10-K 1 d653530d10k.htm 10-K 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, 2013

 

¨ 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, 2013 the aggregate market value of common stock outstanding held by nonaffiliates of the registrant was approximately $1,842,394,141 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, 2014

Common Stock, $1.00 Par Value

  45,235,254

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 22, 2014, 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

     15   

ITEM 2. PROPERTIES

     15   

ITEM 3. LEGAL PROCEEDINGS

     16   

ITEM 4. MINE SAFETY DISCLOSURES

     16   

PART II

     17   

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

     17   

ITEM 6. SELECTED FINANCIAL DATA

     18   

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

     20   

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     49   

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     56   

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

     105   

ITEM 9A. CONTROLS AND PROCEDURES

     105   

ITEM 9B. OTHER INFORMATION

     107   

PART III

     107   

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     107   

ITEM 11. EXECUTIVE COMPENSATION

     107   

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

     107   

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

     108   

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     108   

PART IV

     108   

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

     108   

SIGNATURES

     111   

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) is a diversified financial holding company that is headquartered in Kansas City, Missouri. Together with its subsidiaries, the Company supplies banking services, institutional investment management, asset servicing, and payment solutions to its customers in the United States and around the globe.

The Company was organized as a corporation under Missouri law in 1967 and is registered as a bank holding company under the Bank Holding Company Act of 1956 (the BHCA) and a financial holding company under the Gramm-Leach-Bliley Act of 1999 (the GLBA). The Company currently owns all of the outstanding stock of one national bank and several nonbank subsidiaries.

The Company’s national bank, UMB Bank, National Association (the Bank), has its principal office in Missouri and also has branches in Arizona, Colorado, Illinois, Kansas, Nebraska, Oklahoma, and Texas. The Bank offers a full complement of banking services to commercial, retail, government, and correspondent-bank customers, including a wide range of asset-management, trust, bank-card, and cash-management services.

The Company’s significant nonbank subsidiaries include the following:

 

   

Scout Investments, Inc. (Scout) is an institutional asset-management company that is headquartered in Kansas City, Missouri. Scout offers domestic and international equity strategies through its Scout Asset Management Division and fixed-income strategies through its Reams Asset Management Division.

 

   

UMB Fund Services, Inc. (UMBFS) is located in Milwaukee, Wisconsin, Kansas City, Missouri, and Chadds Ford, Pennsylvania and provides fund accounting, transfer agency, and other services to mutual fund groups. JD Clark & Co., Inc., a subsidiary of UMBFS, is located in Ogden, Utah, and provides similar services to alternative-investment groups.

On a full-time equivalent basis at December 31, 2013, the Company and its subsidiaries employed 3,498 persons.

Business Segments

The Company’s products and services are grouped into four segments: Bank, Institutional Investment Management, Asset Servicing, and Payment Solutions.

These segments and their financial results are described in detail in (i) the section of Management’s Discussion and Analysis entitled Business Segments, which can be found in Item 7, pages 33 through 35, of this report and (ii) Note 12 to the Consolidated Financial Statements, which can be found in Item 8, pages 87 through 88, of this report.

Competition

The Company faces intense competition in each of its business segments and in all of the markets and geographic regions that the Company and its subsidiaries serve. Competition comes from both traditional and non-traditional financial-services providers, including banks, savings associations, finance companies, investment advisors, asset managers, mutual funds, private-equity firms, hedge funds, brokerage firms, mortgage-banking companies, credit-card companies, insurance companies, trust companies, securities processing companies, and credit unions. Many of these competitors, moreover, are not subject to the same kind or degree of supervision and regulation that the Company and its subsidiaries experience.

 

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Competition is based on a number of factors. Banking customers are generally influenced by convenience, rates and pricing, personal experience, quality and availability of products and services, lending limits, transaction execution, and reputation. Investment advisory services compete primarily on returns, expenses, third-party ratings, and the reputation and performance of managers. Asset servicing competes primarily on price, quality of services, and reputation.

Successfully competing in the Company’s chosen markets and regions also depends on the Company’s ability to attract, retain, and motivate talented employees, to invest in technology and infrastructure, and to innovate, all the while effectively managing its expenses. The Company expects that competition will only intensify in the future.

Government Monetary and Fiscal Policies

In addition to the impact of general economic conditions, the Company’s business, results of operations, financial condition, capital, liquidity, and prospects are significantly affected by government monetary and fiscal policies that are announced or implemented in the United States and abroad.

A sizeable influence is exerted, in particular, by the policies of the Board of Governors of the Federal Reserve System (FRB), which influences monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates. Among the FRB’s policy tools are (1) open market operations (that is, purchases or sales of securities in the open market for the purpose of adjusting the supply of reserve balances and thus achieving targeted federal funds rates or for the purpose of putting pressure on longer-term interest rates and thus achieving more desirable levels of economic activity and job creation), (2) the discount rate charged on loans by the Federal Reserve Banks, (3) the level of reserves required to be held by depository institutions against specified deposit liabilities, (4) the interest paid on balances maintained with the Federal Reserve Banks by depository institutions, including balances used to satisfy their reserve requirements, and (5) other deposit and loan facilities.

The FRB and its policies have a substantial bearing on the availability of loans and deposits, the rates and other aspects of pricing for loans and deposits, and the conditions in equity, fixed-income, currency, and other markets in which the Company and its subsidiaries operate. Policies announced or implemented by other central banks around the world have a meaningful effect as well.

Tax and other fiscal policies, moreover, impact not only general economic conditions but also give rise to incentives or disincentives that affect how the Company and its customers prioritize objectives, operate businesses, and deploy resources.

Regulation and Supervision

The Company and its subsidiaries are subject to regulatory frameworks in the United States—at federal, State, and local levels—and in the foreign jurisdictions where its business segments operate. In addition, the Company and its subsidiaries are subject to the direct supervision of government authorities charged with overseeing the kinds of financial activities conducted by its business segments.

This section summarizes some pertinent provisions of the principal laws that apply to the Company or its subsidiaries. The descriptions, however, are not complete and are qualified in their entirety by the full text and judicial or administrative interpretations of those laws and of other laws that affect the Company or its subsidiaries.

Overview

The Company is a bank holding company under the BHCA and a financial holding company under the GLBA. As a result, the Company and its subsidiaries—including all of its businesses and operations in the

 

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United States and abroad—are subject to the regulation, supervision, and examination of the FRB and to restrictions on permissible activities. This scheme of regulation, supervision, and examination is intended primarily for the protection and benefit of depositors and other customers of the Bank, the Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation (FDIC), the banking and financial systems as a whole, and the broader economy, not for the protection or benefit of its shareholders or its non-deposit creditors.

Many of the Company’s subsidiaries are also subject to separate or related schemes of regulation, supervision, and examination: for example, (1) the Bank by the Office of the Comptroller of the Currency (OCC) under the National Banking Acts, the FDIC under the Federal Deposit Insurance Act (FDIA) , and the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); (2) Scout, Scout Distributors, LLC, UMBFS, UMB Distribution Services, LLC, UMB Financial Services, Inc., and Prairie Capital Management, LLC by the Securities and Exchange Commission (SEC) and State regulatory authorities under federal and State securities laws, and UMB Distribution Services, LLC and UMB Financial Services, Inc. by the Financial Industry Regulatory Authority (FINRA) as well; and (3) UMB Insurance, Inc. by State regulatory authorities under applicable State insurance laws. These schemes, like that overseen by the FRB, are designed to protect public or private interests that often are not aligned with those of its shareholders or non-deposit creditors.

The FRB possesses extensive authorities and powers to regulate the conduct of the Company’s businesses and operations. If the FRB were to take the position that the Company or its subsidiaries have violated any law or commitment or engaged in any unsafe or unsound practice, formal or informal corrective or enforcement actions could be taken by the FRB against the Company, its subsidiaries, and institution-affiliated parties (such as directors, officers, and agents). These enforcement actions could include an imposition of civil monetary penalties and could directly affect not only the Company, its subsidiaries, and institution-affiliated parties but also the Company’s counterparties, shareholders, and creditors and its commitments, arrangements, or other dealings with them. The OCC has similarly expansive authorities and powers over the Bank and its subsidiaries, as does the CFPB over matters involving consumer financial laws. The SEC, FINRA, and other domestic or foreign government authorities also have an array of means at their disposal to regulate and enforce matters within their jurisdiction that could impact the Company’s businesses and operations.

Restrictions on Permissible Activities and Corporate Matters

Bank holding companies and their subsidiaries are generally limited, under the BHCA, to the business of banking and to closely related activities that are a proper incident to banking.

As a bank holding company that has elected to become a financial holding company under the GLBA, the Company is also able—directly or through its subsidiaries—to engage in activities that are financial in nature, that are incidental to a financial activity, or that are complementary to a financial activity and do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Activities that are financial in nature include (1) underwriting, dealing in, or making a market in securities, (2) providing financial, investment, or economic advisory services, (3) underwriting insurance, and (4) merchant banking.

The Company’s ability to directly or indirectly engage in these banking and financial activities, however, is subject to conditions and other limits imposed by law or the FRB and, in some cases, requires the approval of the FRB or other government authorities. These conditions or other limits may arise due to the particular type of activity or may apply more generally. An example of the former are the substantial restrictions on the timing, amount, form, substance, interconnectedness, and management of its merchant banking investments. An example of the latter is a condition that, in order for the Company to engage in broader financial activities, its depository institutions must remain “well capitalized” and “well managed” under applicable banking laws and must receive at least a “satisfactory” rating under the Community Reinvestment Act (CRA).

Under amendments to the BHCA effected by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Dodd-Frank Act, the Company may acquire banks outside of its home State of Missouri

 

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subject to specified limits and may establish new branches in other States to the same extent as banks chartered in those States. Under the BHCA, however, the Company must procure the prior approval of the FRB to directly or indirectly acquire ownership or control of more than 5% of any class of voting securities of an unaffiliated bank, savings association, or bank holding company or substantially all of its assets. In deciding whether to approve any acquisition or branch, the FRB, the OCC, and other government authorities will consider public or private interests that may not be aligned with those of its shareholders or non-deposit creditors. The FRB also has the power to require the Company to divest a depository institution that cannot maintain its “well capitalized” or “well managed” status.

