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 June 30, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-4887
UMB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Missouri | 43-0903811 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
1010 Grand Boulevard, Kansas City, Missouri | 64106 | |
(Address of principal executive offices) | (ZIP Code) |
(Registrants telephone number, including area code): (816) 860-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
As of July 25, 2014, UMB Financial Corporation had 45,499,079 shares of common stock outstanding.
FORM 10-Q
INDEX
3 | ||||||
ITEM 1. |
3 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
36 | ||||
ITEM 3. |
55 | |||||
ITEM 4. |
59 | |||||
60 | ||||||
ITEM 1. |
60 | |||||
ITEM 1A. |
60 | |||||
ITEM 2. |
60 | |||||
ITEM 3. |
60 | |||||
ITEM 4. |
60 | |||||
ITEM 5. |
61 | |||||
ITEM 6. |
61 | |||||
62 | ||||||
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT |
64 | |||||
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT |
65 | |||||
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |
66 | |||||
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |
67 |
2
PART I FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands, except share and per share data)
June 30, 2014 |
December 31, 2013 |
|||||||
ASSETS |
||||||||
Loans: |
$ | 6,920,683 | $ | 6,520,512 | ||||
Allowance for loan losses |
(76,802 | ) | (74,751 | ) | ||||
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|
|
|
|||||
Net loans |
6,843,881 | 6,445,761 | ||||||
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|
|
|
|||||
Loans held for sale |
3,156 | 1,357 | ||||||
Securities: |
||||||||
Available for sale |
6,700,623 | 6,762,411 | ||||||
Held to maturity (market value of $269,691 and $231,510, respectively) |
238,799 | 209,770 | ||||||
Trading |
26,484 | 28,464 | ||||||
Federal Reserve Bank stock and other |
67,527 | 50,482 | ||||||
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|
|
|
|||||
Total investment securities |
7,033,433 | 7,051,127 | ||||||
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|
|
|
|||||
Federal funds sold and securities purchased under agreements to resell |
82,652 | 87,018 | ||||||
Interest-bearing due from banks |
255,453 | 2,093,467 | ||||||
Cash and due from banks |
639,878 | 521,001 | ||||||
Bank premises and equipment, net |
250,655 | 249,689 | ||||||
Accrued income |
73,805 | 78,216 | ||||||
Goodwill |
209,758 | 209,758 | ||||||
Other intangibles |
49,888 | 55,585 | ||||||
Other assets |
120,131 | 118,873 | ||||||
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Total assets |
$ | 15,562,690 | $ | 16,911,852 | ||||
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|
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LIABILITIES |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 5,399,733 | $ | 5,189,998 | ||||
Interest-bearing demand and savings |
5,754,573 | 7,001,126 | ||||||
Time deposits under $100,000 |
442,361 | 491,792 | ||||||
Time deposits of $100,000 or more |
577,622 | 957,850 | ||||||
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|
|
|
|||||
Total deposits |
12,174,289 | 13,640,766 | ||||||
Federal funds purchased and repurchase agreements |
1,607,294 | 1,583,218 | ||||||
Short-term debt |
| 107 | ||||||
Long-term debt |
5,745 | 5,055 | ||||||
Accrued expenses and taxes |
131,996 | 153,450 | ||||||
Other liabilities |
42,024 | 23,191 | ||||||
|
|
|
|
|||||
Total liabilities |
13,961,348 | 15,405,787 | ||||||
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|
|
|||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 45,475,197 and 45,221,237 shares outstanding, respectively |
55,057 | 55,057 | ||||||
Capital surplus |
887,086 | 882,407 | ||||||
Retained earnings |
922,268 | 884,630 | ||||||
Accumulated other comprehensive income (loss) |
16,901 | (32,640 | ) | |||||
Treasury stock, 9,581,533 and 9,835,493 shares, at cost, respectively |
(279,970 | ) | (283,389 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
1,601,342 | 1,506,065 | ||||||
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|
|
|||||
Total liabilities and shareholders equity |
$ | 15,562,690 | $ | 16,911,852 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands, except share and per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Loans |
$ | 60,309 | $ | 56,615 | $ | 119,209 | $ | 111,335 | ||||||||
Securities: |
||||||||||||||||
Taxable interest |
19,021 | 18,841 | 37,982 | 37,305 | ||||||||||||
Tax-exempt interest |
9,798 | 10,118 | 19,705 | 19,877 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities income |
28,819 | 28,959 | 57,687 | 57,182 | ||||||||||||
Federal funds and resell agreements |
46 | 40 | 79 | 64 | ||||||||||||
Interest-bearing due from banks |
466 | 330 | 1,589 | 1,000 | ||||||||||||
Trading securities |
149 | 268 | 272 | 533 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest income |
89,789 | 86,212 | 178,836 | 170,114 | ||||||||||||
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INTEREST EXPENSE |
||||||||||||||||
Deposits |
3,092 | 3,333 | 6,151 | 7,125 | ||||||||||||
Federal funds and repurchase agreements |
454 | 491 | 935 | 1,058 | ||||||||||||
Other |
73 | 61 | 135 | 121 | ||||||||||||
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|||||||||
Total interest expense |
3,619 | 3,885 | 7,221 | 8,304 | ||||||||||||
|
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|
|||||||||
Net interest income |
86,170 | 82,327 | 171,615 | 161,810 | ||||||||||||
Provision for loan losses |
5,000 | 5,000 | 9,500 | 7,000 | ||||||||||||
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|||||||||
Net interest income after provision for loan losses |
81,170 | 77,327 | 162,115 | 154,810 | ||||||||||||
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|||||||||
NONINTEREST INCOME |
||||||||||||||||
Trust and securities processing |
73,357 | 63,486 | 144,920 | 125,798 | ||||||||||||
Trading and investment banking |
6,409 | 5,423 | 10,732 | 12,532 | ||||||||||||
Service charges on deposits |
20,627 | 20,882 | 42,185 | 42,405 | ||||||||||||
Insurance fees and commissions |
732 | 1,236 | 1,335 | 2,198 | ||||||||||||
Brokerage fees |
3,075 | 2,886 | 4,890 | 5,832 | ||||||||||||
Bankcard fees |
17,185 | 16,032 | 32,808 | 32,470 | ||||||||||||
Gain on sales of securities available for sale, net |
2,569 | 1,519 | 4,039 | 7,412 | ||||||||||||
Equity earnings on alternative investments |
3,462 | | 5,992 | | ||||||||||||
Other |
6,585 | 2,121 | 10,064 | 5,954 | ||||||||||||
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|
|||||||||
Total noninterest income |
134,001 | 113,585 | 256,965 | 234,601 | ||||||||||||
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|
|||||||||
NONINTEREST EXPENSE |
||||||||||||||||
Salaries and employee benefits |
89,532 | 83,566 | 178,413 | 167,268 | ||||||||||||
Occupancy, net |
9,705 | 9,273 | 19,410 | 19,160 | ||||||||||||
Equipment |
12,920 | 11,873 | 25,583 | 23,807 | ||||||||||||
Supplies and services |
5,554 | 5,362 | 10,191 | 9,849 | ||||||||||||
Marketing and business development |
6,307 | 5,705 | 10,909 | 9,977 | ||||||||||||
Processing fees |
14,817 | 14,293 | 28,468 | 28,383 | ||||||||||||
Legal and consulting |
4,632 | 4,844 | 8,004 | 8,445 | ||||||||||||
Bankcard |
4,997 | 4,709 | 8,685 | 9,257 | ||||||||||||
Amortization of intangible assets |
3,074 | 3,354 | 6,176 | 6,809 | ||||||||||||
Regulatory fees |
2,709 | 2,484 | 5,225 | 4,395 | ||||||||||||
Contingency reserve |
5,272 | | 20,272 | | ||||||||||||
Other |
6,992 | 4,848 | 17,416 | 13,339 | ||||||||||||
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Total noninterest expense |
166,511 | 150,311 | 338,752 | 300,689 | ||||||||||||
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|||||||||
Income before income taxes |
48,660 | 40,601 | 80,328 | 88,722 | ||||||||||||
Income tax provision |
13,988 | 10,672 | 22,243 | 23,852 | ||||||||||||
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|||||||||
NET INCOME |
$ | 34,672 | $ | 29,929 | $ | 58,085 | $ | 64,870 | ||||||||
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PER SHARE DATA |
||||||||||||||||
Net income - basic |
$ | 0.77 | $ | 0.75 | $ | 1.30 | $ | 1.62 | ||||||||
Net income - diluted |
0.76 | 0.74 | 1.28 | 1.61 | ||||||||||||
Dividends |
0.225 | 0.215 | 0.450 | 0.430 | ||||||||||||
Weighted average shares outstanding |
44,823,370 | 39,966,869 | 44,782,944 | 39,924,423 |
See Notes to Consolidated Financial Statements.
4
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(unaudited, dollars in thousands)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net Income |
$ | 34,672 | $ | 29,929 | $ | 58,085 | $ | 64,870 | ||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Unrealized gains (losses) on securities: |
||||||||||||||||
Change in unrealized holding gains (losses), net |
50,910 | (136,367 | ) | 83,369 | (163,415 | ) | ||||||||||
Less: Reclassifications adjustment for gains included in net income |
(2,569 | ) | (1,519 | ) | (4,039 | ) | (7,412 | ) | ||||||||
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|
|||||||||
Change in unrealized gains (losses) on securities during the period |
48,341 | (137,886 | ) | 79,330 | (170,827 | ) | ||||||||||
Income tax (expense) benefit |
(18,143 | ) | 52,087 | (29,789 | ) | 63,012 | ||||||||||
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|
|||||||||
Other comprehensive income (loss) |
30,198 | (85,799 | ) | 49,541 | (107,815 | ) | ||||||||||
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Comprehensive income (loss) |
$ | 64,870 | (55,870 | ) | $ | 107,626 | (42,945 | ) | ||||||||
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|
See Notes to Consolidated Financial Statements.
5
STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS EQUITY
(unaudited, dollars in thousands, except per share data)
Common Stock |
Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive (Loss) Income |
Treasury Stock |
Total | |||||||||||||||||||
Balance - January 1, 2013 |
$ | 55,057 | $ | 732,069 | $ | 787,015 | $ | 85,588 | $ | (380,384 | ) | $ | 1,279,345 | |||||||||||
Total comprehensive income (loss) |
64,870 | (107,815 | ) | (42,945 | ) | |||||||||||||||||||
Cash dividends ($0.43 per share) |
| | (17,440 | ) | | | (17,440 | ) | ||||||||||||||||
Purchase of treasury stock |
| | | | (1,750 | ) | (1,750 | ) | ||||||||||||||||
Issuance of equity awards |
| (2,466 | ) | | | 2,916 | 450 | |||||||||||||||||
Recognition of equity based compensation |
| 4,096 | | | | 4,096 | ||||||||||||||||||
Net tax benefit related to equity compensation plans |
| 503 | | | | 503 | ||||||||||||||||||
Sale of treasury stock |
| 198 | | | 104 | 302 | ||||||||||||||||||
Exercise of stock options |
| 2,056 | | | 1,855 | 3,911 | ||||||||||||||||||
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Balance June 30, 2013 |
$ | 55,057 | $ | 736,456 | $ | 834,445 | $ | (22,227 | ) | $ | (377,259 | ) | $ | 1,226,472 | ||||||||||
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|||||||||||||
Balance - January 1, 2014 |
$ | 55,057 | $ | 882,407 | $ | 884,630 | $ | (32,640 | ) | $ | (283,389 | ) | $ | 1,506,065 | ||||||||||
Total comprehensive income |
58,085 | 49,541 | 107,626 | |||||||||||||||||||||
Cash dividends ($0.45 per share) |
| | (20,447 | ) | | | (20,447 | ) | ||||||||||||||||
Purchase of treasury stock |
| | | | (3,165 | ) | (3,165 | ) | ||||||||||||||||
Issuance of equity awards |
| (3,395 | ) | | | 3,865 | 470 | |||||||||||||||||
Recognition of equity based compensation |
| 4,733 | | | | 4,733 | ||||||||||||||||||
Net tax benefit related to equity compensation plans |
| 1,202 | | | | 1,202 | ||||||||||||||||||
Sale of treasury stock |
| 300 | | | 159 | 459 | ||||||||||||||||||
Exercise of stock options |
| 1,839 | | | 2,560 | 4,399 | ||||||||||||||||||
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|||||||||||||
Balance June 30, 2014 |
$ | 55,057 | $ | 887,086 | $ | 922,268 | $ | 16,901 | $ | (279,970 | ) | $ | 1,601,342 | |||||||||||
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See Notes to Consolidated Financial Statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
Six Months Ended | ||||||||
June 30, | ||||||||
2014 | 2013 | |||||||
Operating Activities |
||||||||
Net Income |
$ | 58,085 | $ | 64,870 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Provision for loan losses |
9,500 | 7,000 | ||||||
Depreciation and amortization |
22,654 | 22,004 | ||||||
Deferred income tax benefit |
(4,361 | ) | (2,803 | ) | ||||
Net (increase) decrease in trading securities |
(4,012 | ) | 7,768 | |||||
Gains on sales of securities available for sale, net |
(4,039 | ) | (7,412 | ) | ||||
Gains on sales of assets |
(3,234 | ) | (1,008 | ) | ||||
Amortization of securities premiums, net of discount accretion |
25,889 | 27,044 | ||||||
Originations of loans held for sale |
(32,342 | ) | (77,333 | ) | ||||
Net gains on sales of loans held for sale |
(495 | ) | (435 | ) | ||||
Proceeds from sales of loans held for sale |
31,038 | 74,952 | ||||||
Issuance of equity awards |
470 | 450 | ||||||
Equity based compensation |
4,733 | 4,096 | ||||||
Advance payment on contingency reserve |
6,000 | | ||||||
Changes in: |
||||||||
Accrued income |
4,411 | (2,068 | ) | |||||
Accrued expenses and taxes |
(9,043 | ) | 17,435 | |||||
Other assets and liabilities, net |
(14,676 | ) | (12,638 | ) | ||||
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|
|||||
Net cash provided by operating activities |
90,578 | 121,922 | ||||||
|
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|
|||||
Investing Activities |
||||||||
Proceeds from maturities of securities held to maturity |
7,761 | 10,132 | ||||||
Proceeds from sales of securities available for sale |
409,804 | 609,475 | ||||||
Proceeds from maturities of securities available for sale |
791,895 | 897,664 | ||||||
Purchases of securities held to maturity |
(48,830 | ) | (55,735 | ) | ||||
Purchases of securities available for sale |
(1,079,530 | ) | (1,712,362 | ) | ||||
Net increase in loans |
(409,806 | ) | (658,751 | ) | ||||
Net decrease in fed funds sold and resell agreements |
4,366 | 22,895 | ||||||
Net increase in interest bearing balances due from other financial institutions |
(79,772 | ) | (1,907 | ) | ||||
Purchases of bank premises and equipment |
(19,261 | ) | (17,389 | ) | ||||
Net cash (paid) received for acquisitions |
(18,111 | ) | 692 | |||||
Proceeds from sales of bank premises and equipment |
4,747 | 810 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(436,737 | ) | (904,476 | ) | ||||
|
|
|
|
|||||
Financing Activities |
||||||||
Net (decrease) increase in demand and savings deposits |
(1,024,246 | ) | 318,000 | |||||
Net decrease in time deposits |
(421,900 | ) | (241,615 | ) | ||||
Net increase in fed funds purchased and repurchase agreements |
24,076 | 370,709 | ||||||
Net decrease in short-term debt |
(107 | ) | (200 | ) | ||||
Proceeds from long-term debt |
1,820 | | ||||||
Repayment of long-term debt |
(1,130 | ) | (1,102 | ) | ||||
Payment of contingent consideration on acquisitions |
(13,725 | ) | (16,171 | ) | ||||
Cash dividends paid |
(20,433 | ) | (17,255 | ) | ||||
Net tax benefit related to equity compensation plans |
1,202 | 503 | ||||||
Proceeds from exercise of stock options and sales of treasury shares |
4,858 | 4,213 | ||||||
Purchases of treasury stock |
(3,165 | ) | (1,750 | ) | ||||
|
|
|
|
|||||
Net cash (used in) provided by financing activities |
(1,452,750 | ) | 415,332 | |||||
|
|
|
|
|||||
Decrease in cash and due from banks |
(1,798,909 | ) | (367,222 | ) | ||||
Cash and due from banks at beginning of period |
2,582,428 | 1,366,394 | ||||||
|
|
|
|
|||||
Cash and due from banks at end of period |
$ | 783,519 | $ | 999,172 | ||||
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|
|||||
Supplemental Disclosures: |
||||||||
Income taxes paid |
$ | 26,118 | $ | 20,783 | ||||
Total interest paid |
$ | 7,427 | $ | 8,704 |
See Notes to Consolidated Financial Statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
1. | Financial Statement Presentation |
The consolidated financial statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after elimination of all intercompany transactions. In the opinion of management of the Company, all adjustments, which were of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations, have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year. The financial statements should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations within this Form 10-Q filing and in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
2. | Summary of Significant Accounting Policies |
The Company is a financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices in the states of Missouri, Kansas, Colorado, Illinois, Oklahoma, Texas, Arizona, Nebraska, Pennsylvania, South Dakota, Indiana, Utah, and Wisconsin. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation is listed in the Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Cash and cash equivalents
Amounts due from the Federal Reserve Bank, which are interest-bearing for all periods presented, and amounts due from certificates of deposits held at other financial institutions are included in interest-bearing due from banks. The amounts due from certificates of deposit totaled $107.4 million and $23.8 million at June 30, 2014 and June 30, 2013, respectively.
