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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, 2015

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 28, 2015, UMB Financial Corporation had 49,294,917 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   

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     5   

CONSOLIDATED STATEMENTS OF CHANGES IN 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

     43   
ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     62   
ITEM 4.  

CONTROLS AND PROCEDURES

     66   

PART II - OTHER INFORMATION

     66   
ITEM 1.  

LEGAL PROCEEDINGS

     66   
ITEM 1A.  

RISK FACTORS

     66   
ITEM 2.  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     67   
ITEM 3.  

DEFAULTS UPON SENIOR SECURITIES

     67   
ITEM 4.  

MINE SAFETY DISCLOSURES

     67   
ITEM 5.  

OTHER INFORMATION

     67   
ITEM 6.  

EXHIBITS

     67   

SIGNATURES

     68   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

     70   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

     71   

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

     72   

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

     73   

 

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,
2015
    December 31,
2014
 

ASSETS

    

Loans:

   $ 9,046,126      $ 7,465,794   

Allowance for loan losses

     (78,030     (76,140
  

 

 

   

 

 

 

Net loans

     8,968,096        7,389,654   
  

 

 

   

 

 

 

Loans held for sale

     1,013        624   

Securities:

    

Available for sale

     6,671,745        6,911,936   

Held to maturity (fair value of $611,382 and $304,112, respectively)

     588,478        278,054   

Trading securities

     23,699        27,203   

Other securities

     68,371        68,474   
  

 

 

   

 

 

 

Total investment securities

     7,352,293        7,285,667   
  

 

 

   

 

 

 

Federal funds sold and securities purchased under agreements to resell

     98,762        118,105   

Interest-bearing due from banks

     847,077        1,539,386   

Cash and due from banks

     339,592        444,299   

Premises and equipment, net

     281,704        257,835   

Accrued income

     87,863        79,297   

Goodwill

     227,962        209,758   

Other intangibles, net

     50,065        43,991   

Other assets

     343,538        132,344   
  

 

 

   

 

 

 

Total assets

   $ 18,597,965      $ 17,500,960   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand

   $ 6,257,944      $ 5,643,989   

Interest-bearing demand and savings

     7,547,822        6,709,281   

Time deposits under $100,000

     465,629        424,925   

Time deposits of $100,000 or more

     790,164        838,664   
  

 

 

   

 

 

 

Total deposits

     15,061,559        13,616,859   

Federal funds purchased and repurchase agreements

     1,342,600        2,025,132   

Short-term debt

     5,000        —     

Long-term debt

     83,534        8,810   

Accrued expenses and taxes

     168,716        180,074   

Other liabilities

     35,699        26,327   
  

 

 

   

 

 

 

Total liabilities

     16,697,108        15,857,202   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 49,296,991 and 45,532,188 shares outstanding, respectively

     55,057        55,057   

Capital surplus

     1,015,383        894,602   

Retained earnings

     1,016,206        963,911   

Accumulated other comprehensive income

     26,530        11,006   

Treasury stock, 5,759,739 and 9,524,542 shares, at cost, respectively

     (212,319     (280,818
  

 

 

   

 

 

 

Total shareholders’ equity

     1,900,857        1,643,758   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 18,597,965      $ 17,500,960   
  

 

 

   

 

 

 

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,

 
     2015     2014     2015     2014  

INTEREST INCOME

        

Loans

   $ 84,686      $ 61,636      $ 220,314      $ 180,845   

Securities:

        

Taxable interest

     18,498        18,884        56,469        56,866   

Tax-exempt interest

     11,320        9,745        31,842        29,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securities income

     29,818        28,629        88,311        86,316   

Federal funds and resell agreements

     175        87        377        166   

Interest-bearing due from banks

     475        426        1,761        2,015   

Trading securities

     75        39        303        311   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     115,229        90,817        311,066        269,653   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

        

Deposits

     3,863        3,015        10,433        9,166   

Federal funds and repurchase agreements

     427        358        1,389        1,293   

Other

     1,044        (82     1,631        53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     5,334        3,291        13,453        10,512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     109,895        87,526        297,613        259,141   

Provision for loan losses

     2,500        4,500        10,500        14,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     107,395        83,026        287,113        245,141   
  

 

 

   

 

 

   

 

 

   

 

 

 

NONINTEREST INCOME

        

Trust and securities processing

     65,182        74,062        199,862        218,982   

Trading and investment banking

     2,969        3,826        14,659        14,558   

Service charges on deposit accounts

     21,663        21,634        64,829        63,819   

Insurance fees and commissions

     480        911        1,636        2,246   

Brokerage fees

     2,958        3,276        8,748        8,166   

Bankcard fees

     17,624        17,121        51,842        49,929   

Gain on sales of securities available for sale, net

     101        26        8,404        4,065   

Equity (loss) earnings on alternative investments

     (5,032     2,470        (6,999     8,462   

Other

     3,153        3,149        10,874        13,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     109,098        126,475        353,855        383,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

NONINTEREST EXPENSE

        

Salaries and employee benefits

     104,733        90,041        302,855        268,454   

Occupancy, net

     11,748        10,475        32,070        29,885   

Equipment

     17,228        13,408        46,810        38,991   

Supplies and services

     5,371        4,817        14,299        15,008   

Marketing and business development

     5,766        6,057        16,914        16,966   

Processing fees

     12,795        14,085        38,232        42,553   

Legal and consulting

     8,648        4,496        18,943        12,500   

Bankcard

     5,266        4,097        14,987        12,782   

Amortization of other intangible assets

     3,483        3,043        8,807        9,219   

Regulatory fees

     3,176        2,577        8,805        7,802   

Contingency reserve

     —          —          —          20,272   

Other

     7,065        8,055        18,934        24,851   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     185,279        161,151        521,656        499,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     31,214        48,350        119,312        129,298   

Income tax expense

     8,763        12,720        32,882        35,583   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 22,451      $ 35,630      $ 86,430      $ 93,715   
  

 

 

   

 

 

   

 

 

   

 

 

 

PER SHARE DATA

        

Net income - basic

   $ 0.46      $ 0.79      $ 1.85      $ 2.09   

Net income - diluted

     0.46        0.78        1.84        2.06   

Dividends

     0.235        0.225        0.705        0.675   

Weighted average shares outstanding - basic

     48,577,282        44,890,309        46,619,428        44,819,125   

Weighted average shares outstanding - diluted

     49,036,332        45,441,983        47,080,009        45,420,385   

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, dollars in thousands)

 

     Three Months Ended
September 30,
   

Nine Months Ended

September 30,

 
     2015     2014     2015     2014  

Net Income

   $ 22,451      $ 35,630      $ 86,430      $ 93,715   

Other comprehensive income, net of tax:

    

Unrealized gains (losses) on securities:

    

Change in unrealized holding gains (losses), net

     46,166        (24,213     33,289        59,156   

Less: Reclassifications adjustment for gains included in net income

     (101     (26     (8,404     (4,065
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     46,065        (24,239     24,885        55,091   

Income tax (expense) benefit

     (17,394     9,165        (9,361     (20,624
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     28,671        (15,074     15,524        34,467   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 51,122      $ 20,556      $ 101,954      $ 128,182   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN 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, 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   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - January 1, 2015

   $ 55,057       $ 894,602      $ 963,911      $ 11,006      $ (280,818   $ 1,643,758   

Total comprehensive income

     —           —          86,430        15,524        —          101,954   

Dividends ($0.705 per share)

     —           —          (34,135     —          —          (34,135

Purchase of treasury stock

     —           —          —          —          (6,172     (6,172

Issuance of equity awards

     —           (4,180     —          —          4,639        459   

Recognition of equity based compensation

     —           9,030        —          —          —          9,030   

Net tax benefit related to equity compensation plans

     —           732        —          —          —          732   

Sale of treasury stock

     —           475        —          —          315        790   

Exercise of stock options

     —           2,089        —          —          2,615        4,704   

Common stock issuance for acquisition

     —           112,635        —          —          67,102        179,737   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2015

   $ 55,057       $ 1,015,383      $ 1,016,206      $ 26,530      $ (212,319   $ 1,900,857   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
    2015     2014  

Operating Activities

   

Net Income

  $ 86,430      $ 93,715   

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

   

Provision for loan losses

    10,500        14,000   

Net accretion of premiums and discounts from acquisition

    (1,255     —     

Depreciation and amortization

    38,498        34,415   

Deferred income tax benefit

    (6,276     (5,909

Net decrease (increase) in trading securities and other earning assets

    10,505        (11,787

Gains on sales of securities available for sale, net

    (8,404     (4,065

Gains on sales of assets

    (99     (2,948

Amortization of securities premiums, net of discount accretion

    40,971        38,599   

Originations of loans held for sale

    (78,931     (51,427

Net gains on sales of loans held for sale

    (1,131     (814

Proceeds from sales of loans held for sale

    79,673        51,880   

Equity based compensation

    9,489        7,714   

Changes in:

   

Accrued income

    (4,811     953   

Accrued expenses and taxes

    146        21,465   

Other assets and liabilities, net

    (2,582     (4,168
 

 