The FRB also maintains a targeted policy that requires a bank holding company to inform and consult with staff of the FRB sufficiently in advance of (1) declaring and paying a dividend that could raise safety and soundness concerns (for example, a dividend that exceeds earnings in the period for which the dividend is being paid), (2) redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses, or (3) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of the quarter in the amount of those equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.

Requirements Affecting the Relationships among the Company, Its Subsidiaries, and Other Affiliates

The Company is a legal entity separate and distinct from the Bank, Scout, UMBFS, and its other subsidiaries but receives the vast majority of its funds in the form of dividends from those subsidiaries. Without the approval of the OCC, however, dividends payable by the Bank in any calendar year may not exceed the lesser of (1) the current year’s net income combined with the retained net income of the two preceding years and (2) undivided profits. In addition, under the Basel III capital-adequacy standards described below, the Bank will be compelled beginning January 1, 2016, to maintain a capital conservation buffer in excess of its minimum risk-based capital ratios and will be restricted in declaring and paying dividends whenever the buffer is breached. The authorities and powers of the FRB, the OCC, and other government authorities to prevent any unsafe or unsound practice also could be employed to further limit the dividends that the Bank or its other subsidiaries may declare and pay.

The Dodd-Frank Act codified the FRB’s policy requiring a bank holding company like UMB to serve as a source of financial strength for its depository-institution subsidiaries and to commit resources to support those subsidiaries in circumstances when the holding company might not otherwise elect to do so. The functional regulator of any nonbank subsidiary of the holding company, however, may prevent that subsidiary from directly or indirectly contributing its financial support, and if that were to preclude the holding company from serving as an adequate source of strength, the FRB may instead require the divestiture of depository-institution subsidiaries and impose operating restrictions pending such a divestiture.

A number of laws, principally, Sections 23A and 23B of the Federal Reserve Act, also exist to prevent the Company and its nonbank subsidiaries from taking improper advantage of the benefits afforded to the Bank as a depository institution, including its access to federal deposit insurance and the discount window. These laws generally require the Bank and its subsidiaries to deal with the Company and its nonbank subsidiaries only on market terms and, in addition, impose restrictions on the Bank and its subsidiaries in directly or indirectly extending credit to or engaging in other covered transactions with the Company or its nonbank subsidiaries. The Dodd-Frank Act recently extended the restrictions to derivatives and securities lending transactions and expanded the restrictions for transactions involving hedge funds or private-equity funds that are owned or sponsored by the Company or its nonbank subsidiaries.

In addition, under amendments to the BHCA effected by the Dodd-Frank Act and commonly known as the Volcker Rule, the Company and its subsidiaries are subject to extensive limits on proprietary trading and on owning or sponsoring hedge funds and private-equity funds. The limits on proprietary trading are largely focused on purchases or sales of financial instruments by a banking entity as principal primarily for the purpose of short-

 

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term resale, benefitting from actual or expected short-term price movements, or realizing short-term arbitrage profits. The limits on owning or sponsoring hedge funds and private-equity funds are designed to ensure that banking entities generally maintain only small positions in managed or advised funds and are not exposed to significant losses arising directly or indirectly from them. The Volcker Rule also provides for increased capital charges, quantitative limits, rigorous compliance programs, and other restrictions on permitted proprietary trading and fund activities, including a prohibition on transactions with a covered fund that would constitute a covered transaction under Sections 23A and 23B of the Federal Reserve Act. The Company is currently assessing the impact to its businesses of the final regulation implementing the Volcker Rule, which was issued in December 2013, and have until July 21, 2015, to fully conform its activities.

Additional Requirements under the Dodd-Frank Act

On an annual basis beginning in the fall of 2013, the Company and the Bank are required under the Dodd-Frank Act to conduct forward-looking, company-run stress tests as an aid to ensuring that each entity would have sufficient capital to absorb losses and support operations during adverse economic conditions. The first disclosure of a summary of stress-test results for UMB and the Bank is expected to occur in 2015 based on the results of the 2014 stress tests.

Several additional requirements under the Dodd-Frank Act and related regulations apply by their terms only to bank holding companies with consolidated assets of $50 billion or more and systemically important nonbank financial companies. These requirements include enhanced prudential standards, submission to the comprehensive capital analysis and review, more stringent capital and liquidity requirements, stricter limits on leverage, early remediation requirements, resolution planning, single-counterparty exposure limits, increased liabilities for assessments to the FRB and the FDIC, and mandates imposed by the Financial Stability Oversight Council. While the Company and its subsidiaries are not expressly subject to these requirements, their imposition on global and super-regional institutions has resulted in heightened supervision of regional institutions like the Company by the FRB, the OCC, and other government authorities and in a more aggressive use of their extensive authorities and powers to regulate the Company’s businesses and operations.

Capital-Adequacy Standards

The FRB and the OCC have adopted risk-based capital and leverage guidelines that require the capital-to-assets ratios of bank holding companies and national banks, respectively, to meet specified minimum standards.

The risk-based capital ratios are based on a banking organization’s risk-weighted asset amounts (RWAs), which are generally determined under the standardized approach applicable to the Company and the Bank by (1) assigning on-balance-sheet exposures to broad risk-weight categories according to the counterparty or, if relevant, the guarantor or collateral (with higher risk weights assigned to categories of exposures perceived as representing greater risk) and (2) multiplying off-balance-sheet exposures by specified credit conversion factors to calculate credit equivalent amounts and assigning those credit equivalent amounts to the relevant risk-weight categories. The leverage ratio, in contrast, is based on an institution’s average on-balance-sheet exposures alone.

The Company and the Bank are currently subject to capital-adequacy standards that were originally promulgated in 1989 and that are commonly known as Basel I. In July 2013, the FRB and the OCC issued comprehensive revisions to the capital-adequacy standards, commonly known as Basel III, to which the Company and the Bank will begin transitioning on January 1, 2015, with full conformance required by January 1, 2019.

Under Basel I, total qualifying capital is divided into two tiers: more loss-absorbent ier 1 capital and less loss-absorbent tier 2 capital. The maximum amount of tier 2 capital that may be included in a banking organization’s qualifying total capital is limited to 100% of its tier 1 capital.

 

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The Company and the Bank must maintain, under Basel I, a minimum total risk-based capital ratio of total qualifying capital to RWAs of 8.0%, a minimum tier 1 risk-based capital ratio of tier 1 capital to RWAs of 4.0%, and a minimum tier 1 leverage ratio of tier 1 capital to average on-balance-sheet exposures of 4.0%.

The capital ratios for the Company and the Bank as of December 31, 2013, are set forth below:

 

      Tier 1 Leverage Ratio      Tier 1 Risk Based
Capital Ratio
     Total Risk-Based
Capital Ratio
 

UMB Financial Corporation

     8.41         13.61         14.43   

UMB Bank, n.a.  

     7.21         11.73         12.56   

These capital-to-assets ratios also play a central role in prompt corrective action (PCA), which is an enforcement framework used by the federal banking agencies to constrain the activities of banking organizations based on their levels of regulatory capital. Five categories have been established using thresholds for the total risk-based capital ratio, the tier 1 risk-based capital ratio, and the leverage ratio: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. While bank holding companies are not subject to the PCA framework, the FRB is empowered to compel a holding company to take measures—such as the execution of financial or performance guarantees—when prompt correction action is required in connection with one of its depository-institution subsidiaries. At December 31, 2013, the Bank was well capitalized under the PCA framework.

Basel III bolsters the quantity and quality of capital required under the capital-adequacy guidelines, in part, by (1) imposing a new minimum common-equity tier 1 risk-based capital ratio of 4.5%, (2) raising the minimum tier 1 risk-based capital ratio to 6.0%, (3) establishing a new capital conservation buffer of common-equity tier 1 capital to RWAs of 2.5%, (4) amending the definition of qualifying capital to be more conservative, and (5) limiting capital distributions and specified discretionary bonus payments whenever the capital conservation buffer is breached. Basel III also enhances the risk sensitivity of the standardized approach to determining a banking organization’s RWAs and addresses other perceived weaknesses in the capital-adequacy guidelines that were identified during the past several years. In addition, as part of their Basel III rulemaking, the federal banking agencies have made corresponding revisions to the PCA framework.

Final and proposed rules relating to Basel III include a number of more rigorous provisions applicable only to banking organizations that are larger or more internationally active than the Company and the Bank. These include, for example, a supplementary leverage ratio incorporating off-balance-sheet exposures, a liquidity coverage ratio, and a net stable funding ratio. It is not yet clear whether, as with the Dodd-Frank Act, these standards may be informally applied or considered by the FRB and the OCC in their regulation, supervision, and examination of UMB and the Bank.

Deposit Insurance and Related Matters

The deposits of the Bank are insured by the FDIC in the standard insurance amount of $250 thousand per depositor for each account ownership category. This insurance is funded through assessments on the Bank and other insured depository institutions. In connection with implementing the Dodd-Frank Act, the FDIC in 2011 changed each institution’s assessment base from its total insured deposits to its average consolidated total assets less average tangible equity and created a scorecard method for calculating assessments that combines CAMELS ratings and specified forward-looking financial measures to determine each institution’s risk to the DIF. The Dodd-Frank Act also required the FDIC, in setting assessments, to offset the effect of increasing its reserve for the DIF on institutions with consolidated assets of less than $10 billion. The result of this revised approach to deposit-insurance assessments is generally an increase in costs, on an absolute or relative basis, for institutions with consolidated assets of $10 billion or more.

If an insured depository institution such as the Bank were to become insolvent or if other specified events were to occur relating to its financial condition or the propriety of its actions, the FDIC may be appointed as

 

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conservator or receiver for the institution. In that capacity, the FDIC would have the power (1) to transfer assets and liabilities of the institution to another person or entity without the approval of the institution’s creditors, (2) to require that its claims process be followed and to enforce statutory or other limits on damages claimed by the institution’s creditors, (3) to enforce the institution’s contracts or leases according to their terms, (4) to repudiate or disaffirm the institution’s contracts or leases, (5) to seek to reclaim, recover, or recharacterize transfers of the institution’s assets or to exercise control over assets in which the institution may claim an interest, (6) to enforce statutory or other injunctions, and (7) to exercise a wide range of other rights, powers, and authorities, including those that could impair the rights and interests of all or some of the institution’s creditors. In addition, the administrative expenses of the conservator or receiver could be afforded priority over all or some of the claims of the institution’s creditors, and under the FDIA, the claims of depositors (including the FDIC as subrogee of depositors) would enjoy priority over the claims of the institution’s unsecured creditors.

