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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 September 30, 2014

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)

(Registrant’s 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 issuer’s classes of common stock as of the latest practicable date.

As of October 30, 2014, UMB Financial Corporation had 45,493,346 shares of common stock outstanding.

 

 

 


Table of Contents

UMB FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I – FINANCIAL INFORMATION

     3   

ITEM 1.

 

FINANCIAL STATEMENTS (UNAUDITED)

     3   

CONSOLIDATED BALANCE SHEETS

     3   

CONSOLIDATED STATEMENTS OF INCOME

     4   

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

     5   

STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDER’S EQUITY

     6   

CONSOLIDATED STATEMENTS OF CASH FLOWS

     7   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     8   

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      36   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     55   

ITEM 4.

 

CONTROLS AND PROCEDURES

     59   

PART II – OTHER INFORMATION

     60   

ITEM 1.

 

LEGAL PROCEEDINGS

     60   

ITEM 1A.

 

RISK FACTORS

     60   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     60   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     60   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     60   

ITEM 5.

 

OTHER INFORMATION

     60   

ITEM 6.

 

EXHIBITS

     61   

SIGNATURES

     62   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

  

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

  

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited, dollars in thousands, except share and per share data)

 

     September 30,
2014
    December 31,
2013
 

ASSETS

    

Loans:

   $ 7,103,163      $ 6,520,512   

Allowance for loan losses

     (77,316     (74,751
  

 

 

   

 

 

 

Net loans

     7,025,847        6,445,761   
  

 

 

   

 

 

 

Loans held for sale

     1,718        1,357   

Securities:

  

Available for sale

     6,759,803        6,762,411   

Held to maturity (fair market value of $270,290 and $231,510, respectively)

     237,961        209,770   

Trading

     31,790        28,464   

Federal Reserve Bank stock and other

     71,192        50,482   
  

 

 

   

 

 

 

Total investment securities

     7,100,746        7,051,127   
  

 

 

   

 

 

 

Federal funds sold and securities purchased under agreements to resell

     65,255        87,018   

Interest-bearing due from banks

     986,428        2,093,467   

Cash and due from banks

     395,956        521,001   

Bank premises and equipment, net

     257,341        249,689   

Accrued income

     77,263        78,216   

Goodwill

     209,758        209,758   

Other intangibles

     46,966        55,585   

Other assets

     116,750        118,873   
  

 

 

   

 

 

 

Total assets

   $ 16,284,028      $ 16,911,852   
  

 

 

   

 

 

 

LIABILITIES

  

Deposits:

  

Noninterest-bearing demand

   $ 5,467,810      $ 5,189,998   

Interest-bearing demand and savings

     6,324,535        7,001,126   

Time deposits under $100,000

     434,863        491,792   

Time deposits of $100,000 or more

     526,229        957,850   
  

 

 

   

 

 

 

Total deposits

     12,753,437        13,640,766   

Federal funds purchased and repurchase agreements

     1,711,809        1,583,218   

Short-term debt

     —          107   

Long-term debt

     7,067        5,055   

Accrued expenses and taxes

     161,194        153,450   

Other liabilities

     35,172        23,191   
  

 

 

   

 

 

 

Total liabilities

     14,668,679        15,405,787   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

  

Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 45,485,313 and 45,221,237 shares outstanding, respectively

     55,057        55,057   

Capital surplus

     891,353        882,407   

Retained earnings

     947,664        884,630   

Accumulated other comprehensive income (loss)

     1,827        (32,640

Treasury stock, 9,571,417 and 9,835,493 shares, at cost, respectively

     (280,552     (283,389
  

 

 

   

 

 

 

Total shareholders’ equity

     1,615,349        1,506,065   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 16,284,028      $ 16,911,852   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited, dollars in thousands, except share and per share data)

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2014     2013      2014      2013  

INTEREST INCOME

          

Loans

   $ 61,636      $ 59,125       $ 180,845       $ 170,459   

Securities:

          

Taxable interest

     18,884        19,017         56,866         56,325   

Tax-exempt interest

     9,745        10,338         29,450         30,216   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total securities income

     28,629        29,355         86,316         86,541   

Federal funds and resell agreements

     87        62         166         126   

Interest-bearing due from banks

     426        276         2,015         1,276   

Trading securities

     39        278         311         808   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest income

     90,817        89,096         269,653         259,210   
  

 

 

   

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

          

Deposits

     3,015        3,097         9,166         10,222   

Federal funds and repurchase agreements

     358        385         1,293         1,443   

Other

     (82     69         53         190   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     3,291        3,551         10,512         11,855   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

     87,526        85,545         259,141         247,355   

Provision for loan losses

     4,500        6,500         14,000         13,500   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     83,026        79,045         245,141         233,855   
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST INCOME

          

Trust and securities processing

     74,062        68,465         218,982         194,263   

Trading and investment banking

     3,826        3,792         14,558         16,324   

Service charges on deposits

     21,634        21,036         63,819         63,441   

Insurance fees and commissions

     911        869         2,246         3,066   

Brokerage fees

     3,276        2,895         8,166         8,727   

Bankcard fees

     17,121        15,196         49,929         47,666   

Gain on sales of securities available for sale, net

     26        1,140         4,065         8,552   

Equity earnings on alternative investments

     2,470        4,241         8,462         4,241   

Other

     3,149        3,991         13,213         9,946   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest income

     126,475        121,625         383,440         356,226   
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST EXPENSE

          

Salaries and employee benefits

     90,041        83,733         268,454         251,000   

Occupancy, net

     10,475        10,016         29,885         29,175   

Equipment

     13,408        12,205         38,991         36,012   

Supplies and services

     4,817        4,761         15,008         14,611   

Marketing and business development

     6,057        5,536         16,966         15,514   

Processing fees

     14,085        14,471         42,553         42,854   

Legal and consulting

     4,496        4,433         12,500         12,877   

Bankcard

     4,097        4,561         12,782         13,817   

Amortization of intangible assets

     3,043        3,245         9,219         10,054   

Regulatory fees

     2,577        2,670         7,802         7,066   

Contingency reserve

     —          —           20,272         —     

Other

     8,365        7,432         25,781         20,772   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest expense

     161,461        153,063         500,213         453,752   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     48,040        47,607         128,368         136,329   

Income tax provision

     12,410        13,175         34,653         37,027   
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 35,630      $ 34,432       $ 93,715       $ 99,302   
  

 

 

   

 

 

    

 

 

    

 

 

 

PER SHARE DATA

          

Net income—basic

   $ 0.79      $ 0.85       $ 2.09       $ 2.47   

Net income—diluted

     0.78        0.83         2.06         2.44   

Dividends

     0.225        0.215         0.675         0.645   

Weight average shares outstanding

     44,890,309        40,698,700         44,819,125         40,185,351   

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

UMB FINANCIAL CORPORATION

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(unaudited, dollars in thousands)

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  

Net Income

   $ 35,630      $ 34,432      $ 93,715      $ 99,302   

Other comprehensive (loss) income, net of tax:

      

Unrealized (losses) gains on securities:

      

Change in unrealized holding (losses) gains, net

     (24,213     11,694        59,156        (151,721

Less: Reclassifications adjustment for gains included in net income

     (26     (1,140     (4,065     (8,552
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized (losses) gains on securities during the period

     (24,239     10,554        55,091        (160,273

Income tax benefit (expense)

     9,165        (4,005     (20,624     59,007   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (15,074     6,549        34,467        (101,266
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 20,556      $ 40,981      $ 128,182      $ (1,964
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

UMB FINANCIAL CORPORATION

STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY

(unaudited, dollars in thousands, except per share data)

 

     Common
Stock
     Capital
Surplus
    Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss) Income
    Treasury
Stock
    Total  

Balance—January 1, 2013

   $ 55,057       $ 732,069      $ 787,015      $ 85,588      $ (380,384   $ 1,279,345   

Total comprehensive loss

          99,302        (101,266       (1,964

Dividends ($0.645 per share)

     —           —          (26,179     —          —          (26,179

Purchase of treasury stock

     —           —            —          (2,551     (2,551

Issuance of equity awards

     —           (2,189     —          —          2,638        449   

Recognition of equity based compensation

     —           6,319        —          —          —          6,319   

Net tax benefit related to equity compensation plans

     —           963        —          —          —          963   

Sale of treasury stock

     —           367        —          —          172        539   

Exercise of stock options

        2,916        —          —          2,641        5,557   

Common stock issuance

     —           121,708        —          —          79,469        201,177   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—September 30, 2013

   $ 55,057       $ 862,153      $ 860,138      $ (15,678   $ (298,015   $ 1,463,655   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—January 1, 2014

   $ 55,057       $ 882,407      $ 884,630      $ (32,640   $ (283,389   $ 1,506,065   

Total comprehensive income

          93,715        34,467          128,182   

Dividends ($0.675 per share)

     —           —          (30,681     —          —          (30,681

Purchase of treasury stock

     —           —          —          —          (3,858     (3,858

Issuance of equity awards

     —           (2,624     —          —          3,114        490   

Recognition of equity based compensation

     —           7,224        —          —          —          7,224   

Net tax benefit related to equity compensation plans

     —           1,507        —          —          —          1,507   

Sale of treasury stock

     —           455        —          —          244        699   

Exercise of stock options

     —           2,384        —          —          3,337        5,721   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—September 30, 2014

   $ 55,057       $ 891,353      $ 947,664      $ 1,827      $ (280,552   $ 1,615,349   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

     Nine Months Ended  
     September 30,  
     2014     2013  

Operating Activities

    

Net Income

   $ 93,715      $ 99,302   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     14,000        13,500   