 

   

 

 

 

Net cash provided by operating activities

    172,723        181,623   
 

 

 

   

 

 

 

Investing Activities

   

Proceeds from maturities of securities held to maturity

    31,410        16,804   

Proceeds from sales of securities available for sale

    782,789        410,580   

Proceeds from maturities of securities available for sale

    925,017        1,034,231   

Purchases of securities held to maturity

    (341,773     (58,573

Purchases of securities available for sale

    (1,293,123     (1,411,017

Net increase in loans

    (604,895     (596,221

Net decrease in fed funds sold and resell agreements

    29,675        21,763   

Net decrease (increase) in interest bearing balances due from other financial institutions

    40,586        (130,125

Purchases of premises and equipment

    (42,100     (35,219

Net cash activity from acquisitions and branch sales

    104,611        (18,231

Proceeds from sales of premises and equipment

    147        5,014   

Purchases of company-owned life insurance

    (204,647     (6,000
 

 

 

   

 

 

 

Net cash used in investing activities

    (572,303     (766,994
 

 

 

   

 

 

 

Financing Activities

   

Net increase (decrease) in demand and savings deposits

    854,302        (386,207

Net decrease in time deposits

    (353,137     (480,791

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

    (682,532     128,591   

Net decrease in short-term debt

    (112,133     (107

Proceeds from long-term debt

    —          3,320   

Repayment of long-term debt

    (10,597     (1,308

Payment of contingent consideration on acquisitions

    (18,702     (13,725

Cash dividends paid

    (34,104     (30,679

Net tax benefit related to equity compensation plans

    732        1,507   

Proceeds from exercise of stock options and sales of treasury shares

    5,494        6,420   

Purchases of treasury stock

    (6,173     (3,858
 

 

 

   

 

 

 

Net cash used in financing activities

    (356,850     (776,837
 

 

 

   

 

 

 

Decrease in cash and cash equivalents

    (756,430     (1,362,208

Cash and cash equivalents at beginning of period

    1,787,230        2,582,428   
 

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 1,030,800      $ 1,220,220   
 

 

 

   

 

 

 

Supplemental Disclosures:

   

Income taxes paid

  $ 36,404      $ 40,789   

Total interest paid

    12,769        10,720   

Transactions related to bank acquisitions

   

Assets acquired

    1,321,453        —     

Liabilities assumed

    1,159,920        —     

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, 2015 (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, 2014.

 

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, Minnesota, California, and Wisconsin. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) 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 provided in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Cash and cash equivalents

Cash and cash equivalents include Cash and due from banks and amounts due from the Federal Reserve Bank. Cash on hand, cash items in the process of collection, and amounts due from correspondent banks are included in Cash and due from banks. 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 Statements of Cash Flows as of September 30, 2015 and September 30, 2014 (in thousands):

 

     September 30,  
     2015      2014  

Due from the Federal Reserve

   $ 691,208       $ 824,264   

Cash and due from banks

     339,592         395,956   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 1,030,800       $ 1,220,220   
  

 

 

    

 

 

 

Also included in the Interest-bearing due from banks line, but not considered cash and cash equivalents, are interest-bearing accounts held at other financial institutions, which totaled $155.9 million and $157.3 million at September 30, 2015 and September 30, 2014, 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 459,050 and 551,674 shares issuable upon the exercise of options granted by the Company and outstanding at September 30, 2015 and 2014, respectively. Diluted year-to-date income per share includes the dilutive effect of 460,581 and 601,260 shares issuable upon the exercise of stock options granted by the Company and outstanding at September 30, 2015 and 2014, respectively.

Options issued under employee benefits plans to purchase 461,905 shares of common stock were outstanding at September 30, 2015, but were not included in the computation of quarter-to-date and year-to-date

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

diluted EPS because the options were anti-dilutive. 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 and year-to-date diluted EPS because the options were anti-dilutive.

 

3. New Accounting Pronouncements

Accounting for Investments in Qualified Affordable Housing Projects In January 2014, the Financial Accounting Standards Board (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 was effective January 1, 2015, and the adoption of this accounting pronouncement did not have a significant impact on the Company’s consolidated 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 loan such that the loan receivable should be derecognized and the real stated property recognized. The ASU was effective January 1, 2015, and the adoption of this accounting pronouncement did 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. 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. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 to annual reporting periods that begin after December 15, 2017. 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 requires increased transparency on collateral pledged in secured borrowings. The accounting changes in the standard and the disclosures for transactions accounted for as sales were effective January 1, 2015 and had no impact on the Company’s financial statements. The disclosures required for repurchase agreements, securities lending transactions, and repos-to-maturity accounted for as secured borrowings were effective April 1, 2015 and did not have a significant impact on the Company’s consolidated financial statements except for additional 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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

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 were effective January 1, 2015 and the adoption of this accounting pronouncement did 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.

Derivatives and Hedging In November 2014, the FASB issued ASU No. 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity.” The amendment is intended to address how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The amendments in this update are effective for interim and annual periods beginning after December 15, 2015, although early adoption is permitted. The adoption of this accounting pronouncement will not have a significant impact on the Company’s consolidated financial statements.

Consolidation In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” The amendment substantially changes the way reporting entities are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the new amendment. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership, and affect the consolidation analysis of reporting entities that are involved with VIEs. The amendments in this update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2015-02 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.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

4. Loans and Allowance for Loan Losses

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio. Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions. Authority levels are established for the extension of credit to ensure consistency throughout the Company. It is necessary that policies, processes and practices implemented to control the risks of individual credit transactions and portfolio segments are sound and adhered to. 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.

Asset-based loans are offered primarily in the form of revolving lines of credit to commercial borrowers that do not generally qualify for traditional bank financing. Asset-based loans are underwritten based primarily upon the value of the collateral pledged to secure the loan, rather than on the borrower’s general financial condition as traditionally reflected by cash flow, balance sheet strength, operating results, and credit bureau ratings. The Company utilizes pre-loan due diligence techniques, monitoring disciplines, and loan management practices common within the asset-based lending industry to underwrite loans to these borrowers.

Factoring loans provide working capital through the purchase and/or financing of accounts receivable to borrowers in the transportation industry and to commercial borrowers that do not generally qualify for traditional bank financing.

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 that 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.

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, 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, 2015 (UNAUDITED)

 

Credit risk is a potential loss resulting from nonpayment of either the primary or secondary exposure. Credit risk is mitigated with formal risk management practices and a thorough initial credit-granting process including consistent underwriting standards and approval process. Control factors or techniques to minimize credit risk include knowing the client, understanding total exposure, analyzing the client and debtor’s financial capacity, and monitoring the client’s activities. Credit risk and portions of the portfolio risk are managed through concentration considerations, average risk ratings, and other aggregate characteristics.

The loan portfolio is comprised of loans originated by the Company and purchased loans in connection with the Company’s acquisition of Marquette Financial Companies (Marquette) on May 31, 2015 (Acquisition Date). The purchased loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related allowance. The purchased loans were segregated between those considered to be performing, non-purchased credit impaired loans (Non-PCI), and those with evidence of credit deterioration, purchased credit impaired loans (PCI). Purchased loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, that all contractually required payments will not be collected.

At Acquisition Date, gross loans from the Marquette acquisition had a fair value of $980.4 million split between Non-PCI loans totaling $972.6 million and PCI loans totaling $7.8 million. The gross contractually required principal and interest payments receivable for the Non-PCI loans and PCI loans totaled $983.9 million and $9.3 million, respectively.

The fair value estimates for purchased loans are based on expected prepayments and the amount and timing of discounted expected principal, interest and other cash flows. Credit discounts representing the principal losses expected over the life of the loan are also a component of the initial fair value. In determining the Acquisition Date fair value of PCI loans, and in subsequent accounting, the Company generally aggregated purchased commercial, real estate, and consumer loans into pools of loans with common risk characteristics.

The difference between the fair value of Non-PCI loans and contractual amounts due at the Acquisition Date is accreted into income over the estimated life of the loans. Contractual amounts due represent the total undiscounted amount of all uncollected principal and interest payments.

Loans accounted for under ASC Topic 310-30

The excess of PCI loans’ contractual amounts due over the amount of undiscounted cash flows expected to be collected is referred to as the non-accretable difference. The non-accretable difference, which is neither accreted into income nor recorded on the consolidated balance sheet, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the PCI loans. The excess cash flows expected to be collected over the carrying amount of PCI loans is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the purchased loans or pools using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment speed assumptions, and changes in expected principal and interest payments over the estimated lives of the PCI loans.

Each quarter the Company evaluates the remaining contractual amounts due and estimates cash flows expected to be collected over the life of the PCI loans. Contractual amounts due may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on PCI loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the Acquisition Date. Prepayments affect the estimated lives of loans and could change the amount of interest income, and possibly principal, expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary. The adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not reforecasted, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

Increases in expected cash flows of PCI loans subsequent to the Acquisition Date are recognized prospectively through adjustments of the yield on the loans or pools over their remaining lives, while decreases in expected cash flows are recognized as impairment through a provision for loan losses and an increase in the allowance.