The FDIA also provides that an insured depository institution can be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another commonly controlled insured depository institution that is in default or in danger of default. This cross-guarantee liability is generally superior in right of payment to claims of the institution’s holding company and its affiliates.

Other Regulatory and Supervisory Matters

As a public company, the Company is subject to the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, and other federal and State securities laws. In addition, because the Company’s common stock is listed with The NASDAQ Stock Market LLC, it is subject to the listing rules of that exchange.

The Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), the USA PATRIOT Act of 2001, and related laws require all financial institutions, including banks and broker-dealers, to establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. These laws include a variety of recordkeeping and reporting requirements (such as currency and suspicious activity reporting) as well as know-your-customer and due-diligence rules.

Under the CRA, the Bank has a continuing and affirmative obligation to help meet the credit needs of its local communities—including low- and moderate-income neighborhoods—consistent with safe and sound banking practices. The CRA does not create specific lending programs but does establish the framework and criteria by which the OCC regularly assesses the Bank’s record in meeting these credit needs. The Bank’s ratings under the CRA are taken into account by the FRB and the OCC when considering merger or other specified applications that UMB or the Bank may submit from time to time.

The Bank is subject as well to a vast array of consumer-protection laws, such as qualified-mortgage and other mortgage-related rules under the jurisdiction of the CFPB. Lending limits, restrictions on tying arrangements, limits on permissible interest-rate charges, and other laws governing the conduct of banking or fiduciary activities are also applicable to the Bank. In addition, the GLBA imposes on the Company and its subsidiaries a number of obligations relating to financial privacy.

Acquisitions

A discussion of past acquisitions is included in Note 15 to the Consolidated Financial Statements, which can be found in Item 8, pages 91 through 92, 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 18 through 55, of this report.

 

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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

   54    Mr. Anderson joined the Company in 1986. In 2011, he was named President of Commercial Banking for the Bank and, in that capacity, 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 Bank 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

   52    Mr. deSilva has served as President and Chief Operating Officer of the Company since January 2004. He was named Vice Chairman of the Bank in January 2014 and, between December 2012 and January 2014, served as President and Chief Operating Officer of the Bank. Mr. deSilva was previously employed by Fidelity Investments from 1987 to 2004, the last seven years as Senior Vice President with principal responsibility for brokerage operations.

Michael D. Hagedorn

   47    Mr. Hagedorn has served as Vice Chairman of the Company since October 2009 and was named President and Chief Executive Officer of the Bank in January 2014. Between March 2005 and January 2014, he served as Chief Financial Officer of the Company and, from October 2009 to January 2014, also as Chief Administrative Officer of the Company. 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

   57    Mr. Hunt was named Chief Administrative Officer of the Company in January 2014. Between November 2007 and January 2014, he served as Executive Vice President of the Operations and Technology Group for the Company and the Bank. 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

   49    Mr. Iseman joined Scout 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.

J. Mariner Kemper

   41    Mr. Kemper has served as the Chairman and Chief Executive Officer of the Company since May 2004, as the Chairman and Chief Executive Officer of the Bank between December 2012 and January 2014, and as Chairman and Chief Executive Officer of UMB Bank Colorado, n.a. (a prior subsidiary of UMB) between 2000 and 2012. He was President of UMB Bank Colorado from 1997 to 2000.

 

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Name

   Age   

Position with Registrant

David D. Kling

   67    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 the Bank since November 2007. He also served as Executive Vice President of Financial Services and Support of the Bank from 1997 to 2007.

Christine Pierson

   51    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.

Lawrence G. Smith

   66    Mr. Smith has served as Executive Vice President and Chief Organizational Effectiveness Officer of the Bank since March 2005. Prior to coming to the Bank, 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.

Scott A. Stengel

   42    Mr. Stengel was named Executive Vice President and General Counsel of the Company and the Bank in January 2014. He joined the Company as Senior Vice President and Deputy General Counsel in April 2013 after practicing law in Washington, D.C., as a partner with King & Spalding LLP from 2011 to 2013 and as a partner with Orrick, Herrington & Sutcliffe LLP from 2005 to 2011.

Brian J. Walker

   42    Mr. Walker was named Executive Vice President and Chief Financial Officer of UMB in January 2014 and has served as Chief Accounting Officer of UMB since June 2007. From July 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 2004.

John P. Zader

   52    Mr. Zader serves as Chief Executive Officer of UMBFS, which he joined in December 2006. He previously served as a consultant to Jefferson Wells International in 2006 and 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.

ITEM 1A.   RISK FACTORS

Financial-services companies routinely encounter and address risks and uncertainties. In the following paragraphs, the Company describes some of the principal risks and uncertainties that could adversely affect its business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. These risks and uncertainties, however, are not the only ones faced by the Company. Other risks and uncertainties that are not presently known to the Company, that it has failed to appreciate, or that it currently consider immaterial may adversely affect the Company as well. Except where otherwise noted, the descriptions here address risks and certainties that may affect the Company as well as its

 

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subsidiaries. These risk factors should be read in conjunction with Management’s Discussion and Analysis (which can be found in Item 7 of this report beginning on page 20) and its Consolidated Financial Statements (which can be found in Item 8 of this report beginning on page 56).

The levels of or changes in interest rates could affect the Company’s business.    The Compnay’s business, results of operations, and financial condition are highly dependent on net interest income, which is the difference between interest income on earning assets (such as loans and investments) and interest expense on deposits and borrowings. Net interest income is significantly affected by market rates of interest, which in turn are influenced by monetary and fiscal policies, general economic conditions, the regulatory environment, competitive pressures, and expectations about future changes in interest rates. The policies and regulations of the FRB, in particular, have a substantial impact on market rates of interest. See “Government Monetary and Fiscal Policies” in Part I, Item 1. The Company may be adversely affected by policies, regulations, or events that have the effect of altering the difference between long-term and short-term interest rates (commonly known as the yield curve), depressing the interest rates associated with its earning assets to levels near the rates associated with interest expense, or changing the relationship between different interest-rate indices. The Company’s customers and counterparties also may be negatively impacted by the levels of or changes in interest rates, which could increase the risk of delinquency or default on obligations to the Company. The levels of or changes in interest rates, moreover, may have an adverse effect on the value of the Company’s investment portfolio and other financial instruments, the return on or demand for loans, the prepayment speed of loans, the cost or availability of deposits or other funding sources, or the purchase or sale of investment securities. In addition, a rapid change in interest rates could result in interest expense increasing faster than interest income because of differences in the maturities of the Company’s assets and liabilities. The level of and changes in market rates of interest—and, as a result, these risks and uncertainties—are beyond the Company’s control. 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.

Weak or deteriorating economic conditions could increase the Company’s credit risk and adversely affect its lending or other banking businesses and the value of its loans or investment securities.    The Company’s business and results of operations depend significantly on general economic conditions. When those conditions are weak or deteriorating in any of the markets or regions where the Company operates, its business or results of operations could be adversely affected. The Company’s lending and other banking businesses, in particular, are susceptible to weak or deteriorating economic conditions, which could result in reduced loan demand or utilization rates and at the same time increased delinquencies or defaults. These kinds of conditions also could dampen the demand for products in the Company’s asset-management, insurance, brokerage, or related businesses. If delinquencies or defaults on the Company’s loans or investment securities increase, their value could be adversely affected. In addition, to the extent that charge-offs exceed estimates, an increase to the amount of provision expense related to the allowance for loan losses would reduce its 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.

Challenging business, economic, or market conditions could adversely affect the Company’s fee-based banking, investment-management, asset-servicing, or other businesses.    The Company’s fee-based banking, investment-management, asset-servicing, and other businesses are driven by wealth creation in the economy, robust market activity, fiscal stability, and positive investor, business, and consumer sentiment. Economic downturns, market disruptions, high unemployment or underemployment, unsustainable debt levels, depressed real-estate markets, or other challenging business, economic, or market conditions could adversely affect these businesses and their results. For example, if any of these conditions were to cause flows into or the fair value of assets held in the funds and accounts advised by Scout to weaken or decline, its revenue could be negatively impacted. If the funds or other groups that are clients of UMBFS were to encounter similar difficulties, its revenue also could suffer. The Company’s bank-card revenue is driven primarily by transaction volumes in business and consumer spending that generate interchange fees, and any of these conditions could dampen those volumes. Revenue from trading, asset management, custody, trust, cash and treasury management, and the Company’s other fee-based businesses could be adversely affected as well if any of these conditions were to occur or persist.

 

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The Company operates in a highly regulated industry, and its business could be adversely affected by the regulatory and supervisory frameworks applicable to it, changes in those frameworks, and other regulatory risks and uncertainties.    The Company is subject to expansive regulatory frameworks in the United States—at federal, State, and local levels—and in the foreign jurisdictions where its business segments operate. In addition, the Company is subject to the direct supervision of government authorities charged with overseeing the kinds of financial activities conducted by its business segments. Much in these regulatory and supervisory frameworks is designed to protect public or private interests that often are not aligned with those of its shareholders or nondeposit creditors. See “Regulation and Supervision” in Part I, Item 1. In the wake of the recent economic crisis, moreover, government scrutiny of all financial-services companies has been amplified, fundamental changes have been made to the banking, securities, and other laws that govern financial services (with the Dodd-Frank Act and Basel III being two of the more prominent examples), and a host of related business practices have been reexamined and reshaped. These seismic shifts in the financial-services industry have yet to slow in an appreciable way, and as a result, the Company expects to continue devoting increased time and resources to risk management, compliance, and regulatory change management. All of this could have a detrimental impact on the Company’s business and results of operations. Risks also exist that government authorities could judge the Company’s business or other practices unfavorably and bring formal or informal corrective or enforcement actions against it—including fines or other penalties and directives to change its products or services—that, for practical or other reasons, the Company could not resist and that also could give rise to litigation by private plaintiffs. These and other regulatory risks and uncertainties could adversely affect the Company’s reputation, business, results of operations, financial condition, or prospects.