Depreciation and amortization

     34,415        32,998   

Deferred income tax benefit

     (5,909     (5,292

Net (increase) decrease in trading securities

     (11,787     770   

Gains on sales of securities available for sale, net

     (4,065     (8,552

Gains on sales of assets

     (2,948     (674

Amortization of securities premiums, net of discount accretion

     38,599        40,339   

Originations of loans held for sale

     (51,427     (101,935

Net gains on sales of loans held for sale

     (814     (609

Proceeds from sales of loans held for sale

     51,880        103,388   

Equity based compensation

     7,714        6,768   

Changes in:

    

Accrued income

     953        (2,281

Accrued expenses and taxes

     21,465        28,401   

Other assets and liabilities, net

     (4,168     (13,009
  

 

 

   

 

 

 

Net cash provided by operating activities

     181,623        193,114   
  

 

 

   

 

 

 

Investing Activities

    

Proceeds from maturities of securities held to maturity

     16,804        27,209   

Proceeds from sales of securities available for sale

     410,580        678,522   

Proceeds from maturities of securities available for sale

     1,034,231        1,193,130   

Purchases of securities held to maturity

     (58,573     (94,481

Purchases of securities available for sale

     (1,411,017     (1,894,722

Net increase in loans

     (596,221     (829,856

Net decrease in fed funds sold and resell agreements

     21,763        35,434   

Net increase in interest bearing balances due from other financial institutions

     (130,125     (411

Purchases of bank premises and equipment

     (35,219     (26,997

Net cash activity from acquisitions and branch sales

     (18,231     692   

Proceeds from sales of bank premises and equipment

     5,014        808   

Purchases of company-owned life insurance

     (6,000     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (766,994     (910,672
  

 

 

   

 

 

 

Financing Activities

    

Net (decrease) increase in demand and savings deposits

     (386,207     1,505,416   

Net decrease in time deposits

     (480,791     (117,737

Net increase (decrease) in fed funds purchased and repurchase agreements

     128,591        (259,306

Net decrease in short-term debt

     (107     (303

Proceeds from long-term debt

     3,320        1,000   

Repayment of long-term debt

     (1,308     (1,235

Payment of contingent consideration on acquisitions

     (13,725     (16,172

Cash dividends paid

     (30,679     (26,002

Net tax benefit related to equity compensation plans

     1,507        963   

Common stock issuance

     —          201,177   

Proceeds from exercise of stock options and sales of treasury shares

     6,420        6,096   

Purchases of treasury stock

     (3,858     (2,551
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (776,837     1,291,346   
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (1,362,208     573,788   

Cash and cash equivalents at beginning of period

     2,582,428        1,366,394   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,220,220      $ 1,940,182   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Income taxes paid

   $ 40,789      $ 34,351   

Total interest paid

     10,720        12,560   

See Notes to Consolidated Financial Statements.

 

7


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

1. Financial Statement Presentation

The consolidated financial statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after elimination of all 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Form 10-Q filing and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

2. Summary of Significant Accounting Policies

The Company is a 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, Texas, 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Cash and cash equivalents

Cash and cash equivalents include Cash and due from banks and amounts due from the Federal Reserve Bank. Amounts due from the Federal Reserve Bank are interest-bearing for all periods presented and are included in the Interest-bearing due from banks line on the Company’s Consolidated Balance Sheets.

This table provides a summary of cash and cash equivalents as presented on the Consolidated Statement of Cash Flows as of September 30, 2014 and September 30, 2013 (in thousands):

 

     September 30,  
     2014      2013  

Due from the Federal Reserve

   $ 824,264       $ 1,335,590   

Cash and due from banks

     395,956         604,592   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 1,220,220       $ 1,940,182   
  

 

 

    

 

 

 

Also included in the Interest-bearing due from banks line, but not considered cash and cash equivalents are amounts due from certificates of deposits held at other financial institutions. The amounts due from certificates of deposit totaled $157.3 million and $22.3 million at September 30, 2014 and September 30, 2013, respectively.

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 quarterly per share data includes the dilutive effect of 551,674 and 650,028 shares issuable upon the exercise of options granted by the Company and outstanding at September 30, 2014 and 2013, respectively. Diluted year-to-date income per share includes the dilutive effect of 601,260 and 544,930 shares issuable upon the exercise of stock options granted by the Company and outstanding at September 30, 2014 and 2013, respectively.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

Options issued under employee benefits plans to purchase 250,911 shares of common stock were outstanding at September 30, 2014, but were not included in the computation of quarter-to-date diluted EPS because the options were anti-dilutive. Options issued under employee benefit plans to purchase 250,911 and 270,839 shares of common stock were outstanding at September 30, 2014 and 2013, respectively, but were not included in the computation of year-to-date diluted EPS because the options were anti-dilutive.

Common Stock Issuance

On September 16, 2013, the Company completed the issuance of 3.9 million shares of common stock with net proceeds of $201.2 million to be used for strategic growth purposes. In addition, UMB granted the underwriters a 30-day option to purchase up to an additional 585,000 shares of common stock. On October 17, 2013, the underwriters exercised the option of 585,000 shares, which generated additional net proceeds of $30.2 million.

3. New Accounting Pronouncements

Investment Companies In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, “Amendments to the Scope, Measurement, and Disclosure Requirements” for investment companies. The amendments changed the assessment of whether an entity is an investment company by requiring an entity to possess certain fundamental characteristics, while allowing judgment in assessing other typical characteristics. The ASU was effective January 1, 2014, and the Company did not change the status of any subsidiary, or the accounting applied to a subsidiary, under the new guidelines.

Accounting for Investments in Qualified Affordable Housing Projects In January 2014, the FASB issued ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Regardless of whether the reporting entity chooses to elect the proportional amortization method, this ASU introduces new recurring disclosures about all investments in qualified affordable housing projects. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this accounting pronouncement will not have a significant impact on the Company’s financial statements or financial statement disclosures.

Reclassification of Residential Real Estate Loans In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendment is intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loans such that the loan receivable should be derecognized and the real stated property recognized. The amendments in this update are effective for interim and annual periods beginning after December 15, 2014. The adoption of this accounting pronouncement will not have a significant impact on the Company’s consolidated financial statements.

Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The issuance is part of a joint effort by the FASB and the International Accounting Standards Board (IASB) to enhance financial reporting by creating common revenue recognition guidance for U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The amendments in this update are effective for interim and annual periods beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

Repurchase-to-Maturity Transactions In June 2014, the FASB issued ASU No. 2014-11, “Repurchase-to-Maturity Transactions, Repurchased Financings, and Disclosures.” The amendment changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with accounting for other repurchase agreements. Additionally, the amendment requires new disclosures on transfers accounted for as sales in transactions that are economically similar to repurchase agreements and

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

requires increased transparency on collateral pledged in secured borrowings. The amendments in this update are effective for interim and annual periods beginning after December 15, 2014. Early application is not permitted. The Company is currently evaluating the effect that ASU 2014-11 will have on its consolidated financial statements and related financial statement disclosures.

Stock Compensation In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target could be Achieved after the Requisite Service Period.” The amendment is intended to reduce diversity in practice by clarifying that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this update are effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. The adoption of this accounting pronouncement will not have a significant impact on the Company’s consolidated financial statements.

Troubled Debt Restructurings by Creditors In August 2014, the FASB issued ASU No. 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The amendment is intended to reduce diversity in practice in the classification of mortgage loans extended under certain government-sponsored loan guarantee programs, such as those offered by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), that entitle the creditor to recover all or a portion of the unpaid principal balance from the government if a borrower defaults. This update requires government-guaranteed mortgage loans that meet certain criteria to be derecognized and a separate receivable be recognized upon foreclosure. The amendments in this update are effective for interim and annual periods beginning after December 15, 2014. The adoption of this accounting pronouncement will not have a significant impact on the Company’s consolidated financial statements.

Going Concern In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The amendment addresses management’s responsibility in regularly evaluating whether there is substantial doubt about a company’s ability to continue as a going concern. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter, although early adoption is permitted. The adoption of this accounting pronouncement will not have a significant impact on the Company’s consolidated financial statements.

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 risk assessment 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 Company’s policies and procedures.

Commercial loans are underwritten after evaluating and understanding the borrower’s 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 borrower’s 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 and 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.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

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, 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 borrower’s loan-to-value percentage, collection remedies, ability to repay, and overall credit history.

Consumer loans are underwritten based on the borrower’s 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 CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

This table provides a summary of loan classes and an aging of past due loans at September 30, 2014 and December 31, 2013 (in thousands):

 

     September 30, 2014  
     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

   $ 1,376       $ 199       $ 15,075       $ 16,650       $ 3,522,624       $ 3,539,274   

Commercial – credit card

     293         75         44         412         129,612         130,024   

Real estate:

              

Real estate – construction

     2,380         —           948         3,328         242,477         245,805   

Real estate – commercial

     3,050         2,038         15,267         20,355         1,786,570         1,806,925   

Real estate – residential

     869         207         567         1,643         315,183         316,826   

Real estate – HELOC

     157         —           115         272         629,224         629,496   

Consumer:

              

Consumer – credit card

     2,348         1,962         550         4,860         298,833         303,693   

Consumer – other

     3,723         197         96         4,016         87,904         91,920   

Leases

     —           —           —           —           39,200         39,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 14,196       $ 4,678       $ 32,662       $ 51,536       $ 7,051,627       $ 7,103,163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     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

   $ 2,107       $ 135       $ 8,042       $ 10,284       $ 3,291,219       $ 3,301,503   

Commercial – credit card

     362         82         38         482         102,788         103,270   

Real estate:

              

Real estate – construction

     186         —           934         1,120         151,755         152,875   

Real estate – commercial

     3,611         344         19,213         23,168         1,678,983         1,702,151   

Real estate – residential

     1,257         13         868         2,138         287,218         289,356   

Real estate – HELOC

     880         6         210         1,096         565,032         566,128   

Consumer:

              

Consumer – credit card

     3,230         2,448         1,031         6,709         311,627         318,336   

Consumer – other

     1,727         190         370         2,287         60,625         62,912   

Leases

     —           —           —           —           23,981         23,981   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 13,360       $ 3,218       $ 30,706       $ 47,284       $ 6,473,228       $ 6,520,512   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

The Company sold $51.9 million and $103.4 million of residential real estate and student loans in the secondary market without recourse during the nine-month periods ended September 30, 2014 and September 30, 2013, respectively.