The PCI loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt Securities Purchased with Deteriorated Credit Quality. At September 30, 2015, the net recorded carrying amount of loans accounted for under ASC 310-30 was $7.1 million and the contractual amount due was $8.4 million.

Information about the PCI loan portfolio subject to purchased credit impairment accounting guidance (ASC 310-30) as of May 31, 2015 is as follows (in thousands):

 

     At May 31, 2015  

PCI Loans:

  

Contractually required principal and interest at acquisition

   $ 9,282   

Non-accretable difference

     (1,307
  

 

 

 

Expected cash flows at acquisition

     7,975   

Accretable yield

     (164
  

 

 

 

Fair value of purchased loans

   $ 7,811   
  

 

 

 

Below is the composition of the net book value for the PCI loans accounted for under ASC 310-30 at September 30, 2015 (in thousands):

 

     At September 30, 2015  

PCI Loans:

  

Contractual cash flows

   $ 8,411   

Non-accretable difference

     (1,307

Accretable yield

     (14
  

 

 

 

Loans accounted for under ASC 310-30

   $ 7,090   
  

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

Loan Aging Analysis

This table provides a summary of loan classes and an aging of past due loans at September 30, 2015 and December 31, 2014 (in thousands):

 

     September 30, 2015  
     30-89
Days Past
Due and
Accruing
     Greater
than 90
Days Past
Due and
Accruing
     Non-
Accrual
Loans
     Total
Past

Due
     PCI
Loans
     Current      Total Loans  

Loans

                    

Commercial:

                    

Commercial

   $ 15,787       $ 8       $ 29,098       $ 44,893       $ 2,497       $ 4,040,023       $ 4,087,413   

Asset-based

     —           —           830         830         —           217,836         218,666   

Factoring

     —           —           706         706         —           105,272         105,978   

Commercial – credit card

     396         42         32         470         —           143,256         143,726   

Real estate:

                    

Real estate – construction

     322         —           741         1,063         525         365,529         367,117   

Real estate – commercial

     2,391         562         9,948         12,901         1,744         2,477,234         2,491,879   

Real estate – residential

     690         —           1,236         1,926         —           472,509         474,435   

Real estate – HELOC

     227         —           3,360         3,587         —           715,452         719,039   

Consumer:

                    

Consumer – credit card

     2,182         1,653         586         4,421         —           279,917         284,338   

Consumer – other

     3,268         287         3,418         6,973         2,324         103,852         113,149   

Leases

     —           —           —           —           —           40,386         40,386   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 25,263       $ 2,552       $ 49,955       $ 77,770       $ 7,090       $ 8,961,266       $ 9,046,126   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2015  
     30-89
Days
Past
Due
     Greater
than 90
Days Past
Due
     Current      Total Loans  

PCI Loans

           

Commercial:

           

Commercial

   $ —         $ 2,497       $ —         $ 2,497   

Asset-based

     —           —           —           —     

Factoring

     —           —           —           —     

Commercial – credit card

     —           —           —           —     

Real estate:

           

Real estate – construction

     —           525         —           525   

Real estate – commercial

     —           1,744         —           1,744   

Real estate – residential

     —           —           —           —     

Real estate – HELOC

     —           —           —           —     

Consumer:

           

Consumer – credit card

     —           —           —           —     

Consumer – other

     106         51         2,167         2,324   

Leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

   $ 106       $ 4,817       $ 2,167       $ 7,090   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

     December 31, 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

   $ 2,509       $ 363       $ 13,114       $ 15,986       $ 3,798,023       $ 3,814,009   

Commercial – credit card

     267         147         37         451         115,258         115,709   

Real estate:

                 

Real estate – construction

     1,244         —           983         2,227         253,779         256,006   

Real estate – commercial

     1,727         61         12,037         13,825         1,852,476         1,866,301   

Real estate – residential

     828         113         562         1,503         318,324         319,827   

Real estate – HELOC

     1,371         —           19         1,390         642,196         643,586   

Consumer:

                 

Consumer – credit card

     2,268         2,303         560         5,131         305,165         310,296   

Consumer – other

     1,743         843         70         2,656         98,314         100,970   

Leases

     —           —           —           —           39,090         39,090   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 11,957       $ 3,830       $ 27,382       $ 43,169       $ 7,422,625       $ 7,465,794   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include troubled debt restructurings on non-accrual status. Loan delinquency for all loans is shown in the tables above at September 30, 2015 and December 31, 2014, respectively. Non-PCI loans that become nonperforming subsequent to acquisition are put on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

The Company has ceased the recognition of interest on loans with a carrying value of $50.0 million and $27.4 million at September 30, 2015 and December 31, 2014, respectively. Restructured loans totaled $35.3 million and $9.3 million at September 30, 2015 and December 31, 2014, respectively. Loans 90 days past due and still accruing interest totaled $2.6 million and $3.8 million at September 30, 2015 and December 31, 2014, respectively. There was an insignificant amount of interest recognized on impaired loans during 2015 and 2014.

The Company sold residential real estate loans with proceeds of $79.7 million and $51.9 million in the secondary market without recourse during the nine-month periods ended September 30, 2015 and September 30, 2014, respectively.

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, asset-based, factoring, commercial real estate, and construction real estate loans. The loan rankings are summarized into the following categories: Non-watch list, Watch, Special Mention, and Substandard. Any loan not classified in one of the categories described below is considered to be a Non-watch list loan. A description of the general characteristics of the loan ranking categories is as follows:

 

    Watch – This rating represents credit exposure that presents higher than average risk and warrants greater than routine attention by Company personnel due to conditions affecting the borrower, the 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.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

    Substandard – This rating represents an asset inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. This category may include loans where the collection of full principal is doubtful or remote.

All other classes of loans are generally evaluated and monitored based on payment activity. Non-performing loans include restructured loans 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, 2015 (UNAUDITED)

 

This table provides an analysis of the credit risk profile of each loan class excluded from ASC 310-30 at September 30, 2015 and December 31, 2014 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating

Originated and Non-PCI Loans

 

     Commercial      Asset-based      Factoring  
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
 

Non-watch list

   $ 3,798,138       $ 3,532,611       $ 194,028       $ —         $ 105,978       $ —     

Watch

     75,905         72,283         —           —           —           —     

Special Mention

     46,802         98,750         23,808         —           —           —     

Substandard

     164,071         110,365         830         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,084,916       $ 3,814,009       $ 218,666       $ —         $ 105,978       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Real estate – construction      Real estate – commercial  
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
 

Non-watch list

   $ 364,464       $ 253,895       $ 2,411,729       $ 1,780,323   

Watch

     170         181         33,341         31,984   

Special Mention

     —           756         16,273         8,691   

Substandard

     1,958         1,174         28,792         45,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 366,592       $ 256,006       $ 2,490,135       $ 1,866,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

Originated and Non-PCI Loans

 

     Commercial – credit card      Real estate – residential      Real estate – HELOC  
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
 

Performing

   $ 143,694       $ 115,672       $ 473,199       $ 319,265       $ 715,679       $ 643,567   

Non-performing

     32         37         1,236         562         3,360         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 143,726       $ 115,709       $ 474,435       $ 319,827       $ 719,039       $ 643,586   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Consumer – credit card      Consumer – other      Leases  
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
 

Performing

   $ 283,752       $ 309,736       $ 107,407       $ 100,900       $ 40,386       $ 39,090   

Non-performing

     586         560         3,418         70         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 284,338       $ 310,296       $ 110,825       $ 100,970       $   40,386       $   39,090   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

This table provides an analysis of the credit risk profile of each loan class accounted for under ASC 310-30 at September 30, 2015 and December 31, 2014 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating

PCI Loans

 

     Commercial      Real estate – construction      Real estate – commercial  
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
 

Non-watch list

   $ 1,039       $ —         $ —         $ —         $ —         $ —     

Watch

     —           —           —           —           —           —     

Special Mention

     —           —           —           —           —           —     

Substandard

     1,458         —           525         —           1,744         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,497       $ —         $ 525       $ —         $ 1,744       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

PCI Loans

 

     Consumer – other  
     September 30,
2015
     December 31,
2014
 

Performing

   $ 2,324       $ —     

Non-performing

     —           —     
  

 

 

    

 

 

 

Total

   $ 2,324       $ —     
  

 

 

    

 

 

 

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

 

18


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

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.

Generally, the unsecured portion of a commercial or commercial real estate loan is charged off when, after analyzing the borrower’s financial condition, it is determined that the borrower is incapable of servicing the debt, little or no prospect for near term improvement exists, and no realistic and significant strengthening action is pending. For collateral-dependent commercial or commercial real estate loans, an analysis is completed regarding the Company’s collateral position to determine if the amounts due from the borrower are in excess of the calculated current fair value of the collateral. Specific allocations of the allowance for loan losses are made for any collateral deficiency. If a collateral deficiency is ultimately deemed to be uncollectible, the amount is charged off. Revolving commercial loans (such as commercial credit cards) which are past due 90 cumulative days are classified as a loss and charged off.