This table provides a summary of cash and cash equivalents as presented on the Consolidated Statement of Cash Flows as of June 30, 2014 and June 30, 2013 (in thousands):
June 30, | ||||||||
2014 | 2013 | |||||||
Due from the Federal Reserve |
$ | 143,641 | $ | 583,683 | ||||
Cash and due from banks |
639,878 | 415,489 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 783,519 | $ | 999,172 | ||||
|
|
|
|
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 597,778 and 521,165 shares issuable upon the exercise of options granted by the Company and outstanding at June 30, 2014 and 2013, respectively. Diluted year-to-date income per share includes the dilutive effect of 626,345 and 473,614 shares issuable upon the exercise of stock options granted by the Company and outstanding at June 30, 2014 and 2013, respectively.
Options issued under employee benefit plans to purchase 253,149 shares of common stock were outstanding at June 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. Options issued under employee benefit plans to purchase 276,931 shares of common stock were outstanding at June 30, 2013, but were not included in the computation of quarter-to-date and year-to-date diluted EPS because the options were anti-dilutive.
8
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
3. | New Accounting Pronouncements |
Investment Companies In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, Amendments to the Scope, Measurement, and Disclosure Requirements for investment companies. The amendments changed the assessment of whether an entity is an investment company by requiring an entity to possess certain fundamental characteristics, while allowing judgment in assessing other typical characteristics. The ASU was effective January 1, 2014, and the Company did not change the status of any subsidiary, or the accounting applied to a subsidiary, under the new guidelines.
Accounting for Investments in Qualified Affordable Housing Projects In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Regardless of whether the reporting entity chooses to elect the proportional amortization method, this ASU introduces new recurring disclosures about all investments in qualified affordable housing projects. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this accounting pronouncement will not have a significant impact on the Companys financial statements or financial statement disclosures.
Reclassification of Residential Real Estate Loans In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendment is intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loans such that the loan receivable should be derecognized and the real stated property recognized. The amendments in this update are effective for interim and annual periods beginning after December 15, 2014. The adoption of this accounting pronouncement will not have a significant impact on the Companys financial statements.
Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The issuance is part of a joint effort by the FASB and the International Accounting Standards Board (IASB) to enhance financial reporting by creating common revenue recognition guidance for U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The amendments in this update are effective for interim and annual periods beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
Repurchase-to-Maturity Transactions In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchased Financings, and Disclosures. The amendment changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with accounting for other repurchase agreements. Additionally, the amendment requires new disclosures on transfers accounted for as sales in transactions that are economically similar to repurchase agreements and requires increased transparency on collateral pledged in secured borrowings. The amendments in this update are effective for interim and annual periods beginning after December 15, 2014. Early application is not permitted. The Company is currently evaluating the effect that ASU 2014-11 will have on its consolidated financial statements and related financial statement disclosures.
Stock Compensation In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target could be Achieved after the Requisite Service Period. The amendment is intended to reduce diversity in practice by clarifying that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this update are effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. The adoption of this accounting pronouncement will not have a significant impact on the Companys financial statements.
9
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
4. | Loans and Allowance for Loan Losses |
Loan Origination/Risk Management
The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio. Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions. The Company maintains an independent loan review department that reviews and validates the 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 Companys policies and procedures.
Commercial loans are underwritten after evaluating and understanding the borrowers ability to operate profitably and prudently expand its business. Commercial loans are made based on the identified cash flows of the borrower and on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers. Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans including an analysis of the borrowers cash flow, available business capital, and overall credit-worthiness of the borrower.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires an appraisal of the collateral be made at origination 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 from approved long-term borrowers, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their repayment being sensitive to interest rate changes, governmental regulation of real property, economic conditions, and the availability of long-term financing.
Underwriting standards for residential real estate and home equity loans are based on the borrowers loan-to-value percentage, collection remedies, ability to repay, and overall credit history.
Consumer loans are underwritten based on the borrowers repayment ability. The Company monitors delinquencies on all of its consumer loans and leases and periodically reviews the distribution of FICO scores relative to historical periods to monitor credit risk on its credit card loans. The underwriting and review practices combined with the relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Consumer loans and leases that are 90 days past due or more are considered non-performing.
10
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
This table provides a summary of loan classes and an aging of past due loans at June 30, 2014 and December 31, 2013 (in thousands):
June 30, 2014 | ||||||||||||||||||||||||
30-89 Days Past Due and Accruing |
Greater than 90 Days Past Due and Accruing |
Non- Accrual Loans |
Total Past Due |
Current | Total Loans |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 29,400 | $ | 1,500 | $ | 8,461 | $ | 39,361 | $ | 3,499,888 | $ | 3,539,249 | ||||||||||||
Commercial credit card |
275 | 92 | 20 | 387 | 118,488 | 118,875 | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
1,965 | 128 | 909 | 3,002 | 228,906 | 231,908 | ||||||||||||||||||
Real estate commercial |
5,784 | 388 | 15,922 | 22,094 | 1,707,280 | 1,729,374 | ||||||||||||||||||
Real estate residential |
3,472 | 13 | 742 | 4,227 | 294,823 | 299,050 | ||||||||||||||||||
Real estate HELOC |
921 | | 348 | 1,269 | 597,962 | 599,231 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
2,041 | 2,218 | 669 | 4,928 | 301,122 | 306,050 | ||||||||||||||||||
Consumer other |
8,315 | 183 | 104 | 8,602 | 64,551 | 73,153 | ||||||||||||||||||
Leases |
| | | | 23,793 | 23,793 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 52,173 | $ | 4,522 | $ | 27,175 | $ | 83,870 | $ | 6,836,813 | $ | 6,920,683 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||||||||||
30-89 Days Past Due and Accruing |
Greater than 90 Days Past Due and Accruing |
Non- Accrual Loans |
Total Past Due |
Current | Total Loans |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 2,107 | $ | 135 | $ | 8,042 | $ | 10,284 | $ | 3,291,219 | $ | 3,301,503 | ||||||||||||
Commercial credit card |
362 | 82 | 38 | 482 | 102,788 | 103,270 | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
186 | | 934 | 1,120 | 151,755 | 152,875 | ||||||||||||||||||
Real estate commercial |
3,611 | 344 | 19,213 | 23,168 | 1,678,983 | 1,702,151 | ||||||||||||||||||
Real estate residential |
1,257 | 13 | 868 | 2,138 | 287,218 | 289,356 | ||||||||||||||||||
Real estate HELOC |
880 | 6 | 210 | 1,096 | 565,032 | 566,128 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
3,230 | 2,448 | 1,031 | 6,709 | 311,627 | 318,336 | ||||||||||||||||||
Consumer other |
1,727 | 190 | 370 | 2,287 | 60,625 | 62,912 | ||||||||||||||||||
Leases |
| | | | 23,981 | 23,981 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 13,360 | $ | 3,218 | $ | 30,706 | $ | 47,284 | $ | 6,473,228 | $ | 6,520,512 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company sold $31.0 million and $75.0 million of residential real estate and student loans in the secondary market without recourse during the six-month periods ended June 30, 2014 and June 30, 2013, respectively.
The Company has ceased the recognition of interest on loans with a carrying value of $27.2 million and $30.7 million at June 30, 2014 and December 31, 2013, respectively. Restructured loans totaled $11.6 million and $12.1 million at June 30, 2014 and December 31, 2013, respectively. Loans 90 days past due and still accruing interest amounted to $4.5 million and $3.2 million at June 30, 2014 and December 31, 2013, respectively. There was an insignificant amount of interest recognized on impaired loans during 2014 and 2013.
11
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Companys loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans, net charge-offs, non-performing loans, and general economic conditions.
The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. The loan rankings are summarized into the following categories: Non-watch list, Watch, Special Mention, and Substandard. Any loan not classified in one of the categories described below is considered to be a Non-watch list loan. The loans in any of the three categories below are considered to be a criticized loan. A description of the general characteristics of the loan ranking categories is as follows:
| Watch This rating represents credit exposure that presents higher than average risk and warrants greater than routine attention by Company personnel due to conditions affecting the borrower, the borrowers industry or the economic environment. These conditions have resulted in some degree of uncertainty that results in higher than average credit risk. |
| Special Mention This rating reflects a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institutions credit position at some future date. The rating is not adversely classified and does not expose an institution to sufficient risk to warrant adverse classification. |
| Substandard This rating represents an asset inadequately protected by the financial worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. This category may include loans where the collection of full principal and interest is doubtful or remote. |
All other classes of loans are generally evaluated and monitored based on payment activity. Non-performing loans include restructured loans on non-accrual and all other non-accrual loans.
12
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
This table provides an analysis of the credit risk profile of each loan class at June 30, 2014 and December 31, 2013 (in thousands):
Credit Exposure
Credit Risk Profile by Risk Rating
Commercial | Real estate- construction | |||||||||||||||
June 30, 2014 |
December 31, 2013 |
June 30, 2014 |
December 31, 2013 |
|||||||||||||
Non-watch list |
$ | 3,257,277 | $ | 3,041,224 | $ | 229,401 | $ | 151,359 | ||||||||
Watch |
96,157 | 110,932 | 1,194 | 210 | ||||||||||||
Special Mention |
94,482 | 78,064 | 19 | | ||||||||||||
Substandard |
91,333 | 71,283 | 1,294 | 1,306 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3,539,249 | $ | 3,301,503 | $ | 231,908 | $ | 152,875 | ||||||||
|
|
|
|
|
|
|
|
Real estate - commercial | ||||||||
June 30, 2014 |
December 31, 2013 |
|||||||
Non-watch list |
$ | 1,610,812 | $ | 1,565,894 | ||||
Watch |
43,955 | 76,647 | ||||||
Special Mention |
30,856 | 19,876 | ||||||
Substandard |
43,751 | 39,734 | ||||||
|
|
|
|
|||||
Total |
$ | 1,729,374 | $ | 1,702,151 | ||||
|
|
|
|
Credit Exposure
Credit Risk Profile Based on Payment Activity
Commercial credit card | Real estate- residential | |||||||||||||||
June 30, 2014 |
December 31, 2013 |
June 30, 2014 |
December 31, 2013 |
|||||||||||||
Performing |
$ | 118,855 | $ | 103,232 | $ | 298,308 | $ | 288,488 | ||||||||
Non-performing |
20 | 38 | 742 | 868 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 118,875 | $ | 103,270 | $ | 299,050 | $ | 289,356 | ||||||||
|
|
|
|
|
|
|
|
Real estate - HELOC | Consumer credit card | |||||||||||||||
June 30, 2014 |
December 31, 2013 |
June 30, 2014 |
December 31, 2013 |
|||||||||||||
Performing |
$ | 598,883 | $ | 565,918 | $ | 305,381 | $ | 317,305 | ||||||||
Non-performing |
348 | 210 | 669 | 1,031 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 599,231 | $ | 566,128 | $ | 306,050 | $ | 318,336 | ||||||||
|
|
|
|
|
|
|
|
Consumer - other | Leases | |||||||||||||||
June 30, 2014 |
December 31, 2013 |
June 30, 2014 |
December 31, 2013 |
|||||||||||||
Performing |
$ | 73,049 | $ | 62,542 | $ | 23,793 | $ | 23,981 | ||||||||
Non-performing |
104 | 370 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 73,153 | $ | 62,912 | $ | 23,793 | $ | 23,981 | ||||||||
|
|
|
|
|
|
|
|
13
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents managements judgment of inherent probable losses within the Companys loan portfolio as of the balance sheet date. The allowance is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Accordingly, the methodology is based on historical loss trends. The Companys process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for 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 managements 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 managements judgment, should be charged off. While management utilizes its best judgment and information available, the adequacy of the allowance is dependent upon a variety of factors beyond the Companys control, including, among other things, the performance of the Companys loan portfolio, the economy, changes in interest rates and changes in the regulatory environment.
The Companys allowance for loan losses consists of specific valuation allowances and general valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, general economic conditions and other qualitative risk factors both internal and external to the Company.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of impaired loans. Loans are classified based on an internal risk grading process that evaluates the obligors ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. When a loan is considered impaired, the loan is analyzed to determine the need, if any, to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrowers ability to repay amounts owed, collateral deficiencies, the relative risk ranking of the loan and economic conditions affecting the borrowers industry.
General valuation allowances are calculated based on the historical loss experience of specific types of loans including an evaluation of the time span and volume of the actual charge-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated based on actual charge-off experience. A valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio, time span to charge-off, and the total dollar amount of the loans in the pool. The Companys pools of similar loans include similarly risk-graded groups of commercial loans, commercial real estate loans, commercial credit card, home equity loans, consumer real estate loans and consumer and other loans. The Company also considers a loan migration analysis for criticized loans. This analysis includes an assessment of the probability that a loan will move to a loss position based on its 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.
14
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS
This table provides a rollforward of the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2014 (in thousands):
Three Months Ended June 30, 2014 | ||||||||||||||||||||
Commercial | Real estate | Consumer | Leases | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 48,363 | $ | 16,091 | $ | 10,984 | $ | 76 | $ | 75,514 | ||||||||||
Charge-offs |
(1,476 | ) | (55 | ) | (3,048 | ) | | (4,579 | ) | |||||||||||
Recoveries |
201 | 8 | 658 | | 867 | |||||||||||||||
Provision |
5,345 | (1,827 | ) | 1,480 | 2 | 5,000 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance |
$ | 52,433 | $ | 14,217 | $ | 10,074 | $ | 78 | $ | 76,802 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 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 |
(2,947 | ) | (181 | ) | (6,136 | ) | | (9,264 | ) | |||||||||||
Recoveries |
268 | 17 | 1,530 | | 1,815 | |||||||||||||||
Provision |
6,226 | (961 | ) | 4,233 | 2 | 9,500 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance |
$ | 52,433 | $ | 14,217 | $ | 10,074 | $ | 78 | $ | 76,802 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance: individually evaluated for impairment |
$ | 2,497 | $ | 1,118 | $ | | $ | | $ | 3,615 | ||||||||||
Ending Balance: collectively evaluated for impairment |
49,936 | 13,099 | 10,074 | 78 | 73,187 | |||||||||||||||
Loans: |
||||||||||||||||||||
Ending Balance: loans |
$ | 3,658,124 | $ | 2,859,563 | $ | 379,203 | $ | 23,793 | $ | 6,920,683 | ||||||||||
Ending Balance: individually evaluated for impairment |
14,517 | 12,407 | 1 | | 26,925 | |||||||||||||||
Ending Balance: collectively evaluated for impairment |
3,643,607 | 2,847,156 | 379,202 | 23,793 | 6,893,758 |
15
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
This table provides a rollforward of the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2013 (in thousands):
Three Months Ended June 30, 2013 | ||||||||||||||||||||
Commercial | Real estate | Consumer | Leases | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 43,345 | $ | 14,946 | $ | 11,529 | $ | 61 | $ | 69,881 | ||||||||||
Charge-offs |
(941 | ) | (176 | ) | (2,968 | ) | | (4,085 | ) | |||||||||||
Recoveries |
141 | 7 | 703 | | 851 | |||||||||||||||
Provision |
2,563 | 1,519 | 904 | 14 | 5,000 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance |
$ | 45,108 | $ | 16,296 | $ | 10,168 | $ | 75 | $ | 71,647 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2013 | ||||||||||||||||||||
Commercial | Real estate | Consumer | Leases | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 43,390 | $ | 15,506 | $ | 12,470 | $ | 60 | $ | 71,426 | ||||||||||
Charge-offs |
(2,423 | ) | (371 | ) | (6,139 | ) | | (8,933 | ) | |||||||||||
Recoveries |
515 | 16 | 1,623 | | 2,154 | |||||||||||||||
Provision |
3,626 | 1,145 | 2,214 | 15 | 7,000 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance |
$ | 45,108 | $ | 16,296 | $ | 10,168 | $ | 75 | $ | 71,647 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance: individually evaluated for impairment |
$ | 2,727 | $ | 483 | $ | | $ | | $ | 3,210 | ||||||||||
Ending Balance: collectively evaluated for impairment |
42,381 | 15,813 | 10,168 | 75 | 68,437 | |||||||||||||||
Loans: |
||||||||||||||||||||
Ending Balance: loans |
$ | 3,443,175 | $ | 2,495,294 | $ | 374,202 | $ | 26,250 | $ | 6,338,921 | ||||||||||
Ending Balance: individually evaluated for impairment |
14,326 | 10,465 | 31 | | 24,822 | |||||||||||||||
Ending Balance: collectively evaluated for impairment |
3,428,849 | 2,484,829 | 374,171 | 26,250 | 6,314,099 |
16
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Impaired Loans
This table provides an analysis of impaired loans by class at June 30, 2014 and December 31, 2013 (in thousands):
June 30, 2014 | ||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment with No Allowance |
Recorded Investment with Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 17,703 | $ | 4,740 | $ | 9,777 | $ | 14,517 | $ | 2,497 | $ | 14,624 | ||||||||||||
Commercial credit card |
| | | | | | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
1,399 | 786 | 123 | 909 | 98 | 921 | ||||||||||||||||||
Real estate commercial |
12,772 | 7,138 | 3,384 | 10,522 | 1,020 | 12,223 | ||||||||||||||||||
Real estate residential |
1,151 | 976 | | 976 | | 1,024 | ||||||||||||||||||
Real estate HELOC |
| | | | | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
| | | | | | ||||||||||||||||||
Consumer other |
1 | 1 | | 1 | | 5 | ||||||||||||||||||
Leases |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 33,026 | $ | 13,641 | $ | 13,284 | $ | 26,925 | $ | 3,615 | $ | 28,797 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment with No Allowance |
Recorded Investment with Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 17,227 | $ | 3,228 | $ | 11,407 | $ | 14,635 | $ | 2,882 | $ | 14,791 | ||||||||||||
Commercial credit card |
| | | | | | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
1,408 | 810 | 123 | 933 | | 1,186 | ||||||||||||||||||
Real estate commercial |
14,686 | 5,305 | 8,218 | 13,523 | 94 | 10,506 | ||||||||||||||||||
Real estate residential |
1,317 | 1,087 | | 1,087 | 1,276 | 1,122 | ||||||||||||||||||
Real estate HELOC |
| | | | | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
| | | | | | ||||||||||||||||||
Consumer other |
12 | 11 | | 11 | | 34 | ||||||||||||||||||
Leases |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 34,650 | $ | 10,441 | $ | 19,748 | $ | 30,189 | $ | 4,252 | $ | 27,639 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
17
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Troubled Debt Restructurings
A loan modification is considered a troubled debt restructuring (TDR) when a concession had been granted to a debtor experiencing financial difficulties. The Companys 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 Companys restructured loans are individually evaluated for impairment and evaluated as part of the allowance for loan loss as described above in the Allowance for Loan Losses section of this note.