The Company has ceased the recognition of interest on loans with a carrying value of $32.7 million and $30.7 million at September 30, 2014 and December 31, 2013, respectively. Restructured loans totaled $10.2 million and $12.1 million at September 30, 2014 and December 31, 2013, respectively. Loans 90 days past due and still accruing interest amounted to $4.7 million and $3.2 million at September 30, 2014 and December 31, 2013, respectively. There was an insignificant amount of interest recognized on impaired loans during 2014 and 2013.

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company’s 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. The loans in any of the three categories below are considered to be a criticized 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 borrower’s 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 management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institution’s 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 financial 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 and interest is doubtful or remote.

All other classes of loans are generally evaluated and monitored based on payment activity. Non-performing loans include restructured loans on non-accrual and all other non-accrual loans.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

This table provides an analysis of the credit risk profile of each loan class at September 30, 2014 and December 31, 2013 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating

 

 

     Commercial      Real estate-construction  
     September 30,
2014
     December 31,
2013
     September 30,
2014
     December 31,
2013
 

Non-watch list

   $ 3,263,847       $ 3,041,224       $ 243,513       $ 151,359   

Watch

     61,424         110,932         186         210   

Special Mention

     87,947         78,064         758         —     

Substandard

     126,056         71,283         1,348         1,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,539,274       $ 3,301,503       $ 245,805       $ 152,875   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Real estate-commercial  
     September 30,
2014
     December 31,
2013
 

Non-watch list

   $ 1,689,958       $ 1,565,894   

Watch

     46,509         76,647   

Special Mention

     24,677         19,876   

Substandard

     45,781         39,734   
  

 

 

    

 

 

 

Total

   $ 1,806,925       $ 1,702,151   
  

 

 

    

 

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

 

     Commercial-credit card      Real estate-residential  
     September 30,
2014
     December 31,
2013
     September 30,
2014
     December 31,
2013
 

Performing

   $ 129,980       $ 103,232       $ 316,259       $ 288,488   

Non-performing

     44         38         567         868   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 130,024       $ 103,270       $ 316,826       $ 289,356   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Real estate-HELOC      Consumer-credit card  
     September 30,
2014
     December 31,
2013
     September 30,
2014
     December 31,
2013
 

Performing

   $ 629,381       $ 565,918       $ 303,143       $ 317,305   

Non-performing

     115         210         550         1,031   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 629,496       $ 566,128       $ 303,693       $ 318,336   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Consumer-other      Leases  
     September 30,
2014
     December 31,
2013
     September 30,
2014
     December 31,
2013
 

Performing

   $ 91,824       $ 62,542       $ 39,200       $ 23,981   

Non-performing

     96         370         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 91,920       $ 62,912       $ 39,200       $ 23,981   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (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 management’s judgment of inherent probable losses within the Company’s 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 Company’s 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 probable 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 management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and estimated 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 management’s 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 Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and changes in the regulatory environment.

The Company’s 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 impaired loans. Loans are classified based on an internal risk grading process that evaluates the obligor’s 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 borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk ranking of the loan and economic conditions affecting the borrower’s 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 Company’s 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 risk rating. The consumer credit card pool is evaluated based on delinquencies and credit scores. In addition, a portion of the allowance is determined by a review of qualitative factors by management.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

This table provides a rollforward of the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2014 (in thousands):

 

     Three Months Ended September 30, 2014  
     Commercial     Real estate     Consumer     Leases      Total  

Allowance for loan losses:

           

Beginning balance

   $ 52,433      $ 14,217      $ 10,074      $ 78       $ 76,802   

Charge-offs

     (2,033     (57     (2,745     —           (4,835

Recoveries

     396        8        445        —           849   

Provision

     3,983        (1,515     1,964        68         4,500   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 54,779      $ 12,653      $ 9,738      $ 146       $ 77,316   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Nine Months Ended September 30, 2014  
     Commercial     Real estate     Consumer     Leases      Total  

Allowance for loan losses:

           

Beginning balance

   $ 48,886      $ 15,342      $ 10,447      $ 76       $ 74,751   

Charge-offs

     (4,980     (238     (8,881     —           (14,099

Recoveries

     664        25        1,975        —           2,664   

Provision

     10,209        (2,476     6,197        70         14,000   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 54,779      $ 12,653      $ 9,738      $ 146       $ 77,316   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance: individually evaluated for impairment

   $ 2,252      $ 1,368      $ —        $ —         $ 3,620   

Ending Balance: collectively evaluated for impairment

     52,527        11,285        9,738        146         73,696   

Loans:

           

Ending Balance: loans

   $ 3,669,298      $ 2,999,052      $ 395,613      $ 39,200       $ 7,103,163   

Ending Balance: individually evaluated for impairment

     19,176        13,467        17        —           32,660   

Ending Balance: collectively evaluated for impairment

     3,650,122        2,985,585        395,596        39,200         7,070,503   

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

This table provides a rollforward of the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2013 (in thousands):

 

     Three Months Ended September 30, 2013  
     Commercial     Real estate     Consumer     Leases      Total  

Allowance for loan losses:

           

Beginning balance

   $ 45,108      $ 16,296      $ 10,168      $ 75       $ 71,647   

Charge-offs

     (592     (162     (3,126     —           (3,880

Recoveries

     246        21        404        —           671   

Provision

     3,491        2        2,996        11         6,500   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 48,253      $ 16,157      $ 10,442      $ 86       $ 74,938   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Nine Months Ended September 30, 2013  
     Commercial     Real estate     Consumer     Leases      Total  

Allowance for loan losses:

           

Beginning balance

   $ 43,390      $ 15,506      $ 12,470      $ 60       $ 71,426   

Charge-offs

     (3,015     (533     (9,265     —           (12,813

Recoveries

     761        37        2,027        —           2,825   

Provision

     7,117        1,147        5,210        26         13,500   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 48,253      $ 16,157      $ 10,442      $ 86       $ 74,938   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance: individually evaluated for impairment

   $ 3,301      $ 1,412      $ —        $ —         $ 4,713   

Ending Balance: collectively evaluated for impairment

     44,952        14,745        10,442        86         70,225   

Loans:

           

Ending Balance: loans

   $ 3,494,603      $ 2,604,956      $ 381,704      $ 25,639       $ 6,506,902   

Ending Balance: individually evaluated for impairment

     14,835        15,852        30        —           30,717   

Ending Balance: collectively evaluated for impairment

     3,479,768        2,589,104        381,674        25,639         6,476,185   

 

17


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

Impaired Loans

This table provides an analysis of impaired loans by class at September 30, 2014 and December 31, 2013 (in thousands):

 

     September 30, 2014  
     Unpaid
Principal
Balance
     Recorded
Investment
with No
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial:

                 

Commercial

   $ 23,599       $ 8,710       $ 10,466       $ 19,176       $ 2,252       $ 15,762   

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     1,499         825         123         948         123         928   

Real estate – commercial

     13,758         4,816         6,652         11,468         1,245         12,035   

Real estate – residential

     1,224         1,051         —           1,051         —           1,030   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     17         17         —           17         —           15   

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,097       $ 15,419       $ 17,241       $ 32,660       $ 3,620       $ 29,770   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     Unpaid
Principal
Balance
     Recorded
Investment
with No
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial:

                 

Commercial

   $ 17,227       $ 3,228       $ 11,407       $ 14,635       $ 2,882       $ 14,791   

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     1,408         810         123         933         —           1,186   

Real estate – commercial

     14,686         5,305         8,218         13,523         94         10,506   

Real estate – residential

     1,317         1,087         —           1,087         1,276         1,122   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     12         11         —           11         —           34   

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,650       $ 10,441       $ 19,748       $ 30,189       $ 4,252       $ 27,639   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

18


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

Troubled Debt Restructurings

A loan modification is considered a troubled debt restructuring (TDR) when a concession had been granted to a debtor experiencing financial difficulties. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the debtor short-term cash relief to allow them to improve their financial condition. The Company’s restructured loans are individually evaluated for impairment and evaluated as part of the allowance for loan losses as described above in the Allowance for Loan Losses section of this note.

The Company had $428 thousand in commitments to lend to borrowers with loan modifications classified as TDR’s as of September 30, 2014. The Company made no TDR’s in the last 12 months that had payment defaults for the three or nine-month periods ended September 30, 2014.