The Company’s business relies on systems, employees, service providers, and counterparties, and failures by any of them or other operational risks could adversely affect the Company.    We engage in a variety of businesses in diverse markets and rely on systems, employees, service providers, and counterparties to properly process a high volume of transactions. This gives rise to meaningful operational risk—including the risk of fraud by employees or outside parties, unauthorized access to its premises or systems, errors in processing, failures of technology, breaches of internal controls or compliance safeguards, inadequate integration of acquisitions, human error, and breakdowns in business continuity plans. Significant financial, business, reputational, regulatory, or other harm could come to the Company as a result of these or related risks and uncertainties. For example, the Company could be negatively impacted if financial, accounting, data-processing, or other systems were to fail or not fully perform their functions. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a pandemic, natural disaster, war, act of terrorism, accident, or other reason. These risks arise as well with the systems and employees of the service providers and counterparties on whom we depend as well as with their third-party service providers and counterparties. 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 its business, the Company collects, stores, and transmits sensitive, confidential, or proprietary data and other information, including intellectual property, business information, and the personally identifiable information of its customers and employees. The secure processing, storage, maintenance, and transmission of this information is critical to the Company’s operations and reputation, and if any of this information were mishandled, misused, improperly accessed, or lost, the Company could suffer significant financial, business, reputational, regulatory, or other damage. For example, despite security measures, the Company’s information technology and infrastructure may be breached in cyber-attacks, by computer viruses or malware, or with other means. A breach also could occur due to employee error, malfeasance, or other disruptions. Even when an attempted breach is successfully avoided or thwarted, the Company may need to expend substantial resources in doing so and may be required take actions that could adversely affect customer satisfaction or behavior. If a breach were to occur, moreover, the Company could be exposed to regulatory actions or litigation by private plaintiffs. Despite the Company’s efforts to ensure the integrity of systems and controls, it may not be able to anticipate or implement effective measures to prevent all security breaches or all risks to the sensitive, confidential, or proprietary information that it collects, stores, or transmits.

 

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Negative publicity outside of the Company’s control or its failure to successfully manage issues arising from its conduct or in connection with the financial-services industry generally could damage the Company’s reputation and adversely affect its business.    The performance and value of the Company’s business could be negatively impacted by any reputational harm that it may suffer. This harm could arise from negative publicity outside of its control or its failure to adequately address issues arising from its conduct or in connection with the financial-services industry generally. Risks to the Company’s reputation could arise in any number of contexts—for example, continuing government responses to the recent economic crisis, cyber-attacks and security breaches, mergers and acquisitions, lending practices, actual or potential conflicts of interest, failures to prevent money laundering, and corporate governance.

The Company’s faces intense competition from other financial-services companies, and competitive pressures could adversely affect the Company’s business.    The Company faces intense competition in each of its business segments and in all of its markets and geographic regions, and the Company expects competitive pressures only to intensify in the future—especially in light of legislative and regulatory initiatives arising out of the recent economic crisis, technological innovations that alter the barriers to entry, current economic and market conditions, and government monetary and fiscal policies. See “Competition” in Part I, Item 1. Competitive pressures may drive the Company to take actions that it might otherwise eschew, such as lowering the interest rates on loans or raising the interest rates on deposits in order to keep or attract high-quality customers. These pressures also may accelerate actions that it might otherwise elect to defer, such as investments in technology or infrastructure. Whatever the reason, actions that it takes in response to competition may adversely affect its results of operations and financial condition. This result could be exacerbated if the Company is not successful in introducing new products and services, achieving market acceptance of its products and services, developing and maintaining a strong customer base, or prudently managing expenses.

The Company’s risk-management framework may not be effective in mitigating risk and loss.    The Company maintains an enterprise risk-management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These include interest-rate risk, credit risk, liquidity risk, operational risk, reputational risk, and compliance and litigation risk. While the Company assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Company’s risk-management program or if its controls break down, the performance and value of its business could be adversely affected.

Liquidity is essential to the Company’s business, and it could be adversely affected by constraints in or increased costs for funding.    Liquidity is the ability to fund increases in assets and meet obligations as they come due, all without incurring unacceptable losses. Banks are especially vulnerable to liquidity risk because of their role in the maturity transformation of demand or short-term deposits into longer-term loans or other extensions of credit. The Company, like other financial-services companies, relies to a significant extent on external sources of funding (such as deposits and borrowings) for the liquidity needed in the conduct of its business. A number of factors beyond the Company’s control, however, could have a detrimental impact on the level or cost of that funding and thus on its liquidity. These include market disruptions, changes in its credit ratings or the sentiment of its investors, the loss of substantial deposit relationships, and reputational damage. Unexpected declines or limits on the dividends declared and paid by the Company’s subsidiaries also could adversely affect its liquidity position. While the Company’s policies and controls are designed to ensure that it maintains adequate liquidity to conduct its business in the ordinary course even in a stressed environment, there can be no assurance that its liquidity position will never become compromised. In such an event, the Company may be required to sell assets at a loss in order to continue its operations. This could damage the performance and value of its business, prompt regulatory intervention, and harm its reputation, and if the condition were to persist for any appreciable period of time, its viability as a going concern could be threatened. 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.

 

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An inability to attract, retain, or motivate qualified employees could adversely affect the Company’s business.    Skilled employees are the Company’s most important resource, and competition for talented people is intense. Even though compensation is among the Company’s highest expenses, it may not be able to hire the best people, keep them with the Company, or properly motivate them to perform at a high level. Recent scrutiny of compensation practices, especially in the financial-services industry, has made this only more difficult. In addition, some parts of its business are particularly dependent on key personnel, including investment management, asset servicing, and commercial lending. If the Company were to lose and find itself unable to replace these personnel or other skilled employees or if the competition for talent drove its compensation costs to unsustainable levels, the business, results of operations, and financial condition could be negatively impacted.

The Company is subject to a variety of litigation or other proceedings, which could adversely affect its business.    The Company is involved from time to time in a variety of judicial, alternative-dispute, or other proceedings arising out of its business or operations. The Company establishes reserves for claims when appropriate under generally accepted accounting principles, but costs often can be incurred in connection with a matter before any reserve has been created. In addition, the actual costs associated with resolving a claim may be substantially higher than amounts that the Company has reserved. Substantial legal claims could have a detrimental impact on the Company’s business, results of operations, and financial condition and cause reputational harm.

Changes in accounting standards could impact the Company’s financial statements and reported earnings.    Accounting standard-setting bodies, such as the Financial Accounting Standards Board, periodically change the financial accounting and reporting standards that affect the preparation of the consolidated financial statements. These changes are beyond the Company’s control and could have a meaningful impact on its consolidated financial statements.

The Company’s management’s selection of accounting methods, assumptions, and estimates could impact its financial statements and reported earnings.    To comply with generally accepted accounting principles, management must sometimes exercise judgment in selecting, determining, and applying accounting methods, assumptions, and estimates. This can arise, for example, in determining the allowance for loan losses or the fair value of assets or liabilities. The judgments required of management can involve difficult, subjective, or complex matters with a high degree of uncertainty, and several different judgments could be reasonable under the circumstances and yet result in significantly different results being reported. See “Critical Accounting Policies and Estimates” in Part II, Item 7. If management’s judgments later prove to have been inaccurate, we may experience unexpected losses that could be substantial.

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

 

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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 37,300 square feet.

As of December 31, 2013, the Bank operated a total of 112 banking centers and one wealth management office.

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 62 and 80 of this report.

ITEM 3.  LEGAL PROCEEDINGS

In the normal course of business, the Company and its subsidiaries are named defendants in various legal proceedings. In the opinion of management, after consultation with legal counsel, none of these proceedings are expected to have a 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, 2014, the Company had 2,184 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  

2013

   March 31      June 30      Sept. 30      Dec. 31  

Dividend

   $ 0.215       $ 0.215       $ 0.215       $ 0.225   

Book value

     31.73         30.20         32.85         33.30   

Market price:

           

High

     49.42         56.14         62.20         65.44   

Low

     43.27         46.34         51.86         53.72   

Close

     49.07         55.67         54.34         64.28   

 

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   

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 82 and 83 of this report. Information concerning securities the Company issued under equity compensation plans is contained in Item 12, pages 107 and 108 and in Note 11 to the Consolidated Financial Statements provided in Item 8, pages 84 through 87 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, 2013:

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, 2013

     205       $ 59.84         205         1,985,553   

November 1—November 30, 2013

     23,393         52.01         23,393         1,962,160   

December 1—December 31, 2013

     4,280         60.40         4,280         1,957,880   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     27,878       $ 53.35         27,878      
  

 

 

    

 

 

    

 

 

    

On April 23, 2013, the Company announced a plan to repurchase up to 2 million shares of common stock. This plan will terminate on April 22, 2014. All open market share purchases under the share repurchase plans are intended to be within the scope of Rule 10b-18 promulgated under the Exchange Act. Rule 10b-18 provides a

 

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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 20 through 49, 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    2013     2012     2011     2010     2009  

Interest income

   $ 348,341      $ 339,685      $ 343,653      $ 346,507      $ 356,217   

Interest expense

     15,072        19,629        26,680        35,894        53,232   

Net interest income

     333,269        320,056        316,973        310,613        302,985   

Provision for loan losses

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

Noninterest income

     491,833        458,122        414,332        360,370        310,176   

Noninterest expense

     624,178        590,454        562,746        512,622        460,585   

Net income

     133,965        122,717        106,472        91,002        89,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AVERAGE BALANCES

        

Assets

   $ 15,030,762      $ 13,389,192      $ 12,417,274      $ 11,108,233      $ 10,110,655   

Loans, net of unearned interest

     6,221,318        5,251,278        4,756,165        4,490,587        4,383,551   

Securities

     7,034,542        6,528,523        5,774,217        5,073,839        4,382,179   

Interest-bearing due from banks

     663,818        547,817        837,807        593,518        492,915   

Deposits

     11,930,318        10,521,658        9,593,638        8,451,966        7,584,025   

Long-term debt

     4,748        5,879        11,284        19,141        32,067   

Shareholders’ equity

     1,337,107        1,258,284        1,138,625        1,066,872        1,006,591   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

YEAR-END BALANCES

        

Assets

   $ 16,911,852      $ 14,927,196      $ 13,541,398      $ 12,404,932      $ 11,663,355   