The Company had $395 thousand in commitments to lend to borrowers with loan modifications classified as TDRs as of June 30, 2014. The Company made no TDRs in the last 12 months that had payment defaults for the three or six-month periods ended June 30, 2014.
This table provides a summary of loans restructured by class during the three and six months ended June 30, 2014 (in thousands):
Three Months Ended June 30, 2014 | Six Months Ended June 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 |
| | | | | | ||||||||||||||||||
Real estate residential |
3 | 210 | 234 | 3 | 210 | 234 | ||||||||||||||||||
Real estate HELOC |
| | | | | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
| | | | | | ||||||||||||||||||
Consumer other |
| | | | | | ||||||||||||||||||
Leases |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
3 | $ | 210 | $ | 234 | 4 | $ | 679 | $ | 703 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
18
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
This table provides a summary of loans restructured by class for the three and six months ended June 30, 2013 (in thousands):
Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 | |||||||||||||||||||||||
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
Troubled Debt Restructurings |
||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
1 | $ | 658 | $ | 596 | 2 | $ | 1,128 | $ | 1,067 | ||||||||||||||
Commercial credit card |
| | | | | | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
| | | | | | ||||||||||||||||||
Real estate commercial |
| | | 1 | 937 | 936 | ||||||||||||||||||
Real estate residential |
1 | 425 | 425 | 1 | 425 | 425 | ||||||||||||||||||
Real estate HELOC |
| | | | | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
| | | | | | ||||||||||||||||||
Consumer other |
| | | | | | ||||||||||||||||||
Leases |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
2 | $ | 1,083 | $ | 1,021 | 4 | $ | 2,490 | $ | 2,428 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
5. | Securities |
Securities Available for Sale
This table provides detailed information about securities available for sale at June 30, 2014 and December 31, 2013 (in thousands):
June 30, 2014 | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. Treasury |
$ | 466,423 | $ | 820 | $ | (568 | ) | $ | 466,675 | |||||||
U.S. Agencies |
968,580 | 1,778 | (992 | ) | 969,366 | |||||||||||
Mortgage-backed |
3,180,331 | 31,755 | (23,881 | ) | 3,188,205 | |||||||||||
State and political subdivisions |
1,924,561 | 27,721 | (8,920 | ) | 1,943,362 | |||||||||||
Corporates |
133,706 | 13 | (704 | ) | 133,015 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,673,601 | $ | 62,087 | $ | (35,065 | ) | $ | 6,700,623 | |||||||
|
|
|
|
|
|
|
|
December 31, 2013 | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
U.S. Treasury |
$ | 110,789 | $ | 284 | $ | (873 | ) | $ | 110,200 | |||||||
U.S. Agencies |
1,258,176 | 2,793 | (3,306 | ) | 1,257,663 | |||||||||||
Mortgage-backed |
2,984,963 | 23,942 | (64,339 | ) | 2,944,566 | |||||||||||
State and political subdivisions |
2,003,509 | 23,493 | (31,756 | ) | 1,995,246 | |||||||||||
Corporates |
457,275 | 902 | (3,441 | ) | 454,736 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,814,712 | $ | 51,414 | $ | (103,715 | ) | $ | 6,762,411 | |||||||
|
|
|
|
|
|
|
|
The following table presents contractual maturity information for securities available for sale at June 30, 2014 (in thousands):
Amortized Cost |
Fair Value |
|||||||
Due in 1 year or less |
$ | 406,525 | $ | 408,703 | ||||
Due after 1 year through 5 years |
2,249,226 | 2,263,974 | ||||||
Due after 5 years through 10 years |
705,537 | 711,189 | ||||||
Due after 10 years |
131,982 | 128,552 | ||||||
|
|
|
|
|||||
Total |
3,493,270 | 3,512,418 | ||||||
Mortgage-backed securities |
3,180,331 | 3,188,205 | ||||||
|
|
|
|
|||||
Total securities available for sale |
$ | 6,673,601 | $ | 6,700,623 | ||||
|
|
|
|
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 six months ended June 30, 2014, proceeds from the sales of securities available for sale were $409.8 million compared to $609.5 million for the same period in 2013. Securities transactions resulted in gross realized gains of $4.1 million and $7.6 million for the six months ended June 30, 2014 and 2013. The gross realized losses for the six months ended June 30, 2014 and 2013 were $11 thousand and $220 thousand, respectively.
Securities available for sale with a market value of $5.0 billion at June 30, 2014, and $5.9 billion at December 31, 2013, were pledged to secure U.S. Government deposits, other public deposits, certain trust deposits as required by law, and other potential borrowings. Of this amount, securities with a market value of $1.4 billion at June 30, 2014 and $1.7 billion at December 31, 2013 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.
20
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
The following table shows the Companys available for sale investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2014 and December 31, 2013 (in thousands):
June 30, 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 |
$ | 157,697 | $ | (128 | ) | $ | 29,524 | $ | (440 | ) | $ | 187,221 | $ | (568 | ) | |||||||||
U.S. Agencies |
249,308 | (242 | ) | 123,824 | (750 | ) | 373,132 | (992 | ) | |||||||||||||||
Mortgage-backed |
859,667 | (14,316 | ) | 482,338 | (9,565 | ) | 1,342,005 | (23,881 | ) | |||||||||||||||
State and political subdivisions |
131,485 | (429 | ) | 375,917 | (8,491 | ) | 507,402 | (8,920 | ) | |||||||||||||||
Corporates |
37,856 | (114 | ) | 86,833 | (590 | ) | 124,689 | (704 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily-impaired debt securities available for sale |
$ | 1,436,013 | $ | (15,229 | ) | $ | 1,098,436 | $ | (19,836 | ) | $ | 2,534,449 | $ | (35,065 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
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 |
$ | 39,822 | $ | (873 | ) | $ | | $ | | $ | 39,822 | $ | (873 | ) | ||||||||||
U.S. Agencies |
675,509 | (3,130 | ) | 9,824 | (176 | ) | 685,333 | (3,306 | ) | |||||||||||||||
Mortgage-backed |
1,945,964 | (60,719 | ) | 89,147 | (3,620 | ) | 2,035,111 | (64,339 | ) | |||||||||||||||
State and political subdivisions |
662,225 | (25,064 | ) | 87,061 | (6,692 | ) | 749,286 | (31,756 | ) | |||||||||||||||
Corporates |
271,834 | (2,458 | ) | 41,522 | (983 | ) | 313,356 | (3,441 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily-impaired debt securities available for sale |
$ | 3,595,354 | $ | (92,244 | ) | $ | 227,554 | $ | (11,471 | ) | $ | 3,822,908 | $ | (103,715 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses in the Companys investments in U.S. treasury obligations, U.S. government agencies, federal agency mortgage-backed securities, municipal securities, and corporates were caused by changes in interest rates. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of fair value. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at June 30, 2014.
Securities Held to Maturity
The table below provides detailed information for securities held to maturity at June 30, 2014 and December 31, 2013 (in thousands):
June 30, 2014 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
State and political subdivisions |
$ | 238,799 | $ | 30,892 | $ | | $ | 269,691 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2013 |
||||||||||||||||
State and political subdivisions |
$ | 209,770 | $ | 21,740 | $ | | $ | 231,510 | ||||||||
|
|
|
|
|
|
|
|
21
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
The following table presents contractual maturity information for securities held to maturity at June 30, 2014 (in thousands):
Amortized Cost |
Fair Value |
|||||||
Due in 1 year or less |
$ | 61 | $ | 69 | ||||
Due after 1 year through 5 years |
28,051 | 31,680 | ||||||
Due after 5 years through 10 years |
97,997 | 110,674 | ||||||
Due after 10 years |
112,690 | 127,268 | ||||||
|
|
|
|
|||||
Total securities held to maturity |
$ | 238,799 | $ | 269,691 | ||||
|
|
|
|
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 six months of 2014 or 2013.
Trading Securities
The net unrealized gains on trading securities at June 30, 2014 and June 30, 2013 were $41 thousand and $788 thousand, respectively, and were included in trading and investment banking income on the consolidated statements of income.
Federal Reserve Bank Stock and Other Securities
The table below provides detailed information for Federal Reserve Bank stock and other securities at June 30, 2014 and December 31, 2013 (in thousands):
June 30, 2014 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Federal Reserve Bank stock |
$ | 16,279 | $ | | $ | | $ | 16,279 | ||||||||
Other securities marketable |
| 20,020 | | 20,020 | ||||||||||||
Other securities non-marketable |
28,638 | 2,590 | | 31,228 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Federal Reserve Bank stock and other |
$ | 44,917 | $ | 22,610 | $ | | $ | 67,527 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2013 |
||||||||||||||||
Federal Reserve Bank stock |
$ | 16,279 | $ | | $ | | $ | 16,279 | ||||||||
Other securities marketable |
20 | 16,612 | | 16,632 | ||||||||||||
Other securities non-marketable |
17,139 | 432 | | 17,571 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Federal Reserve Bank stock and other |
$ | 33,438 | $ | 17,044 | $ | | $ | 50,482 | ||||||||
|
|
|
|
|
|
|
|
Federal Reserve Bank stock is based on the capital structure of the investing bank and is carried at cost. Other marketable and non-marketable securities include Prairie Capital Management alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. The fair value of other marketable securities includes alternative investment securities of $20.0 million at June 30, 2014 and $16.6 million at December 31, 2013. The fair value of other non-marketable securities includes alternative investment securities of $7.2 million at June 30, 2014 and $4.7 million at December 31, 2013. Unrealized gains or losses on alternative investments are recognized in the Equity Earnings on Alternative Investments line of the Companys Consolidated Statements of Income.
22
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
6. | Goodwill and Other Intangibles |
Changes in the carrying amount of goodwill for the periods ended June 30, 2014 and December 31, 2013 by reportable segment are as follows (in thousands):
Bank | Institutional Investment Management |
Asset Servicing |
Total | |||||||||||||
Balances as of January 1, 2013 |
$ | 142,753 | $ | 47,529 | $ | 19,476 | $ | 209,758 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of December 31, 2013 |
$ | 142,753 | $ | 47,529 | $ | 19,476 | $ | 209,758 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of January 1, 2014 |
$ | 142,753 | $ | 47,529 | $ | 19,476 | $ | 209,758 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of June 30, 2014 |
$ | 142,753 | $ | 47,529 | $ | 19,476 | $ | 209,758 | ||||||||
|
|
|
|
|
|
|
|
Following are the finite-lived intangible assets that continue to be subject to amortization as of June 30, 2014 and December 31, 2013 (in thousands):
As of June 30, 2014 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Core deposit intangible assets |
$ | 36,497 | $ | 32,217 | $ | 4,280 | ||||||
Customer relationships |
104,440 | 59,582 | 44,858 | |||||||||
Other intangible assets |
3,247 | 2,497 | 750 | |||||||||
|
|
|
|
|
|
|||||||
Total intangible assets |
$ | 144,184 | $ | 94,296 | $ | 49,888 | ||||||
|
|
|
|
|
|
As of December 31, 2013 | ||||||||||||
Core deposit intangible assets |
$ | 36,497 | $ | 31,674 | $ | 4,823 | ||||||
Customer relationships |
103,960 | 54,062 | 49,898 | |||||||||
Other intangible assets |
3,247 | 2,383 | 864 | |||||||||
|
|
|
|
|
|
|||||||
Total intangible assets |
$ | 143,704 | $ | 88,119 | $ | 55,585 | ||||||
|
|
|
|
|
|
Following is the aggregate amortization expense recognized in each period (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Aggregate amortization expense |
$ | 3,074 | $ | 3,354 | $ | 6,176 | $ | 6,809 | ||||||||
|
|
|
|
|
|
|
|
Estimated amortization expense of intangible assets on future years (in thousands):
For the six months ending December 31, 2014 |
$ | 6,009 | ||
For the year ending December 31, 2015 |
9,619 | |||
For the year ending December 31, 2016 |
8,410 | |||
For the year ending December 31, 2017 |
7,167 | |||
For the year ending December 31, 2018 |
4,976 |
23
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
7. | Commitments, Contingencies and Guarantees |
In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, futures contracts, forward foreign exchange contracts and spot foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. Many of the commitments expire without being drawn upon, therefore, the total amount of these commitments does not necessarily represent the future cash requirements of the Company.
The Companys exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The following table summarizes the Companys off-balance sheet financial instruments.
Contract or Notional Amount (in thousands):
June 30, 2014 |
December 31, 2013 |
|||||||
Commitments to extend credit for loans (excluding credit card loans) |
$ | 2,736,970 | $ | 2,690,268 | ||||
Commitments to extend credit under credit card loans |
2,305,790 | 2,215,278 | ||||||
Commercial letters of credit |
1,842 | 5,949 | ||||||
Standby letters of credit |
385,704 | 356,054 | ||||||
Forward foreign exchange contracts |
29,645 | 21,525 | ||||||
Spot foreign exchange contracts |
1,010 | 8,001 |
On March 28, 2014, the Company received objections to its calculation of an earn-out amount owed to the sellers of Prairie Capital Management, LLC (PCM) and a related incentive bonus calculation. The sellers, which include current employees of PCM, claimed that certain unrealized gains on equity method investments managed by PCM should have been included in the Companys calculations, which are governed by the asset purchase agreement. For the three month period ended March 31, 2014, the Company had accrued $15 million of contingency reserve expense related to this dispute. On June 30, 2014, the Company entered into a settlement agreement ,which amends and supersedes certain portions of the original PCM asset purchase agreement, dated June 27, 2010, that relate to the subject of the objections raised by the sellers of PCM. During the three-month period ended June 30, 2014, an additional $5.3 million of contingency reserve expense was recorded due to increases in value of the equity method investments upon which the settlement is based. Cash payments totaling $6.0 million were made on June 30, 2014 for this liability, resulting in a remaining liability as of June 30, 2014, of $14.3M. As part of the agreement, final settlement payments will be made in the third quarter of 2015. This contingency reserve is included in the Other liabilities line on the Companys Consolidated Balance Sheet and the Contingency reserve line on Companys Consolidated Statements of Income.
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 Companys 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 June 30, 2014. Previously reported results have been reclassified to conform to the current organizational structure.
24
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
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 Companys branches, call center, internet banking, and ATM network. Services include traditional commercial and consumer banking, treasury management, leasing, foreign exchange, merchant bankcard, wealth management, brokerage, insurance, capital markets, investment banking, corporate trust, and correspondent banking.
