10-K 1 d455875d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark one)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2012

 

¨ 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 No.)
1010 Grand Boulevard, Kansas City, Missouri   64106
(Address of principal executive offices)   (ZIP Code)

(Registrant’s telephone number, including area code): (816) 860-7000

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, $1.00 Par Value   The NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     ¨  Yes    x  No

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.     x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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

As of June 30, 2012 the aggregate market value of common stock outstanding held by nonaffiliates of the registrant was approximately $1,764,827,239 based on the NASDAQ Global Select Market closing price of that date.

Indicate the number of shares outstanding of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

  Outstanding at February 14, 2013

Common Stock, $1.00 Par Value

  40,518,987

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on April 24, 2013, are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

INDEX

 

PART I

     3   

ITEM 1. BUSINESS

     3   

ITEM 1A. RISK FACTORS

     11   

ITEM 1B. UNRESOLVED STAFF COMMENTS

     14   

ITEM 2. PROPERTIES

     14   

ITEM 3. LEGAL PROCEEDINGS

     15   

ITEM 4. MINE SAFETY DISCLOSURES

     15   

PART II

     16   

ITEM  5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     16   

ITEM 6. SELECTED FINANCIAL DATA

     17   

ITEM  7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     19   

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     45   

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     52   

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     100   

ITEM 9A. CONTROLS AND PROCEDURES

     100   

ITEM 9B. OTHER INFORMATION

     102   

PART III

     102   

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     102   

ITEM 11. EXECUTIVE COMPENSATION

     102   

ITEM  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     102   

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     103   

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     103   

PART IV

     103   

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

     103   

SIGNATURES

     106   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

  

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

  

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

  

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

  


Table of Contents

PART I

ITEM 1.  BUSINESS

General

UMB Financial Corporation (the Company) was organized as a corporation in 1967 under Missouri law for the purpose of becoming a bank holding company registered under the Bank Holding Company Act of 1956 (BHCA). In 2001, the Company elected to become a financial holding company under the Gramm-Leach-Bliley Act of 1999 (GLB Act). The Company owns all of the outstanding stock of one commercial bank and 21 other subsidiaries.

The commercial bank is engaged in general commercial banking business. The subsidiary bank, UMB Bank, n.a. (the Bank), whose principal office is in Missouri, also has branches in Arizona, Colorado, Illinois, Kansas, Nebraska and Oklahoma. The bank offers a full range of banking services to commercial, retail, government and correspondent bank customers. In addition to standard banking functions the Bank provides commercial and retail banking services including investment and cash management services and a full range of trust activities for individuals, estates, business corporations, governmental bodies and public authorities. The Company formerly had four subsidiary banks, UMB Bank, n.a., UMB Bank Colorado, n.a., UMB National Bank of America, n.a., and UMB Bank Arizona, n.a. These subsidiary banks were merged into the lead subsidiary bank UMB Bank, n.a. effective with the close of business on December 31, 2012.

The significant non-banking subsidiaries of the Company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance and registered investment advisors, offering equity and fixed income investment strategies for institutions and individual investors. The Company’s products and services are grouped into four segments, Bank, Payment Solutions, Institutional Investment Management, and Asset Servicing. These segments are described in detail with their related financial results in Note 12 to the Consolidated Financial Statements provided in Item 8, pages 83 through 84 of this report. The primary non-bank subsidiaries of the Company are described below.

UMB Fund Services, Inc., located in Milwaukee, Wisconsin, Kansas City, Missouri and Boston, Massachusetts, provides fund accounting, transfer agent, and other services to mutual fund groups representing funds and managed account services to asset management groups. In addition, JD Clark & Co., Inc., a subsidiary of UMB Fund Services, Inc., located in Ogden, Utah and Media, Pennsylvania provides similar services to alternative investment groups.

Scout Investments, Inc. is an institutional asset management company located in Kansas City, Missouri. Scout Investments, Inc. offers domestic and international equity investments through its Scout Asset Management Division and fixed income investments through its Reams Asset Management Division.

Prairie Capital Management, LLC, headquartered in Kansas City, Missouri, is a wealth management consulting firm and serves as investment manager to proprietary pooled investment vehicles, including traditional diversified equity funds, hedge funds, and private equity funds. Prairie Capital has branch offices in Illinois, Colorado, and Pennsylvania.

On a full-time equivalent basis at December 31, 2012, the Company and its subsidiaries employed 3,448 persons.

Segment Information.    Financial information regarding the Company’s four segments is included in Note 12 to the Consolidated Financial Statements provided in Item 8, pages 83 through 84 of this report.

Competition.    The Company faces intense competition from hundreds of financial service providers in each of its business segments in the various markets served. The Company competes with other traditional and non-traditional financial service providers including banks, thrifts, finance companies, mutual funds, mortgage

 

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banking companies, brokerage companies, insurance companies, investment managers and credit unions. Banking customers are generally influenced by convenience of location, quality of service, personal contact, price of services, and availability of products. Investment advisory services compete primarily on returns, expenses, ratings by outside rating services, and continuity of management. Fund Services competes based on price and quality of services. The impact from competition is critical not only to pricing, but also to transaction execution, products and services offered, innovation and reputation. Within the Kansas City banking market, the Company ranks first based on the amount of deposits at June 30, 2012, the most recent date for which deposit information is available from the Federal Deposit Insurance Corporation (FDIC). At June 30, 2012, the Company had 13.8 percent of the deposits in its primary market, the Kansas City metropolitan area, compared to 13.4 percent at June 30, 2011.

Monetary Policy and Economic Conditions.    The Company’s business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. It is particularly affected by the policies of the Board of Governors of the Federal Reserve System (the Federal Reserve Board or FRB), which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are: conducting open market operations in United States government securities; changing the discount rates of borrowings of depository institutions; imposing or changing reserve requirements against depository institutions’ deposits; and imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. Monetary policy and economic conditions also greatly affect the equity and fixed income markets. The Company’s investment advisory and investment servicing business derive their income based on the pricing for both investment advisory and fixed income investments. The policies of the FRB have a material effect on the Company’s business, results of operations and financial condition.

Supervision and Regulation.    As a bank holding company and a financial holding company, the Company (and its subsidiaries) is subject to extensive regulation and is affected by numerous federal and state laws and regulations.

Supervision.    The Company is subject to regulation and examination by the FRB. The Bank is subject to regulation and examination by the Office of the Comptroller of the Currency (OCC). UMB Insurance, Inc. is regulated by state agencies in the states in which it operates. Scout Investments, Inc., Scout Distributors, LLC, Prairie Capital Management, LLC and UMB Fund Services, Inc. are subject to the rules and regulations of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). The FRB possesses cease and desist powers over bank holding companies if their actions represent unsafe or unsound practices or violations of law. In addition, the FRB is empowered to impose civil monetary penalties for violations of banking statutes and regulations. Regulation by the FRB is intended to protect depositors of the Company’s bank, not the Company’s shareholders. The Company is subject to a number of restrictions and requirements imposed by the Sarbanes-Oxley Act of 2002 relating to internal controls over financial reporting, disclosure controls and procedures, loans to directors or executive officers of the Company and its subsidiaries, the preparation and certification of the Company’s consolidated financial statements, the duties of the Company’s audit committee, relations with and functions performed by the Company’s independent auditors, and various accounting and corporate governance matters. The Company’s brokerage affiliate, UMB Financial Services, Inc., is regulated by the SEC, FINRA, and is also subject to certain regulations of the various states in which it transacts business. It is subject to regulations covering all aspects of the securities business, including sales methods, trade practices among broker/dealers, capital structure, uses and safekeeping of customers’ funds and securities, recordkeeping, and the conduct of directors, officers and employees. The SEC and the organizations to which it has delegated certain regulatory authority may conduct administrative proceedings that can result in censure, fines, suspension or expulsion of a broker/dealer, its directors, officers and employees. The principal purpose of regulation of securities broker/dealers is the protection of customers and the securities market, rather than the protection of stockholders of broker/dealers.

 

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Limitation on Acquisitions and Activities.    The Company is subject to the BHCA, which requires the Company to obtain the prior approval of the Federal Reserve Board to (i) acquire substantially all the assets of any bank, (ii) acquire more than 5% of any class of voting stock of a bank or bank holding company which is not already majority owned, or (iii) merge or consolidate with another bank holding company. The BHCA also imposes significant limitations on the scope and type of activities in which the Company and its subsidiaries may engage. The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition, under the GLB Act, a bank holding company, all of whose controlled depository institutions are “well-capitalized” and “well-managed” (as defined in federal banking regulations) and which obtains “satisfactory” Community Reinvestment Act (CRA) ratings, may declare itself to be a “financial holding company” and engage in a broader range of activities.

A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. “Financial in nature” activities include:

 

   

securities underwriting, dealing and market making;

 

   

sponsoring mutual funds and investment companies;

 

   

insurance underwriting and insurance agency activities;

 

   

merchant banking; and

 

   

activities that the FRB determines to be financial in nature or incidental to a financial activity, or which are complementary to a financial activity and do not pose a safety and soundness risk.

A financial holding company that desires to engage in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity. Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity if it shows that the activity does not pose a substantial risk to the safety and soundness of insured depository institutions or the financial system. Under the GLB Act, subsidiaries of financial holding companies engaged in non-bank activities are supervised and regulated by the federal and state agencies which normally supervise and regulate such functions outside of the financial holding company context.

A financial holding company may acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, without prior approval from the FRB. Prior FRB approval is required, however, before the financial holding company may acquire control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association. In addition, under the FRB’s merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross market its products or services with any of the financial holding company’s controlled depository institutions. If any subsidiary bank of a financial holding company receives a rating under the CRA of less than “satisfactory”, the financial holding company is limited with respect to its engaging in new activities or acquiring other companies, until the rating is raised to at least “satisfactory.”

Other Regulatory Restrictions & Requirements.    A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with the extension of credit, with limited exceptions. There are also various legal restrictions on the extent to which a bank holding company and certain of its non-bank subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries. The Company and its subsidiaries are also subject to certain restrictions on issuance, underwriting and distribution of securities. FRB policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. Under this “source of strength doctrine,” a bank holding company is expected to stand ready to use its

 

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available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and to maintain resources and the capacity to raise capital that it can commit to its subsidiary banks. Furthermore, the FRB has the right to order a bank holding company to terminate any activity that the FRB believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank. Also, under cross-guaranty provisions of the Federal Deposit Insurance Act (FDIA), bank subsidiaries of a bank holding company are liable for any loss incurred by the FDIC insurance fund in connection with the failure of any other bank subsidiary of the bank holding company.

The Company’s bank subsidiary is subject to a number of laws regulating depository institutions, including the Federal Deposit Insurance Corporation Improvement Act of 1991, which expanded the regulatory and enforcement powers of the federal bank regulatory agencies. These laws require that such agencies prescribe standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and mandated annual examinations of banks by their primary regulators. The Company’s bank subsidiary is also subject to a number of consumer protection laws and regulations of general applicability, as well as the Bank Secrecy Act and USA Patriot Act, which are designed to identify, prevent and deter international money laundering and terrorist financing.

The rate of interest a bank may charge on certain classes of loans is limited by law. At certain times in the past, such limitations have resulted in reductions of net interest margins. Federal laws also impose additional restrictions on the lending activities of banks, including the amount that can be loaned to one borrower or a related group.

The commercial bank owned by the Company is a national bank and is subject to supervision and examination by the OCC and the FRB. The Bank is also a member of and subject to examination by the FDIC.

Payment of dividends by the Bank to the Company is subject to various regulatory restrictions. For national banks, the OCC must approve the declaration of any dividends generally in excess of the sum of net income for that year and retained net income for the preceding two years.

The Bank is subject to the CRA and implementing regulations. CRA regulations establish the framework and criteria by which the bank regulatory agencies assess an institution’s record of helping to meet the credit needs of its community, including low and moderate-income neighborhoods. CRA ratings are taken into account by regulators in reviewing certain applications made by the Company and its bank subsidiaries.

Regulatory Capital Requirements Applicable to the Company.    The FRB has promulgated capital adequacy guidelines for use in its examination and supervision of bank holding companies. If a bank holding company’s capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends and make acquisitions of new bank subsidiaries may be restricted or prohibited. The FRB’s capital adequacy guidelines provide for the following types of capital:

Tier 1 capital, also referred to as core capital, calculated as:

 

   

common stockholders’ equity;

 

   

plus, non-cumulative perpetual preferred stock and any related surplus;

 

   

plus, minority interests in the equity accounts of consolidated subsidiaries;

 

   

less, all intangible assets (other than certain mortgage servicing assets, non-mortgage servicing assets);

 

   

less, certain credit-enhanced interest-only strips and non-financial equity investments required to be deducted from capital; and

 

   

less, certain deferred tax assets.

 

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Tier 2 capital, also referred to as supplementary capital, calculated as:

 

   

allowances for loan and lease losses (limited to 1.25% of risk-weighted assets);

 

   

plus, unrealized gains on certain equity securities (limited to 45% of pre-tax net unrealized gains);

 

   

plus, cumulative perpetual and long-term preferred stock (original maturity of 20 years or more) and any related surplus;

 

   

plus, auction rate and similar preferred stock (both cumulative and non-cumulative);

 

   

plus, hybrid capital instruments (including mandatory convertible debt securities); and

 

   

plus, term subordinated debt and intermediate-term preferred stock with an original weighted average maturity of five years or more (limited to 50% of Tier 1 capital).

The maximum amount of supplementary capital that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital.

Total capital, calculated as:

 

   

Tier 1 capital;

 

   

plus, qualifying Tier 2 capital;

 

   

less, investments in banking and finance subsidiaries that are not consolidated for regulatory capital purposes;

 

   

less, intentional, reciprocal cross-holdings of capital securities issued by banks; and

 

   

less, other deductions (such as investments in other subsidiaries and joint ventures) as determined by supervising authority.

The Company is required to maintain minimum amounts of capital to various categories of assets, as defined by the banking regulators. See Table 17, Risk-Based Capital, on page 39 for additional detail on the computation of risk-based assets and the related capital ratios.