This table provides a summary of loans restructured by class during the three and nine months ended September 30, 2014 (in thousands):

 

     Three Months Ended September 30, 2014      Nine Months Ended September 30, 2014  
     Number
of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

                 

Commercial:

                 

Commercial

     —         $ —         $ —           1       $ 469       $ 469   

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     —           —           —           —           —           —     

Real estate – commercial

     1         178         178         1         178         178   

Real estate – residential

     1         67         67         4         277         301   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     —           —           —           —           —           —     

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 245       $ 245         6       $ 924       $ 948   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

This table provides a summary of loans restructured by class for the three and nine months ended September 30, 2013 (in thousands):

 

     Three Months Ended September 30, 2013      Nine Months Ended September 30, 2013  
     Number
of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

                 

Commercial:

                 

Commercial

     1       $ 182       $ 182         3       $ 1,311       $ 1,249   

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     —           —           —           —           —           —     

Real estate – commercial

     —           —           —           1         937         937   

Real estate – residential

     —           —           —           1         425         425   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     —           —           —           —           —           —     

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 182       $ 182         5       $ 2,673       $ 2,611   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

5. Securities

Securities Available for Sale

This table provides detailed information about securities available for sale at September 30, 2014 and December 31, 2013 (in thousands):

 

            Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value  

September 30, 2014

          

U.S. Treasury

   $ 510,650       $ 472       $ (905   $ 510,217   

U.S. Agencies

     986,247         1,029         (1,853     985,423   

Mortgage-backed

     3,182,642         23,396         (39,665     3,166,373   

State and political subdivisions

     1,944,165         27,390         (5,874     1,965,681   

Corporates

     133,312         5         (1,208     132,109   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 6,757,016       $ 52,292       $ (49,505   $ 6,759,803   
  

 

 

    

 

 

    

 

 

   

 

 

 
            Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value  

December 31, 2013

          

U.S. Treasury

   $ 110,789       $ 284       $ (873   $ 110,200   

U.S. Agencies

     1,258,176         2,793         (3,306     1,257,663   

Mortgage-backed

     2,984,963         23,942         (64,339     2,944,566   

State and political subdivisions

     2,003,509         23,493         (31,756     1,995,246   

Corporates

     457,275         902         (3,441     454,736   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 6,814,712       $ 51,414       $ (103,715   $ 6,762,411   
  

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents contractual maturity information for securities available for sale at September 30, 2014 (in thousands):

 

     Amortized      Fair  
     Cost      Value  

Due in 1 year or less

   $ 466,001       $ 467,789   

Due after 1 year through 5 years

     2,299,824         2,311,028   

Due after 5 years through 10 years

     687,956         696,024   

Due after 10 years

     120,593         118,589   
  

 

 

    

 

 

 

Total

     3,574,374         3,593,430   

Mortgage-backed securities

     3,182,642         3,166,373   
  

 

 

    

 

 

 

Total securities available for sale

   $ 6,757,016       $ 6,759,803   
  

 

 

    

 

 

 

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 nine months ended September 30, 2014, proceeds from the sales of securities available for sale were $410.6 million compared to $678.5 million for the same period in 2013. Securities transactions resulted in gross realized gains of $4.1 million and $8.8 million for the nine months ended September 30, 2014 and 2013. The gross realized losses for the nine months ended September 30, 2014 and 2013 were $11 thousand and $220 thousand, respectively.

Securities available for sale with a market value of $5.1 billion at September 30, 2014, and $5.9 billion at December 31, 2013, were pledged to secure U.S. Government deposits, other public deposits, certain trust deposits as required by law, and other potential borrowings. Of this amount, securities with a market value of $1.4 billion at September 30, 2014 and $1.7 billion at December 31, 2013 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.

 

21


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

The following table shows the Company’s 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 September 30, 2014 and December 31, 2013 (in thousands):

 

     Less than 12 months     12 months or more     Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

September 30, 2014

               

Description of Securities

               

U.S. Treasury

   $ 215,360       $ (404   $ 29,471       $ (501   $ 244,831       $ (905

U.S. Agencies

     407,420         (604     117,295         (1,249     524,715         (1,853

Mortgage-backed

     1,474,931         (23,122     533,596         (16,543     2,008,527         (39,665

State and political subdivisions

     177,480         (410     294,762         (5,464     472,242         (5,874

Corporates

     42,072         (246     86,349         (962     128,421         (1,208
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily-impaired debt securities available for sale

   $ 2,317,263       $ (24,786   $ 1,061,473       $ (24,719   $ 3,378,736       $ (49,505
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 months     12 months or more     Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

December 31, 2013

               

Description of Securities

               

U.S. Treasury

   $ 39,822       $ (873   $ —         $ —        $ 39,822       $ (873

U.S. Agencies

     675,509         (3,130     9,824         (176     685,333         (3,306

Mortgage-backed

     1,945,964         (60,719     89,147         (3,620     2,035,111         (64,339

State and political subdivisions

     662,225         (25,064     87,061         (6,692     749,286         (31,756

Corporates

     271,834         (2,458     41,522         (983     313,356         (3,441
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily-impaired debt securities available for sale

   $ 3,595,354       $ (92,244   $ 227,554       $ (11,471   $ 3,822,908       $ (103,715
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses in the Company’s investments in U.S. treasury obligations, U.S. agencies, federal agency mortgage-backed securities, municipal securities, and corporates were caused by changes in interest rates. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

Securities Held to Maturity

The table below provides detailed information for securities held to maturity at September 30, 2014 and December 31, 2013 (in thousands):

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

September 30, 2014

           

State and political subdivisions

   $ 237,961       $ 32,329       $ —         $ 270,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

State and political subdivisions

   $ 209,770       $ 21,740       $ —         $ 231,510   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

The following table presents contractual maturity information for securities held to maturity at September 30, 2014 (in thousands):

     Amortized      Fair  
     Cost      Value  

Due in 1 year or less

   $ 46       $ 52   

Due after 1 year through 5 years

     26,650         30,271   

Due after 5 years through 10 years

     132,268         150,238   

Due after 10 years

     78,997         89,729   
  

 

 

    

 

 

 

Total securities held to maturity

   $ 237,961       $ 270,290   
  

 

 

    

 

 

 

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.

There were no sales of securities held to maturity during the first nine months of 2014 or 2013.

Trading Securities

The net unrealized gains on trading securities at September 30, 2014 and September 30, 2013 were $38.9 thousand and $14.0 thousand, respectively, and were included in trading and investment banking income on the consolidated statements of income.

Federal Reserve Bank Stock and Other Securities

The table below provides detailed information for Federal Reserve Bank stock and other securities at September 30, 2014 and December 31, 2013 (in thousands):

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

September 30, 2014

           

Federal Reserve Bank stock

   $ 16,279       $ —         $ —         $     16,279   

Other securities – marketable

     —           19,472         —           19,472   

Other securities – non-marketable

     29,839         5,602         —           35,441   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 46,118       $ 25,074       $ —         $ 71,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Federal Reserve Bank stock

   $ 16,279       $ —         $ —         $ 16,279   

Other securities – marketable

     20         16,612         —           16,632   

Other securities – non-marketable

     17,139         432         —           17,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 33,438       $ 17,044       $ —         $ 50,482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Federal Reserve Bank stock is based on the capital structure of the investing bank and is carried at cost. Other marketable and non-marketable securities include Prairie Capital Management alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. The fair value of other marketable securities includes alternative investment securities of $19.5 million at September 30, 2014 and $16.6 million at December 31, 2013. The fair value of other non-marketable securities includes alternative investment securities of $10.2 million at September 30, 2014 and $4.7 million at December 31, 2013. Unrealized gains or losses on alternative investments are recognized in the Equity Earnings on Alternative Investments line of the Company’s Consolidated Statements of Income.

 

23


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

6. Goodwill and Other Intangibles

Changes in the carrying amount of goodwill for the periods ended September 30, 2014 and December 31, 2013 by reportable segment are as follows (in thousands):

 

     Bank      Institutional
Investment
Management
     Asset
Servicing
     Total  

Balances as of January 1, 2013

   $ 142,753         $47,529       $ 19,476       $ 209,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of December 31, 2013

   $ 142,753         $47,529       $ 19,476       $ 209,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of January 1, 2014

   $ 142,753         $47,529       $ 19,476       $ 209,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of September 30, 2014

   $ 142,753         $47,529       $ 19,476       $ 209,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Following are the finite-lived intangible assets that continue to be subject to amortization as of September 30, 2014 and December 31, 2013 (in thousands):

 

     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

September 30, 2014

        

Core deposit intangible assets

   $ 36,497       $ 32,484       $ 4,013   

Customer relationships

     104,560         62,299         42,261   

Other intangible assets

     3,247         2,555         692   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 144,304       $ 97,338       $ 46,966   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Core deposit intangible assets

   $ 36,497       $ 31,674       $ 4,823   

Customer relationships

     103,960         54,062         49,898   

Other intangible assets

     3,247         2,383         864   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 143,704       $ 88,119       $ 55,585   
  

 

 

    

 

 

    

 

 

 

Following is the aggregate amortization expense recognized in each period (in thousands):

 

    

Three Months Ended

September 30,

     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Aggregate amortization expense

     $3,043         $3,245       $ 9,219       $ 10,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

Estimated amortization expense of intangible assets on future years (in thousands):

 

For the three months ending December 31, 2014

   $ 2,974   

For the year ending December 31, 2015

     9,636   

For the year ending December 31, 2016

     8,428   

For the year ending December 31, 2017

     7,185   

For the year ending December 31, 2018

     4,994   

For the year ending December 31, 2019

     4,204   

 

24


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

7. 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 Company’s 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 Company’s off-balance sheet financial instruments.

Contract or Notional Amount (in thousands):

 

     September 30,      December 31,  
     2014      2013  

Commitments to extend credit for loans (excluding credit card loans)

   $ 3,167,398       $ 2,690,268   

Commitments to extend credit under credit card loans

     2,384,213         2,215,278   

Commercial letters of credit

     1,415         5,949   

Standby letters of credit

     374,109         356,054   

Forward foreign exchange contracts

     66,939         21,525   

Spot foreign exchange contracts

     1,425         8,001   

 

25


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

8. Business Segment Reporting

The Company has strategically aligned its operations into the following four reportable segments (collectively, Business Segments): Bank, Payment Solutions, Institutional Investment Management, and Asset Servicing. Business segment financial results produced by the Company’s internal management reporting system are evaluated regularly by senior executive officers in deciding how to allocate resources and assess performance for individual Business Segments. The management reporting 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 presented are based on methodologies in effect at September 30, 2014. Previously reported results have been reclassified to conform to the current organizational structure.