Payment Solutions provides consumer and commercial credit and debit card, prepaid debit card solutions, healthcare services, and institutional cash management. Healthcare services include health savings account and flexible savings account products for healthcare providers, third-party administrators and large employers.
Institutional Investment Management provides equity and fixed income investment strategies in the intermediary and institutional markets via mutual funds, traditional separate accounts and sub-advisory relationships.
Asset Servicing provides services to the asset management industry, supporting a range of investment products, including mutual funds, alternative investments and managed accounts. Services include fund administration, fund accounting, investor services, transfer agency, distribution, marketing, custody, alternative investment services, and collective and multiple-series trust services.
25
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Business Segment Information
Segment financial results were as follows (in thousands):
Three Months Ended June 30, 2014 | ||||||||||||||||||||
Bank | Payment Solutions |
Institutional Investment Management |
Asset Servicing |
Total | ||||||||||||||||
Net interest income |
$ | 72,481 | $ | 12,390 | $ | (1 | ) | $ | 1,300 | $ | 86,170 | |||||||||
Provision for loan losses |
2,686 | 2,314 | | | 5,000 | |||||||||||||||
Noninterest income |
56,006 | 21,219 | 33,999 | 22,777 | 134,001 | |||||||||||||||
Noninterest expense |
100,928 | 24,603 | 22,111 | 18,869 | 166,511 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before taxes |
24,873 | 6,692 | 11,887 | 5,208 | 48,660 | |||||||||||||||
Income tax expense |
7,211 | 1,910 | 3,375 | 1,492 | 13,988 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 17,662 | $ | 4,782 | $ | 8,512 | $ | 3,716 | $ | 34,672 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average assets |
$ | 12,008,000 | $ | 2,148,000 | $ | 69,000 | $ | 1,393,000 | $ | 15,618,000 |
Three Months Ended June 30, 2013 | ||||||||||||||||||||
Bank | Payment Solutions |
Institutional Investment Management |
Asset Servicing |
Total | ||||||||||||||||
Net interest income |
$ | 70,558 | $ | 11,192 | $ | (10 | ) | $ | 587 | $ | 82,327 | |||||||||
Provision for loan losses |
1,628 | 3,372 | | | 5,000 | |||||||||||||||
Noninterest income |
46,436 | 18,640 | 29,155 | 19,354 | 113,585 | |||||||||||||||
Noninterest expense |
92,540 | 21,850 | 18,856 | 17,065 | 150,311 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before taxes |
22,826 | 4,610 | 10,289 | 2,876 | 40,601 | |||||||||||||||
Income tax expense |
6,035 | 1,203 | 2,708 | 726 | 10,672 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 16,791 | $ | 3,407 | $ | 7,581 | $ | 2,150 | $ | 29,929 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average assets |
$ | 11,201,000 | $ | 1,793,000 | $ | 80,000 | $ | 1,801,000 | $ | 14,875,000 |
26
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Six Months Ended June 30, 2014 | ||||||||||||||||||||
Bank | Payment Solutions |
Institutional Investment Management |
Asset Servicing |
Total | ||||||||||||||||
Net interest income |
$ | 143,602 | $ | 24,778 | $ | (3 | ) | $ | 3,238 | $ | 171,615 | |||||||||
Provision for loan losses |
5,112 | 4,388 | | | 9,500 | |||||||||||||||
Noninterest income |
103,425 | 41,453 | 68,094 | 43,993 | 256,965 | |||||||||||||||
Noninterest expense |
208,671 | 45,631 | 47,998 | 36,452 | 338,752 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before taxes |
33,244 | 16,212 | 20,093 | 10,779 | 80,328 | |||||||||||||||
Income tax expense |
9,242 | 4,485 | 5,523 | 2,993 | 22,243 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 24,002 | $ | 11,727 | $ | 14,570 | $ | 7,786 | $ | 58,085 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average assets |
$ | 12,204,000 | $ | 2,023,000 | $ | 71,000 | $ | 1,767,000 | $ | 16,065,000 |
Six Months Ended June 30, 2013 | ||||||||||||||||||||
Bank | Payment Solutions |
Institutional Investment Management |
Asset Servicing |
Total | ||||||||||||||||
Net interest income |
$ | 137,818 | $ | 22,740 | $ | (10 | ) | $ | 1,262 | $ | 161,810 | |||||||||
Provision for loan losses |
1,937 | 5,063 | | | 7,000 | |||||||||||||||
Noninterest income |
99,184 | 38,077 | 57,708 | 39,632 | 234,601 | |||||||||||||||
Noninterest expense |
184,076 | 41,968 | 37,700 | 36,945 | 300,689 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before taxes |
50,989 | 13,786 | 19,998 | 3,949 | 88,722 | |||||||||||||||
Income tax expense |
13,740 | 3,737 | 5,376 | 999 | 23,852 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 37,249 | $ | 10,049 | $ | 14,622 | $ | 2,950 | $ | 64,870 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average assets |
$ | 11,294,000 | $ | 1,726,000 | $ | 78,000 | $ | 1,731,000 | $ | 14,829,000 |
27
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
9. | Derivatives and Hedging Activities |
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Companys derivative financial instruments are used to manage differences in the amount, timing, and duration of the Companys known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate assets. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk of the Companys assets or liabilities. The Company has entered into an offsetting position for each of these derivative instruments with a matching instrument from another financial institution in order to minimize its net risk exposure resulting from such transactions.
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Companys derivative financial instruments as of June 30, 2014 and December 31, 2013. The Companys derivative asset and derivative liability are located within Other assets and Other liabilities, respectively, on the Companys Consolidated Balance Sheet.
This table provides a summary of the fair value of the Companys derivative assets and liabilities as of June 30, 2014 and December 31, 2013 (in thousands):
Asset Derivatives | Liability Derivatives | |||||||||||||||
Fair value | June 30, 2014 |
December 31, 2013 |
June 30, 2014 |
December 31, 2013 |
||||||||||||
Interest Rate Products: |
||||||||||||||||
Derivatives not designated as hedging instruments |
$ | 4,831 | $ | 2,442 | $ | 4,787 | $ | 2,346 | ||||||||
Derivatives designated as hedging instruments |
| 76 | 160 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,831 | $ | 2,518 | $ | 4,947 | $ | 2,346 | ||||||||
|
|
|
|
|
|
|
|
Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve making fixed-rate payments to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2014, the Company had one interest rate swap with a notional amount of $6.8 million that was designated as a fair value hedge of interest rate risk associated with the Companys fixed rate loan assets.
Designated Hedges
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2014, the Company recognized net losses of $8 thousand and $18 thousand, respectively, in other noninterest expense related to hedge ineffectiveness.
28
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Non-designated Hedges
The remainder of the Companys 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 June 30, 2014, the Company had twenty-six interest rate swaps with an aggregate notional amount of $343.5 million related to this program. During the three and six months ended June 30, 2014, the Company recognized $31 thousand of net gains and $52 thousand of net losses, respectively, related to changes in fair value of these swaps. During the three and six months ended June 30, 2013, the Company recognized net gains of $48 thousand and $154 thousand, respectively, related to changes in the fair value of these swaps.
Effect of Derivative Instruments on the Income Statement
This table provides a summary of the amount of gain (loss) recognized in other non-interest expense in the Consolidated Statements of Income related to the Companys derivative asset and liability for the three and six months ended as of June 30, 2014 and June 30, 2013 (in thousands):
Amount of Gain (Loss) Recognized | ||||||||||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2014 | June 30, 2013 | June 30, 2014 | June 30, 2013 | |||||||||||||
Interest Rate Products |
||||||||||||||||
Derivatives not designated as hedging instruments |
$ | 31 | $ | 48 | $ | (52 | ) | $ | 154 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 31 | $ | 48 | $ | (52 | ) | $ | 154 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Interest Rate Products |
||||||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||
Fair value adjustments on derivatives |
$ | (116 | ) | $ | | $ | (235 | ) | $ | | ||||||
Fair value adjustments on hedged items |
108 | | 217 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (8 | ) | $ | | $ | (18 | ) | $ | | ||||||
|
|
|
|
|
|
|
|
Credit-risk-related Contingent Features
The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
As of June 30, 2014 the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $0.8 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has not yet reached its minimum collateral posting threshold under these agreements. If the Company had breached any of these provisions at June 30, 2014, it could have been required to settle its obligations under the agreements at the termination value.
29
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
10. | Fair Value Measurements |
The following table presents information about the Companys assets measured at fair value on a recurring basis as of June 30, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):
Fair Value Measurement at June 30, 2014 | ||||||||||||||||
Description |
June 30, 2014 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
U.S. Treasury |
$ | 400 | $ | 400 | $ | | $ | | ||||||||
U.S. Agencies |
260 | | 260 | | ||||||||||||
Mortgage-backed |
| | | | ||||||||||||
State and political subdivisions |
7,494 | | 7,494 | | ||||||||||||
Trading - other |
18,330 | 18,330 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading securities |
26,484 | 18,730 | 7,754 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. Treasury |
466,675 | 466,675 | | | ||||||||||||
U.S. Agencies |
969,366 | | 969,366 | | ||||||||||||
Mortgage-backed |
3,188,205 | | 3,188,205 | | ||||||||||||
State and political subdivisions |
1,943,362 | | 1,943,362 | | ||||||||||||
Corporates |
133,015 | 133,015 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Available for sale securities |
6,700,623 | 599,690 | 6,100,933 | | ||||||||||||
Company-owned life insurance |
20,452 | | 20,452 | | ||||||||||||
Derivatives |
4,831 | | 4,831 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,752,390 | $ | 618,420 | $ | 6,133,970 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Deferred compensation |
25,377 | 25,377 | | | ||||||||||||
Contingent consideration liability |
52,027 | | | 52,027 | ||||||||||||
Derivatives |
4,947 | | 4,947 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 82,351 | $ | 25,377 | $ | 4,947 | $ | 52,027 | ||||||||
|
|
|
|
|
|
|
|
30
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Fair Value Measurement at December 31, 2013 | ||||||||||||||||
Description |
December 31, 2013 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
U.S. Treasury |
$ | 400 | $ | 400 | $ | | $ | | ||||||||
U.S. Agencies |
| | | | ||||||||||||
Mortgage-backed |
515 | | 515 | | ||||||||||||
State and political subdivisions |
3,072 | | 3,072 | | ||||||||||||
Trading - other |
24,477 | 24,477 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading securities |
28,464 | 24,877 | 3,587 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. Treasury |
110,200 | 110,200 | | | ||||||||||||
U.S. Agencies |
1,257,663 | | 1,257,663 | | ||||||||||||
Mortgage-backed |
2,944,566 | | 2,944,566 | | ||||||||||||
State and political subdivisions |
1,995,246 | | 1,995,246 | | ||||||||||||
Corporates |
454,736 | 454,736 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Available for sale securities |
6,762,411 | 564,936 | 6,197,475 | | ||||||||||||
Company-owned life insurance |
19,619 | | 19,619 | | ||||||||||||
Derivatives |
2,518 | | 2,518 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,813,012 | $ | 589,813 | $ | 6,223,199 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Deferred compensation |
$ | 19,825 | $ | 19,825 | $ | | $ | | ||||||||
Contingent consideration liability |
46,201 | | | 46,201 | ||||||||||||
Derivatives |
2,346 | | 2,346 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 68,372 | $ | 19,825 | $ | 2,346 | $ | 46,201 | ||||||||
|
|
|
|
|
|
|
|
The following table reconciles the beginning and ending balances of the contingent consideration liability for the six months ended June 30, 2014 (in thousands):
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Beginning Balance |
$ | 46,201 | $ | 51,163 | ||||
Contingency reserve |
14,272 | | ||||||
Payment of contingent considerations on acquisitions |
(13,725 | ) | (16,171 | ) | ||||
Income from fair value adjustments |
| (138 | ) | |||||
Expense from fair value adjustments |
5,279 | 3,329 | ||||||
|
|
|
|
|||||
Ending Balance |
$ | 52,027 | $ | 38,183 | ||||
|
|
|
|
During the six month period ended June 30, 2014, the Company recorded contingency reserve expense of $20.3 million in its Consolidated Statement of Income related to the resolution of the PCM dispute. On June 30, 2014, the Company made a payment of $6.0 million, reducing the remaining contingency reserve to $14.3 million. The settlement agreement amends the original asset purchase agreement dated June 27, 2010, and subsequent to the settlement, the remaining contingency reserve liability has been included in the table above as additional contingent consideration recorded at fair value.
31
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
The following table presents certain quantitative information about the significant unobservable input used in the fair value measurement for the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
Description |
Valuation Techniques |
Significant Unobservable Inputs |
Range | |||
Liabilities |
||||||
Contingent consideration liability |
Discounted cash flows | Revenue growth percentage | 1% - 98% |
An increase in the revenue growth percentage may result in a significantly higher estimated fair value of the contingent consideration liability. Alternatively, a decrease in the revenue growth percentage may result in a significantly lower estimated fair value of the contingent consideration liability.
Valuation methods for instruments measured at fair value on a recurring basis
The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a recurring basis:
Securities Available for Sale and Investment Securities Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.
Company-owned Life Insurance Fair values are based on quoted market prices or dealer quotes with adjustments for dividends, capital gains, and administrative charges.
Derivatives Fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Deferred Compensation Fair values are based on quoted market prices or dealer quotes.
Contingent Consideration The fair value of contingent consideration liabilities are derived from a discounted cash flow model of future contingent payments. The valuation of these liabilities are estimated by a collaborative effort of the Companys mergers and acquisitions group, business unit management, and the corporate accounting group. These groups report primarily to the Companys Chief Financial Officer and Chief Executive Officer. These future contingent payments are calculated based on estimates of future income and expense from each acquisition. These estimated cash flows are projected by the business unit management and reviewed by the mergers and acquisitions group. To obtain a current valuation of these projected cash flows, an expected present value technique is utilized to calculate a discount rate. The cash flow projections and discount rates are reviewed quarterly and updated as market conditions necessitate. Potential valuation adjustments are made as future income and expense projections for each acquisition are made which affect the calculation of the related contingent consideration payment. These adjustments are recorded through noninterest income and expense.
32
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Assets measured at fair value on a non-recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):
Fair Value Measurement at June 30, 2014 | ||||||||||||||||||||
Description |
June 30, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Gains (Losses) Recognized During the Six Months Ended June 30 |
|||||||||||||||
Impaired loans |
$ | 9,669 | $ | | $ | | $ | 9,669 | $ | 637 | ||||||||||
Other real estate owned |
205 | | | 205 | $ | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 9,874 | $ | | $ | | $ | 9,874 | $ | 637 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2013 | ||||||||||||||||||||
Description |
December 31, 2013 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Gains (Losses) Recognized During the Twelve Months Ended December 31 |
|||||||||||||||
Impaired loans |
$ | 15,496 | $ | | $ | | $ | 15,496 | $ | (2,496 | ) | |||||||||
Other real estate owned |
329 | | | 329 | (125 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 15,825 | $ | | $ | | $ | 15,825 | $ | (2,621 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
Valuation methods for instruments measured at fair value on a nonrecurring basis
The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a non-recurring basis:
Impaired loans While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans to reflect partial write-downs that are based on the value of the underlying collateral. In determining the value of real estate collateral, the Director of Property Management, who reports to the Chief Administrative Officer, obtains external appraisals. 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. Upon receiving the external appraisal, the Companys appraisal department led by the Chief Appraiser who reports to the Chief Credit Officer review the appraisal to determine if the appraisal is a reasonable basis for the value of the property based upon historical experience and detailed knowledge of the specific property and location. 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 Companys property management group and the Companys 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 or third-party price opinions and, accordingly, those measurements may be classified as Level 2. Other fair value measurements may be based on internally developed pricing methods, and those measurements may be classified as Level 3.