At December 31, 2012, the Company was required to have minimum Tier 1 capital, Total capital, and leverage ratios of 4.00%, 8.00%, and 4.00% respectively. The Company’s actual ratios at that date were 11.05%, 11.92%, and 6.81%, respectively.

Regulatory Capital Requirements Applicable to the Company’s Subsidiary Bank.    In addition to the minimum capital requirements of the FRB applicable to the Company, there are separate minimum capital requirements applicable to its subsidiary national bank.

Federal banking laws classify an insured financial institution in one of the following five categories, depending upon the amount of its regulatory capital:

 

   

“well-capitalized” if it has a total Tier 1 leverage ratio of 5% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a total risk-based capital ratio of 10% or greater (and is not subject to any order or written directive specifying any higher capital ratio);

 

   

“adequately capitalized” if it has a total Tier 1 leverage ratio of 4% or greater (or a Tier 1 leverage ratio of 3% or greater, if the bank has a Capital adequacy, Asset quality, Management, Liquidity, and Sensitivity to market risk (CAMELS) rating of 1), a Tier 1 risk-based capital ratio of 4% or greater, and a total risk-based capital ratio of 8% or greater;

 

   

“undercapitalized” if it has a total Tier 1 leverage ratio that is less than 4% (or a Tier 1 leverage ratio that is less than 3%, if the bank has a CAMELS rating of 1), a Tier 1 risk-based capital ratio that is less than 4% or a total risk-based capital ratio that is less than 8%;

 

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“significantly undercapitalized” if it has a total Tier 1 leverage ratio that is less than 3%, a Tier 1 risk based capital ratio that is less than 3% or a total risk-based capital ratio that is less than 6%; and

 

   

“critically undercapitalized” if it has a Tier 1 leverage ratio that is equal to or less than 2%.

Federal banking laws require the federal regulatory agencies to take prompt corrective action against undercapitalized financial institutions. The capital ratios and classifications for the Company and the Bank as of December 31, 2012, are set forth below:

 

Bank

   Total Tier 1 Leverage Ratio
(5% or greater)
     Tier 1 Risk Based
Capital Ratio

(6% or greater)
     Total Risk-Based
Capital  Ratio
(10% or greater)
 

UMB Financial Corporation

     6.81         11.05         11.92   

UMB Bank, n.a.  

     7.58         10.54         11.42   

The Company is required to maintain minimum balances with the FRB for the Bank. This balance is calculated from reports filed with the FRB. At December 31, 2012, the Company was required to hold $43.3 million at the FRB.

Deposit Insurance and Assessments.    The deposits of the Bank are insured by an insurance fund administered by the FDIC, in general up to a maximum of $250,000 per insured deposit. Under federal banking regulations, insured banks are required to pay quarterly assessments to the FDIC for deposit insurance. The FDIC’s risk-based assessment system requires members to pay varying assessment rates depending upon the level of the institution’s capital and the degree of supervisory concern over the institution. The FDIC assessment is separated into two parts. The first part is the FDIC Insurance, and the second part is the assessment for the Financing Corporation (FICO) to fund interest payments on bonds issued by FICO, an agency of the Federal government established to recapitalize the predecessor to the Savings Association Insurance Fund (SAIF).

In October 2010, the FDIC adopted a new plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act). In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act that provide for temporary unlimited coverage for non-interest-bearing transaction accounts. The separate coverage for non interest-bearing transaction accounts became effective on December 31, 2010 and terminated on December 31, 2012. In February 2011, the FDIC issued a final rule to change the deposit insurance assessment base from total domestic deposits to average total assets minus average tangible equity, as required by the Dodd-Frank Act, effective April 1, 2011. The FDIC created a risk based scorecard system to determine an institutions base assessment rate. The scorecards utilize CAMELS ratings and certain financial measures to assess an institution’s ability to withstand asset-related stress and funding-related stress. The Company cannot provide any assurance as to the effect of any future proposed change in its deposit insurance premium rate as such changes are dependent upon a variety of factors, some of which are beyond the Company’s control.

Limitations on Transactions with Affiliates.    The Company and its non-bank subsidiaries are “affiliates” within the meaning of Sections 23A and 23B of the Federal Reserve Act (FRA). The amount of loans or extensions of credit which a bank may make to non-bank affiliates, or to third parties secured by securities or obligations of the non-bank affiliates, are substantially limited by the FRA and the FDIA. Such acts further restrict the range of permissible transactions between a bank and an affiliated company. A bank and subsidiaries of a bank may engage in certain transactions, including loans and purchases of assets, with an affiliated company, only if the terms and conditions of the transaction, including credit standards, are substantially the same as, or at least as favorable to the bank as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms and conditions that would be offered to non-affiliated companies.

 

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Other Banking Activities.    The investments and activities of the Bank are also subject to regulation by federal banking agencies regarding; investments in subsidiaries, investments for their own account (including limitations in investments in junk bonds and equity securities), loans to officers, directors and their affiliates, security requirements, anti-tying limitations, anti-money laundering, financial privacy and customer identity verification requirements, truth-in-lending, types of interest bearing deposit accounts offered, trust department operations, brokered deposits, audit requirements, issuance of securities, branching and mergers and acquisitions.

A discussion of past acquisitions is included in Note 15 to the Consolidated Financial Statements provided in Item 8 on page 87 of this report.

Statistical Disclosure.    The information required by Guide 3, “Statistical Disclosure by Bank Holding Companies,” has been included in Items 6, 7, and 7A, pages 17 through 51 of this report.

Executive Officers of the Registrant.    The following are the executive officers of the Company, each of whom is elected annually, and there are no arrangements or understandings between any of the persons so named and any other person pursuant to which such person was elected as an officer.

 

Name

   Age   

Position with Registrant

Craig Anderson

   53    Mr. Anderson joined UMB Bank, n.a. in 1986. In 2011, he was named President of Commercial Banking for UMB Financial Corporation where he is responsible for all areas of commercial banking including treasury management. Prior to his appointment to that position, he served as the President for Regional Banking for the Company from September 2009 through November 2011, and as Chairman and CEO of National Bank of America in Salina, Kansas from May 2004 to September 2009.

Peter J. deSilva

   51    Mr. deSilva has served as President and Chief Operating Officer of the Company since January 2004 and Chairman and Chief Executive Officer of UMB Bank, n.a. since May 2004. Mr. deSilva was previously employed by Fidelity Investments from 1987-2004, the last seven years as Senior Vice President with principal responsibility for brokerage operations.

Michael D. Hagedorn

   46    Mr. Hagedorn has served as Vice Chairman, Chief Financial Officer, and Chief Administrative Officer of the Company since October 2009. Previously, he served as Executive Vice President and Chief Financial Officer of the Company from March 2005 to October 2009. He previously served as Senior Vice President and Chief Financial Officer of Wells Fargo, Midwest Banking Group from April 2001 to March 2005.

Daryl S. Hunt

   56    Mr. Hunt joined UMB Bank, n.a. in November 2007, as Executive Vice President of Operations and Technology Group. Previously, Mr. Hunt worked at Fidelity Investments where he served as Senior Vice President for Transfer Operations from 2006 to 2007, Senior Vice President of Customer Processing Operations from 2003 to 2006, and Senior Vice President of Outbound Mail Operations from 2001 to 2003.

Andrew J. Iseman

   48    Mr. Iseman joined Scout Investments, Inc. as Chief Executive Officer in August 2010. From February 2009 to June 2010, he served as Chief Operating Officer of RK Capital Management. He was previously employed by Janus Capital Group from January 2003 to April 2008, most recently serving as the Executive Vice President from January 2008 to April 2008 and Chief Operating Officer from May 2007 to April 2008.

 

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Name

   Age   

Position with Registrant

J. Mariner Kemper

   40    Mr. Kemper has served as the Chairman and CEO of the Company since May 2004 and has served as Chairman and CEO of UMB Bank Colorado, n.a. (a subsidiary of the Company) since 2000. He was President of UMB Bank Colorado from 1997 to 2000.

David D. Kling

   66    Mr. Kling has served as Executive Vice President and Chief Risk Officer of the Company since October 2008. He previously served as the Executive Vice President for Enterprise Services of UMB Bank, n.a. since November 2007. He also served as Executive Vice President of Financial Services and Support of UMB Bank, n.a. from 1997 to 2007.

Christine Pierson

   50    Ms. Pierson joined the Company in January 2011 as Executive Vice President of Consumer Banking. Prior to 2011, she served the Vice President of US Sales – Animal Health Division for Bayer Healthcare Corporation since 2005.

Dennis R. Rilinger

   65    Mr. Rilinger has served as Executive Vice President and General Counsel of the Company and of UMB Bank, n.a. since 1996.

Lawrence G. Smith

   65    Mr. Smith has served as Executive Vice President and Chief Organizational Effectiveness Officer of UMB Bank, n.a. since March 2005. Prior to coming to UMB Bank, n.a., Mr. Smith was Vice President – Human Resources for Fidelity Investments in Boston, Massachusetts where he was responsible for Fidelity’s business group human resource activities.

Brian J. Walker

   41    Mr. Walker joined the Company in June 2007 as Senior Vice President and Corporate Controller (Chief Accounting Officer). From July of 2004 to June 2007 he served as a Certified Public Accountant for KPMG where he worked primarily as an auditor for financial institutions. He worked as a Certified Public Accountant for Deloitte & Touche from November 2002 to July of 2004.

Clyde F. Wendel

   65    Mr. Wendel has served as Vice Chairman of UMB Bank, n.a. and Chief Executive Officer of Personal Financial Services of UMB Bank, n.a. since October 2009. He previously served as President of the Asset Management Division of UMB Bank, n.a. and Vice Chairman of UMB Bank, n.a. from June 2006 to October 2009. Previously, he served as Regional President, Bank of America Private Bank and Senior Bank Executive for Iowa, Kansas, and Western Missouri from 2000-2006.

John P. Zader

   51    Mr. Zader joined UMB Fund Services in December 2006. He serves as Chief Executive Officer of UMB Fund Services. He previously served as a consultant to Jefferson Wells International in 2006 and served as Senior Vice President and Chief Financial Officer of U.S. Bancorp Fund Services, LLC, a mutual and hedge fund service provider from 1988 to 2006.

The Company makes available free of charge on its website at www.umb.com/investor, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, as soon as reasonably practicable after it electronically files or furnishes such material with or to the SEC.

 

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ITEM 1A.  RISK FACTORS

Financial services companies routinely encounter and address risks. Some risks may give rise to occurrences that cause the Company’s future results to be materially different than what companies presently anticipate. In the following paragraphs, the Company describes its current view of certain important strategic risks, although the risks below are not the only risks the Company faces. If any such risks actually materialize, the Company’s business, results of operations, financial condition and prospects could be affected materially and adversely. These risk factors should be read in conjunction with management’s discussion and analysis, beginning on page 19 hereof, and the consolidated financial statements, beginning on page 53 hereof.

Changes in interest rates could affect results of operations.    A significant portion of the Company’s net income is based on the difference between interest earned on earning assets (such as loans and investments) and interest paid on deposits and borrowings. These rates are sensitive to many factors that are beyond the Company’s control, such as general economic conditions and policies of various governmental and regulatory agencies, such as the Federal Reserve Board. For example, policies and regulations of the Federal Reserve Board influence, directly and indirectly, the rate of interest paid by commercial banks on interest-bearing deposits and also may affect the value of financial instruments held by the Company. The actions of the Federal Reserve Board also determine to a significant degree the cost of funds for lending and investing. In addition, these policies and conditions can adversely affect customers and counterparties, which may increase the risk that such customers or counterparties default on their obligations. Changes in interest rates greatly affect the amount of income earned and the amount of interest paid. Changes in interest rates also affect loan demand, the prepayment speed of loans, the purchase and sale of investment bonds and the generation and retention of customer deposits. A rapid increase in interest rates could result in interest expense increasing faster than interest income because of differences in maturities of assets and liabilities. See “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk” in Part II, Item 7A for a discussion of how the Company monitors and manages interest rate risk.

General economic conditions could materially impair customers’ ability to repay loans, harm operating results and reduce the volume of new loans.    The U.S. and the world economies impact how financial instruments are priced. Profitability depends significantly on economic conditions. Economic downturns or recessions, either nationally, internationally or in the states within the Company’s footprint, could materially reduce operating results. An economic downturn could negatively impact demand for loan and deposit products, the demand for insurance and brokerage products and the amount of credit related losses due to customers who cannot pay interest or principal on their loans. To the extent loan charge-offs exceed estimates, an increase to the amount of provision expense related to the allowance for loan losses would reduce income. See “Quantitative and Qualitative Disclosures About Market Risk—Credit Risk” in Part II, Item 7A for a discussion of how the Company monitors and manages credit risk.

General economic conditions, such as a stock market decline, could materially impair the number of investors in the equity and bond markets, the level of assets under management and the demand for other fee-based services.    Economic downturns or recessions could affect the volume of income from and demand for other fee-based services. The fee revenue from asset management segments including income from Scout Investments, Inc. and UMB Fund Services, Inc. subsidiaries, are largely dependent on both inflows to, and the fair value of, assets invested in the Scout Funds and the fund clients to whom the Company provides services. General economic conditions can affect investor sentiment and confidence in the overall securities markets which could adversely affect asset values, net flows to these funds and other assets under management. Bankcard revenues are dependent on transaction volumes from consumer and corporate spending to generate interchange fees. Depressed economic conditions could negatively affect the amount of such fee income. The Company’s banking services group is affected by corporate and consumer demand for debt securities which can be adversely affected by changes in general economic conditions.

The Company is subject to extensive regulation in the jurisdictions in which it conducts business.    The Company is subject to extensive state and federal regulation, supervision and legislation that

 

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govern most aspects of its operations. Laws and regulations, and in particular banking, securities and tax laws, are under intense scrutiny because of the current economic crisis and may change from time to time. Changes in laws and regulations, lawsuits or actions by regulatory agencies could require the Company to devote significant time and resources to compliance efforts and could lead to fines, penalties, judgments, settlements, withdrawal of certain products or services offered in the market or other adverse results which could affect the Company’s business, financial condition or results of operation, or cause serious reputational harm.