Generally, a consumer loan, or a portion thereof, is charged off in accordance with regulatory guidelines which provide that such loans be charged off when the Company becomes aware of the loss, such as from a triggering event that may include, but is not limited to, new information about a borrower’s intent and ability to repay the loan, bankruptcy, fraud, or death. However, the charge-off timeframe should not exceed the specified delinquency time frames, which state that closed-end retail loans (such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (such as home equity lines of credit and consumer credit cards) that become past due 180 cumulative days are classified as a loss and charged off.

 

19


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (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, 2015 (in thousands):

 

     Three Months Ended September 30, 2015  
     Commercial     Real estate     Consumer     Leases     Total  

Allowance for loan losses:

          

Beginning balance

   $ 59,378      $ 8,892      $ 9,288      $ 163      $ 77,721   

Charge-offs

     (1,124     (68     (2,263     —          (3,455

Recoveries

     488        133        643        —          1,264   

Provision

     540        448        1,525        (13     2,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $        59,282      $        9,405      $     9,193      $      150      $    78,030   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2015  
     Commercial     Real estate     Consumer     Leases     Total  

Allowance for loan losses:

          

Beginning balance

   $ 55,349      $ 10,725      $ 9,921      $ 145      $ 76,140   

Charge-offs

     (4,624     (168     (7,413     —          (12,205

Recoveries

     1,387        225        1,983        —          3,595   

Provision

     7,170        (1,377     4,702        5        10,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 59,282      $ 9,405      $ 9,193      $ 150      $ 78,030   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 2,504      $ 305      $ 31      $ —        $ 2,840   

Ending balance: collectively evaluated for impairment

     56,778        9,100        9,162        150        75,190   

Loans:

          

Ending balance: loans

   $ 4,555,783      $ 4,052,470      $ 397,487      $ 40,386      $ 9,046,126   

Ending balance: individually evaluated for impairment

     52,450        8,957        3,365        —          64,772   

Ending balance: collectively evaluated for impairment

     4,503,333        4,043,513        394,122        40,386        8,981,354   

 

20


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

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   

 

21


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

Impaired Loans

This table provides an analysis of impaired loans by class at September 30, 2015 and December 31, 2014 (in thousands):

 

     As of September 30, 2015  
     Unpaid
Principal
Balance
     Recorded
Investment
with No
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial:

                 

Commercial

   $ 55,273       $ 29,137       $ 21,777       $ 50,914       $ 2,504       $ 28,658   

Asset-based

     860         830         —           830         —           —     

Factoring

     706         706         —           706         —           —     

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     1,189         741         120         861         49         935   

Real estate – commercial

     7,228         5,106         1,361         6,467         225         8,314   

Real estate – residential

     1,582         1,120         284         1,404         31         1,426   

Real estate – HELOC

     249         225         —           225         —           114   

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     3,398         2,174         1,191         3,365         31         1,152   

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70,485       $ 40,039       $ 24,733       $ 64,772       $ 2,840       $ 40,599   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2014  
     Unpaid
Principal
Balance
     Recorded
Investment
with No
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial:

                 

Commercial

   $ 21,758       $ 13,928       $ 3,132       $ 17,060       $ 972       $ 16,022   

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     1,540         983         —           983         —           939   

Real estate – commercial

     9,546         4,454         3,897         8,351         935         11,298   

Real estate – residential

     1,083         909         —           909         —           1,006   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     1         1         —           1         —           12   

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,928       $ 20,275       $ 7,029       $ 27,304       $ 1,907       $ 29,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

PCI loans are not subject to individual evaluation for impairment and are not reported as impaired loans based on PCI loan accounting.

Troubled Debt Restructurings

A loan modification is considered a troubled debt restructuring (TDR) when a concession has 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.

Purchased loans restructured after acquisition are not considered or reported as troubled debt restructurings if the loans evidenced credit deterioration as of the Acquisition Date and are accounted for in pools. For the period ended September 30, 2015, no purchased loans were modified as troubled debt restructurings after the Acquisition Date.

The Company had $217 thousand in commitments to lend to borrowers with loan modifications classified as TDR’s. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term. During the nine month period ended September 30, 2015, the Company had one commercial real estate loan classified as a TDR with a payment default totaling $178 thousand. A specific valuation allowance for the full amount of this loan had previously been established within the Company’s allowance for loan losses, and this loan was charged off against the allowance for loan losses during the current period.

This table provides a summary of loans restructured by class during the three and nine months ended September 30, 2015 (in thousands):

 

     Three Months Ended September 30, 2015      Nine Months Ended September 30, 2015  
     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

     2       $ 8,675       $ 8,675         16       $ 28,138       $ 28,138   

Asset-based

     —           —           —           —           —           —     

Factoring

     —           —           —           —           —           —     

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     —           —           —           —           —           —     

Real estate – commercial

     —           —           —           1         261         261   

Real estate – residential

     1         261         261         1         121         121   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     —           —           —           —           —           —     

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 8,936       $ 8,936         18       $ 28,520       $ 28,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

5. Securities

Securities Available for Sale

This table provides detailed information about securities available for sale at September 30, 2015 and December 31, 2014 (in thousands):

 

September 30, 2015    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. Treasury

   $ 351,767       $ 801       $ —         $ 352,568   

U.S. Agencies

     711,381         1,188         (86      712,483   

Mortgage-backed

     3,395,612         34,135         (14,172      3,415,575   

State and political subdivisions

     2,089,507         24,257         (3,080      2,110,684   

Corporates

     80,853         45         (463      80,435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,629,120       $ 60,426       $ (17,801    $ 6,671,745   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. Treasury

   $ 519,484       $ 501       $ (525    $ 519,460   

U.S. Agencies

     991,084         780         (1,175      990,689   

Mortgage-backed

     3,276,009         28,470         (26,875      3,277,604   

State and political subdivisions

     1,983,549         22,973         (5,165      2,001,357   

Corporates

     124,096         —           (1,270      122,826   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,894,222       $ 52,724       $ (35,010    $ 6,911,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

The following table presents contractual maturity information for securities available for sale at September 30, 2015 (in thousands):

 

     Amortized      Fair  
     Cost      Value  

Due in 1 year or less

   $ 806,162       $ 807,367   

Due after 1 year through 5 years

     1,519,825         1,532,670   

Due after 5 years through 10 years

     846,257         855,142   

Due after 10 years

     61,264         60,991   
  

 

 

    

 

 

 

Total

     3,233,508         3,256,170   

Mortgage-backed securities

     3,395,612         3,415,575   
  

 

 

    

 

 

 

Total securities available for sale

   $ 6,629,120       $ 6,671,745   
  

 

 

    

 

 

 

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, 2015, proceeds from the sales of securities available for sale were $782.8 million compared to $410.6 million for the same period in 2014. Securities transactions resulted in gross realized gains of $8.5 million and $4.1 million for the nine months ended September 30, 2015 and 2014, respectively. The gross realized losses for the nine months ended September 30, 2015 and 2014 were $48 thousand and $11 thousand, respectively.

Securities available for sale with a market value of $5.3 billion at September 30, 2015 and $5.7 billion at December 31, 2014 were pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, and sales of securities with simultaneous agreements to repurchase the securities at specified maturities (repurchase agreements). Of this amount, securities with a market value of $1.7 billion at September 30, 2015 and $1.2 billion at December 31, 2014 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.

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, 2015 and December 31, 2014 (in thousands):

 

September 30, 2015

   Less than 12 months     12 months or more     Total  
Description of Securities    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

U.S. Treasury

   $ —         $ —        $ —         $ —        $ —         $ —     

U.S. Agencies

     72,409         (41     36,955         (45     109,364         (86

Mortgage-backed

     621,731         (5,216     383,140         (8,956     1,004,871         (14,172

State and political subdivisions

     331,467         (1,897     69,275         (1,183     400,742         (3,080

Corporates

     15,764         (51     50,959         (412     66,723         (463
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily-impaired debt securities available for sale

   $ 1,041,371       $   (7,205   $    540,329       $ (10,596   $ 1,581,700       $ (17,801
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

25


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

December 31, 2014

   Less than 12 months     12 months or more     Total  
Description of Securities    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

U.S. Treasury

   $ 236,591       $ (329   $ 14,863       $ (196   $ 251,454       $ (525

U.S. Agencies

     387,999         (689     81,593         (486     469,592         (1,175

Mortgage-backed

     727,142         (8,370     616,044         (18,504     1,343,186         (26,874

State and political subdivisions

     401,934         (1,406     226,678         (3,760     628,612         (5,166

Corporates

     36,655         (243     86,171         (1,027     122,826         (1,270
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily-impaired debt securities available for sale

   $ 1,790,321       $ (11,037   $ 1,025,349       $ (23,973   $ 2,815,670       $ (35,010
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses in the Company’s investments in U.S. treasury obligations, U.S. government agencies, Government Sponsored Entity (GSE) 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, 2015.