Loans, net of unearned interest

     6,521,869        5,690,626        4,970,558        4,598,097        4,332,228   

Securities

     7,051,127        7,134,316        6,277,482        5,742,104        5,003,720   

Interest-bearing due from banks

     2,093,467        720,500        1,164,007        848,598        1,057,195   

Deposits

     13,640,766        11,653,365        10,169,911        9,028,741        8,534,488   

Long-term debt

     5,055        5,879        6,529        8,884        25,458   

Shareholders’ equity

     1,506,065        1,279,345        1,191,132        1,060,860        1,015,551   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PER SHARE DATA

        

Earnings—basic

   $ 3.25      $ 3.07      $ 2.66      $ 2.27      $ 2.22   

Earnings—diluted

     3.20        3.04        2.64        2.26        2.20   

Cash dividends

     0.87        0.83        0.79        0.75        0.71   

Dividend payout ratio

     26.77     27.04     29.70     33.04     31.98

Book value

   $ 33.30      $ 31.71      $ 29.46      $ 26.24      $ 25.11   

Market price

        

High

     65.44        52.61        45.20        44.51        49.75   

Low

     43.27        37.68        30.49        31.88        33.65   

Close

     64.28        43.82        37.25        41.44        39.35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average assets

     0.89     0.92     0.86     0.82     0.89

Return on average equity

     10.02        9.75        9.35        8.53        8.89   

Average equity to average assets

     8.90        9.40        9.17        9.60        9.96   

Total risk-based capital ratio

     14.43        11.92        12.20        12.45        14.18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

MANAGEMENT’S DISCUSSION AND ANALYSIS

This review highlights the material changes in the results of operations and changes in financial condition for the year-ended December 31, 2013. It should be read in conjunction with the accompanying condensed consolidated financial statements, notes to condensed consolidated financial statements, and other financial statistics appearing elsewhere in this report. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

 

   

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

 

   

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

 

   

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

 

   

changes in accounting standards or policies;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

adverse publicity or other reputational harm to the Company;

 

   

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

other assumptions, risks, or uncertainties described in the Risk Factors (Item 1A), Management’s Discussion and Analysis (Item 7), or the Notes to Consolidated Financial Statements (Item 8) in this Annual Report on Form 10-K or described in any of the Company’s quarterly or current reports.

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

Results of Operations

Overview

The Company focuses on the following four core strategies. Management believes these strategies will guide its efforts to achieving its vision, to deliver the Unparalleled Customer Experience, all the while maintaining a focus to 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 2013,

 

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noninterest income increased $33.7 million, or 7.4 percent, to $491.8 million for the year ended December 31, 2013, compared to the same period in 2012. Trust and securities processing income increased $40.9 million, or 18.1 percent, for year-to-date December 31, 2013 compared to the same period in 2012. Equity earnings on alternative investments increased $18.6 million for the year-ended December 31, 2013 primarily due to $17.0 million in unrealized gains on Prairie Capital Management equity method investments. These increases in noninterest income were offset by decreases in trading and investment banking income, gains on sales of available for sale securities and other noninterest income. Trading and investment banking income decreased $9.7 million, or 32.0 percent, due to a decline in trading volume. Gains of $8.5 million on securities available for sale were recognized during the year ended December 31, 2013 compared to $20.2 million during the same period in 2012. Other noninterest income decreased $11.3 million primarily due to an $8.7 million adjustment in contingent consideration liabilities on acquisitions recognized in 2012. These adjustments were due to the adoption of new accounting guidance in 2012 related to fair value measurements and changes in cash flow projections.

The second strategy is a focus on net interest income through loan and deposit growth. During 2013, continued progress on this strategy was illustrated by an increase in net interest income of $13.2 million, or 4.1 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 $1.6 billion, or 13.0 percent, from 2012. Average loan balances increased $970.0 million, or 18.5 percent, for year-to-date December 31, 2013 compared to the same period in 2012. Earning asset growth was primarily funded with a $955.6 million increase in average interest-bearing deposits, or 15.3 percent, and a $453.0 million increase in average noninterest-bearing deposits, or 10.6 percent, compared to 2012 respectively. Net interest margin, on a tax-equivalent basis, decreased 20 basis points, and net interest spread decreased 16 basis points compared to 2012, respectively.

The third strategy is a focus on improving operating efficiencies. At December 31, 2013, the Company had 112 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 loans 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. During 2013, 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 helped enhance regulatory capital and provides a more streamlined structure for the implementation of strategic initiatives. The Company continues to evaluate core systems and will invest in enhancements that will yield operating efficiencies. The Company evaluates 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, 2013, the Company had $1.5 billion in total shareholders’ equity. This is an increase of $226.7 million, or 17.7 percent, compared to total shareholders’ equity at December 31, 2012. On September 16, 2013, the Company completed the issuance of 3.9 million shares of common stock with net proceeds of $201.2 million to be used for strategic growth purposes. In addition, UMB granted the underwriters a 30-day option to purchase up to an additional 585 thousand shares of common stock. On October 17, 2013, the underwriters exercised the option of 585 thousand shares, which generated additional net proceeds of $30.2 million. At December 31, 2013, the Company had a total risk-based capital ratio of 14.43 percent. The Company repurchased 66,462 shares at an average price of $52.67 per share during 2013. Further, the Company paid $36.4 million in dividends during 2013, which represents an 8.1 percent increase compared to 2012.

 

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Earnings Summary

The Company recorded consolidated net income of $134.0 million for the year-ended December 31, 2013. This represents a 9.2 percent increase over 2012. Net income for 2012 was $122.7 million, or an increase of 15.3 percent compared to 2011. Basic earnings per share for the year-ended December 31, 2013, were $3.25 per share compared to $3.07 per share in 2012 and $2.66 per share in 2011. Basic earnings per share for 2013 increased 5.9 percent over 2012, which increased 15.4 percent over 2011. Fully diluted earnings per share for the year-ended December 31, 2013, were $3.20 per share compared to $3.04 per share in 2012 and $2.64 per share in 2011. The Company’s net interest income increased to $333.3 million in 2013 compared to $320.1 million in 2012 and $317.0 million in 2011. In total, a favorable volume variance outpaced the impact from an unfavorable rate variance, resulting in a $13.2 million increase in net interest income in 2013, compared to 2012. The impact from an unfavorable rate variance and favorable volume variance on earning assets was slightly offset by the reduced cost of funding on the volume growth of interest-bearing deposits, resulting in the net favorable volume variance described. See Table 2 on page 27. The favorable volume variance on earning assets was predominately driven by the increase in average loan balances of $970.0 million, or 18.5 percent, for 2013 compared to the same period in 2012. This was largely impacted by an unfavorable rate variance in the same categories. Additionally, a 10 basis points reduction in rate on a volume increase of $955.6 million on average interest-bearing deposits helped drive 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 3 on page 28. The $3.1 million increase in net interest income in 2012, compared to 2011, is primarily a result of a favorable volume variance. 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. The current economic 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 20 on page 50 for an illustration of the impact of a rate increase or decrease on net interest income as of December 31, 2013.

The Company had an increase of $33.7 million, or 7.4 percent, in noninterest income in 2013, compared to 2012, and a $43.8 million, or 10.6 percent, increase in 2012, compared to 2011. The increase in 2013 is primarily attributable to higher trust and securities processing income and equity earnings in alternative investments, partially offset by decreases in trading and investment banking, gains on the sales of securities available for sale, and other noninterest income. Trust and securities processing income increased $40.9 million, or 18.2 percent, for the year-ended December 31, 2013, compared to the same period in 2012. Equity earnings on alternative investments increased $18.6 million for the year-ended December 31, 2013, primarily due to $17.0 million in unrealized gains on Prairie Capital Management equity method investments. Trading and investment banking income decreased $9.7 million, or 32.0 percent, due to a general decline in trading volume. Gains of $8.5 million on securities available for sale were recognized during the year ended December 31, 2013 compared to $20.2 million during the same period in 2012. Other noninterest income decreased $11.3 million primarily due to an $8.7 million adjustment in contingent consideration liabilities on acquisitions recognized in 2012. 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 2013 from 2012, and 2012 from 2011 is illustrated on Table 6 on page 31.

Noninterest expense increased in 2013 by $33.7 million, or 5.7 percent, compared to 2012 and increased in 2012 by $27.7 million, or 4.9 percent, compared to 2011. This increase is primarily driven by an increase of $19.8 million, or 6.2 percent, in salary and employee benefit expense, a $6.6 million, or 12.9 percent, increase in processing fees primarily driven by fees paid by the advisor to third-party distributors of the Scout Funds, and a $5.7 million, or 13.2 percent increase in equipment expense driven by increased computer hardware and software expense. Other noninterest expense increased $3.7 million, or 11.4 percent, due to a $5.2 million increase in contingent consideration liabilities on acquisitions, offset by a $4.0 million decrease in derivatives expense. The increase in noninterest expense in 2013 from 2012, and 2012 from 2011 is illustrated on Table 7 on page 32.

 

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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 2 summarizes the change in net interest income resulting from changes in volume and rates for 2013, 2012 and 2011.

Net interest margin is calculated as net interest income on a fully tax equivalent basis (FTE) as a percentage of average earning assets. 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. A critical component of net interest income and related net interest margin is the percentage of earning assets funded by interest-free sources. Table 3 analyzes net interest margin for the three years ended December 31, 2013, 2012 and 2011. Net interest income, average balance sheet amounts and the corresponding yields earned and rates paid for the years 2011 through 2013 are presented in Table 1 below.

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.