Reliance on systems, employees and certain counterparties, and certain failures, including as a result of cyber attacks, could adversely affect operations.    The Company is dependent on its ability to process a large number of transactions. If any of the financial, accounting, or other data processing systems fail or have other significant shortcomings, the Company could be adversely affected. The Company is similarly dependent on its employees. The Company could be adversely affected if a significant number of employees are unavailable due to a pandemic, natural disaster, war, act of terrorism, or other reason, or if an employee causes a significant operational break-down or failure, either as a result of human error, purposeful sabotage or fraudulent manipulation of operations or systems. Third parties with which the Company does business could also be sources of operational risk, including break-downs or failures of such parties’ own systems or employees. Any of these occurrences could result in a diminished ability of the Company to operate, potential liability to clients, reputational damage and regulatory intervention, which could have an adverse impact on the Company. Operational risk also includes the ability to successfully integrate acquisitions into existing charters as an acquired entity will most likely be on a different system. See “Quantitative and Qualitative Disclosures About Market Risk—Operational Risk” in Part II, Item 7A for a discussion of how the Company monitors and manages operational risk.

In the ordinary course of our business, the Company collects and stores sensitive data, including intellectual property, our proprietary business information and that of our customers, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, regulatory penalties, and damage our reputation which could adversely affect our business. In addition, there is the risk that controls and procedures, as well as business continuity and data security systems, may prove to be inadequate. Any such failure could affect operations and could adversely affect results of operations by requiring the Company to expend significant resources to correct the defect, as well as by exposing the Company to litigation or losses not covered by insurance.

In addition, there is the risk that controls and procedures, as well as business continuity and data security systems, may prove to be inadequate. Any such failure could affect operations and could adversely affect results of operations by requiring the Company to expend significant resources to correct the defect, as well as by exposing the Company to litigation or losses not covered by insurance.

If the Company does not successfully handle issues that may arise in the conduct of its business and operations, the Company’s reputation could be damaged, which could in turn negatively affect its business.    The Company’s ability to attract and retain customers and transact with the Company’s counterparties could be adversely affected to the extent its reputation is damaged. The failure of the Company to deal with various issues that could give rise to reputational risk could cause harm to the Company and its business prospects. These issues include, but are not limited to potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, recordkeeping, sales and trading practices and proper identification of the legal, reputational, credit, liquidity and market risks inherent in its products. The failure to appropriately address these issues could make clients unwilling to do business with the Company, which could adversely affect results.

 

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The Company faces strong competition from other financial services firms, which could lead to pricing pressures that could materially adversely affect revenue and profitability.    In addition to the challenge of competing against local, regional and national banks in attracting and retaining customers, the Company’s competitors also include brokers, mortgage bankers, mutual fund sponsors, securities dealers, investment advisors and specialty finance and insurance companies. The financial services industry is intensely competitive and is expected to remain so. The Company competes on the basis of several factors, including transaction execution, products and services, innovation, reputation and price. The Company may experience pricing pressures as a result of these factors and as some competitors seek to increase market share by reducing prices on products and services or increasing rates paid on deposits.

The Company’s framework for managing risks may not be effective in mitigating risk and loss to the Company.    The Company’s risk management framework is made up of various processes and strategies to manage risk exposure. Types of risk to which the Company is subject include liquidity risk, credit risk, price risk, interest rate risk, operational risk, compliance and litigation risk, foreign exchange risk, reputation risk, and fiduciary risk, among others. Although management continually monitors, evaluates, and updates the Company’s risk management framework and the Board oversees the Company’s overall risk management strategy, there can be no assurance that the Company’s framework to manage risk, including such framework’s underlying assumptions, will be effective under all conditions and circumstances. If the Company’s risk management framework proves ineffective, it could suffer unexpected losses and could be materially adversely affected.

Liquidity is essential to the Company’s businesses and the Company relies on the securities market and other external sources to finance a significant portion of its operations.    Liquidity affects the Company’s ability to meet financial commitments. Liquidity could be negatively affected should the need arise to increase deposits or obtain additional funds through borrowing to augment current liquidity sources. Factors beyond the Company’s control, such as disruption of the financial markets or negative views about the general financial services industry, could impair the Company’s access to funding. If the Company is unable to raise funding using the methods described above, it would likely need to sell assets, such as its investment and trading portfolios, to meet maturing liabilities. The Company may be unable to sell some of its assets on a timely basis, or it may have to sell assets at a discount from market value, either of which could adversely affect its results of operations. Liquidity and funding policies have been designed to ensure that the Company maintains sufficient liquid financial resources to continue to conduct business for an extended period in a stressed liquidity environment. If the liquidity and funding policies are not adequate, the Company may be unable to access sufficient financing to service its financial obligations when they come due, which could have a material adverse franchise or business impact. See “Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk” in Part II, Item 7A for a discussion of how the Company monitors and manages liquidity risk.

Inability to hire or retain qualified employees could adversely affect the Company’s performance.    The Company’s people are its most important resource and competition for qualified employees is intense. Employee compensation is the Company’s greatest expense. The Company relies on key personnel to manage and operate its business, including major revenue generating functions such as its loan and deposit portfolios, investment management function and asset servicing function .The loss of key staff may adversely affect the Company’s ability to maintain and manage these portfolios effectively, which could negatively affect its results of operations. If compensation costs required to attract and retain employees become unreasonably expensive, the Company’s performance, including its competitive position, could be adversely affected.

Changes in accounting standards could impact reported earnings.    The accounting standard setting bodies, including the Financial Accounting Standards Board and other regulatory bodies periodically change the financial accounting and reporting standards affecting the preparation of the consolidated financial statements. These changes are not within the Company’s control and could materially impact the consolidated financial statements.

The Company is subject to a variety of litigation which may affect its business, operating results and reputation.    The Company and its subsidiaries may be involved from time to time in a variety of litigation. This

 

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litigation can include class action litigation concerning servicing processes or fees or charges, or employment practices, and potential reductions in fee revenues resulting from such litigation. Past, present and future litigation have included or could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Substantial legal liability could materially affect its business, financial condition or results of operations and/or cause significant reputational harm to its business.

Future events may be different than those anticipated by management assumptions and estimates, which may cause unexpected losses in the future.    Pursuant to current Generally Accepted Accounting Principles, the Company is required to use certain estimates in preparing its financial statements, including accounting estimates to determine allowance for loan losses, and the fair values of certain assets and liabilities, among other items. Should the Company’s determined values for such items prove inaccurate, the Company may experience unexpected losses which could be material.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

There are no unresolved comments from the staff of the SEC required to be disclosed herein as of the date of this Form 10-K.

ITEM 2.  PROPERTIES

The Company’s headquarters building, the UMB Bank Building, is located at 1010 Grand Boulevard in downtown Kansas City, Missouri, and opened during July 1986. Of the 250,000 square feet, 227,000 square feet is occupied by departments and customer service functions of UMB Bank, n.a. as well as offices of the parent company, UMB Financial Corporation. The remaining 23,000 square feet of space within the building is leased to a law firm.

Other main facilities of UMB Bank, n.a. in downtown Kansas City, Missouri are located at 928 Grand Boulevard (185,000 square feet); 906 Grand Boulevard (140,000 square feet); and 1008 Oak Street (180,000 square feet). Both the 928 Grand and 906 Grand buildings house backroom support functions. The 928 Grand building also houses Scout Investments, Inc. Additionally, within the 906 Grand building there is 20,000 square feet of space leased to several small tenants. The 928 Grand building underwent a major renovation during 2004 and 2005. The 928 Grand building is connected to the UMB Bank Building (1010 Grand) by an enclosed elevated pedestrian walkway. The 1008 Oak building, which opened during the second quarter of 1999, houses the Company’s operations and data processing functions.

UMB Bank, n.a. leases 52,000 square feet in the Hertz Building located in the heart of the commercial sector of downtown St. Louis, Missouri. This location has a full-service banking center and is home to some operational and administrative support functions. UMB Bank, n.a. also leases 30,000 square feet on the first, second, third, and fifth floors of the 1670 Broadway building located in the financial district of downtown Denver, Colorado. The location has a full-service banking center and is home to additional operational and administrative support functions.

UMB Fund Services, Inc., a subsidiary of the Company, leases 72,000 square feet in Milwaukee, Wisconsin, at which its fund services operation is headquartered. JD Clark & Co., Inc. is headquartered in Ogden, Utah where it leases 37,297 square feet.

As of December 31, 2012, the Bank operated a total of 119 banking centers and two Wealth Management offices.

The Company utilizes all of these properties to support aspects of all of the Company’s business segments.

Additional information with respect to premises and equipment is presented in Notes 1 and 8 to the Consolidated Financial Statements in Item 8, pages 58 and 76 of this report.

 

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ITEM 3.  LEGAL PROCEEDINGS

In the normal course of business, the Company and its subsidiaries are named defendants in various lawsuits and counter-claims. In the opinion of management, after consultation with legal counsel, none of these lawsuits are expected to have a material effect on the financial position, results of operations, or cash flows of the Company.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s stock is traded on the NASDAQ Global Select Stock Market under the symbol “UMBF.” As of February 14, 2013, the Company had 2,176 shareholders of record. Company stock information for each full quarter period within the two most recent fiscal years is set forth in the table below.

 

Per Share    Three Months Ended  

2012

   March 31      June 30      Sept. 30      Dec. 31  

Dividend

   $ 0.205       $ 0.205       $ 0.205       $ 0.215   

Book value

     29.90         30.89         31.88         31.71   

Market price:

           

High

     46.33         51.57         52.61         49.17   

Low

     37.68         42.90         46.80         40.55   

Close

     44.74         51.23         48.68         43.82   

 

Per Share    Three Months Ended  

2011

   March 31      June 30      Sept. 30      Dec. 31  

Dividend

   $ 0.195       $ 0.195       $ 0.195       $ 0.205   

Book value

     26.62         27.97         28.97         29.46   

Market price:

           

High

     44.21         42.65         45.20         38.53   

Low

     37.20         37.05         32.08         30.49   

Close

     37.37         41.88         32.08         37.25   

Information concerning restrictions on the ability of the Registrant to pay dividends and the Registrant’s subsidiaries to transfer funds to the Registrant is presented in Item 1, page 3 and Note 10 to the Consolidated Financial Statements provided in Item 8, pages 78 and 79 of this report. Information concerning securities the Company issued under equity compensation plans is contained in Item 12, pages 102 and 103 and in Note 11 to the Consolidated Financial Statements provided in Item 8, pages 80 through 83 of this report.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about share repurchase activity by the Company during the quarter ended December 31, 2012:

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   (a)
Total
Number of
Shares
Purchased
     (b)
Average
Price
Paid per
Share
     (c)
Total Number  of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     (d)
Maximum Number
of Shares that May Yet
Be Purchased Under
the Plans or Programs
 

October 1—October 31, 2012

     4,357       $ 45.05         4,357         1,946,708   

November 1—November 30, 2012

     236,513         42.26         236,513         1,710,195   

December 1—December 31, 2012

     102,094         43.35         102,094         1,608,101   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     342,964       $ 42.62         342,964      
  

 

 

    

 

 

    

 

 

    

On April 24, 2012, the Company announced a plan to repurchase up to two million shares of common stock. This plan will terminate on April 23, 2013. All open market share purchases under the share repurchase plans are

 

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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. The Company has not made any repurchases other than through this plan.

ITEM 6.  SELECTED FINANCIAL DATA

For a discussion of factors that may materially affect the comparability of the information below, please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, pages 19 through 51, of this report.

 

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FIVE-YEAR FINANCIAL SUMMARY

(in thousands except per share data)

As of and for the years ended December 31

 

EARNINGS    2012     2011     2010     2009     2008  

Interest income

   $ 339,685      $ 343,653      $ 346,507      $ 356,217      $ 387,973   

Interest expense

     19,629        26,680        35,894        53,232        112,922   

Net interest income

     320,056        316,973        310,613        302,985        275,051   

Provision for loan losses

     17,500        22,200        31,510        32,100        17,850   

Noninterest income

     458,122        414,332        360,370        310,176        312,783   

Noninterest expense

     590,454        562,746        512,622        460,585        430,153   

Net income

     122,717        106,472        91,002        89,484        98,075   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AVERAGE BALANCES

          

Assets

   $ 13,389,192      $ 12,417,274      $ 11,108,233      $ 10,110,655      $ 8,897,886   

Loans, net of unearned interest

     5,251,278        4,756,165        4,490,587        4,383,551        4,193,871   

Securities

     6,528,523        5,774,217        5,073,839        4,382,179        3,421,213   

Interest-bearing due from banks

     547,817        837,807        593,518        492,915        66,814   

Deposits

     10,521,658        9,593,638        8,451,966        7,584,025        6,532,270   

Long-term debt

     5,879        11,284        19,141        32,067        36,404   

Shareholders’ equity

     1,258,284        1,138,625        1,066,872        1,006,591        933,055   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

YEAR-END BALANCES

          

Assets

   $ 14,927,196      $ 13,541,398      $ 12,404,932      $ 11,663,355      $ 10,976,596   

Loans, net of unearned interest

     5,690,626        4,970,558        4,598,097        4,332,228        4,410,034   

Securities

     7,134,316        6,277,482        5,742,104        5,003,720        4,924,407   

Interest-bearing due from banks

     720,500        1,164,007        848,598        1,057,195        575,309   

Deposits

     11,653,365        10,169,911        9,028,741        8,534,488        7,725,326   

Long-term debt

     5,879        6,529        8,884        25,458        35,925   

Shareholders’ equity

     1,279,345        1,191,132        1,060,860        1,015,551        974,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PER SHARE DATA

          

Earnings—basic

   $ 3.07      $ 2.66      $ 2.27      $ 2.22      $ 2.41   

Earnings—diluted

     3.04        2.64        2.26        2.20        2.38   

Cash dividends

     0.83        0.79        0.75        0.71        0.66   

Dividend payout ratio

     27.04     29.70     33.04     31.98     27.18

Book value

   $ 31.71      $ 29.46      $ 26.24      $ 25.11      $ 23.81   

Market price

          

High

     52.61        45.20        44.51        49.75        69.60   

Low

     37.68        30.49        31.88        33.65        35.76   

Close

     43.82        37.25        41.44        39.35        49.14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average assets

     0.92     0.86     0.82     0.89     1.10

Return on average equity

     9.75        9.35        8.53        8.89        10.51   

Average equity to average assets

     9.40        9.17        9.60        9.96        10.49   

Total risk-based capital ratio

     11.92        12.20        12.45        14.18        14.09   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following presents management’s discussion and analysis of the Company’s consolidated financial condition, changes in condition, and results of operations. This review highlights the major factors affecting results of operations and any significant changes in financial conditions for the three-year period ended December 31, 2012. It should be read in conjunction with the accompanying Consolidated Financial Statements and other financial statistics appearing elsewhere in the report.