The following summaries provide information about the activities of each segment:

The Bank provides a full range of banking services to commercial, retail, government and correspondent bank customers through the Company’s branches, call center, internet banking, and ATM network. Services include traditional commercial and consumer banking, treasury management, leasing, foreign exchange, merchant bankcard, wealth management, brokerage, insurance, capital markets, investment banking, corporate trust, and correspondent banking.

Payment Solutions provides consumer and commercial credit and debit card, prepaid debit card solutions, healthcare services, and institutional cash management. Healthcare services include health savings account and flexible savings account products for healthcare providers, third-party administrators and large employers.

Institutional Investment Management provides equity and fixed income investment strategies in the intermediary and institutional markets via mutual funds, traditional separate accounts and sub-advisory relationships.

Asset Servicing provides services to the asset management industry, supporting a range of investment products, including mutual funds, alternative investments and managed accounts. Services include fund administration, fund accounting, investor services, transfer agency, distribution, marketing, custody, alternative investment services, and collective and multiple-series trust services.

Business Segment Information

Segment financial results were as follows (in thousands):

 

     Three Months Ended September 30, 2014  
     Bank      Payment
Solutions
     Institutional
Investment
Management
     Asset
Servicing
     Total  

Net interest income

   $ 72,906       $ 13,442       $ —         $ 1,178       $ 87,526   

Provision for loan losses

     2,446         2,054         —           —           4,500   

Noninterest income

     48,385         21,579         33,919         22,592         126,475   

Noninterest expense

     99,307         22,056         20,910         19,188         161,461   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     19,538         10,911         13,009         4,582         48,040   

Income tax expense

     5,081         2,795         3,350         1,184         12,410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 14,457       $ 8,116       $ 9,659       $ 3,398       $ 35,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 11,639,000       $ 2,823,000       $ 74,000       $ 1,102,000       $ 15,638,000   

 

26


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

     Three Months Ended September 30, 2013  
     Bank      Payment
Solutions
     Institutional
Investment
Management
    Asset
Servicing
     Total  

Net interest income

   $ 73,419       $ 11,587       $ (11   $ 550       $ 85,545   

Provision for loan losses

     1,833         4,667         —          —           6,500   

Noninterest income

     48,945         18,409         33,842        20,429         121,625   

Noninterest expense

     93,150         21,658         21,054        17,201         153,063   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income before taxes

     27,381         3,671         12,777        3,778         47,607   

Income tax expense

     6,922         1,283         3,506        1,464         13,175   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 20,459       $ 2,388       $ 9,271      $ 2,314       $ 34,432   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average assets

   $ 11,128,000       $ 1,727,000       $ 76,000      $ 1,993,000       $ 14,924,000   

 

     Nine Months Ended September 30, 2014  
     Bank      Payment
Solutions
     Institutional
Investment
Management
    Asset
Servicing
     Total  

Net interest income

   $ 216,508       $ 38,220       $ (3   $ 4,416       $ 259,141   

Provision for loan losses

     7,558         6,442         —          —           14,000   

Noninterest income

     151,843         62,998         102,014        66,585         383,440   

Noninterest expense

     308,013         67,680         68,848        55,672         500,213   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income before taxes

     52,780         27,096         33,163        15,329         128,368   

Income tax expense

     14,326         7,272         8,887        4,168         34,653   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 38,454       $ 19,824       $ 24,276      $ 11,161       $ 93,715   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average assets

   $ 11,914,000       $ 2,350,000       $ 74,000      $ 1,583,000       $ 15,921,000   
     Nine Months Ended September 30, 2013  
     Bank      Payment
Solutions
     Institutional
Investment
Management
    Asset
Servicing
     Total  

Net interest income

   $ 211,238       $ 34,327       $ (22   $ 1,812       $ 247,355   

Provision for loan losses

     3,770         9,730         —          —           13,500   

Noninterest income

     148,129         56,486         91,550        60,061         356,226   

Noninterest expense

     277,226         63,626         58,754        54,146         453,752   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income before taxes

     78,371         17,457         32,774        7,727         136,329   

Income tax expense

     19,629         5,464         8,880        3,054         37,027   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 58,742       $ 11,993       $ 23,894      $ 4,673       $ 99,302   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average assets

   $ 11,145,000       $ 1,770,000       $ 79,000      $ 1,867,000       $ 14,861,000   

 

27


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

9. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate assets. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk of the Company’s assets or liabilities. The Company has entered into an offsetting position for each of these derivative instruments with a matching instrument from another financial institution in order to minimize its net risk exposure resulting from such transactions.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as of September 30, 2014 and December 31, 2013. The Company’s derivative asset and derivative liability are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets.

This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of September 30, 2014 and December 31, 2013 (in thousands):

 

     Asset Derivatives      Liability Derivatives  
     September 30,
2014
     December 31,
2013
     September 30,
2014
     December 31,
2013
 

Fair value

           

Interest Rate Products:

           

Derivatives not designated as hedging instruments

   $ 4,548       $ 2,442       $ 4,637       $ 2,346   

Derivatives designated as hedging instruments

     —           76         141         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,548       $ 2,518       $ 4,778       $ 2,346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in the benchmark interest rate, London Interbank Offered Rate (LIBOR). Interest rate swaps designated as fair value hedges involve making fixed-rate payments to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of September 30, 2014, the Company had one interest rate swap with a notional amount of $6.7 million that was designated as a fair value hedge of interest rate risk associated with the Company’s fixed rate loan assets.

Designated Hedges

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and nine months ended September 30, 2014, the Company recognized net losses of $1 thousand and $19 thousand, respectively, in Other noninterest expense related to hedge ineffectiveness.

 

28


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

Non-designated Hedges

The remainder of the Company’s derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of September 30, 2014, the Company had 28 interest rate swaps with an aggregate notional amount of $343.3 million related to this program. During the three and nine months ended September 30, 2014, the Company recognized $133 thousand and $185 thousand of net losses, respectively, related to changes in fair value of these swaps. During the three and nine months ended September 30, 2013, the Company recognized $40 thousand of net losses and $114 thousand of net gains, respectively, related to changes in the fair value of these swaps in Other noninterest expense.

Effect of Derivative Instruments on the Income Statement

This table provides a summary of the amount of gain (loss) recognized in Other non-interest expense in the Consolidated Statements of Income related to the Company’s derivative asset and liability for the three and nine months ended September 30, 2014 and September 30, 2013 (in thousands):

 

     Amount of Gain (Loss) Recognized  
     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Interest Rate Products

        

Derivatives not designated as hedging instruments

   $ (133   $ (40   $ (185   $ 114   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (133   $ (40   $ (185   $ 114   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Rate Products

        

Derivatives designated as hedging instruments

        

Fair value adjustments on derivatives

   $ 19      $ —        $ (216   $ —     

Fair value adjustments on hedged items

     (20     —          197        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (1   $ —        $ (19   $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

As of September 30, 2014 the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $24 thousand. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has not yet reached its minimum collateral posting threshold under these agreements. If the Company had breached any of these provisions at September 30, 2014, it could have been required to settle its obligations under the agreements at the termination value.

 

29


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

10. Fair Value Measurements

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of September 30, 2014, 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 September 30, 2014 and December 31, 2013 (in thousands):

 

     Fair Value Measurement at September 30, 2014  

Description

   September 30,
2014
     Quoted
Prices in
Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

U.S. Treasury

   $ 500       $ 500       $ —         $ —     

U.S. Agencies

     —           —           —           —     

Mortgage-backed

     3,922         —           3,922         —     

State and political subdivisions

     8,988         —           8,988         —     

Trading - other

     18,380         18,380         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     31,790         18,880         12,910         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     510,217         510,217         —           —     

U.S. Agencies

     985,423         —           985,423         —     

Mortgage-backed

     3,166,373         —           3,166,373         —     

State and political subdivisions

     1,965,681         —           1,965,681         —     

Corporates

     132,109         132,109         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,759,803         642,326         6,117,477         —     

Company-owned life insurance

     26,748         —           26,748         —     

Derivatives

     4,548         —           4,548         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,822,889       $ 661,206       $ 6,161,683       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 26,188       $ 26,188       $ —         $ —     

Contingent consideration liability

     54,259         —           —           54,259   

Derivatives

     4,778         —           4,778         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 85,225       $ 26,188       $ 4,778       $ 54,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

     Fair Value Measurement at December 31, 2013  

Description

   December 31,
2013
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

U.S. Treasury

   $ 400       $ 400       $ —         $ —     

U.S. Agencies

     —           —           —           —     

Mortgage-backed

     515         —           515         —     

State and political subdivisions

     3,072         —           3,072         —     

Trading - other

     24,477         24,477         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     28,464         24,877         3,587         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     110,200         110,200         —           —     

U.S. Agencies

     1,257,663         —           1,257,663         —     

Mortgage-backed

     2,944,566         —           2,944,566         —     

State and political subdivisions

     1,995,246         —           1,995,246         —     

Corporates

     454,736         454,736         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,762,411         564,936         6,197,475         —     

Company-owned life insurance

     19,619         —           19,619         —     

Derivatives

     2,518         —           2,518         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,813,012       $ 589,813       $ 6,223,199       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 19,825       $ 19,825       $ —         $ —     

Contingent consideration liability

     46,201         —           —           46,201   

Derivatives

     2,346         —           2,346         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68,372       $ 19,825       $ 2,346       $ 46,201   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reconciles the beginning and ending balances of the contingent consideration liability for the nine months ended September 30, 2014 (in thousands):

 

     Nine Months Ended September 30,  
     2014     2013  

Beginning Balance

   $ 46,201      $ 51,163   

Contingency reserve

     14,272        —     

Payment of contingent considerations on acquisitions

     (13,725     (16,172

Income from fair value adjustments

     —          (138

Expense from fair value adjustments

     7,511        4,462   
  

 

 

   

 

 

 

Ending Balance

   $ 54,259      $ 39,315   
  

 

 

   

 

 

 

During the nine month period ended September 30, 2014, the Company recorded contingency reserve expense of $20.3 million in its Consolidated Statement of Income related to the resolution of the PCM dispute. On June 30, 2014, the Company made a payment of $6.0 million, reducing the remaining contingency reserve to $14.3 million. The settlement agreement amends the original asset purchase agreement dated June 27, 2010, and subsequent to the settlement, the remaining contingency reserve liability has been included in the table above as additional contingent consideration recorded at fair value. Fair value adjustments made subsequent to settlement are included in the table above as Expense from fair value adjustments.