Securities Held to Maturity

The table below provides detailed information for securities held to maturity at September 30, 2015 and December 31, 2014 (in thousands):

 

September 30, 2015

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

State and political subdivisions

   $ 588,478       $ 22,904       $ —         $ 611,382   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                           

State and political subdivisions

   $ 278,054       $ 26,058       $ —         $ 304,112   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents contractual maturity information for securities held to maturity at September 30, 2015 (in thousands):

 

     Amortized
Cost
     Fair
Value
 

Due in 1 year or less

   $ 4,366       $ 4,536   

Due after 1 year through 5 years

     89,100         92,568   

Due after 5 years through 10 years

     339,631         352,850   

Due after 10 years

     155,381         161,428   
  

 

 

    

 

 

 

Total securities held to maturity

   $ 588,478       $ 611,382   
  

 

 

    

 

 

 

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 2015 or 2014.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

Trading Securities

The net unrealized gains on trading securities at September 30, 2015 and September 30, 2014 were $8 thousand and $39 thousand, respectively, and were included in trading and investment banking income on the Consolidated Statements of Income.

Other Securities

The table below provides detailed information for Federal Reserve Bank (FRB) stock and Federal Home Loan Bank (FHLB) stock and other securities at September 30, 2015 and December 31, 2014 (in thousands):

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  

September 30, 2015

   Cost      Gains      Losses      Value  

FRB and FHLB stock

   $ 34,006       $ —         $ —         $ 34,006   

Other securities – marketable

     —           12,006         —           12,006   

Other securities – non-marketable

     20,867         1,571         (79      22,359   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 54,873       $ 13,577       $ (79    $ 68,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                           

FRB and FHLB stock

   $ 26,279       $ —         $ —         $ 26,279   

Other securities – marketable

     —           16,668         —           16,668   

Other securities – non-marketable

     21,669         3,937         (79      25,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 47,948       $ 20,605       $ (79    $ 68,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost. Other marketable and non-marketable securities include Prairie Capital Management (PCM) 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 $12.0 million at September 30, 2015 and $16.7 million at December 31, 2014. The fair value of other non-marketable securities includes alternative investment securities of $2.4 million at September 30, 2015 and $8.5 million at December 31, 2014. Unrealized gains or losses on alternative investments are recognized in the Equity (loss) earnings on alternative investments line of the Company’s Consolidated Statements of Income.

 

6. Goodwill and Other Intangibles

Changes in the carrying amount of goodwill for the periods ended September 30, 2015 and December 31, 2014 by reportable segment are as follows (in thousands):

 

     Bank      Institutional
Investment
Management
     Asset
Servicing
     Total  

Balances as of January 1, 2015

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

Acquisition of Marquette Financial Companies

     18,204         —           —           18,204   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of September 30, 2015

   $ 160,957       $ 47,529       $ 19,476       $ 227,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of January 1, 2014

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

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of December 31, 2014

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

 

 

    

 

 

    

 

 

    

 

 

 

 

27


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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

Following are the finite-lived intangible assets that continue to be subject to amortization as of September 30, 2015 and December 31, 2014 (in thousands):

 

     As of September 30, 2015  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Core deposit intangible assets

   $ 36,497       $ 33,415       $ 3,082   

Core deposit intangible-Marquette Acquisition

     11,030         1,051         9,979   

Customer relationships

     104,560         71,519         33,041   

Customer relationship-Marquette Acquisition

     2,900         193         2,707   

Other intangible assets

     3,247         2,783         464   

Other intangible assets-Marquette Acquisition

     951         159         792   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 159,185       $ 109,120       $ 50,065   
  

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2014  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Core deposit intangible assets

   $ 36,497       $ 32,721       $ 3,776   

Customer relationships

     104,560         64,980         39,580   

Other intangible assets

     3,247         2,612         635   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 144,304       $ 100,313       $ 43,991   
  

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Aggregate amortization expense

   $ 3,483       $ 3,043       $ 8,807       $ 9,219   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

For the three months ending December 31, 2015

   $ 3,283   

For the year ending December 31, 2016

     12,291   

For the year ending December 31, 2017

     10,180   

For the year ending December 31, 2018

     7,202   

For the year ending December 31, 2019

     5,822   

For the year ending December 31, 2020

     4,487   

 

7. Securities Sold Under Agreements to Repurchase

The Company utilizes repurchase agreements to facilitate the needs of customers and to facilitate secured short-term funding needs. Repurchase agreements are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with the Company’s safekeeping agents.

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

The table below presents the remaining contractual maturities of repurchase agreements outstanding at September 30, 2015, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings (in thousands).

 

     As of September 30, 2015  
     Remaining Contractual Maturities of the Agreements  
     Overnight & Continuous      Over 90 Days      Total  

Repurchase agreements, secured by:

        

U.S. Treasury

   $ 206,883       $ —         $ 206,883   

U.S. Agencies

     1,132,719         1,500         1,134,219   
  

 

 

    

 

 

    

 

 

 

Total repurchase agreements

   $ 1,339,602       $ 1,500       $ 1,341,102   
  

 

 

    

 

 

    

 

 

 

 

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, 2015. 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 cards, 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.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

Business Segment Information

Segment financial results were as follows (in thousands):

 

     Three Months Ended September 30, 2015  
     Bank      Payment
Solutions
     Institutional
Investment
Management
     Asset
Servicing
     Total  

Net interest income

   $ 93,960       $ 14,627       $ —         $ 1,308       $ 109,895   

Provision for loan losses

     1,333         1,167         —           —           2,500   

Noninterest income

     42,999         22,038         21,449         22,612         109,098   

Noninterest expense

     122,165         27,053         16,512         19,549         185,279   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     13,461         8,445         4,937         4,371         31,214   

Income tax expense

     3,731         2,393         1,408         1,231         8,763   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 9,730       $ 6,052       $ 3,529       $ 3,140       $ 22,451   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 14,120,000       $ 2,943,000       $ 66,000       $    991,000       $ 18,120,000   

 

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

Net interest income

   $ 72,893       $ 13,469       $ —         $ 1,164       $ 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

     99,084         21,995         20,913         19,159         161,151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     19,748         10,999         13,006         4,597         48,350   

Income tax expense

     5,364         2,818         3,350         1,188         12,720   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 14,384       $ 8,181       $ 9,656       $ 3,409       $ 35,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 11,752,000       $ 2,744,000       $ 72,000       $ 1,070,000       $ 15,638,000   

 

30


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

     Nine Months Ended September 30, 2015  
     Bank      Payment
Solutions
     Institutional
Investment
Management
     Asset
Servicing
     Total  

Net interest income

   $ 252,044       $ 42,260       $ 1       $ 3,308       $ 297,613   

Provision for loan losses

     5,545         4,955         —           —           10,500   

Noninterest income

     142,099         68,469         74,217         69,070         353,855   

Noninterest expense

     329,951         78,131         52,768         60,806         521,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     58,647         27,643         21,450         11,572         119,312   

Income tax expense

     16,037         7,770         5,921         3,154         32,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 42,610       $ 19,873       $ 15,529       $ 8,418       $ 86,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 13,440,000       $ 2,998,000       $ 70,000       $    952,000       $ 17,460,000   

 

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

Net interest income

   $ 216,495       $ 38,248       $ (3   $ 4,401       $ 259,141   

Provision for loan losses

     7,558         6,442         —          —           14,000   

Noninterest income

     151,843         62,999         102,014        66,584         383,440   

Noninterest expense

     307,400         67,451         68,862        55,570         499,283   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income before taxes

     53,380         27,354         33,149        15,415         129,298   

Income tax expense

     15,167         7,342         8,883        4,191         35,583   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 38,213       $ 20,012       $ 24,266      $ 11,224       $ 93,715   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average assets

   $ 12,023,000       $ 2,287,000       $ 72,000      $ 1,539,000       $ 15,921,000   

 

9. Acquisition

On May 31, 2015, the Company acquired 100% of the outstanding common shares of Marquette Financial Companies. Marquette was a privately held financial services company with a portfolio of businesses and operated thirteen branches in Arizona and Texas, two national commercial specialty-lending businesses focused on asset-based lending and accounts receivable factoring, as well as an asset-management firm. As a result of the acquisition, the Company expects to increase its presence in Arizona and Texas and supplement the Company’s commercial-banking services with factoring and asset-based lending businesses. As of the close of trading on the Acquisition Date, the beneficial owners of Marquette received 9.2295 shares of the Company’s common stock for each share of Marquette common stock owned at that date (approximately 3.47 million shares total). The market value of the shares of the Company’s common stock issued at the effective time of the merger was approximately $179.7 million, based on the closing stock price of $51.79 on May 29, 2015. The transaction was accounted for using the purchased method of accounting in accordance with FASB ASC Topic 805, Business Combinations. Accordingly, the purchase price was allocated based on the estimated fair market values of the assets and liabilities acquired.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

The following table summarizes the net assets acquired (at fair value) and consideration transferred for Marquette (in thousands, except for per share data):

 

     Fair Value
May 31, 2015
 

Assets

  

Loans

   $ 980,404   

Investment securities

     177,694   

Cash and due from banks

     104,610   

Premises and equipment, net

     11,508   

Identifiable intangible assets

     14,881   

Other assets

     32,356   
  

 

 

 

Total assets acquired

     1,321,453   

Liabilities

  

Noninterest-bearing deposits

     235,426   

Interest-bearing deposits

     708,675   

Short-term debt

     112,133   

Long-term debt

     89,971   

Other liabilities

     13,715   
  

 

 

 

Total liabilities assumed

     1,159,920   

Net identifiable assets acquired

     161,533   

Preliminary goodwill

     18,204   
  

 

 

 

Net assets acquired

   $ 179,737   
  

 

 

 

Consideration:

  

Company’s common shares issued

     3,470   

Purchase price per share of the Company’s common stock

   $ 51.79   
  

 

 

 

Fair value of total consideration transferred

   $ 179,737   
  

 

 

 

In the acquisition, the Company purchased $980.4 million of loans at fair value. All non-performing loans and select other classified loan relationships considered by management to be credit impaired are accounted for pursuant to ASC Topic 310-30, as previously discussed within Note 4, “Loans and Allowance for Loan Losses.”