 

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Table 1

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

 

    2013     2012  
    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) (4)

  $ 6,221.3      $ 229.7        3.69   $ 5,251.3      $ 217.6        4.14

Securities:

           

Taxable

    4,876.3        75.2        1.54        4,612.5        81.0        1.76   

Tax-exempt (FTE)

    2,102.2        62.5        2.97        1,862.8        57.9        3.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

    6,978.5        137.7        1.97        6,475.3        138.9        2.14   

Federal funds sold and resell agreements

    36.6        0.2        0.53        26.5        0.1        0.46   

Interest-bearing

    663.9        1.9        0.29        547.8        1.8        0.33   

Other earning assets (FTE)

    56.0        1.1        1.90        53.2        1.2        2.34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets (FTE)

    13,956.3        370.6        2.66        12,354.1        359.6        2.91   

Allowance for loan losses

    (72.4         (73.0    

Cash and due from banks

    439.5            402.1       

Other assets

    707.4            706.0       
 

 

 

       

 

 

     

Total assets

  $ 15,030.8          $ 13,389.2       
 

 

 

       

 

 

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Interest-bearing demand and savings deposits

  $ 6,073.5      $ 5.3        0.09   $ 5,021.5      $ 6.5        0.13

Time deposits under $100,000

    527.3        3.5        0.66        577.6        4.9        0.85   

Time deposits of $100,000 or more

    619.9        4.4        0.71        665.9        6.0        0.90   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing deposits

    7,220.7        13.2        0.18        6,265.0        17.4        0.28   

Short-term debt

    0.2        —          —          5.6        0.1        1.75   

Long-term debt

    4.7        0.2        4.26        5.9        0.3        5.08   

Federal funds purchased and repurchase agreements

    1,613.6        1.7        0.11        1,410.5        1.9        0.13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

    8,839.2        15.1        0.17        7,687.0        19.7        0.26   

Noninterest bearing demand deposits

    4,709.6            4,256.6       

Other

    144.9            187.3       
 

 

 

       

 

 

     

Total

    13,693.7            12,130.9       
 

 

 

       

 

 

     

Total shareholders’ equity

    1,337.1            1,258.3       
 

 

 

       

 

 

     

Total liabilities and shareholders’ equity

  $ 15,030.8          $ 13,389.2       
 

 

 

       

 

 

     

Net interest income (FTE)

    $ 355.5          $ 339.9     

Net interest spread

        2.49         2.65

Net interest margin

        2.55         2.75
     

 

 

       

 

 

 

 

(1) Interest income and yields are stated on a fully tax-equivalent (FTE) basis, using a rate of 35%. The tax-equivalent interest income and yields give effect to disallowance of interest expense, for federal income tax purposes related to certain tax-free assets. Rates earned/paid may not compute to the rates shown due to presentation in millions. The tax-equivalent interest income totaled $22.2 million, $19.9 million, and $18.6 million in 2013, 2012, and 2011, respectively.
(2) Loan fees are included in interest income. Such fees totaled $10.9 million, $11.0 million, and $11.6 million in 2013, 2012, and 2011, respectively.
(3) Loans on non-accrual are included in the computation of average balances. Interest income on these loans is also included in loan income.
(4) Amount includes loans held for sale.

 

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

 

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

ASSETS

     

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

  $ 4,756.2      $ 219.4        4.61

Securities:

     

Taxable

    4,224.5        85.1        2.01   

Tax-exempt (FTE)

    1,497.8        53.0        3.54   
 

 

 

   

 

 

   

 

 

 

Total securities

    5,722.3        138.1        2.41   

Federal funds sold and resell agreements

    31.3        0.1        0.32   

Interest-bearing

    837.8        3.3        0.39   

Other earning assets (FTE)

    51.9        1.4        2.64   
 

 

 

   

 

 

   

 

 

 

Total earning assets (FTE)

    11,399.5        362.3        3.18   

Allowance for loan losses

    (73.0    

Cash and due from banks

    396.9       

Other assets

    693.9       
 

 

 

     

Total assets

  $ 12,417.3       
 

 

 

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Interest-bearing demand and savings deposits

  $ 4,731.3      $ 8.0        0.17

Time deposits under $100,000

    662.0        7.8        1.18   

Time deposits of $100,000 or more

    785.5        8.8        1.12   
 

 

 

   

 

 

   

 

 

 

Total interest bearing deposits

    6,178.8        24.6        0.40   

Short-term debt

    25.3        0.2        0.79   

Long-term debt

    11.3        0.2        1.77   

Federal funds purchased and repurchase agreements

    1,471.0        1.7        0.12   
 

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

    7,686.4        26.7        0.35   

Noninterest bearing demand deposits

    3,414.8       

Other

    177.4       
 

 

 

     

Total

    11,278.6       
 

 

 

     

Total shareholders’ equity

    1,138.7       
 

 

 

     

Total liabilities and shareholders’ equity

  $ 12,417.3       
 

 

 

     

Net interest income (FTE)

    $ 335.6     

Net interest spread

        2.83

Net interest margin

        2.94
     

 

 

 

 

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Table 2

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    

2013 vs. 2012

   Increase (Decrease)  
2013      2012      2013     2012          Volume     Rate     Total  
         

Change in interest earned on:

      
$ 6,221,318       $ 5,251,278         3.69     4.14  

Loans

   $ 35,918      $ (23,644   $ 12,274   
         

Securities:

      
  4,876,304         4,612,510         1.54        1.76     

Taxable

     4,068        (9,879     (5,811
  2,102,216         1,862,786         2.97        3.11     

Tax-exempt

     5,315        (3,140     2,175   
  36,589         26,459         0.53        0.46     

Federal funds sold and resell agreements

     53        19        72   
  663,818         547,817         0.29        0.33     

Interest-bearing due from banks

     335        (206     129   
  56,022         53,227         1.90        2.34     

Other

     52        (235     (183

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
  13,956,267         12,354,077         2.66        2.91     

Total

     45,741        (37,085     8,656   
         

Change in interest incurred on:

      
  7,220,675         6,265,040         0.18        0.28     

Interest-bearing deposits

     1,745        (5,978     (4,233
  1,613,584         1,410,478         0.11        0.13     

Federal funds purchased and repurchase agreements

     219        (364     (145
  4,972         11,514         3.02        2.86     

Other

     (197     18        (179

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
$   8,839,231       $ 7,687,032         0.17     0.26  

Total

     1,767        (6,324     (4,557

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
         

Net interest income

   $ 43,974      $ (30,761   $ 13,213   
            

 

 

   

 

 

   

 

 

 

 

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   
            

 

 

   

 

 

   

 

 

 

 

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Table 3

ANALYSIS OF NET INTEREST MARGIN (in thousands)

 

     2013     2012     2011  

Average earning assets

   $ 13,956,267      $ 12,354,077      $ 11,399,462   

Interest-bearing liabilities

     8,839,231        7,687,032        7,686,386   
  

 

 

   

 

 

   

 

 

 

Interest-free funds

   $ 5,117,036      $ 4,667,045      $ 3,713,076   
  

 

 

   

 

 

   

 

 

 

Free funds ratio (free funds to earning assets)

     36.66     37.78     32.57
  

 

 

   

 

 

   

 

 

 

Tax-equivalent yield on earning assets

     2.66     2.91     3.18

Cost of interest-bearing liabilities

     0.17        0.26        0.35   
  

 

 

   

 

 

   

 

 

 

Net interest spread

     2.49     2.65     2.83

Benefit of interest-free funds

     0.06        0.10        0.11   
  

 

 

   

 

 

   

 

 

 

Net interest margin

     2.55     2.75     2.94
  

 

 

   

 

 

   

 

 

 

The Company experienced an increase in net interest income of $13.2 million, or 4.1 percent, for the year 2013, compared to 2012. This follows an increase of $3.1 million, or 1.0 percent, for the year 2012, compared to 2011. As illustrated in Table 1, the 2013 increase is due to the favorable volume variances in earning assets, which was largely offset by the rate variances. In 2012, the volume variance on earning assets was more than offset by the rate variances. However, the Company reduced the average cost of interest-bearing liabilities by 9 basis points during 2013 and 2012, 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 38.0 percent, 42.2 percent and 38.8 percent of total outstanding deposits at December 31, 2013, 2012 and 2011, respectively. As illustrated in Table 3, the impact from these interest-free funds was 6 basis points in 2013, compared to 10 basis points in 2012 and 11 basis points in 2011.

The Company has experienced a repricing of its earning assets and interest-bearing liabilities during the 2013 interest rate cycle. The average rate on earning assets during 2013 has decreased by 25 basis points, while the average rate on interest-bearing liabilities decreased by 9 basis points, resulting in a 16 basis point decline in spread. The volume of loans has increased from an average of $5.3 billion in 2012 to an average of $6.2 billion in 2013. 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 moderate 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 2014, approximately $1.1 billion of available for sale securities are expected to have principal repayments. This includes approximately $404 million which will have principal repayments during the first quarter of 2014. The total investment portfolio had an average life of 47.6 months and 40.0 months as of December 31, 2013 and 2012, respectively. It should be noted that the Company also had a portfolio of short-term investments with original maturities of one year or less as of the end of both 2013 and 2012. At December 31, 2013, the amount of such investments was approximately $15 million, and without these investments, the average life of the investment portfolio would have remained at 47.6 months. At December 31, 2012, the amount of such short-term investments was approximately $215 million, and without these short-term investments, the average life of the investment portfolio would have been 41.2 months.

 

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Table of Contents

Provision and Allowance for Loan Losses

The allowance for loan losses (ALL) represents management’s judgment of the losses inherent in the Company’s loan portfolio as of the balance sheet date. An analysis is performed quarterly to determine the appropriate balance of the ALL. The analysis reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. 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 4 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 4

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (in thousands)

This table presents an allocation of the allowance for loan losses by loan portfolio segment, which represents the inherent probable loss derived by both quantitative and qualitative methods. The amounts presented are not necessarily indicative of actual future charge-offs in any particular category and are subject to change.

 

     December 31  

Loan Category

   2013      2012      2011      2010      2009  

Commercial

   $ 48,886       $ 43,390       $ 37,927       $ 39,138       $ 40,420   

Real estate

     15,342         15,506         20,486         18,557         13,321   

Consumer

     10,447         12,470         13,593         16,243         10,128   

Leases

     76         60         11         14         270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance

   $ 74,751       $ 71,426       $ 72,017       $ 73,952       $ 64,139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Table 5 presents a five-year summary of the Company’s ALL. Also, please see “Quantitative and Qualitative Disclosures About Market Risk—Credit Risk” on page 52 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 5 below, the ALL decreased as a percentage of total loans to 1.15 percent as of December 31, 2013, compared to 1.26 percent as of December 31, 2012. Based on the factors above, management of the Company had no change in expense related to the provision for loan losses in 2013, compared to 2012. This compares to a $4.7 million, or 21.2 percent, decrease in the provision for loan losses in 2012, compared to 2011.