 

31


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

The following table presents certain quantitative information about the significant unobservable input used in the fair value measurement for the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

Description

   Valuation Techniques    Significant
Unobservable Inputs
   Range  

Liabilities

        

Contingent consideration liability

   Discounted cash flows    Revenue growth percentage      1% - 98

An increase in the revenue growth percentage may result in a significantly higher estimated fair value of the contingent consideration liability. Alternatively, a decrease in the revenue growth percentage may result in a significantly lower estimated fair value of the contingent consideration liability.

Valuation methods for instruments measured at fair value on a recurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a recurring basis:

Securities Available for Sale and Investment Securities Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price or dealer quote 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.

Company-owned Life Insurance Fair values are based on quoted market prices or dealer quotes with adjustments for dividends, capital gains, and administrative charges.

Derivatives Fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Deferred Compensation Fair values are based on quoted market prices or dealer quotes.

Contingent Consideration The fair value of contingent consideration liabilities are derived from a discounted cash flow model of future contingent payments. The valuation of these liabilities are estimated by a collaborative effort of the Company’s mergers and acquisitions group, business unit management, and the corporate accounting group. These groups report primarily to the Company’s Chief Financial Officer and Chief Executive Officer. These future contingent payments are calculated based on estimates of future income and expense from each acquisition. These estimated cash flows are projected by the business unit management and reviewed by the mergers and acquisitions group. To obtain a current valuation of these projected cash flows, an expected present value technique is utilized to calculate a discount rate. The cash flow projections and discount rates are reviewed quarterly and updated as market conditions necessitate. Potential valuation adjustments are made as future income and expense projections for each acquisition are made which affect the calculation of the related contingent consideration payment. These adjustments are recorded through noninterest income and expense.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

Assets measured at fair value on a non-recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):

 

     Fair Value Measurement at September 30, 2014  

Description

   September 30,
2014
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Gains
(Losses)
Recognized
During the Nine
Months Ended
September 30
 

Impaired loans

   $ 13,621       $         $         $ 13,621       $ 632   

Other real estate owned

     138         —           —           138       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,759       $         $         $ 13,759       $ 632   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement at December 31, 2013  

Description

   December 31,
2013
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Gains
(Losses)
Recognized
During the
Twelve Months
Ended
December 31
 

Impaired loans

   $ 15,496       $ —         $ —         $ 15,496       $ (2,496

Other real estate owned

     329         —           —           329         (125
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,825       $ —         $ —         $ 15,825       $ (2,621
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 write-downs that are based on the external appraisal value of the underlying collateral. The external appraisals are generally based on recent sales of comparable properties which are then adjusted for the unique characteristics of the property being valued. 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 within the Company’s property management group and the Company’s credit department. The valuation of the impaired loans is reviewed on a quarterly basis. 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. The initial valuation of the foreclosed property is obtained through an appraisal process similar to the process described in the impaired loans paragraph above. Subsequent to foreclosure, valuations are reviewed quarterly and updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods and those measurements are classified as Level 3.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (UNAUDITED)

 

Fair value disclosures require disclosure of 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. The estimated fair value of the Company’s financial instruments at September 30, 2014 and December 31, 2013 are as follows (in millions):

 

     Fair Value Measurement at September 30, 2014  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Estimated
Fair Value
 

FINANCIAL ASSETS

              

Securities held to maturity

   $ 238.0       $ —         $ 270.3       $ —         $ 270.3   

Federal Reserve Bank and other

     71.2         —           71.2         —           71.2   

Loans (exclusive of allowance for loan loss)

     7,104.9         —           7,136.3         —           7,136.3   

FINANCIAL LIABILITIES

              

Time deposits

     961.1         —           960.7         —           960.7   

Long-term debt

     7.1         —           7.3         —           7.3   

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 4.3   

Commercial letters of credit

                 0.1   

Standby letters of credit

                 1.8   

 

     Fair Value Measurement at December 31, 2013  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Estimated
Fair Value
 

FINANCIAL ASSETS

              

Securities held to maturity

   $ 209.8       $ —         $ 231.5       $ —         $ 231.5   

Federal Reserve Bank and other

     50.5         —           50.5         —           50.5   

Loans (exclusive of allowance for loan loss)

     6,521.9         —           6,571.6         —           6,571.6   

FINANCIAL LIABILITIES

              

Time deposits

     1,449.6         —           1,449.4         —           1,449.4   

Long-term debt

     5.1         —           4.5         —           4.5   

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 6.0   

Commercial letters of credit

                 0.1   

Standby letters of credit

                 2.0   

The fair values of cash and short-term investments, demand and savings deposits, federal funds and repurchase agreements, and short-term debt approximate the carrying values.

Securities Held to Maturity Fair value of held-to-maturity securities are estimated by discounting the future cash flows using the current rates at which similar investments would be made to borrowers with similar credit ratings and for the same remaining maturities.

Federal Reserve Bank and Other Amount consists of Federal Reserve Bank stock held by the Bank, Prairie Capital Management equity-method investments, and other miscellaneous investments. The fair value of Federal Reserve Bank stock is considered to be the carrying value as no readily determinable market exists for these investments because they can only be redeemed with the FRB. The fair value of Prairie Capital Management marketable equity-method investments are based on quoted market prices used to estimate the value of the underlying investment. For non-marketable equity-method investments, the Company’s proportionate share of the income or loss is recognized on a one-quarter lag based on the valuation of the underlying investments.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 (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 ratings and for the same remaining maturities.

Time Deposits 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.

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 value at year-end are significant to the Company’s consolidated financial position.

 

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ITEM 2. MANAGEMENT’S 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 of the Company for the three-month and nine-month periods ended September 30, 2014. It should be read in conjunction with the accompanying consolidated financial statements, notes to consolidated financial statements and other financial statistics appearing elsewhere in this report and the Company’s Annual Report on Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

From time to time the Company has made, and in the future will make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast,” “target,” “trend,” “plan,” “goal,” or other words of comparable meaning or future-tense or conditional verbs such as “may,” “will,” “should,” “would,” or “could.” Forward-looking statements convey the Company’s expectations, intentions, or forecasts about future events, circumstances, results, or aspirations.

This report, including any information incorporated by reference in this report, contains forward-looking statements. The Company also may make forward-looking statements in other documents that are filed or furnished with the Securities and Exchange Commission (SEC). In addition, the Company may make forward-looking statements orally or in writing to investors, analysts, members of the media, or others.

All forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond the Company’s control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events, circumstances, or aspirations to differ from those in forward-looking statements include:

 

    local, regional, national, or international business, economic, or political conditions or events;

 

    changes in laws or the regulatory environment, including as a result of recent financial-services legislation or regulation;

 

    changes in monetary, fiscal, or trade laws or policies, including as a result of actions by central banks or supranational authorities;

 

    changes in accounting standards or policies;

 

    shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including changes in market liquidity or volatility or changes in interest or currency rates;

 

    changes in spending, borrowing, or saving by businesses or households;

 

    the Company’s ability to effectively manage capital or liquidity or to effectively attract or deploy deposits;

 

    changes in any credit rating assigned to the Company or its affiliates;

 

    adverse publicity or other reputational harm to the Company;

 

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    changes in the Company’s corporate strategies, the composition of its assets, or the way in which it funds those assets;

 

    the Company’s ability to develop, maintain, or market products or services or to absorb unanticipated costs or liabilities associated with those products or services;

 

    the Company’s ability to innovate to anticipate the needs of current or future customers, to successfully compete in its chosen business lines, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures;

 

    changes in the credit, liquidity, or other condition of the Company’s customers, counterparties, or competitors;

 

    the Company’s ability to effectively deal with economic, business, or market slowdowns or disruptions;

 

    judicial, regulatory, or administrative investigations, proceedings, disputes, or rulings that create uncertainty for or are adverse to the Company or the financial-services industry;

 

    the Company’s ability to address stricter or heightened regulatory or other governmental supervision or requirements;

 

    the Company’s ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or facilities, including its capacity to withstand cyber-attacks;

 

    the adequacy of the Company’s corporate governance, risk-management framework, compliance programs, or internal controls, including its ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk;

 

    the efficacy of the Company’s methods or models in assessing business strategies or opportunities or in valuing, measuring, monitoring, or managing positions or risk;

 

    the Company’s ability to keep pace with changes in technology that affect the Company or its customers, counterparties, or competitors;

 

    mergers or acquisitions, including the Company’s ability to integrate acquisitions;

 

    the adequacy of the Company’s succession planning for key executives or other personnel;

 

    the Company’s ability to grow revenue, to control expenses, or to attract or retain qualified employees;

 

    natural or man-made disasters, calamities, or conflicts, including terrorist events; or

 

    other assumptions, risks, or uncertainties described in the Notes to Consolidated Financial Statements (Item 1) and Management’s Discussion and Analysis (Item 2) in this Form 10-Q, in the Risk Factors (Item 1A) in the Company’s Annual Report on Form 10-K, or as described in any of the Company’s quarterly or current reports.