33
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value of the Companys financial instruments at June 30, 2014 and December 31, 2013 are as follows (in millions):
Fair Value Measurement at June 30, 2014 | ||||||||||||||||||||
Carrying Amount |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Estimated Fair Value |
||||||||||||||||
FINANCIAL ASSETS |
||||||||||||||||||||
Securities held to maturity |
$ | 238.8 | $ | | $ | 269.7 | $ | | $ | 269.7 | ||||||||||
Federal Reserve Bank and other stock |
67.5 | | 67.5 | | 67.5 | |||||||||||||||
Loans (exclusive of allowance for loan loss) |
6,923.8 | | 6,937.5 | | 6,937.5 | |||||||||||||||
FINANCIAL LIABILITIES |
||||||||||||||||||||
Time deposits |
1,020.0 | | 1,019.5 | | 1,019.5 | |||||||||||||||
Long-term debt |
5.7 | | 5.9 | | 5.9 | |||||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS |
||||||||||||||||||||
Commitments to extend credit for loans |
2.9 | |||||||||||||||||||
Commercial letters of credit |
0.1 | |||||||||||||||||||
Standby letters of credit |
1.2 |
Fair Value Measurement at December 31, 2013 | ||||||||||||||||||||
Carrying Amount |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Estimated Fair Value |
||||||||||||||||
FINANCIAL ASSETS |
||||||||||||||||||||
Securities held to maturity |
$ | 209.8 | $ | | $ | 231.5 | $ | | $ | 231.5 | ||||||||||
Federal Reserve Bank and other stock |
50.5 | | 50.5 | | 50.5 | |||||||||||||||
Loans (exclusive of allowance for loan loss) |
6,521.9 | | 6,571.6 | | 6,571.6 | |||||||||||||||
FINANCIAL LIABILITIES |
||||||||||||||||||||
Time deposits |
1,449.6 | | 1,449.4 | | 1,449.4 | |||||||||||||||
Long-term debt |
5.1 | | 4.5 | | 4.5 | |||||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS |
||||||||||||||||||||
Commitments to extend credit for loans |
6.0 | |||||||||||||||||||
Commercial letters of credit |
0.1 | |||||||||||||||||||
Standby letters of credit |
2.0 |
The fair values of cash and short-term investments, demand and savings deposits, federal funds and repurchase agreements, and short-term debt approximate the carrying values.
Securities Held to Maturity Fair value of held-to-maturity securities are estimated by discounting the future cash flows using the current rates at which similar investments would be made to borrowers with similar credit ratings and for the same remaining maturities.
Federal Reserve Bank and Other Amount consists of Federal Reserve Bank stock held by the Bank, Prairie Capital Management equity-method investments, and other miscellaneous investments. The fair value of Federal Reserve Bank stock is considered to be the carrying value as no readily determinable market exists for these investments because they can only be redeemed with the FRB. The fair value of Prairie Capital Management marketable equity-method investments are based on quoted market prices used to estimate the value of the underlying investment. For non-marketable equity-method investments, the Companys proportionate share of the income or loss is recognized on a one-quarter lag based on the valuation of the underlying investment(s).
34
UMB FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)
Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Time Deposits The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are currently offered for deposits of similar remaining maturities.
Long-Term Debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Other Off-Balance Sheet Instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair value at year-end are significant to the Companys consolidated financial position.
The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2014 and December 31, 2013. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amount presented herein.
35
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This review highlights the material changes in the results of operations and changes in financial condition for the three-month and six-month periods ended June 30, 2014. It should be read in conjunction with the accompanying consolidated financial statements, notes to consolidated financial statements and other financial statistics appearing elsewhere in this report. 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 Companys 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 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 Companys 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 Companys 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; |
| changes in the Companys corporate strategies, the composition of its assets, or the way in which it funds those assets; |
36
| the Companys ability to develop, maintain, or market products or services or to absorb unanticipated costs or liabilities associated with those products or services; |
| the Companys 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 Companys customers, counterparties, or competitors; |
| the Companys 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 Companys ability to address stricter or heightened regulatory or other governmental supervision or requirements; |
| the Companys 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 Companys 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 Companys methods or models in assessing business strategies or opportunities or in valuing, measuring, monitoring, or managing positions or risk; |
| the Companys ability to keep pace with changes in technology that affect the Company or its customers, counterparties, or competitors; |
| mergers or acquisitions, including the Companys ability to integrate acquisitions; |
| the adequacy of the Companys succession planning for key executives or other personnel; |
| the Companys 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) in this Form 10-Q and Managements Discussion and Analysis (Item 2), or the or described in any of the Companys 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.
37
Overview
The Company focuses on the following four core strategies. Management believes these strategies will guide our efforts to achieving our vision, to deliver the Unparalleled Customer Experience, all while maintaining a focus to improve net income and strengthen the balance sheet.
The first strategy is to maintain high quality through a strong balance sheet, solid credit quality, a low cost of funding, and effective risk management. The strength in the balance sheet can be seen in the solid credit quality of the earning assets and the Companys continued growth in low cost funding. At June 30, 2014, the Companys nonperforming assets as a percentage of total assets was 0.18 percent. As a percentage of loans, nonperforming loans decreased to 0.39 percent compared to 0.40 percent on June 30, 2013. These credit quality ratios were achieved while maintaining positive directional growth in average earning assets, which increased 8.9 percent from June 30, 2013, driven by an 11.4 percent increase in average noninterest-bearing demand deposits compared to June 30, 2013.
The second strategy is to deliver profitable and sustainable growth by accelerating fee businesses, growing quality earning assets, maximizing efficiencies, and maintaining sales leverage. The Companys acceleration of fee businesses is apparent with the increase in trust and securities processing. Trust and securities processing income increased $9.9 million, or 15.6 percent, for the three months ended June 30, 2014 compared to the same period in 2013. The increase in trust and securities processing income was primarily due to a $3.7 million, or 18.9 percent, increase in fees related to institutional and personal investment management services, a $3.1 million, or 16.3 percent, increase in fund administration and custody services, and a $2.2 million, or 10.0 percent increase, in advisory fee income from the Scout Funds. Also notable and continuing to push industry trends, the Company produced double digit loan growth. While maintaining the aforementioned credit ratios, the Companys June 30, 2014 average loans increased $739.0 million, or 12.0 percent, compared to the same three-month period one year ago.
The third strategy is to maintain diversified revenue streams. The emphasis on fee-based operations helps reduce the Companys exposure to changes in interest rates. During the second quarter of 2014, noninterest income increased $20.4 million, or 18.0 percent, compared to the same period of 2013. The Company continues to emphasize its asset management, brokerage, bankcard services, health care services, and treasury management businesses. In particular, during the second quarter of 2014, this favorable change is primarily attributable to increased trust and securities processing income and increased equity earnings on alternative investments. At June 30, 2014, noninterest income represented 60.9 percent of total revenues, compared to 58.0 percent at June 30, 2013.
The fourth strategy is a focus on capital management. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Companys ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, investing in acquisitions, evaluating increased dividends over time and utilizing a share buy-back strategy when appropriate. At June 30, 2014, the Company had $1.6 billion in total shareholders equity. This is an increase of $374.9 million, or 30.6 percent, compared to total shareholders equity at June 30, 2013. In 2013, the Company completed the issuance of 4.5 million shares of common stock with net proceeds of $231.4 million to be used for strategic growth purposes. At June 30, 2014, the Company had a total risk-based capital ratio of 14.62 percent, which is higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 5,153 shares at an average price of $57.73 per share during the second quarter of 2014.
Earnings Summary
The Company recorded consolidated net income of $34.7 million for the three-month period ended June 30, 2014, compared to $29.9 million for the same period a year earlier. This represents a 15.9 percent increase over the three-month period ended June 30, 2013. Basic earnings per share for the second quarter of 2014 were $0.77 per share ($0.76 per share fully-diluted) compared to $0.75 per share ($0.74 per share fully-diluted) for the second quarter of 2013. Return on average assets and return on average common shareholders equity for the three-month period ended June 30, 2014 were 0.89 and 8.77 percent, respectively, compared to 0.81 and 9.31 percent for the three-month period ended June 30, 2013.
38
The Company recorded consolidated net income of $58.1 million for the six-month period ended June 30, 2014, compared to $64.9 million for the same period a year earlier. This represents a 10.5 percent decrease over the six-month period ended June 30, 2013. Basic earnings per share for the six-month period ended June 30, 2014 were $1.30 per share ($1.28 per share fully-diluted) compared to $1.62 per share ($1.61 per share fully-diluted) for the period in 2013. Return on average assets and return on average common shareholders equity for the six-month period ended June 30, 2014 were 0.73 and 7.48 percent, respectively, compared to 0.88 and 10.17 percent for the same period in 2013.
Net interest income for the three and six-month periods ended June 30, 2014 increased $3.8 million, or 4.7 percent, and $9.8 million, or 6.1 percent, respectively, compared to the same period in 2013. For the three-month period ended June 30, 2014, average earning assets increased by $749.3 million, or 5.4 percent, and for the six-month period ended June 30, 2014, they increased by $1.2 billion, or 8.9 percent, compared to the same periods in 2013. Net interest margin, on a tax-equivalent basis, decreased to 2.53 percent and 2.45 percent for the three and six-months periods ended June 30, 2014, compared to 2.56 percent and 2.53 percent for the same periods in 2013. These changes are discussed in greater detail below under Net Interest Income.
The provision for loan losses was flat for the three-month period ended June 30, 2014, and increased by $2.5 million for the six-month periods ended June 30, 2014, compared to the same periods in 2013. These changes are a direct result of applying the Companys methodology for computing the allowance for loan losses. The allowance for loan losses as a percentage of total loans decreased by two basis points to 1.11 percent as of June 30, 2014, compared to June 30, 2013. For a description of the Companys methodology for computing the allowance for loan losses, please see the summary discussion of the Allowance for Loan Losses within the Critical Accounting Policies and Estimates subsection of the Managements Discussion and Analysis of Financial Condition and Results of Operations section in the Companys 2013 Annual Report on Form 10-K.
Noninterest income increased by $20.4 million, or 18.0 percent, for the three-month period ended June 30, 2014 and increased by $22.4 million, or 9.5 percent, for the six-month period ended June 30, 2014, compared to the same periods one year ago. These changes are discussed in greater detail below under Noninterest Income.
Noninterest expense increased by $16.2 million, or 10.8 percent, for the three-month period ended June 30, 2014, and increased by $38.1 million, or 12.7 percent, for the six-month period ended June 30, 2014, compared to the same periods in 2013. These increases are discussed in greater detail below under Noninterest Expense.
Net Interest Income
Net interest income is a significant source of the Companys earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. For the three-month period ended June 30, 2014, average earning assets increased by $749.3 million, or 5.4 percent, and for the six-month period ended June 30, 2014, they increased by $1.2 billion, or 8.9 percent, compared to the same periods in 2013. Net interest margin, on a tax-equivalent basis, decreased to 2.53 percent and 2.45 percent for the three and six-months periods ended June 30, 2014, compared to 2.56 percent and 2.53 percent for the same periods in 2013.
Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. The Company continues to experience a repricing of these earning assets and interest-bearing liabilities during the recent interest rate cycle. While the Company continues to see declining rates, it has been able to improve net interest income through volume. As illustrated in this table, net interest spread and margin for the three months ended June 30, 2014 decreased by three basis points compared to the same period in 2013. Net interest spread for the six months ended June 30, 2014 decreased by seven basis points and net interest margin decreased by eight basis points compared to the same period in 2013. These results are primarily due to an unfavorable rate variance, offset by a favorable volume variance on loans. The combined impact of these variances has led to an increase in interest income and a slight decrease in interest expense, or an increase in the Companys net interest income as compared to results one year ago.
39
The favorable rate variance on deposits is bolstered by the contribution from free funds. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and rates have resulted in an increase in net interest income.
Table 1
AVERAGE BALANCES/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)
The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.48 percent for the three-month period ended June 30, 2014 and 2.51 percent for the same period in 2013. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.41 percent for the six-month period ended June 30, 2014 and 2.49 percent for the same period in 2013.
Three Months Ended June 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Average Balance |
Average Yield/Rate |
Average Balance |
Average Yield/Rate |
|||||||||||||
Assets |
||||||||||||||||
Loans, net of unearned interest |
$ | 6,897,840 | 3.51 | % | $ | 6,158,821 | 3.69 | % | ||||||||
Securities: |
||||||||||||||||
Taxable |
4,836,080 | 1.58 | 4,978,109 | 1.52 | ||||||||||||
Tax-exempt |
2,104,368 | 2.88 | 2,113,009 | 2.97 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities |
6,940,448 | 1.97 | 7,091,118 | 1.95 | ||||||||||||
Federal funds and resell agreements |
32,692 | 0.56 | 28,524 | 0.56 | ||||||||||||
Interest-bearing due from banks |
619,094 | 0.30 | 432,588 | 0.31 | ||||||||||||
Trading |
36,785 | 1.80 | 66,482 | 1.79 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total earning assets |
14,526,859 | 2.63 | 13,777,533 | 2.67 | ||||||||||||
Allowance for loan losses |
(75,929 | ) | (70,004 | ) | ||||||||||||
Other assets |
1,167,262 | 1,167,899 | ||||||||||||||
|
|
|
|
|||||||||||||
Total assets |
$ | 15,618,192 | $ | 14,875,428 | ||||||||||||
|
|
|
|
|||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Interest-bearing deposits |
$ | 7,126,614 | 0.17 | % | $ | 6,943,399 | 0.19 | % | ||||||||
Federal funds and repurchase agreements |
1,592,986 | 0.11 | 1,848,118 | 0.11 | ||||||||||||
Borrowed funds |
5,771 | 5.07 | 4,592 | 5.33 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest-bearing liabilities |
8,725,371 | 0.17 | 8,796,109 | 0.18 | ||||||||||||
Noninterest-bearing demand deposits |
5,152,980 | 4,636,240 | ||||||||||||||
Other liabilities |
154,229 | 153,227 | ||||||||||||||
Shareholders equity |
1,585,612 | 1,289,852 | ||||||||||||||
|
|
|
|
|||||||||||||
Total liabilities and shareholders equity |
$ | 15,618,192 | $ | 14,875,428 | ||||||||||||
|
|
|
|
|||||||||||||
Net interest spread |
2.46 | % | 2.49 | % | ||||||||||||
Net interest margin |
2.53 | 2.56 |
40
Six Months Ended June 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Average Balance |
Average Yield/Rate |
Average Balance |
Average Yield/Rate |
|||||||||||||
Assets |
||||||||||||||||
Loans, net of unearned interest |
$ | 6,788,991 | 3.54 | % | $ | 5,987,788 | 3.75 | % | ||||||||
Securities: |
||||||||||||||||
Taxable |
4,861,475 | 1.58 | 4,925,312 | 1.53 | ||||||||||||
Tax-exempt |
2,107,119 | 2.90 | 2,054,141 | 3.02 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities |
6,968,594 | 1.98 | 6,979,453 | 1.97 | ||||||||||||
Federal funds and resell agreements |
29,939 | 0.53 | 23,858 | 0.54 | ||||||||||||
Interest-bearing due from banks |
1,154,811 | 0.28 | 701,282 | 0.29 | ||||||||||||
Trading |
37,682 | 1.63 | 62,048 | 1.92 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total earning assets |
14,980,017 | 2.55 | 13,754,429 | 2.65 | ||||||||||||
Allowance for loan losses |
(75,466 | ) | (70,750 | ) | ||||||||||||
Other assets |
1,160,124 | 1,145,799 | ||||||||||||||
|
|
|
|
|||||||||||||
Total assets |
$ | 16,064,675 | $ | 14,829,478 | ||||||||||||
|
|
|
|
|||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Interest-bearing deposits |
$ | 7,545,182 | 0.16 | % | $ | 6,980,728 | 0.21 | % | ||||||||
Federal funds and repurchase agreements |
1,630,169 | 0.12 | 1,761,074 | 0.12 | ||||||||||||
Borrowed funds |
5,738 | 4.74 | 4,989 | 4.89 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest-bearing liabilities |
9,181,089 | 0.16 | 8,746,791 | 0.19 | ||||||||||||
Noninterest-bearing demand deposits |
5,160,206 | 4,631,425 | ||||||||||||||
Other liabilities |
156,608 | 165,117 | ||||||||||||||
Shareholders equity |
1,566,772 | 1,286,145 | ||||||||||||||
|
|
|
|
|||||||||||||
Total liabilities and shareholders equity |
$ | 16,064,675 | $ | 14,829,478 | ||||||||||||
|
|
|
|
|||||||||||||
Net interest spread |
2.39 | % | 2.46 | % | ||||||||||||
Net interest margin |
2.45 | 2.53 |
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 $820.1 million for the three-month and $791.3 million for the six-month periods ended June 30, 2014 compared to the same periods in 2013, the benefit from interest free funds was flat in the three-month period and declined one basis point in the six-month period, due to decreases in interest rates.