The Company assumed long-term debt obligations with an aggregate balance of $103.1 million and an aggregate fair value of $65.5 million as of the Acquisition Date payable to four unconsolidated trusts (Marquette Capital Trust I, Marquette Capital Trust II, Marquette Capital Trust III, and Marquette Capital Trust IV) that have issued trust preferred securities. The interest rate on the trust preferred securities issued by Marquette Capital Trust II are fixed at 6.30 percent until January 2016, and then reset each quarter at a variable rate tied to the three-month London Interbank Offered Rate (LIBOR) plus 133 basis points thereafter. Interest rates on trust preferred securities issued by the remaining three trusts are tied to the three-month LIBOR rate with spreads ranging from 133 basis points to 160 basis points and reset quarterly. The trust preferred securities have maturity dates ranging from January 2036 to September 2036.

The amount of goodwill arising from the acquisition reflects the Company’s increased market share and related synergies that are expected to result from combining the operations of UMB and Marquette. All of the goodwill was assigned to the Bank segment. In accordance with ASC 350, Intangibles-Goodwill and Other, goodwill will not be amortized but will be subject to at least an annual impairment test. As the Company acquired tax deductible goodwill in excess of the amount reported in the consolidated financial statements, the goodwill is expected to be deductible for tax purposes. The fair value of the acquired identifiable intangible assets of $14.9 million is comprised of a core deposit intangible of $11.0 million, customer lists of $2.9 million and non-compete agreements of $1.0 million.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

The fair value of the acquired assets and liabilities noted in the table above is provisional pending receipt of the final valuation for those assets and liabilities. During the provisional period, which may last up to twelve months subsequent to the acquisition date, the Company will obtain additional information to refine the valuation of the acquired assets and liabilities. The Company expects that some adjustments to the fair value of the acquired assets and liabilities will be recorded after September 30, 2015, although such adjustments are not expected to be significant.

The results of Marquette are included in the results of the Company subsequent to the Acquisition Date. For the nine months ended September 30, 2015, acquisition expenses recognized in Noninterest expense in the Company’s Consolidated Statements of Income totaled $6.0 million. This total included $1.4 million of severance in Salaries and employee benefits and $2.8 million in Legal and consulting fees.

The following pro forma information combines the historical results of Marquette and the Company. The pro forma financial information does not include the potential impacts of possible business model changes, current market conditions, revenue enhancements, expense efficiencies, or other factors. The pro forma information below reflects adjustments made to exclude the impact of acquisition-related expenses of $6.0 million, net accretion of premiums and discounts of $1.3 million, and amortization of acquired identifiable intangibles of $1.4 million during the nine month period ended September 30, 2015. The pro forma information is theoretical in nature and not necessarily indicative of future consolidated results of operations of the Company or the consolidated results of operations which would have resulted had the Company acquired Marquette during the periods presented.

If the Marquette acquisition had been completed on January 1, 2014, total revenue would have been approximately $669.1 million and $692.4 million for the nine month periods ended September 30, 2015 and September 30, 2014, respectively. Net income would have been approximately $90.3 million and $98.9 million, respectively, for the same periods. Basic earnings per share would have been $1.88 and $2.09 for the nine month periods ended September 30, 2015 and September 30, 2014, respectively

The Company has determined that it is impractical to report the amounts of revenue and earnings of legacy Marquette since the Acquisition Date due to the integration of operations shortly after the Acquisition Date. Accordingly, reliable and separate complete revenue and earnings information is no longer available. In addition, such amounts would require significant estimates related to the proper allocation of merger cost savings that cannot be objectively made.

 

10. 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.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

The following table summarizes the Company’s off-balance sheet financial instruments.

Contract or Notional Amount (in thousands):

 

     September 30,
2015
     December 31,
2014
 

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

   $ 5,838,033       $ 3,509,841   

Commitments to extend credit under credit card loans

     2,910,148         2,690,752   

Commercial letters of credit

     4,655         1,334   

Standby letters of credit

     378,562         375,003   

Futures contracts

     1,000         —     

Forward foreign exchange contracts

     53,766         144,950   

Spot foreign exchange contracts

     9,460         14,721   

11. 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 values 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 and liabilities. 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 Consolidated Balance Sheets

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, 2015 and December 31, 2014 (in thousands):

 

     Asset Derivatives      Liability Derivatives  
Fair Value    September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
 

Interest Rate Products:

           

Derivatives not designated as hedging instruments

   $ 13,986       $ 7,138       $ 14,307       $ 7,250   

Derivatives designated as hedging instruments

     753         —           415         285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,739       $ 7,138       $ 14,722       $ 7,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed rate assets and liabilities due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve either making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments, or making variable rate payments to a counterparty in exchange for the Company receiving fixed rate payments, over the life of the agreements without the exchange of the underlying notional amount. As of September 30, 2015, the Company had two interest rate swaps with a notional amount of $16.1 million that were designated as fair value hedges of interest rate risk associated with the Company’s fixed rate loan assets and brokered time deposits.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

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.

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, 2015, the Company had 36 interest rate swaps with an aggregate notional amount of $476.8 million related to this program. During the three and nine months ended September 30, 2015, the Company recognized $125 thousand and $211 thousand of net losses, respectively, related to changes in fair value of these swaps. 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 the fair value of these swaps.

Effect of Derivative Instruments on the Consolidated Statements of Income

This table provides a summary of the amount of gain (loss) recognized in other noninterest 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, 2015 and September 30, 2014 (in thousands):

 

     Amount of (Loss) Gain Recognized  
     For the Three Months Ended      For the Nine Months Ended  
     September 30,
2015
     September 30,
2014
     September 30,
2015
     September 30,
2014
 

Interest Rate Products

  

     

Derivatives not designated as hedging instruments

   $ (125    $ (133    $ (211    $ (185
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (125    $ (133    $ (211    $ (185
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Rate Products

           

Derivatives designated as hedging instruments

           

Fair value adjustments on derivatives

   $ (178    $ 19       $ (172    $ (216

Fair value adjustments on hedged items

     177         (20      173         197   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (1    $ (1    $ 1       $ (19
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision that 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, 2015 the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $15.0 million. The Company has minimum collateral posting

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

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, 2015, it could have been required to settle its obligations under the agreements at the termination value.

 

12. 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, 2015, 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 and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

 

     Fair Value Measurement at September 30, 2015 Using  

Description

   September 30,
2015
     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

   $ 702       $ 702       $ —         $ —     

U.S. Agencies

     1,321         —           1,321         —     

Mortgage-backed

     1,044         —           1,044         —     

State and political subdivisions

     3,770         —           3,770         —     

Trading - other

     16,862         16,862         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     23,699         17,564         6,135         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     352,568         352,568         —           —     

U.S. Agencies

     712,483         —           712,483         —     

Mortgage-backed

     3,415,575         —           3,415,575         —     

State and political subdivisions

     2,110,684         —           2,110,684         —     

Corporates

     80,435         80,435         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,671,745         433,003         6,238,742         —     

Company-owned life insurance

     31,252         —           31,252         —     

Bank-owned life insurance

     201,213         —           201,213         —     

Derivatives

     14,739         —           14,739         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,942,648       $ 450,567       $ 6,492,081       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 32,115       $ 32,115       $ —         $ —     

Contingent consideration liability

     31,232         —           —           31,232   

Derivatives

     14,722         —           14,722         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 78,069       $ 32,115       $ 14,722       $ 31,232   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

     Fair Value Measurement at December 31, 2014 Using  

Description

   December 31,
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

   $ 400       $ 400       $ —         $ —     

U.S. Agencies

     1,315         —           1,315         —     

Mortgage-backed

     —           —           —           —     

State and political subdivisions

     7,381         —           7,381         —     

Trading - other

     18,107         18,106         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     27,203         18,506         8,697         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     519,460         519,460         —           —     

U.S. Agencies

     990,689         —           990,689         —     

Mortgage-backed

     3,277,604         —           3,277,604         —     

State and political subdivisions

     2,001,357         —           2,001,357         —     

Corporates

     122,826         122,826         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,911,936         642,286         6,269,650         —     

Company-owned life insurance

     26,886         —           26,886         —     

Derivatives

     7,138         —           7,138         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,973,163       $ 660,792       $ 6,312,371       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 26,885       $ 26,885       $ —         $ —     

Contingent consideration liability

     53,411         —           —           53,411   

Derivatives

     7,535         —           7,535         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 87,831       $ 26,885       $ 7,535       $ 53,411   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reconciles the beginning and ending balances of the contingent consideration liability for the nine months ended September 30, 2015 and 2014 (in thousands):

 

     Nine Months Ended September 30,  
     2015      2014  

Beginning balance

   $ 53,411       $ 46,201   

Payment of contingent considerations on acquisitions

     (18,702      (13,725

Contingency reserve

     —           14,272   

Fair value adjustments

     (3,477      7,511   
  

 

 

    

 

 

 

Ending balance

   $ 31,232       $ 54,259   
  

 

 

    

 

 

 

During the nine month period ended September 30, 2014, the Company recorded contingency reserve expense of $20.3 million in its Consolidated Statements 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 fair value adjustments.