Any forward-looking statement made by the Company or on its behalf speaks only as of the date that it was made. The Company does not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that the Company may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.

 

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Overview

The Company focuses on the following four core strategies. Management believes these strategies will guide our efforts to achieving our vision, to deliver the Unparalleled Customer Experience, all while maintaining a focus to improve net income and strengthen the balance sheet.

The first strategy is to maintain high quality through a strong balance sheet, solid credit quality, a low cost of funding, and effective risk management. The strength in the Company’s balance sheet can be seen in the solid credit quality of its earning assets and the Company’s continued growth in low cost funding. At September 30, 2014, the Company’s nonperforming assets as a percentage of total assets was 0.21 percent. As a percentage of loans, nonperforming loans decreased to 0.46 percent compared to 0.48 percent on September 30, 2013. These credit quality ratios were achieved while maintaining positive directional growth in average earning assets, which increased 7.7 percent from September 30, 2013, driven primarily by a 10.4 percent increase in average noninterest-bearing demand deposits compared to September 30, 2013.

The second strategy is to deliver profitable and sustainable growth by accelerating fee businesses, growing quality earning assets, maximizing efficiencies, and maintaining sales leverage. The Company’s acceleration of fee businesses is apparent with the increase in trust and securities processing. Trust and securities processing income increased $5.6 million, or 8.2 percent, for the three months ended September 30, 2014, compared to the same period in 2013. The increase in trust and securities processing income was primarily due to a $4.1 million, or 20.0 percent, increase in fees related to institutional and personal investment management services and a $2.3 million, or 11.1 percent, increase in fund administration and custody services. While maintaining the aforementioned credit ratios, the Company’s September 30, 2014 average loans increased $578.0 million, or 9.0 percent, compared to the same three-month period one year ago.

The third strategy is to maintain diversified revenue streams. The emphasis on fee-based operations helps reduce the Company’s exposure to changes in interest rates. During the third quarter of 2014, noninterest income increased $4.9 million, or 4.0 percent, compared to the same period of 2013. The Company continues to emphasize its asset management, brokerage, bankcard services, health care services, and treasury management businesses. In particular, during the third quarter of 2014, this favorable change is primarily attributable to increased trust and securities processing income. At September 30, 2014, noninterest income represented 59.1 percent of total revenues, compared to 58.7 percent at September 30, 2013.

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 Company’s 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 September 30, 2014, the Company had $1.6 billion in total shareholders’ equity. This is an increase of $151.7 million, or 10.4 percent, compared to total shareholders’ equity at September 30, 2013. At September 30, 2014, the Company had a total risk-based capital ratio of 14.37 percent, which is higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 12,155 shares at an average price of $57.02 per share during the third quarter of 2014.

Earnings Summary

The following is a summary regarding the Company’s earnings for the third quarter of 2014. The changes identified in the summary are explained in greater detail below. The Company recorded consolidated net income of $35.6 million for the three-month period ended September 30, 2014, compared to $34.4 million for the same period a year earlier. This represents a 3.5 percent increase over the three-month period ended September 30, 2013. Basic earnings per share for the third quarter of 2014 were $0.79 per share ($0.78 per share fully-diluted) compared to $0.85 per share ($0.83 per share fully-diluted) for the third quarter of 2013. Return on average assets and return on average common shareholders’ equity for the three-month period ended September 30, 2014 were 0.90 and 8.77 percent, respectively, compared to 0.92 and 10.84 percent for the three-month period ended September 30, 2013.

 

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The Company recorded consolidated net income of $93.7 million for the nine-month period ended September 30, 2014, compared to $99.3 million for the same period a year earlier. This represents a 5.6 percent decrease over the nine-month period ended September 30, 2013. Basic earnings per share for the nine-month period ended September 30, 2014 were $2.09 per share ($2.06 per share fully-diluted) compared to $2.47 per share ($2.44 per share fully-diluted) for the period in 2013. Return on average assets and return on average common shareholders’ equity for the nine-month period ended September 30, 2014 were 0.79 and 7.92 percent, respectively, compared to 0.89 and 10.39 percent for the same period in 2013.

Net interest income for the three and nine-month periods ended September 30, 2014 increased $2.0 million, or 2.3 percent, and $11.8 million, or 4.8 percent, respectively, compared to the same periods in 2013. For the three-month period ended September 30, 2014, average earning assets increased by $719.9 million, or 5.2 percent, and for the nine-month period ended September 30, 2014, they increased by $1.1 billion, or 7.7 percent, compared to the same periods in 2013. Net interest margin, on a tax-equivalent basis, decreased to 2.53 percent and 2.48 percent for the three and nine-months periods ended September 30, 2014, compared to 2.61 percent and 2.56 percent for the same periods in 2013.

The provision for loan losses decreased $2.0 million for the three-month period ended September 30, 2014, and increased by $0.5 million for the nine-month period ended September 30, 2014, compared to the same periods in 2013. These changes are a direct result of applying the Company’s methodology for computing the allowance for loan losses. The allowance for loan losses as a percentage of total loans decreased by six basis points to 1.09 percent as of September 30, 2014, compared to September 30, 2013. For a description of the Company’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2013.

Noninterest income increased by $4.9 million, or 4.0 percent, for the three-month period ended September 30, 2014, and increased by $27.2 million, or 7.6 percent, for the nine-month period ended September 30, 2014, compared to the same periods one year ago. These changes are discussed in greater detail below under Noninterest Income. Noninterest expense increased by $8.4 million, or 5.5 percent, for the three-month period ended September 30, 2014, and increased by $46.5 million, or 10.2 percent, for the nine-month period ended September 30, 2014, compared to the same periods in 2013. These increases are discussed in greater detail below under Noninterest Expense.

Net Interest Income

Net interest income is a significant source of the Company’s 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 September 30, 2014, average earning assets increased by $719.9 million, or 5.2 percent, and for the nine-month period ended September 30, 2014, they increased by $1.1 billion, or 7.7 percent, compared to the same periods in 2013. Net interest margin, on a tax-equivalent basis, decreased to 2.53 percent and 2.48 percent for the three and nine-months periods ended September 30, 2014, compared to 2.61 percent and 2.56 percent for the same periods in 2013.

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 current interest rate cycle. While the Company continues to see declining rates, it has been able to improve net interest income through increased volume. As illustrated in this table, net interest spread and margin for the three months ended September 30, 2014 decreased by eight basis points compared to the same period in 2013. Net interest spread and margin for the nine months ended September 30, 2014 decreased by eight basis points compared to the same period in 2013. These results are primarily due to an unfavorable rate variance, offset by a favorable volume variance on loans. The combined impact of these variances has led to an increase in interest income and a slight decrease in interest expense, or an increase in the Company’s net interest income as compared to results for the same periods in 2013.

 

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The favorable rate variance on deposits is bolstered by the contribution from free funds. 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 an increase in net interest income.

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 2.47 percent for the three-month period ended September 30, 2014 and 2.55 percent for the same period in 2013. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.43 percent for the nine-month period ended September 30, 2014 and 2.51 percent for the same period in 2013.

 

     Three Months Ended September 30,  
     2014     2013  
     Average     Average     Average     Average  
     Balance     Yield/Rate     Balance     Yield/Rate  

Assets

        

Loans, net of unearned interest

   $ 6,996,363        3.50   $ 6,418,368        3.65

Securities:

        

Taxable

     4,864,337        1.54        4,835,235        1.56   

Tax-exempt

     2,128,281        2.80        2,150,108        2.95   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     6,992,618        1.92        6,985,343        1.99   

Federal funds and resell agreements

     61,161        0.56        46,593        0.53   

Interest-bearing due from banks

     501,157        0.34        342,307        0.32   

Trading

     24,550        0.95        63,302        1.85   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     14,575,849        2.62        13,855,913        2.71   

Allowance for loan losses

     (77,347       (72,792  

Other assets

     1,139,820          1,140,648     
  

 

 

     

 

 

   

Total assets

   $ 15,638,322        $ 14,923,769     
  

 

 

     

 

 

   

Liabilities and Shareholders’ Equity

        

Interest-bearing deposits

   $ 7,444,093        0.16   $ 7,117,927        0.17

Federal funds and repurchase agreements

     1,347,665        0.11        1,764,082        0.09   

Borrowed funds

     5,728        (5.68     4,688        5.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     8,797,486        0.15        8,886,697        0.16   

Noninterest-bearing demand deposits

     5,060,662          4,669,742     

Other liabilities

     167,704          107,000     

Shareholders’ equity

     1,612,470          1,260,330     
  

 

 

     

 

 

   

Total liabilities and shareholders’ equity

   $ 15,638,322        $ 14,923,769     
  

 

 

     

 

 

   

Net interest spread

       2.47       2.55

Net interest margin

       2.53          2.61   

 

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Table of Contents
     Nine Months Ended September 30,  
     2014     2013  
     Average     Average     Average     Average  
     Balance     Yield/Rate     Balance     Yield/Rate  

Assets

        

Loans, net of unearned interest

   $ 6,858,874        3.53   $ 6,132,892        3.72

Securities:

        

Taxable

     4,862,439        1.56        4,894,956        1.54   

Tax-exempt

     2,114,251        2.87        2,086,482        2.99   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

     6,976,690        1.96        6,981,438        1.97   

Federal funds and resell agreements

     40,461        0.55        31,519        0.53   

Interest-bearing due from banks

     934,532        0.29        580,309        0.29   

Trading

     33,257        1.46        62,470        1.89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     14,843,814        2.57        13,788,628        2.67   

Allowance for loan losses

     (76,100       (71,438  

Other assets

     1,153,074          1,144,064     
  

 

 

     

 

 

   

Total assets

   $ 15,920,788        $ 14,861,254     
  

 

 

     

 

 

   

Liabilities and Shareholders’ Equity

        

Interest-bearing deposits

   $ 7,511,115        0.16   $ 7,026,963        0.19

Federal funds and repurchase agreements

     1,534,966        0.11        1,762,087        0.11   

Borrowed funds

     5,735        1.24        4,888        5.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     9,051,816        0.16        8,793,938        0.18   

Noninterest-bearing demand deposits

     5,126,660          4,644,338     

Other liabilities

     160,140          145,533     

Shareholders’ equity

     1,582,172          1,277,445     
  

 

 

     

 

 

   

Total liabilities and shareholders’ equity

   $ 15,920,788        $ 14,861,254     
  

 

 

     

 

 

   

Net interest spread

       2.41       2.49

Net interest margin

       2.48          2.56   

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 $809.1 million for the three-month and $797.3 million for the nine-month periods ended September 30, 2014 compared to the same periods in 2013, the benefit from interest free funds was flat in the three-month and nine-month periods due to decreases in interest rates.

 

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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
September 30, 2014 vs 2013
    Nine Months Ended
September 30, 2014 vs 2013
 
     Volume     Rate     Total     Volume     Rate     Total  

Change in interest earned on:

            

Loans

   $ 5,091      $ (2,580   $ 2,511      $ 19,161      $ (8,775   $ 10,386   

Securities:

            

Taxable

     113        (246     (133     (380     921        541   

Tax-exempt

     (93     (500     (593     738        (1,504     (766

Federal funds sold and resell agreements

     21        4        25        37        3        40   

Interest-bearing due from banks

     135        15        150        764        (25     739   

Trading

     (94     (145     (239     (174     (323     (497
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     5,173        (3,452     1,721        20,146        (9,703     10,443   

Change in interest incurred on:

            

Interest-bearing deposits

     132        (214     (82     591        (1,647     (1,056

Federal funds purchased and repurchase agreements

     (111     84        (27     (191     41        (150

Borrowed funds

     (15     (136     (151     8        (145     (137
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     6        (266     (260     408        (1,751     (1,343
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 5,167      $ (3,186   $ 1,981      $ 19,738      $ (7,952   $ 11,786   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ANALYSIS OF NET INTEREST MARGIN

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     Change     2014     2013     Change  

Average earning assets

   $ 14,575,849      $ 13,855,913      $ 719,936      $ 14,843,814      $ 13,788,628      $ 1,055,186   

Average interest-bearing liabilities

     8,797,486        8,886,697        (89,211     9,051,816        8,793,938        257,878   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average interest free funds

   $ 5,778,363      $ 4,969,216      $ 809,147      $ 5,791,998      $ 4,994,690      $ 797,308   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free funds ratio (free funds to earning assets)

     39.64     35.86     3.78     39.02     36.22     2.80

Tax-equivalent yield on earning assets

     2.62        2.71          2.57        2.67        (0.10

Cost of interest-bearing liabilities

     0.15        0.16        (0.01     0.16        0.18        (0.02
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest spread

     2.47        2.55        (0.08     2.41        2.49        (0.08

Benefit of interest-free funds

     0.06        0.06        0.00        0.07        0.07        0.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     2.53     2.61     (0.08 )%      2.48     2.56     (0.08 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Provision and Allowance for Loan Losses

The allowance for loan losses (ALL) represents management’s judgment of the losses inherent in the Company’s 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. 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 $4.5 million and $14.0 million related to the provision for loan losses for the three and nine-month periods ended September 30, 2014, compared to $6.5 million and $13.5 million for the same periods in 2013. As illustrated in Table 3 below, the ALL decreased to 1.09 percent of total loans as of September 30, 2014, compared to 1.15 percent of total loans as of the same period in 2013.

Table 3 presents a summary of the Company’s ALL for the nine months ended September 30, 2014 and 2013, and for the year ended December 31, 2013. Net charge-offs were $11.4 million for the first nine months of 2014, compared to $10.0 million for the same period in 2013. 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)

 

     Nine Months Ended     Year Ended  
     September 30,     December 31,  
     2014     2013     2013  

Allowance-January 1

   $ 74,751      $ 71,426      $ 71,426   

Provision for loan losses

     14,000        13,500        17,500   
  

 

 

   

 

 

   

 

 

 

Charge-offs:

      

Commercial

     (4,980     (3,015     (4,748

Consumer:

      

Credit card

     (7,751     (8,079     (10,531

Other

     (1,130     (1,186     (1,600

Real estate

     (238     (533     (775
  

 

 

   

 

 

   

 

 

 

Total charge-offs

     (14,099     (12,813     (17,654
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial

     664        761        867   

Consumer:

      

Credit card

     1,413        1,349        1,720   

Other

     562        678        815   

Real estate

     25        37        77   
  

 

 

   

 

 

   

 

 

 

Total recoveries

     2,664        2,825        3,479   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (11,435     (9,988     (14,175
  

 

 

   

 

 

   

 

 

 

Allowance-end of period

   $ 77,316      $ 74,938      $ 74,751   
  

 

 

   

 

 

   

 

 

 

Average loans, net of unearned interest

   $ 6,857,813      $ 6,128,029      $ 6,217,240   

Loans at end of period, net of unearned interest

     7,103,163        6,506,902        6,520,512   

Allowance to loans at end of period

     1.09     1.15     1.15

Allowance as a multiple of net charge-offs

     5.06     5.61     5.27

Net charge-offs to:

      

Provision for loan losses

     81.68     73.99     81.00

Average loans

     0.22        0.22        0.23   

 

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Table of Contents

Noninterest Income

A key objective of the Company is the growth of noninterest income to enhance profitability and provide steady income. Fee-based businesses are typically non-credit related and not generally affected by fluctuations in interest rates but instead are largely driven by the underlying asset values, which are driven by fund inflows, outflows, and market fluctions.

The Company’s fee-based businesses 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 businesses 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.

Table 4

SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)

 

     Three Months Ended
September 30,
     Dollar
Change
    Percent
Change
 
     2014      2013      14-13     14-13  

Trust and securities processing

   $ 74,062       $ 68,465       $ 5,597        8.17

Trading and investment banking

     3,826         3,792         34        0.90   

Service charges on deposit accounts

     21,634         21,036         598        2.84   

Insurance fees and commissions

     911         869         42        4.83   

Brokerage fees

     3,276         2,895         381        13.16   

Bankcard fees

     17,121         15,196         1,925        12.67   

Gains on sales of securities available for sale, net

     26         1,140         (1,114     (97.72

Equity earnings on alternative investments

     2,470         4,241         (1,771     (41.76

Other

     3,149         3,991         (842     (21.10
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest income

   $ 126,475       $ 121,625       $ 4,850        3.99
  

 

 

    

 

 

    

 

 

   

 

 

 
     Nine Months Ended
September 30,
     Dollar
Change
    Percent
Change
 
     2014      2013      14-13     14-13  

Trust and securities processing

   $ 218,982       $ 194,263       $ 24,719        12.72

Trading and investment banking

     14,558         16,324         (1,766     (10.82

Service charges on deposits

     63,819         63,441         378        0.60   

Insurance fees and commissions

     2,246         3,066         (820     (26.74

Brokerage fees

     8,166         8,727         (561     (6.43

Bankcard fees

     49,929         47,666         2,263        4.75   

Gains on sales of securities available for sale, net

     4,065         8,552         (4,487     (52.47

Equity earnings on alternative investments

     8,462         4,241         4,221        99.53   

Other

     13,213         9,946         3,267        32.85   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total noninterest income

   $ 383,440       $ 356,226       $ 27,214        7.64
  

 

 

    

 

 

    

 

 

   

 

 

 

Fee-based, or noninterest income (summarized in Table 4), increased by $4.9 million, or 4.0 percent, during the three months ended September 30, 2014, and increased by $27.2 million, or 7.6 percent, during the nine months ended September 30, 2014, compared to the same periods in 2013. Table 4 above summarizes the components of noninterest income and the respective year-over-year comparison for each category.

 

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Table of Contents

Trust and securities processing consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and investment management services, and servicing of mutual fund assets. The increase in these fees for the three and nine-month periods compared to the same periods last year was primarily due to changes in three categories of income. Institutional and personal investment management services fees for the three and nine-month periods ended September 30, 2014, increased by $4.1 million, or 20.0 percent, and $10.9 million, or 18.1 percent, respectively. Fund administration and custody services fees for the three and nine-month periods ended September 30, 2014, increased by $2.3 million, or 11.1 percent, and $6.7 million, or 11.4 percent, respectively, due to an increase in the underlying assets under administration. Advisory fee income from the Scout Funds for the three and nine-month periods ended September 30, 2014, decreased by $1.6 million, or 6.6 percent, and increased by $4.8 million, or 7.1 percent, respectively, due to changes in the underlying assets under management for the respective periods. Since trust and securities processing fees are primarily asset-based, which are highly correlated to the change in market value of the assets, 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.

Trading and investment banking fees for the three-month period ended September