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

The information included or incorporated by reference in this report contains forward-looking statements of expected future developments within the meaning of and pursuant to the safe harbor provisions established by Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may refer to financial condition, results of operations, plans, objectives, future financial performance and business of the Company, including, without limitation:

 

   

Statements that are not historical in nature; and

 

   

Statements preceded by, followed by or that include the words “believes,” “expects,” “may,” “should,” “could,” “anticipates,” “estimates,” “intends,” or similar words or expressions.

Forward-looking statements are not guarantees of future performance or results. You are cautioned not to put undue reliance on any forward-looking statement which speaks only as of the date it was made. Forward-looking statements reflect management’s expectations and are based on currently available data; however, they involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

   

Changes in the interest rate environment;

 

   

General economic and political conditions, either nationally, internationally or in the Company’s footprint, may be less favorable than expected;

 

   

Legislative or regulatory changes;

 

   

Changes in the securities markets impacting mutual fund performance and flows;

 

   

Changes in operations;

 

   

The ability to successfully and timely integrate acquisitions;

 

   

Competitive pressures among financial services companies may increase significantly;

 

   

Changes in technology may be more difficult or expensive than anticipated;

 

   

Changes in the ability of customers to repay loans;

 

   

Changes in loan demand may adversely affect liquidity needs;

 

   

Changes in employee costs; and

 

   

Results of litigation claims.

Any forward-looking statements should be read in conjunction with information about risks and uncertainties set forth in this report and in documents incorporated herein by reference. Forward-looking statements speak only as of the date they are made, and the Company does not intend to review or revise any particular forward-looking statement in light of events that occur thereafter or to reflect the occurrence of unanticipated events, except as required by federal securities laws.

 

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Results of Operations

Overview

The Company continues to focus on the following five strategies which management believes will improve net income and strengthen the balance sheet.

The first strategy is to grow the Company’s fee-based businesses. As the industry continues to experience economic uncertainty, the Company has continued to emphasize its fee-based operations. With a diverse source of revenues, this strategy has helped reduce the Company’s exposure to sustained low interest rates. During 2012, noninterest income increased $43.8 million, or 10.6 percent, to $458.1 million for the year ended December 31, 2012, compared to the same period in 2011. Trust and securities processing income increased $16.7 million, or 8.0 percent, for year-to-date December 31, 2012 compared to the same period in 2011. Gains from the sale of securities available for sale of $20.2 million were recognized during 2012 compared to $16.1 million for 2011. Other noninterest income increased $14.6 million, or 109.7 percent, primarily driven by an $8.7 million adjustment decreasing the contingent consideration liabilities on acquisitions. These adjustments were due to the adoption of new accounting guidance related to fair value measurements and additional changes in cash flow projections. Fair value adjustments on interest rate swap transactions increased $2.4 million compared to 2011. Gains of $0.6 million were recognized on the sale of two branches during 2012.

The second strategy is a focus on net interest income through loan and deposit growth. During 2012, continued progress on this strategy was illustrated by an increase in net interest income of $3.1 million, or 1.0 percent, from the previous year. The Company has continued to show increased net interest income in a historically low rate environment through the effects of increased volume of average earning assets and a low cost of funds in its balance sheet. Average earning assets increased by $1.0 billion, or 8.4 percent, from 2011. Average loan balances increased $495.1 million, or 10.4 percent, for year-to-date December 31, 2012 compared to the same period in 2011. Earning asset growth was primarily funded with a $86.2 million increase in average interest-bearing deposits, or 1.4 percent, and an $84.8 million increase in average noninterest-bearing deposits, or 24.7 percent, compared to 2011 respectively. Net interest margin, on a tax-equivalent basis, decreased 19 basis points, and net interest spread decreased 18 basis points compared to 2011, respectively.

The third strategy is a focus on improving operating efficiencies. At December 31, 2012, the Company had 119 branches. The Company continues to emphasize increasing its primary retail customer base by providing a broad offering of services through our existing branch network. These efforts have resulted in the total loan and deposits growth previously discussed. The Company continues to invest in technological advances that will help management drive operating efficiencies through improved data analysis and automation. Starting in 2011, the Company has converted to a new financial and human resource software that is integrated and enterprise wide. During 2012, additional systems infrastructure enhancements have been implemented. In addition to the use of automation technology, the Company has merged the subsidiary banks into a single chartered entity. This will enhance regulatory capital and the implementation of strategic initiatives. With the related core systems conversion to be conducted in 2013, operating efficiencies are anticipated. The Company will continue to evaluate its cost structure for opportunities to moderate expense growth without sacrificing growth initiatives.

The fourth strategy is a focus on capital management. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, evaluating acquisition opportunities that complement the strategies, increasing dividends over time and properly utilizing a share buy-back strategy. At December 31, 2012, the Company had $1.3 billion in total shareholders’ equity. This is an increase of $88.2 million, or 7.4 percent, compared to total shareholders’ equity at December 31, 2011. At December 31, 2012, the Company had a total risk-based capital ratio of 11.92 percent. The Company repurchased 472,956 shares at an average price of $43.17 per share during 2012. Further, the Company paid $33.6 million in dividends during 2012, which represents a 5.2 percent increase compared to 2011.

 

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The fifth strategy is to deliver the unparalleled customer experience. The Company delivers products and services through outstanding associates who are focused on a high-touch customer service model. The Company continues to hire key associates within the core segments that are focused on achieving our strategies through a high level of service. The Company’s associates exhibit pride, power, and passion each day to enable the Company to retain a strong customer base and focus on growing this base to obtain the financial results noted below.

Earnings Summary

The Company recorded consolidated net income of $122.7 million for the year ended December 31, 2012. This represents a 15.3 percent increase over 2011. Net income for 2011 was $106.5 million, or an increase of 17.0 percent compared to 2010. Basic earnings per share for the year ended December 31, 2012, were $3.07 per share compared to $2.66 per share in 2011 and $2.27 per share in 2010. Basic earnings per share for 2012 increased 15.4 percent over 2011, which increased 17.2 percent over 2010. Fully diluted earnings per share for the year ended December 31, 2012, were $3.04 per share compared to $2.64 per share in 2011 and $2.26 per share in 2010.

The Company’s net interest income increased to $320.1 million in 2012 compared to $317.0 million in 2011 and $310.6 million in 2010. In total, a favorable volume variance outpaced the impact from an unfavorable rate variance, resulting in a $3.1 million increase in net interest income in 2012, compared to 2011. Upon further examination, the reduced cost of funding on the volume growth of interest-bearing deposits reduced the impact from an unfavorable rate variance on earning assets, resulting in the net favorable volume variance described. See Table 1 on page 23. The favorable volume variance on earning assets was predominately driven by the increase in average loan balances of $495.1 million, or 10.4 percent, for 2012 compared to the same period in 2011. This was more than offset by an unfavorable rate variance in the same categories. However, a 12 basis points reduction in rate on a volume increase of $86.2 million on interest-bearing deposits drove the resulting increase in net interest income. While decreasing due to the current low rate environment, the Company continues to see benefit from interest-free funds. The impact of this benefit is illustrated on Table 2 on page 24. The $6.4 million increase in net interest income in 2011, compared to 2010, is primarily a result of a favorable volume variance. The favorable volume variance was driven by a 6.6 percent increase in the average balance of taxable securities, a 40.3 percent increase in tax-exempt securities, and a 5.9 percent increase in the average balance of loans and loans held for sale. This was partially offset by an unfavorable rate variance in tax-exempt securities and loans, or a 74 basis points and 34 basis points decrease in yield, respectively. The current credit environment has made it difficult to anticipate the future of the Company’s margins. The magnitude and duration of this impact will be largely dependent upon the Federal Reserve’s policy decisions and market movements. See Table 19 on page 46 for an illustration of the impact of a rate increase or decrease on net interest income as of December 31, 2012.

The Company had an increase of $43.8 million, or 10.6 percent, in noninterest income in 2012, compared to 2011, and a $54.0 million, or 15.0 percent, increase in 2011, compared to 2010. The increase in 2012 is primarily attributable to higher trust and securities processing income, gains on the sale of securities available for sale, and adjustments of the contingent consideration liabilities on acquisitions. Trust and securities processing income increased $16.7 million, or 8.0 percent, for the year ended December 31, 2012, compared to the same period in 2011. Gains from the sale of securities available for sale of $20.2 million were recognized during 2012 compared to $16.1 million for 2011. Other noninterest income increased $14.6 million, or 109.7 percent, primarily driven by an $8.7 million adjustment decreasing the contingent consideration liabilities on acquisitions. These adjustments were due to the adoption of new accounting guidance related to fair value measurements and additional changes in cash flow projections. The change in noninterest income in 2012 from 2011, and 2011 from 2010 is illustrated on Table 5 on page 27.

Noninterest expense increased in 2012 by $27.7 million, or 4.9 percent, compared to 2011 and increased in 2011 by $50.1 million, or 9.8 percent, compared to 2010. Salary and employee benefit expense increased by $25.1 million, or 8.5 percent, offset by a $7.8 million escrow fund established during the second quarter of 2011

 

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to settle a class action lawsuit. Marketing and business development increased $4.5 million compared to 2011 driven by increased advertising campaigns and business development. Other noninterest expense increased $3.0 million, or 10.2 percent, primarily driven by an increase in contingent consideration liabilities on acquisitions of $3.5 million compared to 2011. The increase in noninterest expense in 2012 from 2011, and 2011 from 2010 is illustrated on Table 6 on page 28.

Net Interest Income

Net interest income is a significant source of the Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. Table 1 summarizes the change in net interest income resulting from changes in volume and rates for 2012, 2011 and 2010.

Net interest margin is calculated as net interest income on a fully tax equivalent basis (FTE) as a percentage of average earning assets. A critical component of net interest income and related net interest margin is the percentage of earning assets funded by interest-free sources. Table 2 analyzes net interest margin for the three years ended December 31, 2012, 2011 and 2010. Net interest income, average balance sheet amounts and the corresponding yields earned and rates paid for the years 2008 through 2012 are presented in a table following “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” on pages 44 and 45. Net interest income is presented on a tax-equivalent basis to adjust for the tax-exempt status of earnings from certain loans and investments, which are primarily obligations of state and local governments.

 

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Table 1

RATE-VOLUME ANALYSIS (in thousands)

This analysis attributes changes in net interest income either to changes in average balances or to changes in average rates for earning assets and interest-bearing liabilities. The change in net interest income is due jointly to both volume and rate and has been allocated to volume and rate in proportion to the relationship of the absolute dollar amount of the change in each. All rates are presented on a tax-equivalent basis and give effect to the disallowance of interest expense for federal income tax purposes, related to certain tax-free assets. The loan average balances and rates include nonaccrual loans.

 

Average Volume      Average Rate    

2012 vs. 2011

   Increase (Decrease)  
2012      2011      2012     2011          Volume     Rate     Total  
         

Change in interest earned on:

      
$ 5,251,278       $ 4,756,165         4.14     4.61  

Loans

   $ 20,571      $ (22,256   $ (1,685
         

Securities:

      
  4,612,510         4,224,456         1.76        2.01     

Taxable

     6,816        (10,923     (4,107
  1,862,786         1,497,834         3.11        3.54     

Tax-exempt

     10,458        (7,001     3,457   
  26,459         31,273         0.46        0.32     

Federal funds sold and resell agreements

     (22     42        20   
  547,817         837,807         0.33        0.39     

Interest-bearing due from banks

     (947     (548     (1,495
  53,227         51,927         2.34        2.64     

Other

     25        (183     (158

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
  12,354,077         11,399,462         2.91        3.18     

Total

     36,901        (40,869     (3,968
         

Change in interest incurred on:

      
  6,265,040         6,178,795         0.28        0.40     

Interest-bearing deposits

     240        (7,452     (7,212
  1,410,478         1,471,011         0.13        0.12     

Federal funds purchased and repurchase agreements

     (81     253        172   
  11,514         36,580         2.86        0.93     

Other

     (716     704        (12

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
$   7,687,032       $ 7,686,386         0.26     0.35  

Total

     (557     (6,495     (7,052

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
         

Net interest income

   $ 37,458      $ (34,374   $ 3,084   
            

 

 

   

 

 

   

 

 

 

 

Average Volume      Average Rate    

2011 vs. 2010

   Increase (Decrease)  
2011      2010      2011     2010          Volume     Rate     Total  
         

Change in interest earned on:

      
$   4,756,165       $ 4,490,587         4.61     4.95  

Loans

   $ 12,228      $ (14,949   $ (2,721
         

Securities:

      
  4,224,456         3,964,661         2.01        2.28     

Taxable

     5,235        (10,524     (5,289
  1,497,834         1,067,689         3.54        4.28     

Tax-exempt

     13,908        (8,638     5,270   
  31,273         44,383         0.32        0.36     

Federal funds sold and resell agreements

     (42     (16     (58
  837,807         593,518         0.39        0.66     

Interest-bearing due from banks

     958        (1,588     (630
  51,927         41,489         2.64        1.91     

Other

     274        300        574   

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
  11,399,462         10,202,327         3.18        3.56     

Total

     32,561        (35,415     (2,854
         

Change in interest incurred on:

      
  6,178,795         5,656,508         0.40        0.59     

Interest-bearing deposits

     2,082        (10,901     (8,819
  1,471,011         1,409,349         0.12        0.14     

Federal funds purchased and repurchase agreements

     72        (377     (305
  36,580         42,313         0.93        1.02     

Other

     (53     (36     (89

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
$ 7,686,386       $ 7,108,170         0.35     0.50  

Total

     2,101        (11,314     (9,213

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
         

Net interest income

   $ 30,460      $ (24,101   $     6,359   
            

 

 

   

 

 

   

 

 

 

 

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Table 2

ANALYSIS OF NET INTEREST MARGIN (in thousands)

 

     2012     2011     2010  

Average earning assets

   $ 12,354,077      $ 11,399,462      $ 10,202,327   

Interest-bearing liabilities

     7,687,032        7,686,386        7,108,170   
  

 

 

   

 

 

   

 

 

 

Interest-free funds

   $ 4,667,045      $ 3,713,076      $ 3,094,157   
  

 

 

   

 

 

   

 

 

 

Free funds ratio (free funds to earning assets)

     37.78     32.57     30.33
  

 

 

   

 

 

   

 

 

 

Tax-equivalent yield on earning assets

     2.91     3.18     3.56

Cost of interest-bearing liabilities

     0.26        0.35        0.50   
  

 

 

   

 

 

   

 

 

 

Net interest spread

     2.65     2.83     3.06

Benefit of interest-free funds

     0.10        0.11        0.15   
  

 

 

   

 

 

   

 

 

 

Net interest margin

     2.75     2.94     3.21
  

 

 

   

 

 

   

 

 

 

The Company experienced an increase in net interest income of $3.1 million, or 1.0 percent, for the year 2012, compared to 2011. This follows an increase of $6.4 million, or 2.1 percent, for the year 2011, compared to 2010. As illustrated in Table 1, the 2011 increase is due to a favorable volume variance. The most significant portion of this favorable volume variance is associated with higher loan balances in 2012 and the higher security balances in 2011, respectively. In 2012, the favorable volume variances for earning assets were outpaced by the rate variances. However, the Company reduced the average cost of interest-bearing liabilities by 12 basis points during 2012 and 19 basis points in 2011, resulting in the positive increase in net interest income.