41
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 June 30, 2014 vs 2013 |
Six Months Ended June 30, 2014 vs 2013 |
|||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Change in interest earned on: |
||||||||||||||||||||||||
Loans |
$ | 6,462 | $ | (2,768 | ) | $ | 3,694 | $ | 14,088 | $ | (6,214 | ) | $ | 7,874 | ||||||||||
Securities: |
||||||||||||||||||||||||
Taxable |
(559 | ) | 739 | 180 | (499 | ) | 1,176 | 677 | ||||||||||||||||
Tax-exempt |
(35 | ) | (285 | ) | (320 | ) | 852 | (1,024 | ) | (172 | ) | |||||||||||||
Federal funds sold and resell agreements |
6 | | 6 | 16 | (1 | ) | 15 | |||||||||||||||||
Interest-bearing due from banks |
140 | (6 | ) | 134 | 624 | (35 | ) | 589 | ||||||||||||||||
Trading |
(121 | ) | 2 | (119 | ) | (137 | ) | (124 | ) | (261 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest income |
5,893 | (2,318 | ) | 3,575 | 14,944 | (6,222 | ) | 8,722 | ||||||||||||||||
Change in interest incurred on: |
||||||||||||||||||||||||
Interest-bearing deposits |
79 | (320 | ) | (241 | ) | 460 | (1,434 | ) | (974 | ) | ||||||||||||||
Federal funds purchased and repurchase agreements |
(73 | ) | 36 | (37 | ) | (75 | ) | (48 | ) | (123 | ) | |||||||||||||
Borrowed funds |
15 | (3 | ) | 12 | 18 | (4 | ) | 14 | ||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest expense |
21 | (287 | ) | (266 | ) | 403 | (1,486 | ) | (1,083 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net interest income |
$ | 5,872 | $ | (2,031 | ) | $ | 3,841 | $ | 14,541 | $ | (4,736 | ) | $ | 9,805 | ||||||||||
|
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|
ANALYSIS OF NET INTEREST MARGIN
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||||
2014 | 2013 | Change | 2014 | 2013 | Change | |||||||||||||||||||
Average earning assets |
$ | 14,526,859 | $ | 13,777,533 | $ | 749,326 | $ | 14,980,017 | $ | 13,754,429 | $ | 1,225,588 | ||||||||||||
Average interest-bearing liabilities |
8,725,371 | 8,796,109 | (70,738 | ) | 9,181,089 | 8,746,791 | 434,298 | |||||||||||||||||
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|
|||||||||||||
Average interest free funds |
$ | 5,801,488 | $ | 4,981,424 | $ | 820,064 | $ | 5,798,928 | $ | 5,007,638 | $ | 791,290 | ||||||||||||
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|
|||||||||||||
Free funds ratio (free funds to earning assets) |
39.94 | % | 36.16 | % | 3.78 | % | 38.71 | % | 36.41 | % | 2.30 | % | ||||||||||||
Tax-equivalent yield on earning assets |
2.63 | % | 2.67 | % | (0.04 | )% | 2.55 | % | 2.65 | % | (0.10 | )% | ||||||||||||
Cost of interest-bearing liabilities |
0.17 | 0.18 | (0.01 | ) | 0.16 | 0.19 | (0.03 | ) | ||||||||||||||||
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|
|||||||||||||
Net interest spread |
2.46 | % | 2.49 | % | (0.03 | )% | 2.39 | % | 2.46 | % | (0.07 | )% | ||||||||||||
Benefit of interest-free funds |
0.07 | 0.07 | 0.00 | 0.06 | 0.07 | (0.01 | ) | |||||||||||||||||
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|
|||||||||||||
Net interest margin |
2.53 | % | 2.56 | % | (0.03 | )% | 2.45 | % | 2.53 | % | (0.08 | )% | ||||||||||||
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42
Provision and Allowance for Loan Losses
The allowance for loan losses (ALL) represents managements judgment of the losses inherent in the Companys loan portfolio as of the balance sheet date. An analysis is performed quarterly to determine the appropriate balance of the ALL. This analysis considers items such as historical loss trends, a review of individual loans, migration analysis, current economic conditions, loan growth and characteristics, industry or segment concentration and other factors. After the balance sheet analysis is performed for the ALL, the provision for loan losses is computed as the amount required to adjust the ALL to the appropriate level.
Based on the factors above, management of the Company expensed $5.0 million and $9.5 million related to the provision for loan losses for the three and six-month periods ended June 30, 2014, compared to $5.0 million and $7.0 million for the same periods in 2013. As illustrated in Table 3 below, the ALL decreased to 1.11 percent of total loans as of June 30, 2014, compared to 1.13 percent of total loans as of the same period in 2013.
Table 3 presents a summary of the Companys ALL for the six months ended June 30, 2014 and 2013 and for the year ended December 31, 2013. Net charge-offs were $7.4 million for the first six months of 2014, compared to $6.8 million for the same period in 2013. See Credit Risk Management under Item 3. Quantitative and Qualitative Disclosures About Market Risk in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.
Table 3
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)
Six Months Ended June 30, |
Year Ended December 31, |
|||||||||||
2014 | 2013 | 2013 | ||||||||||
Allowance-January 1 |
$ | 74,751 | $ | 71,426 | $ | 71,426 | ||||||
Provision for loan losses |
9,500 | 7,000 | 17,500 | |||||||||
|
|
|
|
|
|
|||||||
Charge-offs: |
||||||||||||
Commercial |
(2,947 | ) | (2,423 | ) | (4,748 | ) | ||||||
Consumer: |
||||||||||||
Credit card |
(5,348 | ) | (5,372 | ) | (10,531 | ) | ||||||
Other |
(788 | ) | (767 | ) | (1,600 | ) | ||||||
Real estate |
(181 | ) | (371 | ) | (775 | ) | ||||||
|
|
|
|
|
|
|||||||
Total charge-offs |
(9,264 | ) | (8,933 | ) | (17,654 | ) | ||||||
|
|
|
|
|
|
|||||||
Recoveries: |
||||||||||||
Commercial |
268 | 515 | 867 | |||||||||
Consumer: |
||||||||||||
Credit card |
1,101 | 1,115 | 1,720 | |||||||||
Other |
429 | 508 | 815 | |||||||||
Real estate |
17 | 16 | 77 | |||||||||
|
|
|
|
|
|
|||||||
Total recoveries |
1,815 | 2,154 | 3,479 | |||||||||
|
|
|
|
|
|
|||||||
Net charge-offs |
(7,449 | ) | (6,779 | ) | (14,175 | ) | ||||||
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|
|
|
|
|||||||
Allowance-end of period |
$ | 76,802 | $ | 71,647 | $ | 74,751 | ||||||
|
|
|
|
|
|
|||||||
Average loans, net of unearned interest |
$ | 6,787,972 | $ | 5,982,266 | $ | 6,217,240 | ||||||
Loans at end of period, net of unearned interest |
6,920,683 | 6,338,921 | 6,520,512 | |||||||||
Allowance to loans at end of period |
1.11 | % | 1.13 | % | 1.15 | % | ||||||
Allowance as a multiple of net charge-offs |
5.11 | x | 5.24 | x | 5.27 | x | ||||||
Net charge-offs to: |
||||||||||||
Provision for loan losses |
78.41 | % | 96.84 | % | 81.00 | % | ||||||
Average loans |
0.22 | 0.23 | 0.23 |
43
Noninterest Income
A key objective of the Company is the growth of noninterest income to enhance profitability and provide steady income. Fee-based businesses are typically non-credit related and not generally affected by fluctuations in interest rates.
The Companys fee-based businesses provide the opportunity to offer multiple products and services, which management believes will more closely align the customer with the Company. The Company is currently emphasizing fee-based businesses including trust and securities processing, bankcard, brokerage, health care services, and treasury management. Management believes it can offer these products and services both efficiently and profitably, as most share common platforms and support structures.
Table 4
SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)
Three Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Trust and securities processing |
$ | 73,357 | $ | 63,486 | $ | 9,871 | 15.55 | % | ||||||||
Trading and investment banking |
6,409 | 5,423 | 986 | 18.18 | ||||||||||||
Service charges on deposit accounts |
20,627 | 20,882 | (255 | ) | (1.22 | ) | ||||||||||
Insurance fees and commissions |
732 | 1,236 | (504 | ) | (40.78 | ) | ||||||||||
Brokerage fees |
3,075 | 2,886 | 189 | 6.55 | ||||||||||||
Bankcard fees |
17,185 | 16,032 | 1,153 | 7.19 | ||||||||||||
Gains on sales of securities available for sale, net |
2,569 | 1,519 | 1,050 | 69.12 | ||||||||||||
Equity earnings on alternative investments |
3,462 | | 3,462 | >100.00 | ||||||||||||
Other |
6,585 | 2,121 | 4,464 | >100.00 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest income |
$ | 134,001 | $ | 113,585 | $ | 20,416 | 17.97 | % | ||||||||
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Trust and securities processing |
$ | 144,920 | $ | 125,798 | $ | 19,122 | 15.20 | % | ||||||||
Trading and investment banking |
10,732 | 12,532 | (1,800 | ) | (14.36 | ) | ||||||||||
Service charges on deposits |
42,185 | 42,405 | (220 | ) | (0.52 | ) | ||||||||||
Insurance fees and commissions |
1,335 | 2,198 | (863 | ) | (39.26 | ) | ||||||||||
Brokerage fees |
4,890 | 5,832 | (942 | ) | (16.15 | ) | ||||||||||
Bankcard fees |
32,808 | 32,470 | 338 | 1.04 | ||||||||||||
Gains on sales of securities available for sale, net |
4,039 | 7,412 | (3,373 | ) | (45.51 | ) | ||||||||||
Equity earnings on alternative investments |
5,992 | | 5,992 | >100.00 | ||||||||||||
Other |
10,064 | 5,954 | 4,110 | 69.03 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest income |
$ | 256,965 | $ | 234,601 | $ | 22,364 | 9.53 | % | ||||||||
|
|
|
|
|
|
|
|
Fee-based, or noninterest income (summarized in Table 4), increased by $20.4 million, or 18.0 percent, during the three months ended June 30, 2014, and increased by $22.4 million, or 9.5 percent, during the six months ended June 30, 2014, compared to the same periods in 2013. Table 4 above summarizes the components of noninterest income and the respective year-over-year comparison for each category.
Trust and securities processing consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and investment management services, and servicing of mutual fund assets. The increase in these fees for the three and six-month periods compared to the same periods last year was primarily due
44
to changes in the following three categories of income. Institutional and personal investment management services fees for the three and six-month periods ended June 30, 2014, increased by $3.7 million, or 18.9 percent, and $6.7 million, or 17.2 percent, respectively. Fund administration and custody services fees for the three and six-month periods ended June 30, 2014, increased by $3.1 million, or 16.3 percent, and $4.5 million, or 11.6 percent, respectively. Advisory fee income from the Scout Funds for the three and six-month periods ended June 30, 2014, increased by $2.2 million, or 10.0 percent, and by $6.5 million, or 15.0 percent, respectively. Trust and securities processing fees are primarily asset-based. As such, they are highly correlated to the change in market value of the assets. Thus, the related income for the remainder of the year will be affected by changes in the securities markets. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels.
Trading and Investment Banking for the three and six-month periods ended June 30, 2014, increased by $1.0 million, or 18.2 percent, and decreased $1.8 million, or 14.4 percent, respectively. The income in this category is market driven and impacted by general increases or decreases in trading volume.
During the three and six-month periods ended June 30, 2014, $2.6 million and $4.0 million in pre-tax gains were recognized on the sales of securities available for sale, compared to $1.5 million and $7.4 million for the same periods in 2013. The investment portfolio is continually evaluated for opportunities to improve its performance and risk profile relative to market conditions and the Companys interest rate expectations. This can result in differences from quarter to quarter in the amount of realized gains.
During the three and six-month periods ended June 30, 2014, $3.5 million and $6.0 million of equity earnings on alternative investments were recognized on Prairie Capital Management investments. There were no unrealized gains or losses recognized in the same periods of 2013.
Other noninterest income for the three-month period ended June 30, 2014, increased $4.5 million, or 210.5 percent primarily driven by a $2.8 million gain on the sale of a branch property and increased fair value adjustments on interest rate swap transactions of $0.8 million compared to the same period in 2013. Other noninterest income for the six-month period ended June 30, 2014 increased $4.1 million, or 69.0 percent, primarily driven by the $2.8 million property gain noted above and increased fair value adjustments on interest rate swap transactions of $1.4 million.
45
Noninterest Expense
The components of noninterest expense are shown below on Table 5.
Table 5
SUMMARY OF NONINTEREST EXPENSE (unaudited in thousands)
Three Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Salaries and employee benefits |
$ | 89,532 | $ | 83,566 | $ | 5,966 | 7.14 | % | ||||||||
Occupancy, net |
9,705 | 9,273 | 432 | 4.66 | ||||||||||||
Equipment |
12,920 | 11,873 | 1,047 | 8.82 | ||||||||||||
Supplies and services |
5,554 | 5,362 | 192 | 3.58 | ||||||||||||
Marketing and business development |
6,307 | 5,705 | 602 | 10.55 | ||||||||||||
Processing fees |
14,817 | 14,293 | 524 | 3.67 | ||||||||||||
Legal and consulting |
4,632 | 4,844 | (212 | ) | (4.38 | ) | ||||||||||
Bankcard |
4,997 | 4,709 | 288 | 6.12 | ||||||||||||
Amortization of other intangible assets |
3,074 | 3,354 | (280 | ) | (8.35 | ) | ||||||||||
Regulatory fees |
2,709 | 2,484 | 225 | 9.06 | ||||||||||||
Contingency reserve |
5,272 | | 5,272 | >100.00 | ||||||||||||
Other |
6,992 | 4,848 | 2,144 | 44.22 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest expense |
$ | 166,511 | $ | 150,311 | $ | 16,200 | 10.78 | % | ||||||||
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Salaries and employee benefits |
$ | 178,413 | $ | 167,268 | $ | 11,145 | 6.66 | % | ||||||||
Occupancy, net |
19,410 | 19,160 | 250 | 1.30 | ||||||||||||
Equipment |
25,583 | 23,807 | 1,776 | 7.46 | ||||||||||||
Supplies and services |
10,191 | 9,849 | 342 | 3.47 | ||||||||||||
Marketing and business development |
10,909 | 9,977 | 932 | 9.34 | ||||||||||||
Processing fees |
28,468 | 28,383 | 85 | 0.30 | ||||||||||||
Legal and consulting |
8,004 | 8,445 | (441 | ) | (5.22 | ) | ||||||||||
Bankcard |
8,685 | 9,257 | (572 | ) | (6.18 | ) | ||||||||||
Amortization of other intangible assets |
6,176 | 6,809 | (633 | ) | (9.30 | ) | ||||||||||
Regulatory fees |
5,225 | 4,395 | 830 | 18.89 | ||||||||||||
Contingency reserve |
20,272 | | 20,272 | >100.00 | ||||||||||||
Other |
17,416 | 13,339 | 4,077 | 30.56 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest expense |
$ | 338,752 | $ | 300,689 | $ | 38,063 | 12.66 | % | ||||||||
|
|
|
|
|
|
|
|
Noninterest expense increased by $16.2 million, or 10.8 percent, for the three months ended June 30, 2014, and increased $38.1 million, or 12.7 percent, compared to the same period in 2013. Table 5 above summarizes the components of noninterest expense and the respective year-over-year comparison for each category.
Salaries and employee benefits increased by $6.0 million, or 7.1 percent, and increased $11.1 million, or 6.7 percent, for the three and six months ended June 30, 2014 compared to the same period in 2013. These increases are due to increases in salaries and wages of $2.5 million, or 4.7 percent, and $5.1 million, or 5.0 percent, for the three and six months ended June 30, 2014, compared to the same periods in 2013. Commissions and bonuses increased $1.2 million, or 6.7 percent, and $2.5 million, or 7.1 percent, for the three and six months ended June 30, 2014, compared to the same periods in 2013. Employee benefits expense increased $2.3 million, or 17.4 percent, and $3.6 million, or 11.8 percent, for the three and six months ended June 30, 2014, compared to the same periods in 2013.
46
Equipment expense increased $1.0 million, or 8.8 percent, and $1.8 million, or 7.5 percent, for the three and six months ended June 30, 2014 compared to the same period in 2013. The increases in both periods are due to increased computer hardware and software expenses.
Other noninterest expense increased $2.1 million, or 44.2 percent, and $4.1 million, or 30.6 percent, for the three and six months ended June 30, 2014 compared to the same period in 2013. The increase for the three-month period is due to increases of $0.8 million in fair value adjustments to the contingent consideration liabilities on acquisitions and increases in value adjustments on interest rate swap transactions of $0.6 million. The increase for the six-month period is due to increases of $2.1 million in fair value adjustments to the contingent consideration liabilities on acquisitions and increases in value adjustments on interest rate swap transactions of $1.4 million.
On June 30, 2014, the Company entered into a settlement agreement to resolve objections to its calculation of the earn-out amount owed to the sellers of PCM and a related incentive bonus calculation for the employees of PCM. As of March 31, 2014, $15.0 million of contingency reserve expense had been accrued related to this dispute. For the three-month period ended June 30, 2014, an additional $5.3 million of contingency reserve expense was recorded for a total estimated settlement liability of $20.3 million. Cash payments totaling $6.0 million were made on June 30, 2014 for this liability with final settlement payments to be made in the third quarter of 2015. This contingency reserve is included in the Other liabilities line on the Companys Consolidated Balance Sheet and the Contingency reserve line on Companys Consolidated Statements of Income.
Income Tax Expense
The Companys effective tax rate is 27.7 percent for the six months ended June 30, 2014, compared to 26.9 percent for the same period in 2013. The increase in the effective tax rate is primarily attributable to a decrease in federal tax credits.