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (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 and expense growth percentage    (1%) - 102%

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:

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.

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. Additionally, throughout the year if securities are sold, comparisons are made between the pricing services prices and the market prices at which the securities were sold. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing services. Based on this research, the pricing services may affirm or revise their quoted price. No significant adjustments have been made to the prices provided by the pricing services. The pricing services also provide documentation on an ongoing basis that includes referenced data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate.

Company-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.

Bank-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.

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 Liability The fair value of contingent consideration liabilities is derived from a discounted cash flow model of future contingent payments. The valuation of these liabilities is 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. 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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

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 expense.

Assets measured at fair value on a non-recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

 

     Fair Value Measurement at September 30, 2015 Using  

Description

   September 30,
2015
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

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

Impaired loans

   $ 21,893       $ —         $ —         $ 21,893       $ (933

Other real estate owned

     2,520         —           —           2,520         (9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,413       $ —         $ —         $ 24,413       $ (942
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement at December 31, 2014 Using  

Description

   December 31,
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 Twelve
Months Ended
December 31
 

Impaired loans

   $ 5,122       $ —         $ —         $ 5,122       $ 2,345   

Other real estate owned

     208         —           —           208         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,330       $ —         $ —         $ 5,330       $ 2,345   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015 (UNAUDITED)

 

Goodwill Valuation of goodwill to determine impairment is performed annually, or more frequently if there is an event or circumstance that would indicate impairment may have occurred. The process involves calculations to determine the fair value of each reporting unit on a stand-alone basis. A combination of formulas using current market multiples, based on recent sales of financial institutions within the Company’s geographic marketplace, is used to estimate the fair value of each reporting unit. That fair value is compared to the carrying amount of the reporting unit, including its recorded goodwill. Impairment is considered to have occurred if the fair value of the reporting unit is lower than the carrying amount of the reporting unit. The fair value of the Company’s common stock relative to its computed book value per share is also considered as part of the overall evaluation. These measurements are classified as Level 3.

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, 2015 and December 31, 2014 are as follows (in millions):

 

     Fair Value Measurement at September 30, 2015 Using  
     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

              

Cash and short-term investments

   $ 1,285.4       $ 1,202.4       $ 83.0       $ —         $ 1,285.4   

Securities available for sale

     6,671.7         433.0         6,238.7         —           6,671.7   

Securities held to maturity

     588.5         —           611.4         —           611.4   

Other securities

     68.4         —           68.4         —           68.4   

Trading securities

     23.7         17.6         6.1         —           23.7   

Loans (exclusive of allowance for loan loss)

     9,047.1         —           9,074.0         —           9,074.0   

Derivatives

     14.7         —           14.7         —           14.7   

FINANCIAL LIABILITIES

              

Demand and savings deposits

     13,805.8         13,805.8         —           —           13,805.8   

Time deposits

     1,255.8         —           1,255.8         —           1,255.8   

Other borrowings

     1,347.6         1.5         1,346.1         —           1,347.6   

Long-term debt

     83.5         —           83.8         —           83.8   

Derivatives

     14.7         —           14.7         —           14.7   

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 3.6   

Commercial letters of credit

                 0.2   

Standby letters of credit

                 1.9   

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

     Fair Value Measurement at December 31, 2014 Using  
     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

              

Cash and short-term investments

   $ 2,101.8       $ 2,006.3       $ 95.5       $ —         $ 2,101.8   

Securities available for sale

     6,911.9         642.3         6,269.6         —           6,911.9   

Securities held to maturity

     278.1         —           304.1         —           304.1   

Other securities

     68.5         —           68.5         —           68.5   

Trading securities

     27.2         18.5         8.7         —           27.2   

Loans (exclusive of allowance for loan loss)

     7,466.4         —           7,483.3         —           7,483.3   

Derivatives

     7.1         —           7.1         —           7.1   

FINANCIAL LIABILITIES

              

Demand and savings deposits

     12,353.3         12,353.3         —           —           12,353.3   

Time deposits

     1,263.6         —           1,263.6         —           1,263.6   

Other borrowings

     2,025.1         42.0         1,983.1         —           2,025.1   

Long-term debt

     8.8         —           9.1         —           9.1   

Derivatives

     7.5         —           7.5         —           7.5   

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 5.7   

Commercial letters of credit

                 0.2   

Standby letters of credit

                 2.4   

Cash and short-term investments The carrying amounts of cash and due from banks, federal funds sold and resell agreements are reasonable estimates of their fair values.

Securities held to maturity Fair value of held-to-maturity securities are estimated by discounting the future cash flows using current market rates.

Other securities Amount consists of FRB and FHLB stock held by the Company, PCM equity-method investments, and other miscellaneous investments. The fair value of FRB and FHLB 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 or FHLB. The fair value of PCM 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 investment(s).

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.

Demand and savings deposits The fair value of demand deposits and savings accounts is the amount payable on demand at September 30, 2015 and 2014.

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.

Other borrowings The carrying amounts of federal funds purchased, repurchase agreements and other short-term debt are reasonable estimates of their fair value because of the short-term nature of their maturities.

Long-term debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

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, 2015. 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 achieve our vision to deliver the unparalleled customer experience, all while maintaining a focus to improve net income and strengthen the balance sheet.

The first strategic objective is to expand the Company’s fee-based businesses. As the industry continues to experience economic uncertainty, the Company has continued to emphasize its fee-based operations to diversify its sources of revenue. With diverse sources of revenues, the Company’s exposure to sustained low interest rates is reduced. During the third quarter of 2015, noninterest income decreased $17.4 million, or 13.7 percent, compared to the same period of 2014. This change is discussed in greater detail below under Noninterest Income. The Company continues to emphasize its asset management, brokerage, bankcard services, healthcare services, and treasury management businesses. At September 30, 2015, noninterest income represented 49.8 percent of total revenues, compared to 59.1 percent at September 30, 2014.

The second strategic objective is a focus on net interest income through loan and deposit growth. During the third quarter of 2015, continued progress on this strategy was illustrated by an increase in net interest income of $22.4 million, or 25.6 percent, from the previous year. The Company has continued to show increased net interest income in a historically low rate environment through the effects of increased volume of average earning assets and a low cost of funds in its balance sheet. On May 31, 2015 the merger with Marquette was completed adding earning assets with an acquired value of $1.2 billion to the Company’s balance sheet. Average earning assets increased by $2.3 billion, or 15.5 percent from September 30, 2014. The funding for these assets was driven primarily by a 16.6 percent increase in average interest-bearing liabilities. Average loan balances increased $1.9 billion, or 27.7 percent compared to the same period in 2014. Net interest margin, on a tax-equivalent basis, increased 20 basis points compared to the same period in 2014.

The third strategic objective is a focus on improving operating efficiencies. Over the past quarter, an in-depth review was completed of the organization to identify efficiencies. This company-wide initiative has been designed to simplify our organizational and reporting structures, streamline back office functions and take advantage of synergies among various platforms and distribution networks. The Company has identified a total of $32.9 million in annualized savings to be executed over the coming quarters as a result of employee position eliminations and business process improvements. These savings are discussed further in the Company’s Current Report on Form 8-K filed October 27, 2015. This total does not include the additional cost savings we expect to recognize related to the Marquette integration, or any ongoing efficiencies identified through our normal course of business. The Company continues to invest in technological advances that will help management drive operating efficiencies in the future through improved data analysis and automation. The Company continues to evaluate core systems and will invest in enhancements that will yield operating efficiencies.