 

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Table of Contents

Table 5

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (in thousands)

 

     2013     2012     2011     2010     2009  

Allowance-beginning of year

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

Provision for loan losses

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

Allowance of banks and loans acquired

     —          —          —          —          —     

Charge-offs:

          

Commercial

     (4,748     (8,446     (12,693     (6,644     (5,532

Consumer

          

Credit card

     (10,531     (11,148     (13,493     (15,606     (13,625

Other

     (1,600     (1,530     (1,945     (2,979     (4,911

Real estate

     (775     (932     (532     (258     (881
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (17,654     (22,056     (28,663     (25,487     (24,949

Recoveries:

          

Commercial

     867        1,136        813        637        1,419   

Consumer

          

Credit card

     1,720        1,766        2,366        1,327        1,334   

Other

     815        1,035        1,317        1,797        1,936   

Real estate

     77        28        32        29        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     3,479        3,965        4,528        3,790        4,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (14,175     (18,091     (24,135     (21,697     (20,258
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance-end of year

   $ 74,751      $ 71,426      $ 72,017      $ 73,952      $ 64,139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loans, net of unearned interest

   $ 6,217,240      $ 5,243,264      $ 4,748,909      $ 4,478,377      $ 4,356,187   

Loans at end of year, net of unearned interest

     6,520,512        5,686,749        4,960,343        4,583,683        4,314,705   

Allowance to loans at year-end

     1.15     1.26     1.45     1.61     1.49

Allowance as a multiple of net charge-offs

     5.27     3.95     2.98     3.41     3.17

Net charge-offs to:

          

Provision for loan losses

     81.00     103.38     108.71     68.86     63.11

Average loans

     0.23        0.35        0.51        0.48        0.47   

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 $33.7 million, or 7.4 percent, to $491.8 million for the year ended December 31, 2013, compared to the same period in 2012. The increase in 2013 is primarily attributable to higher trust and securities processing income and equity earnings on alternative investments, partially offset by trading and investment banking, gains on the sales of securities available for sale, and other noninterest income. 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 Company’s fee-based services provide the opportunity to offer multiple products and services to customers which management believes will more closely align to 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 6

SUMMARY OF NONINTEREST INCOME (in thousands)

 

     Year Ended December 31  
                          Dollar Change     Percent Change  
     2013      2012      2011      13-12     12-11     13-12     12-11  

Trust and securities processing

   $ 265,948       $ 225,094       $ 208,392       $ 40,854      $ 16,702        18.1     8.0

Trading and investment banking

     20,641         30,359         27,720         (9,718     2,639        (32.0     9.5   

Service charges on deposit accounts

     84,133         78,694         74,659         5,439        4,035        6.9        5.4   

Insurance fees and commissions

     3,727         4,095         4,375         (368     (280     (9.0     (6.4

Brokerage fees

     11,470         11,105         9,950         365        1,155        3.3        11.6   

Bankcard fees

     62,031         60,567         59,767         1,464        800        2.4        1.3   

Gains on sales of securities available for sale, net

     8,542         20,232         16,125         (11,690     4,107        (57.8     25.5   

Equity earnings on alternative investments

     19,048         422         3         18,626        419        >100.0        >100.0   

Other

     16,293         27,554         13,341         (11,261     14,213        (40.9     >100.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 491,833       $ 458,122       $ 414,332       $ 33,711      $ 43,790        7.4     10.6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income and the year-over-year changes in noninterest income are summarized in Table 6 above. The dollar change and percent change columns highlight the respective net increase or decrease in the categories of noninterest income in 2013 compared to 2012, and in 2012 compared to 2011.

Trust and securities processing income consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and investment management services, and mutual fund assets servicing. This income category increased by $40.9 million, or 18.1 percent in 2013, compared to 2012, and increased by $16.7 million, or 8.0 percent in 2012, compared to 2011. The Company increased fund administration and custody services fee income by $5.4 million and $4.6 million in 2013 and 2012, respectively. Advisory fee income from the Scout Funds increased $21.5 million in 2013 compared to 2012 and $9.0 million in 2012 compared to 2011. Fee income from institutional and personal investment management services increased $12.7 million in 2013 and $3.4 million in 2012. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels.

Trading and investment banking income decreased by $9.7 million, or 32.0 percent in 2013, compared to 2012, and increased $2.6 million, or 9.5 percent in 2012, compared to 2011. The income in this category is market driven and impacted by general increases or decreases in trading volume.

Gains on sales of securities available for sale decreased $11.7 million in 2013 compared to 2012 and increased by $4.1 million in 2012 compared to 2011. This change in sales activity is due to the strategic initiative to rotate earning assets into loans and out of the investment portfolio.

Equity earnings on alternative investments increased $18.6 million in 2013 compared to 2012, primarily due to $17.0 million in unrealized gains on Prairie Capital Management investments.

Other noninterest income decreased $11.3 million primarily due to an $8.7 million adjustment in contingent consideration liabilities on acquisitions recognized in 2012. These adjustments were due to the adoption of new accounting guidance in 2012 related to fair value measurements and changes in cash flow projections.

 

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Table of Contents

Noninterest Expense

Noninterest expense increased in 2013 by $33.7 million, or 5.7 percent, compared to 2012 and increased in 2012 by $27.7 million, or 4.9 percent, compared to 2011. The main drivers of this increase in 2013 were salaries and employee benefits expense, equipment expense, processing fees, and other noninterest expense. The increases in 2012 were salaries and employee benefits expense, marketing and business development, and increases in the contingent consideration liability on acquisitions. Table 7 below summarizes the components of noninterest expense and the respective year-over-year changes for each category.

Table 7

SUMMARY OF NONINTEREST EXPENSE (in thousands)

 

     Year Ended December 31  
                          Dollar Change     Percent Change  
     2013      2012      2011      13-12     12-11     13-12     12-11  

Salaries and employee benefits

   $ 339,691       $ 319,852       $ 294,756       $ 19,839      $ 25,096        6.2     8.5

Occupancy, net

     39,291         37,927         38,406         1,364        (479     3.6        (1.2

Equipment

     49,207         43,465         42,728         5,742        737        13.2        1.7   

Supplies and services

     20,387         21,045         22,166         (658     (1,121     (3.1     (5.1

Marketing and business development

     22,703         24,604         20,150         (1,901     4,454        (7.7     22.1   

Processing fees

     57,791         51,191         49,985         6,600        1,206        12.9        2.4   

Legal and consulting

     18,703         17,980         15,601         723        2,379        4.0        15.2   

Bankcard

     18,381         18,154         15,600         227        2,554        1.3        16.4   

Amortization of other intangible assets

     13,218         14,775         16,100         (1,557     (1,325     (10.5     (8.2

Regulatory fees

     9,129         9,447         10,395         (318     (948     (3.4     (9.1

Class action litigation settlement

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

Other

     35,677         32,014         29,059         3,663        2,955        11.4        10.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 624,178       $ 590,454       $ 562,746       $ 33,724      $ 27,708        5.7     4.9
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and employee benefits expense increased $19.8 million, or 6.2 percent, and $25.1 million, or 8.5 percent, in 2013 and 2012, respectively. The increase in both 2013 and 2012 is primarily due to higher employee base salaries, higher commissions and bonuses and higher cost of benefits. Base salaries increased by $10.5 million, or 5.3 percent, in 2013, compared to the same period in 2012. Commissions and bonuses increased by $5.0 million, or 7.6 percent, in 2013, compared to the same period in 2012. Employee benefits increased by $4.4 million, or 8.0 percent, in 2013, compared to the same period in 2012.

Equipment expense increased $5.7 million, or 13.2 percent in 2013. This increase is driven by increased computer hardware and software expenses.

Processing fees increased $6.6 million, or 12.9 percent in 2013. This increase is primarily driven by fees paid by the advisor to third-party distributors of the Scout Funds.

Other noninterest expense increased $3.7 million, or 11.4 percent, primarily driven by an increase in contingent consideration liabilities on acquisitions of $5.2 million due to changes in cash flow projections, offset by a $4.0 million decrease in derivative expense, compared to 2012.

 

32


Table of Contents

Income Taxes

Income tax expense totaled $49.5 million, $47.5 million, and $39.9 million in 2013, 2012 and 2011, respectively. These amounts equate to effective rates of 27.0 percent, 27.9 percent, and 27.3 percent for 2013, 2012 and 2011, respectively. 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. The decrease in the effective tax rate from 2012 to 2013 is primarily attributable to federal tax credits realized.

On September 13, 2013, the IRS released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code (IRC) and proposed regulations under Section 168 of the IRC. These regulations generally apply to taxable years beginning on or after January 1, 2014 and will affect all taxpayers that acquire, produce, or improve tangible property. Based upon preliminary analysis, the adoption of these regulations will not have a material impact on the Company’s Consolidated Financial Statements.

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

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.

Table 8

Bank Operating Results

 

     Year Ended
December 31,
     Dollar
Change
    Percent
Change
 
     2013      2012      13-12     13-12  

Net interest income

   $ 285,112       $ 274,843       $ 10,269        3.7

Provision for loan losses

     5,112         9,267         (4,155     (44.8

Noninterest income

     210,535         214,595         (4,060     (1.9

Noninterest expense

     376,365         381,585         (5,220     (1.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     114,170         98,586         15,584        15.8   

Income tax expense

     28,532         26,452         2,080        7.9   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 85,638       $ 72,134       $ 13,504        18.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Bank net income increased $13.5 million, or 18.7 percent, from $72.1 million in 2012 to $85.6 million in 2013. Net interest income improved $10.3 million, or 3.7 percent driven by strong Commercial loan growth, while being slightly offset by interest rate margin compression. Provision decreased by $4.2 million due to improvements in the credit characteristics of the loan portfolio in this segment.

Noninterest income decreased $4.1 million, or 1.9 percent, over the same period in 2012. The decrease in noninterest income was driven by decreases in securities gains of $11.7 million, bond trading income of $10.5 million, and other noninterest income of $8.0 million. The reduction in other noninterest income was primarily

 

33


Table of Contents

due to a decrease of $3.8 million in fair value adjustments to contingent consideration liabilities due to the adoption of new accounting guidance in 2012 and a decrease of $3.6 million in fair value adjustments on interest rate swap transactions compared to last year. These decreases were partially offset by an increase of $6.2 million in trust and securities processing income and an increase of $18.6 million in equity earnings on alternative investments, primarily due to $17.0 million of unrealized gains on Prairie Capital Management equity method investments recognized in 2013.