Strategic Lines of Business
Table 6
Bank Operating Results (unaudited, dollars in thousands)
Three Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Net interest income |
$ | 72,481 | $ | 70,558 | $ | 1,923 | 2.73 | % | ||||||||
Provision for loan losses |
2,686 | 1,628 | 1,058 | 64.99 | ||||||||||||
Noninterest income |
56,006 | 46,436 | 9,570 | 20.61 | ||||||||||||
Noninterest expense |
100,928 | 92,540 | 8,388 | 9.06 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before taxes |
24,873 | 22,826 | 2,047 | 8.97 | ||||||||||||
Income tax expense |
7,211 | 6,035 | 1,176 | 19.49 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 17,662 | $ | 16,791 | $ | 871 | 5.19 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Six Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Net interest income |
$ | 143,602 | $ | 137,818 | $ | 5,784 | 4.20 | % | ||||||||
Provision for loan losses |
5,112 | 1,937 | 3,175 | >100.00 | ||||||||||||
Noninterest income |
103,425 | 99,184 | 4,241 | 4.28 | ||||||||||||
Noninterest expense |
208,671 | 184,076 | 24,595 | 13.36 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before taxes |
33,244 | 50,989 | (17,745 | ) | (34.80 | ) | ||||||||||
Income tax expense |
9,242 | 13,740 | (4,498 | ) | (32.74 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 24,002 | $ | 37,249 | $ | (13,247 | ) | (35.56 | )% | |||||||
|
|
|
|
|
|
|
|
47
Bank net income decreased by $13.2 million, or 35.6 percent, to $24.0 million for the six-month period ended June 30, 2014 compared to the prior year. Net interest income increased $5.8 million, or 4.2 percent over the same period in 2013 driven by commercial and commercial real estate loan growth, while being slightly offset by interest rate margin compression. Provision increased by $3.2 million, due to characteristics of the loan portfolio driving an increased allowance for loan loss reserve for this segment. Noninterest income increased $4.2 million, or 4.3 percent, over the same period in 2013 driven by increased trust and securities processing income of $4.3 million, increased unrealized gains on Prairie Capital Management equity method investments of $6.0 million, and an increase in other noninterest income of $4.6 million. The increase in trust and securities processing income is due to an increase in asset values and new business generated during the current year compared to the same period last year. The increase in other noninterest income is due to a gain on sale of a branch property of $2.8 million and an increase in fair value adjustments on interest rate swaps of $1.4 million. These increases were offset by decreases of $3.4 million in bond trading income, securities gains of $3.4 million, card services income of $1.7 million, and deposit service charges of $1.0 million compared to the same period last year.
Noninterest expense increased $24.6 million, or 13.4 percent, to $208.7 million compared to the prior year. The increase in noninterest expense is primarily due to a $20.3 million contingency reserve recorded in the current year and a $3.9 million increase in salaries and benefits compared to the same period last year. On June 30, 2014, the Company entered into a settlement agreement to resolve objections to its calculation of the earn-out amount owed to the sellers of PCM and a related incentive bonus calculation for the employees of PCM. A contingency reserve of $20.3 million was recorded during the six-month period ended June 30, 2014 related to the settlement.
Table 7
Payment Solutions Operating Results (unaudited, dollars in thousands)
Three Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Net interest income |
$ | 12,390 | $ | 11,192 | $ | 1,198 | 10.70 | % | ||||||||
Provision for loan losses |
2,314 | 3,372 | (1,058 | ) | (31.38 | ) | ||||||||||
Noninterest income |
21,219 | 18,640 | 2,579 | 13.84 | ||||||||||||
Noninterest expense |
24,603 | 21,850 | 2,753 | 12.60 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before taxes |
6,692 | 4,610 | 2,082 | 45.16 | ||||||||||||
Income tax expense |
1,910 | 1,203 | 707 | 58.77 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 4,782 | $ | 3,407 | $ | 1,375 | 40.36 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Six Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Net interest income |
$ | 24,778 | $ | 22,740 | $ | 2,038 | 8.96 | % | ||||||||
Provision for loan losses |
4,388 | 5,063 | (675 | ) | (13.33 | ) | ||||||||||
Noninterest income |
41,453 | 38,077 | 3,376 | 8.87 | ||||||||||||
Noninterest expense |
45,631 | 41,968 | 3,663 | 8.73 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before taxes |
16,212 | 13,786 | 2,426 | 17.60 | ||||||||||||
Income tax expense |
4,485 | 3,737 | 748 | 20.02 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 11,727 | $ | 10,049 | $ | 1,678 | 16.70 | % | ||||||||
|
|
|
|
|
|
|
|
Payment Solutions net income increased $1.7 million, or 16.7 percent, to $11.7 million from the prior year. Net interest income increased $2.0 million, or 9.0 percent and provision expense was flat compared to the prior year for the six months ended June 30, 2014. Noninterest income increased $3.4 million, or 8.9 percent, driven by an increase in card services income of $2.0 million. Noninterest expense increased by $3.7 million, or 8.7 percent, primarily due to increased staffing, technology, and occupancy expenses compared to the same period last year.
48
Table 8
Institutional Investment Management Operating Results (unaudited, dollars in thousands)
Three Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Net interest income |
$ | (1 | ) | $ | (10 | ) | $ | 9 | 90.00 | % | ||||||
Provision for loan losses |
| | | | ||||||||||||
Noninterest income |
33,999 | 29,155 | 4,844 | 16.61 | ||||||||||||
Noninterest expense |
22,111 | 18,856 | 3,255 | 17.26 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before taxes |
11,887 | 10,289 | 1,598 | 15.53 | ||||||||||||
Income tax expense |
3,375 | 2,708 | 667 | 24.63 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 8,512 | $ | 7,581 | $ | 931 | 12.28 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Six Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Net interest income |
$ | (3 | ) | $ | (10 | ) | $ | 7 | 70.00 | % | ||||||
Provision for loan losses |
| | | | ||||||||||||
Noninterest income |
68,094 | 57,708 | 10,386 | 18.00 | ||||||||||||
Noninterest expense |
47,998 | 37,700 | 10,298 | 27.32 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before taxes |
20,093 | 19,998 | 95 | 0.48 | ||||||||||||
Income tax expense |
5,523 | 5,376 | 147 | 2.73 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 14,570 | $ | 14,622 | $ | (52 | ) | (0.36 | )% | |||||||
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014, Institutional Investment Management net income was flat with the same period last year. Noninterest income increased $10.4 million, or 18.0 percent, due to a $3.8 million increase in advisory fees from separately managed accounts, and a $6.5 million increase in fees from the Scout Funds, which are both driven by increased asset values. The increase in noninterest expense of $10.3 million, or 27.3 percent, over the prior year was primarily due to a $3.9 million increase in salaries and benefits and a $4.6 million increase in contingent consideration liabilities related to the Reams acquisition.
49
Table 9
Asset Servicing Operating Results (unaudited, dollars in thousands)
Three Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Net interest income |
$ | 1,300 | $ | 587 | $ | 713 | >100.00 | % | ||||||||
Provision for loan losses |
| | | | ||||||||||||
Noninterest income |
22,777 | 19,354 | 3,423 | 17.69 | ||||||||||||
Noninterest expense |
18,869 | 17,065 | 1,804 | 10.57 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before taxes |
5,208 | 2,876 | 2,332 | 81.08 | ||||||||||||
Income tax expense |
1,492 | 726 | 766 | >100.00 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 3,716 | $ | 2,150 | $ | 1,566 | 72.84 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Six Months Ended June 30, |
Dollar Change |
Percent Change |
||||||||||||||
2014 | 2013 | 14-13 | 14-13 | |||||||||||||
Net interest income |
$ | 3,238 | $ | 1,262 | $ | 1,976 | >100.00 | % | ||||||||
Provision for loan losses |
| | | | ||||||||||||
Noninterest income |
43,993 | 39,632 | 4,361 | 11.00 | ||||||||||||
Noninterest expense |
36,452 | 36,945 | (493 | ) | (1.33 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before taxes |
10,779 | 3,949 | 6,830 | >100.00 | ||||||||||||
Income tax expense |
2,993 | 999 | 1,994 | >100.00 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 7,786 | $ | 2,950 | $ | 4,836 | >100.00 | % | ||||||||
|
|
|
|
|
|
|
|
Asset Servicing net income increased $4.8 million, or 163.9 percent, to $7.8 million compared to the same period last year. Net interest income increased $2.0 million compared to last year. Noninterest income increased $4.4 million, or 11.0 percent, due to a $4.4 million, or 11.3%, increase in fee income driven primarily by new business added in transfer agent, alternative investment, and fund administration services. Noninterest expense remained flat with the same period last year.
Balance Sheet Analysis
Total assets of the Company decreased by $1.3 billion, or 8.0 percent, as of June 30, 2014, compared to December 31, 2013, primarily due to a decrease in due from Federal Reserve balances of $1.9 billion, or 93.0 percent, offset by an increase in loan balances of $400.2 million, or 6.1 percent. The overall decrease in total assets is directly related to a corresponding decrease in deposit balances of $1.5 billion, or 10.8 percent, from December 31, 2013 to June 30, 2014.
Total assets of the Company increased $309.5 million as of June 30, 2014, or 2.0 percent, compared to June 30, 2013. This increase is a result of an increase in loans of $581.8 million, or 9.2 percent, offset by a decrease in due from Federal Reserve balances of $440.0 million, or 75.4 percent. The overall increase in total assets from June 30, 2013 to June 30, 2014 is directly related to a corresponding increase in total deposits of $444.5 million, or 3.8 percent, and an increase in total shareholders equity of $374.9 million, or 30.6 percent, as a result of the common stock issuance completed in September 2013, which increased total shareholders equity by $231.4 million. The increases in total deposits and shareholders equity from June 30, 2013 to June 30, 2014 were offset by decreases in borrowed funds of $550.7 million.
50
Table 10
SELECTED BALANCE SHEET INFORMATION (unaudited, dollars in thousands)
June 30, | December 31, | |||||||||||
2014 | 2013 | 2013 | ||||||||||
Total assets |
$ | 15,562,690 | $ | 15,253,217 | $ | 16,911,852 | ||||||
Loans, net of unearned interest |
6,920,683 | 6,338,921 | 6,520,512 | |||||||||
Total investment securities |
7,033,433 | 7,178,637 | 7,051,127 | |||||||||
Interest-bearing due from banks |
255,453 | 607,470 | 2,093,467 | |||||||||
Total earning assets |
14,218,575 | 14,127,047 | 15,678,730 | |||||||||
Total deposits |
12,174,289 | 11,729,750 | 13,640,766 | |||||||||
Total borrowed funds |
1,613,039 | 2,162,556 | 1,588,380 |
Loans and Loans Held For Sale
Loans represent the Companys largest source of interest income. In addition to growing the commercial loan portfolio, management believes its middle market commercial business and its consumer business, including home equity and credit card loan products, are the market niches that represent its best opportunity to cross-sell fee-related services.
Total loan balances increased $400.2 million, or 6.1 percent, to $6.9 billion at June 30, 2014 compared to December 31, 2013 and increased $581.8 million, or 9.2 percent, compared to June 30, 2013. Compared to December 31, 2013, commercial loans increased $237.7 million, or 7.2 percent. Compared to June 30, 2013, commercial loans increased $207.5 million, or 6.2 percent, commercial real estate increased $160.2 million, or 10.2 percent, and construction real estate increased $124.7 million, or 116.4 percent. The increase in total loans is driven by the Companys focus on generating higher-yielding assets by shifting assets from the securities portfolio to the loan portfolio.
Nonaccrual, past due and restructured loans are discussed under Credit Risk Management within Item 3. Quantitative and Qualitative Disclosures About Market Risk in this report.
Investment Securities
The Companys securities portfolio provides liquidity as a result of the composition and average life of the underlying securities. This liquidity can be used to fund loan growth or to offset the outflow of traditional funding sources. In addition to providing a potential source of liquidity, the securities portfolio can be used as a tool to manage interest rate sensitivity. The Companys goal in the management of its securities portfolio is to maximize return within the Companys parameters of liquidity goals, interest rate risk and credit risk. The Company maintains strong liquidity levels while investing in only high-grade securities. The securities portfolio generates the Companys second largest component of interest income.
Investment securities totaled $7.0 billion at June 30, 2014, compared to $7.1 billion at December 31, 2013, and $7.2 billion at June 30, 2013. Management expects collateral pledging requirements for public funds, loan demand, and deposit funding to be the primary factors impacting changes in the level of security holdings. Investment securities comprised 49.5 percent, 45.0 percent, and 50.8 percent, respectively, of the earning assets as of June 30, 2014, December 31, 2013, and June 30, 2013. There were $5.0 billion of these securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, and other potential borrowings as required by law at June 30, 2014. Of this amount, securities with a market value of $1.4 billion at June 30, 2014 were pledged at the Federal Reserve Discount Window but were unencumbered as of that date.
Investment securities had an average tax-equivalent yield of 1.98 percent for the first six months of 2014 compared to 1.97 percent for the same period in 2013. The average life of the securities portfolio was 47.4 months at June 30, 2014 compared to 47.7 months at December 31, 2013 and 48.8 months at June 30, 2013. The decrease in average life from June 30, 2013 and December 31, 2013 was primarily related to the companys strategy to gradually lower the market value sensitivity of the portfolio as well as to better position the portfolio for a rising interest rate environment.
51
Deposits and Borrowed Funds
Deposits decreased $1.5 billion, or 10.8 percent, from December 31, 2013 to June 30, 2014 and increased $444.5 million, or 3.8 percent, from June 30, 2013. Noninterest-bearing deposits increased $209.7 million and interest-bearing deposits decreased $1.7 billion from December 31, 2013. The decrease in interest-bearing deposits from December 31, 2013 is primarily due to a single Asset Servicing client that migrated approximately $1.5 billion of money market deposits to another financial institution during the first quarter of 2014. Noninterest-bearing deposits increased $512.1 million and interest-bearing deposits decreased $0.1 million compared to June 30, 2013.
Deposits represent the Companys primary funding source for its asset base. In addition to the core deposits garnered by the Companys retail branch structure, the Company continues to focus on its cash management services, as well as its trust and mutual fund servicing segments, in order to attract and retain additional core deposits. Management believes a strong core deposit composition is one of the Companys key strengths given its competitive product mix.
Borrowed funds remained flat with December 31, 2013 and decreased $0.5 million from June 30, 2013. Borrowings, other than repurchase agreements, are a function of the source and use of funds and will fluctuate to cover short term gaps in funding.
Federal funds purchased and securities sold under agreement to repurchase totaled $1.6 billion at June 30, 2014 and December 31, 2013, compared to $2.2 billion at June 30, 2013. Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company under an agreement to repurchase the same or similar issues at an agreed-upon price and date.
Capital and Liquidity
The Company places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Companys ability to capitalize on business growth and acquisition opportunities. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. The Company manages capital for each subsidiary based upon the subsidiarys respective risks and growth opportunities as well as regulatory requirements.
Total shareholders equity was $1.6 billion at June 30, 2014, a $95.3 million increase compared to December 31, 2013 and a $374.9 million increase compared to June 30, 2013. The increase in shareholders equity from June 30, 2013 to June 30, 2014 is a result of the common stock issuance completed in September 2013, which increased total shareholders equity by $231.4 million.
The Companys Board of Directors authorized, at its April 22, 2014 and April 23, 2013 meetings, the repurchase of up to two million shares of the Companys common stock during the twelve months following the meetings. During the six months ended June 30, 2014 and 2013, the Company acquired 52,123 shares and 37,848 shares under the 2014 and 2013 plans, respectively, of its common stock. The Company has not made any purchases other than through these plans.
On July 22, 2014, the Board of Directors declared a dividend of $0.225 per share. The dividend will be paid on October 1, 2014 to shareholders of record on September 10, 2014.
Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institutions assets. A financial institutions total capital is required to equal at least 8 percent of risk-weighted assets. At least half of that 8 percent must consist of Tier 1 core capital, and the remainder may be Tier 2 supplementary capital. The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance-sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. Due to the Companys high level of core capital and substantial portion of earning assets invested in government securities, the Tier 1 capital ratio of 13.81 percent and total capital ratio of 14.62 percent substantially exceed the regulatory minimums.
52
The Company is also required to maintain a leverage ratio equal to or greater than 4 percent. The leverage ratio is Tier 1 core capital to total average assets less goodwill and intangibles. The Companys leverage ratio of 8.70 percent as of June 30, 2014 substantially exceeds the regulatory minimum.
In July 2013 the Federal Reserve approved a final rule to implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The final rule increases minimum requirements for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets.
The final rule substantially revises the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and UMB Bank, n.a., compared to the current U.S. risk-based capital rules. The rule defines the components of capital and addresses other issues affecting the numerator in banking institutions regulatory capital ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions regulatory capital ratios and replaces the existing risk-weighting approach to enhance risk sensitivity.