The decrease in the cost of funds has led to a declining beneficial impact from interest-free funds. However, the Company still maintains a significant portion of its deposit funding with noninterest-bearing demand deposits. Noninterest-bearing demand deposits represented 42.2 percent, 38.8 percent and 32.0 percent of total outstanding deposits at December 31, 2012, 2011 and 2010, respectively. As illustrated in Table 2, the impact from these interest-free funds was 10 basis points in 2012, compared to 11 basis points in 2011 and 15 basis points in 2010.

The Company has experienced a repricing of its earning assets and interest-bearing liabilities during the 2012 interest rate cycle. The average rate on earning assets during 2012 has decreased by 27 basis points, while the average rate on interest-bearing liabilities decreased by 9 basis points, resulting in a 18 basis point decline in spread. The volume of loans has increased from an average of $4.8 billion in 2011 to an average of $5.3 billion in 2012. Loan-related earning assets tend to generate a higher spread than those earned in the Company’s investment portfolio. By design, the Company’s investment portfolio is relatively short in duration and liquid in its composition of assets. If the Federal Reserve’s Open Market Committee maintains rates at current levels, the Company anticipates a negative impact to interest income as a result. The magnitude of this impact will be largely dependent upon the Federal Reserve’s policy decisions, market movements and the duration of this rate environment.

During 2013, approximately $1.5 billion of securities are expected to have principal repayments and be reinvested. This includes approximately $421 million which will have principal repayments during the first quarter of 2013. The total investment portfolio had an average life of 40.0 months and 32.8 months as of December 31, 2012 and 2011, respectively. It should be noted that the Company also had a portfolio of short-term investments as of the end of both 2012 and 2011. At December 31, 2012, the amount of such investments was approximately $215 million, and without these investments, the average life of the investment portfolio would have been 41.2 months. At December 31, 2011, the amount of such short-term investments was approximately $157 million, and without these short-term investments, the average life of the investment portfolio would have been 33.6 months.

 

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Provision and Allowance for Loan Losses

The allowance for loan losses (ALL) represents management’s judgment of the losses inherent in the Company’s loan portfolio as of the balance sheet date. An analysis is performed quarterly to determine the appropriate balance of the ALL. This analysis considers items such as historical loss trends, a review of individual loans, migration analysis, current economic conditions, loan growth and characteristics, industry or segment concentration and other factors. After the balance sheet analysis is performed for the ALL, the provision for loan losses is computed as the amount required to adjust the ALL to the appropriate level.

Table 3 presents the components of the allowance by loan portfolio segment. The Company manages the ALL against the risk in the entire loan portfolio and therefore, the allocation of the ALL to a particular loan segment may change in the future. Management of the Company believes the present ALL is adequate considering the Company’s loss experience, delinquency trends and current economic conditions. Future economic conditions and borrowers’ ability to meet their obligations, however, are uncertainties which could affect the Company’s ALL and/or need to change its current level of provision. For more information on loan portfolio segments and ALL methodology refer to Note 3 to the Consolidated Financial Statements.

Table 3

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (in thousands)

This table presents an allocation of the allowance for loan losses by loan portfolio segment. The breakdown is based on a number of qualitative factors; therefore, the amounts presented are not necessarily indicative of actual future charge-offs in any particular category.

 

     December 31  

Loan Category

   2012      2011      2010      2009      2008  

Commercial

   $ 43,390       $ 37,927       $ 39,138       $ 40,420       $ 31,617   

Real estate

     15,506         20,486         18,557         13,321         9,737   

Consumer

     12,470         13,593         16,243         10,128         10,893   

Leases

     60         11         14         270         50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance

   $ 71,426       $ 72,017       $ 73,952       $ 64,139       $ 52,297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Table 4 presents a five-year summary of the Company’s ALL. Also, please see “Quantitative and Qualitative Disclosures About Market Risk—Credit Risk” on pages 48 and 49 in this report for information relating to nonaccrual, past due, restructured loans, and other credit risk matters. For more information on loan portfolio segments and ALL methodology refer to Note 3 of the Consolidated Financial Statements.

As illustrated in Table 4 below, the ALL decreased as a percentage of total loans to 1.26 percent as of December 31, 2012, compared to 1.45 percent as of December 31, 2011. Based on the factors above, management of the Company had a reduction of expense of $4.7 million, or 21.2 percent, related to the provision for loan losses in 2012, compared to 2011. This decrease is primarily attributable to improvements in the credit characteristics of the loan portfolio. This compares to a $9.3 million, or 29.6 percent, decrease in the provision for loan losses in 2011, compared to 2010.

 

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Table 4

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (in thousands)

 

     2012     2011     2010     2009     2008  

Allowance-beginning of year

   $ 72,017      $ 73,952      $ 64,139      $ 52,297      $ 45,986   

Provision for loan losses

     17,500        22,200        31,510        32,100        17,850   

Allowance of banks and loans acquired

     —          —          —          —          216   

Charge-offs:

          

Commercial

     (8,446     (12,693     (6,644     (5,532     (4,281

Consumer

          

Credit card

     (11,148     (13,493     (15,606     (13,625     (8,092

Other

     (1,530     (1,945     (2,979     (4,911     (4,147

Real estate

     (932     (532     (258     (881     (61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (22,056     (28,663     (25,487     (24,949     (16,581

Recoveries:

          

Commercial

     1,136        813        637        1,419        1,338   

Consumer

          

Credit card

     1,766        2,366        1,327        1,334        1,253   

Other

     1,035        1,317        1,797        1,936        2,220   

Real estate

     28        32        29        2        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     3,965        4,528        3,790        4,691        4,826   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (18,091     (24,135     (21,697     (20,258     (11,755
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance-end of year

   $ 71,426      $ 72,017      $ 73,952      $ 64,139      $ 52,297   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loans, net of unearned interest

   $ 5,243,264      $ 4,748,909      $ 4,478,377      $ 4,356,187      $ 4,175,658   

Loans at end of year, net of unearned interest

     5,686,749        4,960,343        4,583,683        4,314,705        4,388,148   

Allowance to loans at year-end

     1.26     1.45     1.61     1.49     1.19

Allowance as a multiple of net charge-offs

     3.95     2.98     3.41     3.17     4.45

Net charge-offs to:

          

Provision for loan losses

     103.38     108.71     68.86     63.11     65.86

Average loans

     0.35        0.51        0.48        0.47        0.28   

Noninterest Income

A key objective of the Company is the growth of noninterest income to enhance profitability and provide steady income, as fee-based services are typically non-credit related and are not generally affected by fluctuations in interest rates. Noninterest income increased $43.8 million, or 10.6 percent, to $458.1 million for the year ended December 31, 2012, compared to the same period in 2011. The increase in 2012 is primarily attributable to higher trust and securities processing income, gains on the sale of securities available for sale, and adjustments of the contingent consideration liabilities on acquisitions. The increase in 2011 is primarily attributed to higher trust and securities processing income and higher bankcard fees.

The Company’s fee-based services provide the opportunity to offer multiple products and services to customers which management believes will more closely align the customer’s product demand with the Company. The Company’s ongoing focus is to continue to develop and offer multiple products and services to its customers. The Company is currently emphasizing fee-based services including trust and securities processing, bankcard, securities trading/brokerage and cash/treasury management. Management believes that it can offer these products and services both efficiently and profitably, as most have common platforms and support structures.

 

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Table 5

SUMMARY OF NONINTEREST INCOME (in thousands)

 

     Year Ended December 31  
                          Dollar Change     Percent Change  
     2012      2011      2010      12-11     11-10     12-11     11-10  

Trust and securities processing

   $ 225,094       $ 208,392       $ 160,356       $ 16,702      $ 48,036        8.0     30.0

Trading and investment banking

     30,359         27,720         29,211         2,639        (1,491     9.5        (5.1

Service charges on deposit accounts

     78,694         74,659         77,617         4,035        (2,958     5.4        (3.8

Insurance fees and commissions

     4,095         4,375         5,565         (280     (1,190     (6.4     (21.4

Brokerage fees

     11,105         9,950         6,345         1,155        3,605        11.6        56.8   

Bankcard fees

     60,567         59,767         54,804         800        4,963        1.3        9.1   

Gains on sales of securities available for sale, net

     20,232         16,125         8,315         4,107        7,810        25.5        93.9   

Other

     27,976         13,344         18,157         14,632        (4,813     >100.0        (26.5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 458,122       $ 414,332       $ 360,370       $ 43,790      $ 53,962        10.6     15.0
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income and the year-over-year changes in noninterest income are summarized in Table 5 above. The dollar change and percent change columns highlight the respective net increase or decrease in the categories of noninterest income in 2012 compared to 2011, and in 2011 compared to 2010.

Trust and securities processing income consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and money management services, and mutual fund assets servicing. This income category increased by $16.7 million, or 8.0 percent in 2012, compared to 2011, and increased by $48.0 million, or 30.0 percent in 2011, compared to 2010. The Company increased fund administration and custody services fee income by $4.6 million and $6.8 million in 2012 and 2011, respectively. Advisory fee income from the Scout Funds increased $9.0 million in 2012 compared to 2011 and $14.4 million in 2011 compared to 2010. Fee income from institutional and personal investment management services increased $3.4 million in 2012 and $23.2 million in 2011. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels.

Gains on sales of securities available for sale increased $4.1 million in 2012 compared to 2011 and increased by $7.8 million in 2011 compared to 2010.

Other noninterest income increased in 2012 by $14.6 million, or 109.7 percent, primarily driven by $8.7 million in adjustments decreasing the contingent consideration liabilities on acquisitions. These adjustments were due to the adoption of new accounting guidance related to fair value measurements and additional changes in cash flow projections.

Noninterest Expense

Noninterest expense increased in both 2012 and 2011 compared to the respective prior years. Noninterest expense increased in 2012 by $27.7 million, or 4.9 percent, compared to 2011 and increased in 2011 by $50.1 million, or 9.8 percent, compared to 2010. The main drivers of this increase in 2012 were salaries and employee benefits expense, marketing and business development, a legal settlement, and increases in the contingent consideration liability on acquisitions. Table 6 below summarizes the components of noninterest expense and the respective year-over-year changes for each category.

 

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Table 6

SUMMARY OF NONINTEREST EXPENSE (in thousands)

 

     Year Ended December 31  
    

 

    

 

    

 

     Dollar Change     Percent Change  
     2012      2011      2010      12-11     11-10     12-11     11-10  

Salaries and employee benefits

   $ 319,852       $ 294,756       $ 267,213       $ 25,096      $ 27,543        8.5     10.3

Occupancy, net

     37,927         38,406         36,251         (479     2,155        (1.2     5.9   

Equipment

     43,465         42,728         44,934         737        (2,206     1.7        (4.9

Supplies and services

     21,045         22,166         18,841         (1,121     3,325        (5.1     17.6   

Marketing and business development

     24,604         20,150         18,348         4,454        1,802        22.1        9.8   

Processing fees

     51,191         49,985         45,502         1,206        4,483        2.4        9.9   

Legal and consulting

     17,980         15,601         14,046         2,379        1,555        15.2        11.1   

Bankcard

     18,154         15,600         16,714         2,554        (1,114     16.4        (6.7

Amortization of other intangible assets

     14,775         16,100         11,142         (1,325     4,958        (8.2     44.5   

Regulatory fees

     9,447         10,395         13,448         (948     (3,053     (9.1     (22.7

Class action litigation settlement

     —           7,800         —           (7,800     7,800        >100.0        >100.0   

Other

     32,014         29,059         26,183         2,955        2,876        10.2        11.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 590,454       $ 562,746       $ 512,622       $ 27,708      $ 50,124        4.9     9.8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and employee benefits expense increased $25.1 million, or 8.5 percent, and $27.5 million, or 10.3 percent, in 2012 and 2011, respectively. The increase in both 2012 and 2011 is primarily due to higher employee base salaries, higher commissions and bonuses and higher cost of benefits. Base salaries increased by $15.1 million, or 8.2 percent, in 2012, compared to the same period in 2011. Commissions and bonuses increased by $2.5 million, or 4.1 percent, in 2012, compared to the same period in 2011. Employee benefits increased by $7.4 million, or 15.8 percent, in 2012, compared to the same period in 2011.