The fourth strategic objective 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, 2015, the Company had $1.9 billion in total shareholders’ equity. This is an increase of $285.5 million, or 17.7 percent, compared to total shareholders’ equity at September 30, 2014. This increase is primarily attributable to the common stock issuance associated with the acquisition of Marquette of $179.7 million at May 31, 2015. At September 30, 2015, the Company had a total risk-based capital ratio of 13.50 percent, which is higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 119,690 shares at an average price of $51.57 per share during the first nine months of 2015.

Earnings Summary

The following is a summary regarding the Company’s earnings for the third quarter of 2015. The changes identified in the summary are explained in greater detail below. The Company recorded consolidated net income of $22.5 million for the three-month period ended September 30, 2015, compared to $35.6 million for the same period a year earlier. This represents a 37.0 percent decrease over the three-month period ended September 30, 2014.

 

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Basic earnings per share for the third quarter of 2015 were $0.46 per share ($0.46 per share fully-diluted) compared to $0.79 per share ($0.78 per share fully-diluted) for the third quarter of 2014. Return on average assets and return on average common shareholders’ equity for the three-month period ended September 30, 2015 were 0.49 and 4.72 percent, respectively, compared to 0.90 and 8.77 percent for the three-month period ended September 30, 2014.

The Company recorded consolidated net income of $86.4 million for the nine-month period ended September 30, 2015, compared to $93.7 million for the same period a year earlier. This represents a 7.8 percent decrease over the nine-month period ended September 30, 2014. Basic earnings per share for the nine-month period ended September 30, 2015 were $1.85 per share ($1.84 per share fully-diluted) compared to $2.09 per share ($2.06 per share fully-diluted) for the same period in 2014. Return on average assets and return on average common shareholders’ equity for the nine-month period ended September 30, 2015 were 0.66 and 6.53 percent, respectively, compared to 0.79 and 7.92 percent for the same period in 2014.

Net interest income for the three and nine-month periods ended September 30, 2015 increased $22.4 million, or 25.6 percent, and $38.5 million, or 14.8 percent, respectively, compared to the same periods in 2014. For the three-month period ended September 30, 2015, average earning assets increased by $2.3 billion, or 15.5 percent, and for the nine-month period ended September 30, 2015, they increased by $1.4 billion, or 9.1 percent, compared to the same periods in 2014. Net interest margin, on a tax-equivalent basis, increased to 2.73 percent and 2.60 percent for the three and nine-month periods ended September 30, 2015, compared to 2.53 percent and 2.48 percent for the same periods in 2014. The Marquette acquisition added earning assets with an acquired value of $1.2 billion primarily from loan balances with an acquired value of $980.4 million at May 31, 2015. Marquette also added interest-bearing liabilities with an acquired value of $910.8 million primarily from interest-bearing deposits of $708.7 million at May 31, 2015.

The provision for loan losses decreased $2.0 million for the three-month period ended September 30, 2015, and $3.5 million for the nine-month period ended September 30, 2015, compared to the same periods in 2014. This decrease is 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 to 0.86 percent as of September 30, 2015. As noted above, the Company added loans with an acquired value of $980.4 million with the acquisition of Marquette. 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, 2014.

Noninterest income decreased by $17.4 million, or 13.7 percent, for the three-month period ended September 30, 2015, and decreased by $29.6 million, or 7.7 percent, for the nine-month period ended September 30, 2015, compared to the same periods one year ago. These changes are discussed in greater detail below under Noninterest Income. Noninterest expense increased by $24.1 million, or 15.0 percent, for the three-month period ended September 30, 2015, and increased by $22.4 million, or 4.5 percent, for the nine-month period ended September 30, 2015, compared to the same periods in 2014. These changes 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. As noted above, the impacts of the Marquette acquisition are included in these results. For the three-month period ended September 30, 2015, average earning assets increased by $2.3 billion, or 15.5 percent, and for the nine-month period ended September 30, 2015, they increased by $1.4 billion, or 9.1 percent, compared to the same periods in 2014. Net interest margin, on a tax-equivalent basis, increased to 2.73 percent and 2.60 percent for the three and nine-months periods ended September 30, 2015, compared to 2.53 percent and 2.48 percent for the same periods in 2014.

Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. As illustrated in this table, net interest spread and margin for the three months ended September 30, 2015 increased by 18 and 20 basis points, respectively, compared to the same period in 2014. Net interest spread and

 

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margin for the nine months ended September 30, 2015 both increased by 12 basis points compared to the same period in 2014. These results are primarily due to a favorable volume variance on loans coupled with a small favorable rate variance. The combined impact of these variances has led to an increase in interest income and an increase in interest expense, or an increase in the Company’s net interest income as compared to results for the same periods in 2014. 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 2.71 percent for the three-month period ended September 30, 2015 and 2.47 percent for the same period in 2014. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.57 percent for the nine-month period ended September 30, 2015 and 2.43 percent for the same period in 2014.

 

     Three Months Ended September 30,  
     2015     2014  
     Average      Average     Average      Average  
     Balance      Yield/Rate     Balance      Yield/Rate  

Assets

          

Loans, net of unearned interest

   $ 8,933,775         3.76   $ 6,996,363         3.50

Securities:

          

Taxable

     4,750,122         1.54        4,864,337         1.54   

Tax-exempt

     2,557,629         2.70        2,128,281         2.80   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

     7,307,751         1.95        6,992,618         1.92   

Federal funds and resell agreements

     83,048         0.84        61,161         0.56   

Interest-bearing due from banks

     481,575         0.39        501,157         0.34   

Other earning assets

     36,171         1.04        24,550         0.95   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total earning assets

     16,842,320         2.86        14,575,849         2.62   

Allowance for loan losses

     (78,419        (77,347   

Other assets

     1,356,548           1,139,820      
  

 

 

      

 

 

    

Total assets

   $ 18,120,449         $ 15,638,322      
  

 

 

      

 

 

    

Liabilities and Shareholders’ Equity

          

Interest-bearing deposits

   $ 8,532,814         0.18   $ 7,444,093         0.16

Federal funds and repurchase agreements

     1,634,394         0.10        1,347,665         0.11   

Borrowed funds

     88,468         4.68        5,728         (5.68
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     10,255,676         0.21        8,797,486         0.15   

Noninterest-bearing demand deposits

     5,800,870           5,060,662      

Other liabilities

     176,040           167,704      

Shareholders’ equity

     1,887,863           1,612,470      
  

 

 

      

 

 

    

Total liabilities and shareholders’ equity

   $ 18,120,449         $ 15,638,322      
  

 

 

      

 

 

    

Net interest spread

        2.65        2.47

Net interest margin

        2.73           2.53   

 

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     Nine Months Ended September 30,  
     2015     2014  
     Average      Average     Average      Average  
     Balance      Yield/Rate     Balance      Yield/Rate  

Assets

          

Loans, net of unearned interest

   $ 8,163,984         3.61   $ 6,858,874         3.53

Securities:

          

Taxable

     4,864,016         1.55        4,862,439         1.56   

Tax-exempt

     2,407,653         2.72        2,114,251         2.87   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

     7,271,669         1.94        6,976,690         1.96   

Federal funds and resell agreements

     62,326         0.81        40,461         0.55   

Interest-bearing due from banks

     665,667         0.35        934,532         0.29   

Other earning assets

     34,507         1.51        33,257         1.46   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total earning assets

     16,198,153         2.71        14,843,814         2.57   

Allowance for loan losses

     (77,560        (76,100   

Other assets

     1,339,262           1,153,074      
  

 

 

      

 

 

    

Total assets

   $ 17,459,855         $ 15,920,788      
  

 

 

      

 

 

    

Liabilities and Shareholders’ Equity

          

Interest-bearing deposits

   $ 8,023,331         0.17   $ 7,511,115         0.16

Federal funds and repurchase agreements

     1,686,766         0.11        1,534,966         0.11   

Borrowed funds

     49,169         4.43        5,735         1.24   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     9,759,266         0.18        9,051,816         0.16   

Noninterest-bearing demand deposits

     5,655,878           5,126,660      

Other liabilities

     274,845           160,140      

Shareholders’ equity

     1,769,866           1,582,172      
  

 

 

      

 

 

    

Total liabilities and shareholders’ equity

   $ 17,459,855         $ 15,920,788      
  

 

 

      

 

 

    

Net interest spread

        2.53        2.41

Net interest margin

        2.60           2.48   

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 $808.3 million for the three-month period and $646.9 million for the nine-month period ended September 30, 2015 compared to the same periods in 2014, the benefit from interest free funds was relatively 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     Nine Months Ended  
     September 30, 2015 and 2014     September 30, 2015 and 2014  
     Volume     Rate     Total     Volume     Rate     Total  

Change in interest earned on:

            

Loans

   $ 18,365      $ 4,685      $ 23,050      $ 35,221      $ 4,248      $ 39,469   

Securities:

            

Taxable

     (445     59        (386     18        (415     (397

Tax-exempt

     2,200        (625     1,575        5,040        (2,648     2,392   

Federal funds sold and resell agreements

     46        42        88        132        79        211   

Interest-bearing due from banks

     (19     68        49        (711     457        (254

Trading

     31        5        36        (4     (4     (8
  

 

 

   

 

 

   

 

 

   

 

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