Beginning January 1, 2015, the Company must be compliant with revised minimum regulatory capital ratios and will begin the transitional period for definitions of regulatory capital and regulatory capital adjustments and deductions established under the final rule. Compliance with the risk-weighted asset calculations will also be required on January 1, 2015. The impact of these new rules will require the Company to maintain capital in excess of current well-capitalized regulatory standards. The Company believes its capital ratios will be higher than those required in the final rule.
Table 11
The Companys capital position is summarized in the table below and exceeds regulatory requirements:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
RATIOS |
2014 | 2013 | 2014 | 2013 | ||||||||||||
Return on average assets |
0.89 | % | 0.81 | % | 0.73 | % | 0.88 | % | ||||||||
Return on average equity |
8.77 | 9.31 | 7.48 | 10.17 | ||||||||||||
Average equity to assets |
10.15 | 8.67 | 9.75 | 8.67 | ||||||||||||
Tier 1 risk-based capital ratio |
13.81 | 10.72 | 13.81 | 10.72 | ||||||||||||
Total risk-based capital ratio |
14.62 | 11.52 | 14.62 | 11.52 | ||||||||||||
Leverage ratio |
8.70 | 6.76 | 8.70 | 6.76 |
The Companys per share data is summarized in the table below.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Per Share Data |
2014 | 2013 | 2014 | 2013 | ||||||||||||
Earnings basic |
$ | 0.77 | $ | 0.75 | $ | 1.30 | $ | 1.62 | ||||||||
Earnings diluted |
0.76 | 0.74 | 1.28 | 1.61 | ||||||||||||
Cash dividends |
0.225 | 0.215 | 0.450 | 0.430 | ||||||||||||
Dividend payout ratio |
29.22 | % | 28.67 | % | 34.62 | % | 26.54 | % | ||||||||
Book value |
$ | 35.21 | $ | 30.20 | $ | 35.21 | $ | 30.20 |
53
Off-balance Sheet Arrangements
The Companys main off-balance sheet arrangements are loan commitments, commercial and standby letters of credit, futures contracts and forward exchange contracts, which have maturity dates rather than payment due dates. Please see Note 7, Commitments, Contingencies and Guarantees in the Notes to Consolidated Financial Statements for detailed information on these arrangements.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations discusses the Companys condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to allowance for loan losses, investments, long-lived assets, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from the recorded estimates under different assumptions or conditions. A summary of critical accounting policies is listed in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of the Companys Annual Report Form 10-K for the fiscal year ended December 31, 2013.
54
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of financial instruments. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading.
Interest Rate Risk
In the banking industry, a major risk exposure is changing interest rates. To minimize the effect of interest rate changes to net interest income and exposure levels to economic losses, the Company manages its exposure to changes in interest rates through asset and liability management within guidelines established by its Asset Liability Committee (ALCO) and approved by the Companys Board of Directors. The ALCO has the responsibility for approving and ensuring compliance with asset/liability management policies, including interest rate exposure. The Companys primary method for measuring and analyzing consolidated interest rate risk is the Net Interest Income Simulation Analysis. The Company also uses a Net Portfolio Value model to measure market value risk under various rate change scenarios and a gap analysis to measure maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time. On a limited basis, the Company uses hedges such as swaps and futures contracts to manage interest rate risk on certain loans and trading securities.
Overall, the Company manages interest rate risk by positioning the balance sheet to maximize net interest income while maintaining an acceptable level of interest rate and credit risk, remaining mindful of the relationship among profitability, liquidity, interest rate risk and credit risk.
Net Interest Income Modeling
The Companys primary interest rate risk tool, the Net Interest Income Simulation Analysis, measures interest rate risk and the effect of interest rate changes on net interest income and net interest margin. This analysis incorporates substantially all of the Companys assets and liabilities together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on net interest income of a 300 basis point upward gradual and a 100 basis point downward gradual change of market interest rates over a one-year period. Assumptions are made to project rates for new loans and deposits based on historical analysis, management outlook, and repricing strategies. Asset prepayments and other market risks are developed from industry estimates of prepayment speeds and other market changes. Since the results of these simulations can be significantly influenced by assumptions utilized, management evaluates the sensitivity of the simulation results to changes in assumptions.
55
Table 12 shows the net interest income increase or decrease over the next twelve months as of June 30, 2014 and 2013 based on hypothetical gradual changes in interest rates.
Table 12
MARKET RISK (unaudited, dollars in thousands)
Hypothetical change in interest rate (Rates in Basis Points) |
June 30, 2014 Amount of change |
June 30, 2013 Amount of change |
||||||
300 |
$ | 24,877 | $ | 9,410 | ||||
200 |
16,893 | 5,661 | ||||||
100 |
8,842 | 1,651 | ||||||
Static |
| | ||||||
(100) |
N/A | N/A |
The Company is sensitive at June 30, 2014 to increases in rates. Increases in interest rates are projected to cause increases in net interest income. Due to the already low interest rate environment, the Company did not include a 100 basis point falling scenario. There is little room for projected yields on liabilities to decrease. For projected increases in rates, net interest income is projected to increase due to the Company being positioned to adjust yields on assets with changes in market rates more than the cost of paying liabilities is projected to increase.
Trading Account
The Companys subsidiary, UMB Bank, n.a (the Bank) carries taxable governmental securities in a trading account that is maintained according to Board-approved policy and procedures. The policy limits the amount and type of securities that can be carried in the trading account and requires compliance with any limits under applicable law and regulations, and mandates the use of a value-at-risk methodology to manage price volatility risks within financial parameters. The risk associated with the carrying of trading securities is offset by the sale of exchange-traded financial futures contracts, with both the trading account and futures contracts marked to market daily. This account had a balance of $26.5 million as of June 30, 2014 compared to $28.5 million as of December 31, 2013.
The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The discussion in Table 12 above of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading, because the instruments held for trading represent such a small portion of the Companys portfolio that the interest rate risk associated with them is immaterial.
Other Market Risk
The Company does have minimal foreign currency risk as a result of foreign exchange contracts. See Note 7 Commitments, Contingencies and Guarantees in the notes to the Condensed Consolidated Financial Statements.
Credit Risk Management
Credit risk represents the risk that a customer or counterparty may not perform in accordance with contractual terms. The Company utilizes a centralized credit administration function, which provides information on the Banks risk levels, delinquencies, an internal ranking system and overall credit exposure. Loan requests are centrally reviewed to ensure the consistent application of the loan policy and standards. In addition, the Company has an internal loan review staff that operates independently of the Bank. This review team performs periodic examinations of the banks loans for credit quality, documentation and loan administration. The respective regulatory authority of the Bank also reviews loan portfolios.
A primary indicator of credit quality and risk management is the level of nonperforming loans. Nonperforming loans include both nonaccrual loans and restructured loans. The Companys nonperforming loans increased $1.7 million to $27.2 million at June 30, 2014, compared to June 30, 2013 and decreased $3.5 million, compared to December 31, 2013.
56
The Company had $1.5 million and $3.6 million of other real estate owned as of June 30, 2014 and 2013 respectively, compared to $1.3 million as of December 31, 2013. Loans past due more than 90 days totaled $4.5 million as of June 30, 2014, compared to $4.0 million at June 30, 2013 and $3.2 million as of December 31, 2013.
A loan is generally placed on nonaccrual status when payments are past due 90 days or more and/or when management has considerable doubt about the borrowers ability to repay on the terms originally contracted. The accrual of interest is discontinued and recorded thereafter only when actually received in cash.
Certain loans are restructured to provide a reduction or deferral of interest or principal due to deterioration in the financial condition of the respective borrowers. The Company had $11.6 million of restructured loans at June 30, 2014, $14.0 million at June 30, 2013 and $12.1 million at December 31, 2013.
Table 13
LOAN QUALITY (unaudited, dollars in thousands)
June 30, | December 31, | |||||||||||
2014 | 2013 | 2013 | ||||||||||
Nonaccrual loans |
$ | 16,117 | $ | 12,576 | $ | 19,305 | ||||||
Restructured loans on nonaccrual |
11,058 | 12,913 | 11,401 | |||||||||
|
|
|
|
|
|
|||||||
Total nonperforming loans |
27,175 | 25,489 | 30,706 | |||||||||
Other real estate owned |
1,455 | 3,573 | 1,288 | |||||||||
|
|
|
|
|
|
|||||||
Total nonperforming assets |
$ | 28,630 | $ | 29,062 | $ | 31,994 | ||||||
|
|
|
|
|
|
|||||||
Loans past due 90 days or more |
$ | 4,522 | $ | 4,013 | $ | 3,218 | ||||||
Restructured loans accruing |
554 | 1,135 | 665 | |||||||||
Allowance for Loan Losses |
76,802 | 71,647 | 74,751 | |||||||||
|
|
|
|
|
|
|||||||
Ratios |
||||||||||||
Nonperforming loans as a percent of loans |
0.39 | % | 0.40 | % | 0.47 | % | ||||||
Nonperforming assets as a percent of loans plus other real estate owned |
0.41 | 0.46 | 0.49 | |||||||||
Nonperforming assets as a percent of total assets |
0.18 | 0.19 | 0.19 | |||||||||
Loans past due 90 days or more as a percent of loans |
0.07 | 0.06 | 0.05 | |||||||||
Allowance for loan losses as a percent of loans |
1.11 | 1.13 | 1.15 | |||||||||
Allowance for loan losses as a multiple of nonperforming loans |
2.83 | x | 2.81 | x | 2.43 | x |
Liquidity Risk
Liquidity represents the Companys ability to meet financial commitments through the maturity and sale of existing assets or availability of additional funds. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. The primary source of liquidity for the Company is regularly scheduled payments and maturity of assets, which include $6.7 billion of high-quality securities available for sale. Securities available for sale with a market value of $5.0 billion at June 30, 2014 were pledged to secure U.S. Government deposits, other public deposits and certain trust deposits as required by law. Of this amount, securities with a market value of $1.4 billion at June 30, 2014 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.
The liquidity of the Company and the Bank is also enhanced by its activity in the federal funds market and by its core deposits. Neither the Company nor its subsidiaries are active in the debt market. The traditional funding source for the Companys subsidiary banks has been core deposits. In 2013, the Company completed the issuance of 4.5 million shares of common stock with net proceeds of $231.4 million to be used for strategic growth purposes. Management believes it can raise debt or equity capital on favorable terms in the future, should the need arise. The Bank is a member of the Federal Home Loan Bank (FHLB) system, which also provides an additional source of funding.
57
The Company also has other commercial commitments that may impact liquidity. These commitments include unused commitments to extend credit, standby letters of credit and financial guarantees, and commercial letters of credit. The total amount of these commercial commitments at June 30, 2014 was $5.4 billion. Since many of these commitments expire without being drawn upon, the total amount of these commercial commitments does not necessarily represent the future cash requirements of the Company.
The Companys cash requirements consist primarily of dividends to shareholders, debt service, operating expenses, and treasury stock purchases. Management fees and dividends received from bank and non-bank subsidiaries traditionally have been sufficient to satisfy these requirements and are expected to be sufficient in the future. The Bank is subject to various rules regarding payment of dividends to the Company. For the most part, the Bank can pay dividends at least equal to its current years earnings without seeking prior regulatory approval. The Company also uses cash to inject capital in its bank and non-bank subsidiaries to maintain adequate capital as well as fund strategic initiatives.
To enhance general working capital needs, the Company has a revolving line of credit with Wells Fargo, N.A. which allows the Company to borrow up to $25.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Companys option either 1.00 percent above LIBOR or 1.75 percent below Prime on the date of an advance. The Company will also pay a 0.2 percent unused commitment fee for unused portions of the line of credit. The Company had no advances outstanding at June 30, 2014.
Operational Risk
Operational risk generally refers to the risk of loss resulting from the Companys operations, including those operations performed for the Company by third parties. This would include but is not limited to the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees or others, errors relating to transaction processing, breaches of the internal control system and compliance requirements, and unplanned interruptions in service. This risk of loss also includes the potential legal or regulatory actions that could arise as a result of an operational deficiency, or as a result of noncompliance with applicable regulatory standards. Included in the legal and regulatory issues with which the Company must comply are a number of imposed rules resulting from the enactment of the Sarbanes-Oxley Act of 2002.
The Company operates in many markets and places reliance on the ability of its employees and systems to properly process a high number of transactions. In the event of a breakdown in the internal control systems, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation. In order to address this risk, management maintains a system of internal controls with the objective of providing proper transaction authorization and execution, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other data.
The Company maintains systems of controls that provide management with timely and accurate information about the Companys operations. These systems have been designed to manage operational risk at appropriate levels given the Companys financial strength, the environment in which it operates, and considering factors such as competition and regulation. The Company has also established procedures that are designed to ensure that policies relating to conduct, ethics and business practices are followed on a uniform basis. In certain cases, the Company has experienced losses from operational risk. Such losses have included the effects of operational errors that the Company has discovered and included as expense in the statement of income. While there can be no assurance that the Company will not suffer such losses in the future, management continually monitors and works to improve its internal controls, systems and corporate-wide processes and procedures.
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ITEM 4. | CONTROLS AND PROCEDURES |
The Sarbanes-Oxley Act of 2002 requires the Chief Executive Officer and the Chief Financial Officer to make certain certifications with respect to this report and to the Companys disclosure controls and procedures and internal control over financial reporting. The Company has a Code of Ethics that expresses the values that drive employee behavior and maintains the Companys commitment to the highest standards of ethics.
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys Disclosure Controls and Procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by the report, the Companys disclosure controls and procedures are effective for ensuring the following criteria for the information the Company is required to report in its periodic SEC filings. SEC filings are recorded, processed, summarized, and reported within the time period required and that information required to be disclosed by the Company is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Internal Control Over Financial Reporting
There has been no change in the Companys internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the three months ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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ITEM 1. | LEGAL PROCEEDINGS |
In the normal course of business, the Company and its subsidiaries are named defendants in various legal proceedings. In the opinion of management, after consultation with legal counsel, none of these proceedings are expected to have a materially adverse effect on the financial position, results of operations, or cash flows of the Company.
ITEM 1A. | RISK FACTORS |
There were no material changes to the risk factors as previously disclosed in response to Item 1A to Part 1 of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The table below sets forth the information with respect to purchases made by or on behalf of the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three months ended June 30, 2014.
ISSUER PURCHASE OF EQUITY SECURITIES
Period | (a) Total Number of Shares (or Units) Purchased |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
April 1-April 22, 2014 |
97 | $ | 60.55 | 97 | 1,910,813 | |||||||||||
April 23-April 30, 2014 |
| | | 2,000,000 | ||||||||||||
May 1-May 31, 2014 |
3,993 | 57.28 | 3,993 | 1,996,007 | ||||||||||||
June 1-June 30, 2014 |
1,063 | 59.17 | 1,063 | 1,994,944 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total |
5,153 | $ | 57.73 | 5,153 | ||||||||||||
|
|
|
|
|
|
On April 23, 2013, the Company announced a plan to repurchase up to two million shares of common stock, which terminated on April 22, 2014. On April 22, 2014, the Company announced a plan to repurchase up to two million shares of common stock. This plan will terminate on April 21, 2015. The Company has not made any repurchases other than through this plan. All open market share purchases under the share repurchase plan are intended to be within the scope of Rule 10b-18 promulgated under the Exchange Act. Rule 10b-18 provides a safe harbor for purchases in a given day if the Company satisfies the manner, timing and volume conditions of the rule when purchasing its own common shares.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
None.
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ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
a) | The following exhibits are filed herewith: |
i. | 3.1 Articles of Incorporation restated as of April 25, 2006. Amended Article III was filed with the Missouri Secretary of State on May 18, 2006 and incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and filed with the Commission on May 9, 2006. | |
ii. | 3.2 Bylaws, amended and restated as of January 28, 2014 incorporated by reference to Exhibit 3 (ii).2 to the Companys Current Report on Form 8-K and filed with the Commission on January 28, 2014. | |
iii. | 4 Description of the Registrants common stock in Amendment No. 1 on Form 8, incorporated by reference to its General Form for Registration of Securities on Form 10 dated March 5, 1993. | |
iv. | 10.1 Settlement Agreement and Release dated June 30, 2014 incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K and filed with the Commission on July 3, 2014. | |
v. | 31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act. | |
vi. | 31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act. | |
vii. | 32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act. | |
viii. | 32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act. | |
ix. | 101.INS XBRL Instance | |
x. | 101.SCH XBRL Taxonomy Extension Schema | |
xi. | 101.CAL XBRL Taxonomy Extension Calculation | |
xii. | 101.DEF XBRL Taxonomy Extension Definition | |
xiii. | 101.LAB XBRL Taxonomy Extension Labels | |
xiv. | 101.PRE XBRL Taxonomy Extension Presentation |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
UMB FINANCIAL CORPORATION |
/s/ Brian J. Walker |
Brian J. Walker |
Chief Financial Officer |
Chief Accounting Officer |
Date: July 31, 2014 |
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