Marketing and business development increased $4.5 million, or 22.1 percent, in 2012. This increase is driven by increased advertising campaigns and business development.

During the second quarter of 2011, the Company and its subsidiaries, UMB Bank, n.a., UMB Bank Colorado, n.a., UMB Bank Arizona, n.a., and UMB National Bank of America entered into an agreement to settle a class action lawsuit. While admitting no wrongdoing, in order to fully and finally resolve the litigation and avoid any further expense and distraction caused by the litigation, the Company established a $7.8 million escrow fund in accordance with this agreement.

Other noninterest expense increased $3.0 million, or 10.2 percent, primarily driven by an increase in contingent consideration liabilities on acquisitions of $3.5 million compared to 2011.

Income Taxes

Income tax expense totaled $47.5 million, $39.9 million, and $35.8 million in 2012, 2011 and 2010, respectively. These amounts equate to effective rates of 27.9 percent, 27.3 percent, and 28.3 percent for 2012, 2011 and 2010, respectively. The decrease in the effective tax rate from 2010 to 2011 is primarily attributable to an increase in the valuation allowance recorded during 2010. The increase in the effective tax rate from 2011 to 2012 results from changes in the portion of income earned from tax-exempt municipal securities and an increase in the state marginal tax rate.

For further information on income taxes refer to Note 16 of the Notes to Consolidated Financial Statements.

 

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Business Segments

The Company has strategically aligned its operations into the following four reportable segments (collectively, “Business Segments”): Bank, Payment Solutions, Institutional Investment Management, and Asset Servicing. Business segment financial results produced by the Company’s internal management accounting system are evaluated regularly by the Executive Committee in deciding how to allocate resources and assess performance for individual Business Segments. The Business Segments were redefined during the first quarter of 2012 to reflect the Executive Committee’s changes in executive management responsibilities for each of the core businesses, the products and services provided and the types of customers served, and how financial information is currently evaluated by management. The management accounting system assigns balance sheet and income statement items to each business segment using methodologies that are refined on an ongoing basis. In 2011, the Business Segments were Commercial Financial Services, Institutional Financial Services, and Personal Financial Services. For comparability purposes, amounts in all periods presented are based on methodologies in effect at December 31, 2012. Previously reported results have been reclassified to conform to the current organizational structure.

Table 7

Bank Operating Results

 

     Year Ended
December 31,
     Dollar
Change
    Percent
Change
 
     2012      2011      12-11     12-11  

Net interest income

   $ 275,178       $ 273,481       $ 1,697        0.62

Provision for loan losses

     8,098         11,060         (2,962     (26.78

Noninterest income

     216,688         205,877         10,811        5.25   

Noninterest expense

     383,034         378,065         4,969        1.31   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     100,734         90,233         10,501        11.64   

Income tax expense

     26,533         23,085         3,448        14.94   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 74,201       $ 67,148       $ 7,053        10.50
  

 

 

    

 

 

    

 

 

   

 

 

 

Bank’s net income increased by $7.1 million, or 10.5 percent, to $74.2 million compared to the same period for the prior year. This increase was driven by increased noninterest income, increased net interest income, a decrease in provision for loan losses offset by a slight increase in noninterest expense. Noninterest income increased $10.8 million, or 5.3 percent, over the same period in 2011. The noninterest income growth compared to 2011 was driven by increased securities gains of $4.1 million, increased bond trading income of $2.6 million and increased miscellaneous income of $8.6 million. The increase in miscellaneous income was attributable to a $3.0 million increase related to an adjustment in contingent consideration liabilities on acquisitions due to new accounting guidance, a $2.4 million increase in fair value adjustments on interest rate swap transactions and $0.6 million in gains on the sale of two branches during 2012. These increases were offset by a decrease in card services income of $6.7 million primarily driven by the impact of the Durbin amendment on interchange income. Provision decreased by $3.0 million, or 26.8 percent, due to improvements in the credit characteristics of the loan portfolio in this segment. Noninterest expense increased $5.0 million, or 1.3 percent, to $383.0 million as compared to 2011. The growth in noninterest expense is attributable to an increase in marketing expense of $2.5 million and a $10.4 million increase in support services. These increases are offset by the $7.8 million overdraft class action lawsuit settlement recorded in 2011.

 

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Table 8

Payment Solutions Operating Results

 

     Year Ended
December 31,
     Dollar
Change
    Percent
Change
 
     2012      2011      12-11     12-11  

Net interest income

   $ 43,351       $ 42,101       $ 1,250        2.97

Provision for loan losses

     9,402         11,140         (1,738     (15.60

Noninterest income

     65,723         54,702         11,021        20.15   

Noninterest expense

     68,903         56,367         12,536        22.24   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     30,769         29,296         1,473        5.03   

Income tax expense

     9,430         9,002         428        4.75   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 21,339       $ 20,294       $ 1,045        5.15
  

 

 

    

 

 

    

 

 

   

 

 

 

Payments Solutions net income increased $1.0 million, or 5.2 percent, to $21.3 million from the prior year. Net interest margin increased by $1.3 million, or 3.0 percent, due to growth in earning assets, but offset by a reduction in funds transfer pricing credit on deposits. Provision expense decreased by $1.7 million, or 15.6 percent, due to lower charge offs and enhanced credit quality in the card portfolio. Noninterest income increased $11.0 million, or 20.2 percent, driven by a $7.5 million increase in cards services income due to increased sales volume for commercial card, retail credit card, and healthcare services. There was also an additional $3.4 million increase in deposit service charge income from institutional cash management and healthcare services customers driven from new business growth as well as an acquisition of customers. Noninterest expense increased by $12.5 million, or 22.2 percent, primarily from increased staffing, advertising, consulting and legal fees, and in bankcard processing fees associated with the increase in sales volume. Salaries and benefits expense increased $3.8 million, bankcard processing fees increased $2.4 million, advertising expense increased $2.0 million, legal and consulting increased $0.7 million, and support services increased $2.9 million compared to 2011.

Table 9

Institutional Investment Management Operating Results

 

     Year Ended
December 31,
     Dollar
Change
    Percent
Change
 
     2012      2011      12-11     12-11  

Net interest income

   $ 2       $ 45       $ (43     (95.56 )% 

Provision for loan losses

     —           —           —          —     

Noninterest income

     100,093         83,955         16,138        19.22   

Noninterest expense

     70,527         64,050         6,477        10.11   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     29,568         19,950         9,618        48.21   

Income tax expense

     8,269         5,534         2,735        49.42   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 21,299       $ 14,416       $ 6,883        47.75
  

 

 

    

 

 

    

 

 

   

 

 

 

Institutional Investment Management net income increased $6.9 million, or 47.8 percent, to $21.3 million for the 2012 compared to the prior year. This increase is due to a large increase in noninterest income offset by an increase in noninterest expense. Noninterest income increased $16.1 million, or 19.2 percent, to $100.1 million primarily due to an $11.2 million increase in advisory fees due to increased asset values year-to-date compared to the prior year and the addition of a new administrative fee added in early 2012. Another driver was a $4.3 million adjustment decreasing the contingent consideration liabilities on acquisitions in this segment related to new accounting guidance to fair value measurements. Noninterest expense increased $6.5 million, or 10.1 percent, to $70.5 million compared to a year ago. This increase was due to a $1.1 million increase in salaries

 

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and benefits, a $0.9 million increase in third party distribution expense and a $3.1 million increase in contingent consideration liabilities on acquisitions related to cash flow estimate changes on acquisitions compared to last year.

Table 10

Asset Servicing Operating Results

 

     Year Ended
December 31,
     Dollar
Change
     Percent
Change
 
     2012      2011      12-11      12-11  

Net interest income

   $ 1,525       $ 1,346       $ 179         13.30

Provision for loan losses

     —           —           —           —     

Noninterest income

     75,618         69,798         5,820         8.34   

Noninterest expense

     67,990         64,264         3,726         5.80   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     9,153         6,880         2,273         33.04   

Income tax expense

     3,275         2,266         1,009         44.53   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,878       $ 4,614       $ 1,264         27.39
  

 

 

    

 

 

    

 

 

    

 

 

 

Asset Servicing net income increased $1.3 million, or 27.4 percent, to $5.9 million compared to the prior year. Noninterest income increased $5.8 million, or 8.3 percent, driven primarily by new business added in transfer agent, alternative investment, and fund administration services. Net interest margin increased by $0.2 million, or 13.3 percent, due to an increase in deposits in the last quarter, offset by an overall decrease in deposit funds transfer credit. Noninterest expense increased $3.7 million, or 5.8 percent, due primarily to staffing added to support new business, increasing salary and benefit expense by $4.7 million, or 17.7 percent, compared to 2011. This increase was offset by a decrease in processing fees of $0.9 million and amortization expense of intangibles of $0.5 million compared to last year.

Balance Sheet Analysis

Loans and Loans Held For Sale

Loans represent the Company’s largest source of interest income. Loan balances held for investment increased by $726.4 million, or 14.6 percent, in 2012. Commercial loans had the most significant growth in outstanding balances in 2012, compared to 2011. Commercial real estate and home equity loans had smaller increases compared to 2011. These increases were offset by small decreases in consumer loans and construction real estate.

 

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Table 11

ANALYSIS OF LOANS BY TYPE (in thousands)

 

     December 31  
     2012     2011     2010     2009     2008  

Commercial

   $ 2,873,694      $ 2,234,817      $ 1,937,052      $ 1,963,533      $ 2,128,512   

Commercial—credit card

     104,320        95,339        84,544        65,273        59,196   

Real estate—construction

     78,486        84,590        128,520        106,914        89,960   

Real estate—commercial

     1,435,811        1,394,555        1,294,897        1,141,447        1,030,227   

Leases

     19,084        3,834        7,055        7,510        9,895   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total business-related

     4,511,395        3,813,135        3,452,068        3,284,677        3,317,790   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate—residential

     212,363        185,886        193,157        218,081        181,935   

Real estate—HELOC

     573,923        533,032        476,057        435,814        377,740   

Consumer—credit card

     334,518        333,646        322,208        231,254        194,958   

Consumer—other

     54,550        94,644        140,193        144,879        315,725   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer-related

     1,175,354        1,147,208        1,131,615        1,030,028        1,070,358   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans before allowance and loans held for sale

     5,686,749        4,960,343        4,583,683        4,314,705        4,388,148   

Allowance for loan losses

     (71,426     (72,017     (73,952     (64,139     (52,297
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans before loans held for sale

     5,615,323        4,888,326        4,509,731        4,250,566        4,335,851   

Loans held for sale

     3,877        10,215        14,414        17,523        21,886   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and loans held for sale

   $ 5,619,200      $ 4,898,541      $ 4,524,145      $ 4,268,089      $ 4,357,737   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a % of total loans and loans held for sale

          

Commercial

     50.49     44.96     42.13     45.32     48.27

Commercial—credit card

     1.83        1.92        1.84        1.51        1.34   

Real estate—construction

     1.38        1.70        2.80        2.47        2.04   

Real estate—commercial

     25.23        28.06        28.16        26.35        23.36   

Leases

     0.34        0.08        0.15        0.17        0.22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total business-related

     79.27        76.72        75.08        75.82        75.23   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate—residential

     3.73        3.74        4.20        5.03        4.13   

Real estate—HELOC

     10.09        10.72        10.35        10.06        8.57   

Consumer—credit card

     5.88        6.71        7.01        5.34        4.42   

Consumer—other

     0.96        1.90        3.05        3.35        7.15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer-related

     20.66        23.07        24.61        23.78        24.27   

Loans held for sale

     0.07        0.21        0.31        0.40        0.50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and loans held for sale

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in Table 11 is a five-year breakdown of loans by type. Business-related loans continue to represent the largest segment of the Company’s loan portfolio, comprising approximately 79.3 percent and 76.7 percent of total loans and loans held for sale at the end of 2012 and 2011, respectively.

Commercial loans represent the largest percent of total loans. Commercial loans have increased $638.9 million, or 28.6 percent, compared to 2011. Commercial loans have also increased to 50.5 percent of total loans compared to 45.0 percent in 2011. The Company has also increased its capacity to lend through increased commitments over 2011. Commercial line utilization has remained lower compared to prior years due to the current economic conditions.

As a percentage of total loans, commercial real estate and real estate construction loans now comprise 26.6 percent of total loans, compared to 29.8 percent at the end of 2011. Commercial real estate increased

 

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41.3 million, or 3.0 percent, compared to 2011. This increase was offset by a $6.1 million, or 7.2 percent, decrease in construction real estate. Generally, these loans are made for working capital or expansion purposes and are primarily secured by real estate with a maximum loan-to-value of 80 percent. Most of these properties are owner-occupied and/or have other collateral or guarantees as security.

Bankcard loans including both commercial and consumer categories have increased $9.9 million, or 2.3 percent in 2012, compared to 2011. The increase in bankcard loans is due primarily to continued promotional activity and rewards programs associated with the various card products.

Other consumer loans continued to decrease in total amount outstanding and as a percentage of loans. These loans decreased $40.1 million, or 42.4 percent, compared to 2011 and decreased to 1.0 percent of total loans in 2012 compared to 1.9 percent in 2011. This decrease was driven by a reduction in auto loans with reduced demand for other consumer credit as well.

Real estate home equity loans (HELOC) have increased $40.9 million, or 7.7 percent, compared to 2011, but decreased slightly to 10.1 percent of total loans compared to 2011. The HELOC growth was a result of the success of multiple promotions, as well as market penetration within the Company’s current customer base through its current distribution channels.

Nonaccrual, past due and restructured loans are discussed under “Credit Risk” within the Quantitative and Qualitative Disclosure about Market Risk in Item 7A on pages 48 and 49 of this report.

Investment Securities

The Company’s security portfolio provides liquidity as a result of the composition and average life of the underlying securities. This liquidity can be used to fund loan growth or to offset the outflow of traditional funding sources. In addition to providing a potential source of liquidity, the security portfolio can be used as a tool to manage interest rate sensitivity. The Company’s goal in the management of its securities portfolio is to maximize return within the Company’s parameters of liquidity goals, interest rate risk and credit risk. The Company maintains high liquidity levels while investing in only high-grade securities. The security portfolio generates the Company’s second largest component of interest income.

