March 31, 2010.
Federal funds purchased and securities sold under agreement to repurchase totaled $1.7 billion at March 31, 2011, compared to $2.1 billion at December 31, 2010 and $1.3 billion at March 31, 2010. 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 issues at an agreed-upon price and date.
Capital and Liquidity
The Company places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Companys ability to capitalize on business growth and acquisition opportunities. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. The Company manages capital for each subsidiary based upon the subsidiarys respective risks and growth opportunities as well as regulatory requirements.
Total shareholders equity was $1.1 billion at March 31, 2011, a $18.1 million increase compared to December 31, 2010. The Companys Board of Directors authorized, at its April 26, 2011, April 27, 2010, and April 21, 2009 meetings, the repurchase of up to two million shares of the Companys common stock during the twelve months following the meetings. During the three months ended March 31, 2011 and 2010, the Company acquired 33,337 shares and 76,809 shares under the 2011 and 2010 plans, respectively, of its common stock. The Company has not made any purchases other than through these plans.
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On April 26, 2011, the Board of Directors also declared a dividend of $0.195 per share. The dividend will be paid on July 1, 2011 to shareholders of record on June 10, 2011.
Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institutions assets. A financial institutions total capital is required to equal at least 8 percent of risk-weighted assets. At least half of that 8 percent 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 Companys high level of core capital and substantial portion of earning assets invested in government securities, the Tier 1 capital ratio of 11.57 percent and total capital ratio of 12.68 percent substantially exceed the regulatory minimums.
For further discussion of capital and liquidity, see Liquidity Risk under Item 3. Quantitative and Qualitative Disclosures About Market Risk in this report.
Table 8
The Companys capital position is summarized in the table below and exceeds regulatory requirements:
Three Months Ended March 31, |
||||||||
RATIOS |
2011 | 2010 | ||||||
Return on average assets |
0.99 | % | 0.96 | % | ||||
Return on average equity |
11.63 | 10.25 | ||||||
Average equity to assets |
8.54 | 9.41 | ||||||
Tier 1 risk-based capital ratio |
11.57 | 13.51 | ||||||
Total risk-based capital ratio |
12.68 | 14.64 | ||||||
Leverage ratio |
6.23 | 7.57 |
The Companys per share data is summarized in the table below.
Three Months Ended March 31, |
||||||||
Per Share Data |
2011 | 2010 | ||||||
Earnings basic |
$ | 0.77 | $ | 0.65 | ||||
Earnings diluted |
0.76 | 0.65 | ||||||
Cash dividends |
0.195 | 0.185 | ||||||
Dividend payout ratio |
25.32 | % | 28.46 | % | ||||
Book value |
$ | 26.62 | $ | 25.43 |
Off-balance Sheet Arrangements
The Companys main off-balance sheet arrangements are loan commitments, commercial and standby letters of credit, futures contracts and forward exchange contracts, which have maturity dates rather than payment due dates. Please see Note 8, Commitments, Contingencies and Guarantees in the Notes to Condensed Consolidated Financial Statements for detailed information on these arrangements.
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Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations discusses the Companys condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customers and suppliers, allowance for loan losses, bad debts, investments, financing operations, long-lived assets, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from the recorded estimates under different assumptions or conditions. A summary of critical accounting policies is listed in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of the Companys Annual Report Form 10-K for the fiscal year ended December 31, 2010.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of financial instruments. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading.
The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The following discussion of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading, because the instruments held for trading represent such a small portion of the Companys portfolio that the interest rate risk associated with them is immaterial.
Interest Rate Risk
In the banking industry, a major risk exposure is changing interest rates. To minimize the effect of interest rate changes to net interest income and exposure levels to economic losses, the Company manages its exposure to changes in interest rates through asset and liability management within guidelines established by its Funds Management Committee (FMC) and approved by the Companys Board of Directors. The FMC has the responsibility for approving and ensuring compliance with asset/liability management policies, including interest rate exposure. The Companys primary method for measuring and analyzing consolidated interest rate risk is the Net Interest Income Simulation Analysis. The Company also uses a Net Portfolio Value model to measure market value risk under various rate change scenarios and a gap analysis to measure maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time. On a limited basis, the Company uses hedges or swaps to manage interest rate risk by using futures contracts on certain loans and trading securities.
Overall, the Company manages interest rate risk by positioning the balance sheet to maximize net interest income while maintaining an acceptable level of interest rate and credit risk, remaining mindful of the relationship among profitability, liquidity, interest rate risk and credit risk.
Net Interest Income Modeling
The Companys primary interest rate risk tool, the Net Interest Income Simulation Analysis, measures interest rate risk and the effect of interest rate changes on net interest income and net interest margin. This analysis incorporates substantially all of the Companys assets and liabilities together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on net interest income of a 200 basis point upward or downward gradual change of market interest rates over a one year period. Assumptions are made to project rates for new loans and deposits based on historical analysis, management outlook, and repricing strategies. Asset prepayments and other market risks are developed from industry estimates of prepayment speeds and other market changes. Since the results of these simulations can be significantly influenced by assumptions utilized, management evaluates the sensitivity of the simulation results to changes in assumptions.
Table 9 shows the net interest income increase or decrease over the next twelve months as of March 31, 2011 and 2010 based on hypothetical changes in interest rates.
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Table 9
MARKET RISK (unaudited, dollars in thousands)
Hypothetical change in interest rate (Rates in Basis Points) |
March 31, 2011 Amount of change |
March 31, 2010 Amount of change | ||
300 |
$2,449 | $8,868 | ||
200 |
743 | 5,790 | ||
100 |
(479) | 3,006 | ||
Static |
| | ||
(100) |