Securities available for sale and securities held to maturity comprised 52.0 percent and 50.0 percent of earning assets as of December 31, 2012 and 2011, respectively. Total investment securities totaled $7.1 billion at December 31, 2012, compared to $6.3 billion at year-end 2011. Management expects deposit balance changes, loan demand, and collateral pledging requirements for public funds to be the primary factors impacting changes in the level of security holdings.

Securities available for sale comprised 97.2 percent of the Company’s investment securities portfolio at December 31, 2012, compared to 97.3 percent at year-end 2011. Securities available for sale had a net unrealized gain of $134.8 million at year-end, compared to a net unrealized gain of $128.0 million the preceding year. These amounts are reflected, on an after-tax basis, in the Company’s other comprehensive income in shareholders’ equity, as an unrealized gain of $85.6 million at year-end 2012, compared to an unrealized gain of $81.1 million for 2011.

The securities portfolio achieved an average yield on a tax-equivalent basis of 2.1 percent for 2012, compared to 2.4 percent in 2011, and 2.7 percent in 2010. The decrease in yield is due to the replacement of higher yielding securities with lower yielding securities as the investment portfolio is reinvested. The average life of the securities portfolio was 40.0 months at December 31, 2012, compared to 32.8 months at year-end 2011. The increase in average life from December 31, 2012 and December 31, 2011 was related to a strategy of buying longer-term investments in order to increase the average life of the portfolio.

Included in Tables 12 and 13 are analyses of the cost, fair value and average yield (tax-equivalent basis) of securities available for sale and securities held to maturity.

 

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Table of Contents

The securities portfolio contains securities that have unrealized losses and are not deemed to be other-than-temporarily impaired (see the table of these securities in Note 4 to the Consolidated Financial Statements on page 72 of this document). The unrealized losses in the Company’s investments in direct obligations of U.S. treasury obligations, U.S. government agencies, federal agency mortgage-backed securities, municipal securities, and Corporates were caused by changes in interest rates. Because the Company does not have the intent to sell these securities, it is more likely than not that the Company will not be required to sell these securities before a recovery of fair value. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at December 31, 2012.

Table 12

SECURITIES AVAILABLE FOR SALE (in thousands)

 

December 31, 2012

   Amortized Cost      Fair Value  

U.S. Treasury

   $ 116,856       $ 117,851   

U.S. Agencies

     1,019,640         1,026,115   

Mortgage-backed

     3,480,006         3,556,193   

State and political subdivisions

     1,842,715         1,892,684   

Corporates

     337,706         338,887   

Commercial Paper

     5,733         5,733   
  

 

 

    

 

 

 

Total

   $ 6,802,656       $ 6,937,463   
  

 

 

    

 

 

 

December 31, 2011

   Amortized Cost      Fair Value  

U.S. Treasury

   $ 184,523       $ 189,325   

U.S. Agencies

     1,615,637         1,632,009   

Mortgage-backed

     2,437,282         2,492,348   

State and political subdivisions

     1,642,844         1,694,036   

Corporates

     99,620         100,164   

Commercial Paper

     —           —     
  

 

 

    

 

 

 

Total

   $ 5,979,906       $ 6,107,882   
  

 

 

    

 

 

 

 

     U.S. Treasury Securities     U.S. Agency Securities  

December 31, 2012

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 2,005         0.98   $ 252,983         1.03

Due after 1 year through 5 years

     96,026         0.89        773,132         0.87   

Due after 5 years through 10 years

     19,820         1.67        —           —     

Due after 10 years

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 117,851         1.02   $ 1,026,115         0.91
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Mortgage-backed
Securities
    State and Political
Subdivisions
 

December 31, 2012

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 56,799         3.04   $ 217,581         2.96

Due after 1 year through 5 years

     3,325,225         2.11        826,808         2.84   

Due after 5 years through 10 years

     171,013         1.89        692,953         3.23   

Due after 10 years

     3,156         3.34        155,342         3.25   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,556,193         2.11   $ 1,892,684         3.03
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     Corporates     Commercial Paper        

December 31, 2012

   Fair Value      Weighted
Average
Yield
    Fair
Value
     Weighted
Average
Yield
    Total Fair
Value
 

Due in one year or less

   $ 37,723         1.06   $ 5,733         0.40   $ 572,824   

Due after 1 year through 5 years

     301,164         1.09        —           —          5,322,355   

Due after 5 years through 10 years

     —           —          —           —          883,786   

Due after 10 years

     —           —          —           —          158,498   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 338,887         1.09   $ 5,733         0.40   $ 6,937,463   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     U.S. Treasury
Securities
    U.S. Agency
Securities
 

December 31, 2011

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ —           —     $ 525,045         1.41

Due after 1 year through 5 years

     184,265         1.32        1,106,964         1.17   

Due after 5 years through 10 years

     5,060         1.98        —           —     

Due after 10 years

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 189,325         1.34   $ 1,632,009         1.25
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Mortgage-backed
Securities
    State and Political
Subdivisions
 

December 31, 2011

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 66,084         4.62   $ 271,922         3.17

Due after 1 year through 5 years

     2,140,763         2.55        815,473         3.12   

Due after 5 years through 10 years

     267,696         2.78        515,414         3.75   

Due after 10 years

     17,805         4.12        91,227         3.61   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,492,348         2.65   $ 1,694,036         3.34
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Corporates     Commercial Paper        

December 31, 2011

   Fair Value      Weighted
Average
Yield
    Fair
Value
     Weighted
Average
Yield
    Total Fair
Value
 

Due in one year or less

   $ —           —     $ —           —     $ 863,051   

Due after 1 year through 5 years

     100,164         1.34        —           —          4,347,629   

Due after 5 years through 10 years

     —           —          —           —          788,170   

Due after 10 years

     —           —          —           —          109,032   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 100,164         1.51   $ —           —     $ 6,107,882   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table 13

SECURITIES HELD TO MATURITY (in thousands)

 

December 31, 2012

   Amortized
Cost
     Fair Value      Weighted Average
Yield/Average Maturity

Due in one year or less

   $ 1,751       $ 1,976       4.81%

Due after 1 year through 5 years

     31,802         35,887       3.06%

Due after 5 years through 10 years

     28,084         31,691       3.21%

Due over 10 years

     53,119         59,941       3.14%
  

 

 

    

 

 

    

 

Total

   $ 114,756       $ 129,495       10 yr. 8 mo.
  

 

 

    

 

 

    

 

December 31, 2011

                  

Due in one year or less

   $ 256       $ 293       1.55%

Due after 1 year through 5 years

     30,154         34,560       3.28%

Due after 5 years through 10 years

     17,562         20,128       4.38%

Due over 10 years

     41,274         47,306       3.46%
  

 

 

    

 

 

    

 

Total

   $ 89,246       $ 102,287       11 yr. 0 mo.
  

 

 

    

 

 

    

 

Other Earning Assets

Federal funds transactions essentially are overnight loans between financial institutions, which allow for either the daily investment of excess funds or the daily borrowing of another institution’s funds in order to meet short-term liquidity needs. The net sold position was $32.7 million at December 31, 2012, and $13.1 million at December 31, 2011.

The Bank buys and sells federal funds as agent for non-affiliated banks. Because the transactions are pursuant to agency arrangements, these transactions do not appear on the balance sheet and averaged $348.6 million in 2012 and $408.9 million in 2011.

At December 31, 2012, the Company held securities bought under agreements to resell of $57.2 million compared to $53.0 million at year end 2011. The Company used these instruments as short-term secured investments, in lieu of selling federal funds, or to acquire securities required for collateral purposes. These investments averaged $22.0 million in 2012 and $27.5 million in 2011.

The Company also maintains an active securities trading inventory. The average holdings in the securities trading inventory in 2012 were $53.2 million, compared to $51.9 million in 2011, and were recorded at market value. As discussed in the “Quantitative and Qualitative Disclosures About Market Risk—Trading Account” in Part II, Item 7A on page 48, the Company offsets the trading account securities by the sale of exchange-traded financial futures contracts, with both the trading account and futures contracts marked to market daily.

Interest-bearing due from banks totaled $720.5 million as of December 31, 2012 compared to $1.16 billion as of December 31, 2011 and includes amounts due from the Federal Reserve Bank and from certificates of deposits held at other financial institutions. The amount due from the Federal Reserve Bank totaled $698.6 million and $1,013.1 million at December 31, 2012 and 2011, respectively. The amounts due from certificates of deposit totaled $21.9 million and $151.0 million at December 31, 2012 and 2011, respectively.

Deposits and Borrowed Funds

Deposits represent the Company’s primary funding source for its asset base. In addition to the core deposits garnered by the Company’s retail branch structure, the Company continues to focus on its cash management

 

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services, as well as its asset management and mutual fund servicing segments in order to attract and retain additional core deposits. Deposits totaled $11.7 billion at December 31, 2012, and $10.2 billion at year end 2011. Deposits averaged $10.5 billion in 2012 and $9.6 billion in 2011. The Company continually strives to expand, improve and promote its cash management services in order to attract and retain commercial funding customers.

Noninterest–bearing demand deposits averaged $4.3 billion in 2012 and $3.4 billion in 2011. These deposits represented 40.5 percent of average deposits in 2012, compared to 35.6 percent in 2011. The Company’s large commercial customer base provides a significant source of noninterest–bearing deposits. Many of these commercial accounts do not earn interest; however, they receive an earnings credit to offset the cost of other services provided by the Company.

Table 14

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE (in thousands)

 

     December 31  
     2012      2011  

Maturing within 3 months

   $ 364,449       $ 462,992   

After 3 months but within 6 months

     99,700         142,852   

After 6 months but within 12 months

     122,514         135,225   

After 12 months

     155,402         191,870   
  

 

 

    

 

 

 

Total

   $ 742,065       $ 932,939   
  

 

 

    

 

 

 

Table 15

ANALYSIS OF AVERAGE DEPOSITS (in thousands)

 

     2012     2011     2010     2009     2008  

Amount

          

Noninterest-bearing demand

   $ 4,256,618      $ 3,414,843      $ 2,795,458      $ 2,372,456      $ 1,936,170   

Interest-bearing demand and savings

     5,021,526        4,731,300        4,059,615        3,631,486        3,162,015   

Time deposits under $100,000

     577,656        661,957        728,804        782,469        833,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     9,855,800        8,808,100        7,583,877        6,786,411        5,931,218   

Time deposits of $100,000 or more

     665,858        785,537        868,089        797,614        601,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

   $ 10,521,658      $ 9,593,637      $ 8,451,966      $ 7,584,025      $ 6,532,270   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a % of total deposits

          

Noninterest-bearing demand

     40.46     35.59     33.07     31.28     29.64

Interest-bearing demand and savings

     47.72        49.32        48.03        47.88        48.41   

Time deposits under $100,000

     5.49        6.90        8.63        10.32        12.75   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     93.67        91.81        89.73        89.48        90.80   

Time deposits of $100,000 or more

     6.33        8.19        10.27        10.52        9.20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     100.00     100.00     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company, under an agreement to repurchase the same issues at an agreed-upon price and date. Securities sold under agreements to repurchase and federal funds purchased totaled $1.8 billion at December 31, 2012, and $1.9 billion at December 31, 2011. These agreements averaged $1.4 and $1.5 billion in 2012 and 2011, respectively. The Company enters into these transactions with its downstream correspondent banks, commercial customers, and various trust, mutual fund and local government relationships.

 

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Table 16

SHORT-TERM DEBT (in thousands)

 

     2012     2011  
     Amount      Rate     Amount      Rate  

At December 31:

          

Federal funds purchased

   $ —           0.00   $ 2,796         0.02

Repurchase agreements

     1,787,270         0.33        1,948,031         0.11   

Other

     —           0.00        12,000         1.10   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,787,270         0.33   $ 1,962,827         0.12
  

 

 

    

 

 

   

 

 

    

 

 

 

Average for year:

          

Federal funds purchased

   $ 35,589         0.06   $ 32,804         0.05

Repurchase agreements

     1,374,888         0.14        1,438,207         0.12   

Other

     5,656         1.17        25,296         0.12   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,416,133         0.14   $ 1,496,307         0.12
  

 

 

    

 

 

   

 

 

    

 

 

 

Maximum month-end balance:

          

Federal funds purchased

   $ 65,343         $ 46,208      

Repurchase agreements

     1,787,270           1,948,031      

Other

     —             26,798      

The Company had two fixed-rate advances at December 31, 2012, from the Federal Home Loan Banks at rates of 5.89 percent. These advances, collateralized by the Company’s securities, are used to offset interest rate risk of longer-term fixed-rate loans.

Capital Resources 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 Company’s ability to capitalize on business growth and acquisition opportunities. The Company is not aware of any trends, demands, commitments, events or uncertainties that would materially change its capital position or affect its liquidity in the foreseeable future. Capital is managed for each subsidiary based upon its respective risks and growth opportunities as well as regulatory requirements.

Total shareholders’ equity was $1.3 billion at December 31, 2012, compared to $1.2 billion one year earlier. During each year, management has the opportunity to repurchase shares of the Company’s stock if it concludes that the repurchases would enhance overall shareholder value. During 2012 and 2011, the Company acquired 472,956 shares and 238,834 shares of its common stock, respectively.

Risk-based capital guidelines established by regulatory agencies establish minimum capital standards based on the level of risk associated with a financial institution’s assets. A financial institution’s total capital is required to equal at least 8% of risk-weighted assets. At least half of that 8% must consist of Tier 1 core capital, and the remainder may be Tier 2 supplementary capital. The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance-sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. Due to the Company’s high level of core capital and substantial portion of earning assets invested in government securities, the Tier 1 capital ratio of 11.05 percent and total capital ratio of 11.92 percent substantially exceed the regulatory minimums.

For further discussion of capital and liquidity, see the “Liquidity Risk” section of Item 7A, Quantitative and Qualitative Disclosures about Market Risk on page 46 of this report.

 

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Table 17

RISK-BASED CAPITAL (in thousands)

This table computes risk-based capital in accordance with current regulatory guidelines. These guidelines as of December 31, 2012, excluded net unrealized gains or losses on securities available for sale from the computation of regulatory capital and the related risk-based capital ratios.

 

     Risk-Weighted Category  
     0%     20%      50%     100%      Total  

Risk-Weighted Assets

            

Loans held for sale

   $ —        $ 839       $ 2,939      $ 99       $ 3,877   

Loans and leases

     —          44,886         221,925        5,419,938         5,686,749   

Securities available for sale

     2,079,107        4,356,945         23,166        343,440         6,802,658   

Securities held to maturity

     —          114,756         —          —           114,756   

Federal funds and resell agreements

     —          89,868         —          —           89,868   

Trading securities

     400        11,793         12,914        30,657         55,764   

Cash and due from banks

     782,452        605,822         —          —           1,388,274   

All other assets

     11,779        —           —          431,532         443,311   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Category totals

     2,873,738        5,224,909         260,944        6,225,666         14,585,257   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Risk-weighted totals

     —          1,044,982         130,472        6,225,666         7,401,120   

Off-balance-sheet items (risk-weighted)

     —          825         1,017        983,268         985,110   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total risk-weighted assets

   $ —        $ 1,045,807       $ 131,489      $ 7,208,934       $ 8,386,230   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Tier1     Tier2      Total               

Regulatory Capital

            

Shareholders’ equity

   $ 1,279,345      $ —         $ 1,279,345        

Accumulated other comprehensive gains

     (85,588     —           (85,588     

Goodwill and intangibles

     (267,291     —           (267,291     

Allowance for loan losses

     —          73,292         73,292        
  

 

 

   

 

 

    

 

 

      

Total capital

   $ 926,466      $ 73,292       $ 999,758        
  

 

 

   

 

 

    

 

 

      
                  Company               

Capital ratios

            

Tier 1 capital to risk-weighted assets

          11.05     

Total capital to risk-weighted assets

          11.92     

Leverage ratio (Tier 1 to total average assets less goodwill and intangibles)

          6.81     
       

 

 

      

For further discussion of regulatory capital requirements, see Note 10, “Regulatory Requirements” with the Notes to Consolidated Financial Statements under Item 8 on pages 78 and 79.

Commitments, Contractual Obligations and Off-balance Sheet Arrangements

The Company’s 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. These commitments and contingent liabilities are not required to be recorded on the Company’s balance sheet. Since commitments associated with letters of credit and lending and financing arrangements may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. See Table 18 below, as well as Note 14, “Commitments, Contingencies and Guarantees” in the Notes to Consolidated

 

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Financial Statements under Item 8 on pages 85 through 87 for detailed information and further discussion of these arrangements. Management does not anticipate any material losses from its off-balance sheet arrangements.

Table 18

COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS (in thousands)

The table below details the contractual obligations for the Company as of December 31, 2012. The Company has no capital leases or long-term purchase obligations. Includes principal payments only.

 

     Payments due by Period  
      Total      Less than 1
year
     1-3 years      3-5 years      More
than 5
years
 

Contractual Obligations

              

Fed funds purchased and repurchase agreements

   $ 1,787,270       $ 1,787,270       $ —         $ —         $ —     

Short-term debt obligations

     —           —           —           —           —     

Long-term debt obligations

     5,879         1,773         2,616         1,186         304   

Operating lease obligations

     65,396         8,215         14,487         12,698         29,996   

Time open and C.D.’s

     1,282,334         992,595         196,661         87,013         6,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,140,879       $ 2,789,853       $ 213,764       $ 100,897       $ 36,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2012, the total liabilities for unrecognized tax benefits were $4.3 million. The Company cannot reasonably estimate the timing of the future payments of these liabilities. Therefore, these liabilities have been excluded from the table above. See Note 16 to the consolidated financial statements for information regarding the liabilities associated with unrecognized tax benefits.

The table below (a continuation of Table 18 above) details the commitments, contingencies and guarantees for the Company as of December 31, 2012.

 

    Maturities due by Period  
    Total     Less than 1
year
    1-3 years     3-5 years     More than
5 years
 

Commitments, Contingencies and Guarantees

         

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

  $ 2,458,444      $ 414,158      $ 354,934      $ 1,010,126      $ 679,226   

Commitments to extend credit under credit card loans

    2,184,415        2,184,415        —          —          —     

Commercial letters of credit

    1,041        1,041        —          —          —     

Standby letters of credit

    343,503        217,864        84,335        41,304        —     

Futures contracts

    7,500        7,500        —          —          —     

Forward foreign exchange contracts

    2,005        2,005        —          —          —     

Spot foreign exchange contracts

    2,910        2,910        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,999,818      $ 2,829,893      $ 439,269      $ 1,051,430      $ 679,226   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of financial condition and results of operations discusses the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets

 

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and liabilities and the disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customers and suppliers, allowance for loan losses, bad debts, investments, financing operations, long-lived assets, taxes, other 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. Under different assumptions or conditions, actual results may differ from the recorded estimates.

Management believes that the Company’s critical accounting policies are those relating to: the allowance for loan losses, goodwill and other intangibles, revenue recognition, accounting for stock-based compensation, accounting for uncertainty in income taxes, and fair value measurements.

Allowance for Loan Losses

The Company’s allowance for loan losses represents management’s judgment of the loan losses inherent in the loan portfolio. The allowance is reviewed quarterly, considering both quantitative and qualitative factors such as historical trends, internal ratings, migration analysis, current economic conditions, loan growth and individual impairment testing.

Larger commercial loans are individually reviewed for potential impairment. For these loans, if management deems it probable that the borrower cannot meet its contractual obligations with respect to payment or timing such loans are deemed to be impaired under current accounting standards. Such loans are then reviewed for potential impairment based on management’s estimate of the borrower’s ability to repay the loan given the availability of cash flows, collateral and other legal options. Any allowance related to the impairment of an individually impaired loan is based on the present value of discounted expected future cash flows, the fair value of the underlying collateral, or the fair value of the loan. Based on this analysis, some loans that are classified as impaired do not have a specific allowance as the discounted expected future cash flows or the fair value of the underlying collateral exceeds the Company’s basis in the impaired loan.

The Company also maintains an internal risk grading system for other loans not subject to individual impairment. An estimate of the inherent loan losses on such risk-graded loans is based on a migration analysis which computes the net charge-off experience related to each risk category.

An estimate of inherent losses is computed on remaining loans based on the type of loan. Each type of loan is segregated into a pool based on the nature of such loans. This includes remaining commercial loans that have a low risk grade, as well as other homogenous loans. Homogenous loans include automobile loans, credit card loans and other consumer loans. Allowances are established for each pool based on the loan type using historical loss rates, certain statistical measures and loan growth.

An estimate of the total inherent loss is based on the above three computations. From this an adjustment can be made based on other factors management considers to be important in evaluating the probable losses in the portfolio such as general economic conditions, loan trends, risk management and loan administration and changes in internal policies. For more information on loan portfolio segments and ALL methodology refer to Note 3 to the Consolidated Financial Statements.

Goodwill and Other Intangibles

Goodwill is tested for impairment annually and more frequently whenever events or changes in circumstance indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. During the quarter ended December 31, 2012, the Company changed its goodwill testing date from November 30 to October 1. The selection of October 1 as the annual testing date is preferable as the Company

 

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will have more time and greater availability of accounting resources because the new testing date is two months earlier relative to the fiscal year-end close and reporting process. As a result of the change in the annual goodwill impairment testing date, the Company completed a test as of October 1, 2012 and no more than 12 months elapsed between annual tests. The change in accounting principle related to changing the annual goodwill impairment testing date did not accelerate, delay, or cause an impairment charge. Due to the significant judgments and estimates that are utilized in the goodwill impairment test, the Company determined it was impracticable to objectively determine, without the use of hindsight, the assumptions that would have been used as of each October 1 for periods before October 1, 2012. As such, the Company prospectively applied the change in the annual goodwill impairment testing date from October 1, 2012.

To test goodwill for impairment, the Company performs a qualitative assessment of each reporting unit. If the Company determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not greater than the carrying amount, the two-step impairment test is not required. Otherwise, the Company compares the fair value of its reporting units to their carrying amounts to determine if an impairment is indicated. If an impairment is indicated, the implied fair value of the reporting unit’s goodwill is compared to its carrying amount. An impairment loss is measured as the excess of the carrying value of a reporting unit’s goodwill over its implied fair value. As a result of such impairment tests, the Company has not recognized an impairment charge.

For customer-based identifiable intangibles, the Company amortizes the intangibles over their estimated useful lives of up to seventeen years. When facts and circumstances indicate potential impairment of amortizing intangible assets, the Company evaluates the fair value of the asset and compares it to the carrying value for possible impairment. For more information see “Goodwill and Other Intangibles” in Note 7 in the Notes to the Consolidated Financial Statements.

Revenue Recognition

Revenue recognition includes the recording of interest on loans and securities and is recognized based on a rate multiplied by the principal amount outstanding and also includes the impact of the amortization of related premiums and discounts. Interest accrual is discontinued when, in the opinion of management, the likelihood of collection becomes doubtful, or the loan is past due for a period of ninety days or more unless the loan is both well-secured and in the process of collection. Other noninterest income is recognized as services are performed or revenue-generating transactions are executed.

Accounting for Stock-Based Compensation

The amount of compensation recognized is based primarily on the value of the awards on the grant date. To value stock options, the Company uses the Black-Scholes model, which requires the input of several variables. The expected option life is derived from historical exercise patterns and represents the amount of time that options granted are expected to be outstanding. The expected volatility is based on a combination of historical and implied volatilities of the Company’s stock. The interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of the stock on the grant date is used to value awards of restricted stock. Forfeitures are estimated at the grant date and reduce the expense recognized. The forfeiture rate is adjusted annually based on experience. The value of the awards, adjusted for forfeitures, is amortized using the straight-line method over the requisite service period. Management of the Company believes that it is probable that all current performance-based awards will achieve the performance target. Please see the discussion of the “Accounting for Stock-Based Compensation” under Note 1 and Note 11 in the Notes to the Consolidated Financial Statements under Item 8 on pages 58 and 80.

Accounting for Uncertainty in Income Taxes

The Company is subject to income taxes in the U.S. federal and various states jurisdictions. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in

 

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these jurisdictions. The Company records the financial statement effects of an income tax position when it is more likely than not that the position will be sustained on the basis of the technical merits. We recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The measurement of any unrecognized tax benefit is based on management’s best judgment. These liabilities may change as a result of changes in tax laws and regulations, interpretations of law by taxing authorities, and income tax examinations among other factors. Due to the complexity of these uncertainties, the ultimate resolution may differ from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. See the discussion of “Liabilities Associated with Unrecognized Tax Benefits” under Note 16 in the Notes to the Consolidated Financial Statements.

Fair Value Measurements

Fair value is measured in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves discounting future amounts to a single present amount and is based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.

U.S. GAAP establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:

Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that are available at the measurement date.

Level 2—Inputs other than quoted prices included within 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; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3—Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Company’s own financial data such as internally developed pricing models and discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

The Company’s fair value measurements involve various valuation techniques and models, which involve inputs that are observable, when available, and include available-for-sale, trading securities, and contingent consideration measured at fair value on a recurring basis.

Fair value pricing information obtained from third party data providers and pricing services for investment securities are reviewed for appropriateness on a periodic basis. The third party service providers are also analyzed to understand and evaluate the valuation methodologies utilized. This review includes an analysis of current market prices compared to pricing provided by the third party pricing service to assess the relative accuracy of the data provided.

 

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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.

FIVE YEAR AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis) (in millions)

 

    2012     2011  
    Average
Balance
    Interest
Income/
Expense (1)
    Rate
Earned/
Paid (1)
    Average
Balance
    Interest
Income/
Expense (1)
    Rate
Earned/
Paid (1)
 

ASSETS

           

Loans, net of unearned interest (FTE) (2) (3)

  $ 5,251.3      $ 217.6        41.4   $ 4,756.2      $ 219.4        4.61

Securities:

           

Taxable

    4,612.5        81.0        1.76        4,224.5        85.1        2.01   

Tax-exempt (FTE)

    1,862.8        57.9        3.11        1,497.8        53.0        3.54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

    6,475.3        138.9        2.14        5,722.3        138.1        2.41   

Federal funds sold and resell agreements

    26.5        0.1        0.46        31.3        0.1        0.32   

Interest-bearing

    547.8        1.8        0.33        837.8        3.3        0.39   

Other earning assets (FTE)

    53.2        1.2        2.34        51.9        1.4        2.64   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets (FTE)

    12,354.1        359.6        2.91        11,399.5        362.3        3.18   

Allowance for loan losses

    (73.0         (73.0    

Cash and due from banks

    402.1            396.9       

Other assets

    706.0            693.9       
 

 

 

       

 

 

     

Total assets

  $ 13,389.2          $ 12,417.3       
 

 

 

       

 

 

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Interest-bearing demand and savings deposits

  $ 5,021.5      $ 6.5        0.13   $ 4,731.3      $ 8.0        0.17

Time deposits under $100,000

    577.6        4.9        0.85        662.0        7.8        1.18   

Time deposits of $100,000 or more

    665.9        6.0        0.90        785.5        8.8        1.12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing deposits

    6,265.0        17.4        0.28        6,178.8        24.6        0.40   

Short-term debt

    5.6        0.1        1.75        25.3        0.2        0.79   

Long-term debt

    5.9        0.3        5.08        11.3        0.2        1.77   

Federal funds purchased and repurchase agreements

    1,410.5        1.9        0.13        1,471.0        1.7        0.12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

    7,687.0        19.7        0.26        7,686.4        26.7        0.35   

Noninterest bearing demand deposits

    4,256.6            3,414.8       

Other

    187.3            177.4       
 

 

 

       

 

 

     

Total

    12,130.9            11,278.6       
 

 

 

       

 

 

     

Total shareholders’ equity

    1,258.3            1,138.7       
 

 

 

       

 

 

     

Total liabilities and shareholders’ equity

  $ 13,389.2          $ 12,417.3