Noninterest expense decreased $5.2 million, or 1.4 percent, to $376.4 million, compared to 2012, which was primarily driven by a decrease in fair value adjustments on interest rate swap transactions of $4.0 million.

Table 9

Payment Solutions Operating Results

 

     Year Ended
December 31,
     Dollar
Change
    Percent
Change
 
     2013      2012      13-12     13-12  

Net interest income

   $ 45,832       $ 43,350       $ 2,482        5.7

Provision for loan losses

     12,388         8,233         4,155        50.5   

Noninterest income

     74,223         67,887         6,336        9.3   

Noninterest expense

     86,746         69,095         17,651        25.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     20,921         33,909         (12,988     (38.3

Income tax expense

     6,732         9,555         (2,823     (29.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 14,189       $ 24,354       $ (10,165     (41.7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Payments Solutions net income after taxes decreased $10.2 million, or 41.7 percent, to $14.2 million from the prior year. Net interest income increased by $2.5 million, or 5.7 percent, due to growth in earning assets and deposits, but offset with a reduction in funds transfer pricing credit on deposits. Provision expense increased by $4.2 million, or 50.5 percent. Noninterest income increased $6.3 million, or 9.3 percent, driven by an increase in deposit service charge income from institutional banking and investor services and healthcare services customers as well as an increase in bankcard income for healthcare services. Noninterest expense increased by $17.7 million, or 25.5 percent, due to increases in salaries and benefits of $4.9 million, support services of $3.2 million, technology project expenses of $3.3 million, processing fees of $2.2 million due to increased volumes, fraud losses of $0.8 million, and legal and compliance fees of $0.8 million.

Table 10

Institutional Investment Management Operating Results

 

     Year Ended
December 31,
     Dollar
Change
    Percent
Change
 
     2013     2012      13-12     13-12  

Net interest income

   $ (32   $ 2       $ (34     (>100.0 )% 

Provision for loan losses

     —          —           —          —     

Noninterest income

     126,442        100,051         26,391        26.4   

Noninterest expense

     88,336        70,981         17,355        24.5   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before taxes

     38,074        29,072         9,002        31.0   

Income tax expense

     10,011        8,118         1,893        23.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 28,063      $ 20,954       $ 7,109        33.9
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Institutional Investment Management net income increased $7.1 million, or 33.9 percent, to $28.1 million for 2013 compared to the prior year. Noninterest income increased $26.4 million, or 26.4 percent, to $126.4 million primarily due to a $29.2 million increase in advisory fees driven from an increase in assets under management of $7.7 billion, which was offset by a decrease of $4.3 million in fair value adjustments to the contingent consideration liability due to the adoption of new accounting guidance in 2012. Noninterest expense increased $17.4 million, or 24.5 percent, to $88.3 million compared to a year ago. This increase was primarily due to a $5.9 million increase in salaries and benefits, a $5.7 million increase in third party distribution expense and a $5.1 million increase in contingent consideration liability on acquisitions related to cash flow estimate changes on acquisitions compared to last year.

Table 11

Asset Servicing Operating Results

 

     Year Ended
December 31,
     Dollar
Change
     Percent
Change
 
     2013      2012      13-12      13-12  

Net interest income

   $ 2,357       $ 1,861       $ 496         26.65

Provision for loan losses

     —           —           —           —     

Noninterest income

     80,633         75,589         5,044         6.67   

Noninterest expense

     72,731         68,793         3,938         5.72   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     10,259         8,657         1,602         18.51   

Income tax expense

     4,184         3,382         802         23.71   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 6,075       $ 5,275       $ 800         15.17
  

 

 

    

 

 

    

 

 

    

 

 

 

Asset Servicing net income increased $0.8 million, or 15.2 percent, to $6.1 million compared to 2012. Net interest margin increased by $0.5 million, or 26.7 percent, due to deposit growth within this segment. Noninterest income increased $5.0 million, or 6.7 percent, resulting from a $5.5 million increase in fee income from business added in transfer agent, alternative investment, and fund administration services, increases from asset based fees, fund growth and a $0.7 million gain from the transfer of trust-related distribution services. These increases were offset by a decrease in miscellaneous income of $1.3 million in fair value adjustments to the contingent consideration liability compared to last year due to the adoption of new accounting guidance in 2012. Noninterest expense increased $3.9 million, or 5.7 percent, due primarily to a $1.9 million increase in fair value adjustments to the contingent consideration liability on acquisitions and an increase of $1.7 million in salary and benefit expense to support business growth.

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 $833.8 million, or 14.7 percent, in 2013. Commercial and commercial real estate loans had the most significant growth in outstanding balances in 2013, compared to 2012. Residential real estate, construction real estate, and other consumer loans also experienced increases compared to 2012. These increases were offset by small decreases in credit card and HELOC loans.

 

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Table 12

ANALYSIS OF LOANS BY TYPE (in thousands)

 

    December 31  
    2013     2012     2011     2010     2009  

Commercial

  $ 3,301,503      $ 2,873,694      $ 2,234,817      $ 1,937,052      $ 1,963,533   

Commercial—credit card

    103,270        104,320        95,339        84,544        65,273   

Real estate—construction

    152,875        78,486        84,590        128,520        106,914   

Real estate—commercial

    1,702,151        1,435,811        1,394,555        1,294,897        1,141,447   

Leases

    23,981        19,084        3,834        7,055        7,510   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total business-related

    5,283,780        4,511,395        3,813,135        3,452,068        3,284,677   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate—residential

    289,356        212,363        185,886        193,157        218,081   

Real estate—HELOC

    566,128        573,923        533,032        476,057        435,814   

Consumer—credit card

    318,336        334,518        333,646        322,208        231,254   

Consumer—other

    62,912        54,550        94,644        140,193        144,879   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer-related

    1,236,732        1,175,354        1,147,208        1,131,615        1,030,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans before allowance and loans held for sale

    6,520,512        5,686,749        4,960,343        4,583,683        4,314,705   

Allowance for loan losses

    (74,751     (71,426     (72,017     (73,952     (64,139
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans before loans held for sale

    6,445,761        5,615,323        4,888,326        4,509,731        4,250,566   

Loans held for sale

    1,357        3,877        10,215        14,414        17,523   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and loans held for sale

  $ 6,447,118      $ 5,619,200      $ 4,898,541      $ 4,524,145      $ 4,268,089   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a % of total loans and loans held for sale

         

Commercial

    50.63     50.49     44.96     42.13     45.32

Commercial—credit card

    1.58        1.83        1.92        1.84        1.51   

Real estate-construction

    2.34        1.38        1.70        2.80        2.47   

Real estate-commercial

    26.10        25.23        28.06        28.16        26.35   

Leases

    0.37        0.34        0.08        0.15        0.17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total business-related

    81.02        79.27        76.72        75.08        75.82   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate—residential

    4.44        3.73        3.74        4.20        5.03   

Real estate—HELOC

    8.68        10.09        10.72        10.35        10.06   

Consumer—credit card

    4.88        5.88        6.71        7.01        5.34   

Consumer—other

    0.96        0.96        1.90        3.05        3.35   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer-related

    18.96        20.66        23.07        24.61        23.78   

Loans held for sale

    0.02        0.07        0.21        0.31        0.40   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and loans held for sale

    100.0     100.0     100.0     100.0     100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in Table 12 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 81.0 percent and 79.3 percent of total loans and loans held for sale at the end of 2013 and 2012, respectively.

Commercial loans represent the largest percent of total loans. Commercial loans have increased $427.8 million, or 14.9 percent, compared to 2012. Commercial loans have also increased to 50.6 percent of total loans compared to 50.5 percent in 2012. The Company has also increased its capacity to lend through increased commitments over 2012. Commercial line utilization has remained low due to the current economic conditions.

As a percentage of total loans, commercial real estate and construction real estate loans now comprise 28.4 percent of total loans, compared to 26.6 percent at the end of 2012. Commercial real estate increased $266.3 million, or 18.6 percent, and construction real estate loans increased $74.4 million, or 94.8 percent, compared to

 

36


Table of Contents

2012. 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.

Residential real estate loans increased $77.0 million, or 36.3 percent, and now represent 4.44 percent of total loans compared to 3.73 percent in 2012.

Nonaccrual, past due and restructured loans are discussed under “Credit Risk” within the Quantitative and Qualitative Disclosure about Market Risk in Item 7A on page 52 of this report.

Investment Securities

The Company’s security portfolio provides liquidity as a result of the composition and cash flow characteristics 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 44.5 percent and 52.0 percent of earning assets as of December 31, 2013 and 2012, respectively. Total investment securities remained flat totaling $7.1 billion at December 31, 2013 and December 31, 2012. 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 95.9 percent of the Company’s investment securities portfolio at December 31, 2013, compared to 97.2 percent at year-end 2012. Securities available for sale had a net unrealized loss of $52.3 million at year-end, compared to a net unrealized gain of $134.8 million the preceding year. This market value change reflects primarily the impact of mid and longer-term market interest rate increases during the second half of 2013. These amounts are reflected, on an after-tax basis, in the Company’s other comprehensive income in shareholders’ equity, as an unrealized loss of $32.6 million at year-end 2013, compared to an unrealized gain of $85.6 million for 2012.

The securities portfolio achieved an average yield on a tax-equivalent basis of 2.0 percent for 2013, compared to 2.1 percent in 2012, and 2.4 percent in 2011. 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 47.6 months at December 31, 2013, compared to 40.0 months at year-end 2012. The increase in average life from December 31, 2012 to December 31, 2013, was related primarily to mortgage-backed securities holdings experiencing extension due to slower prepayment rates resulting from market interest rate increases during the second half of 2013.

Included in Tables 13 and 14 are analyses of the cost, fair value and average yield (tax-equivalent basis) of securities available for sale and securities held to maturity.

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 76 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. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of fair value. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at December 31, 2013.

 

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Table 13

SECURITIES AVAILABLE FOR SALE (in thousands)

 

December 31, 2013

   Amortized Cost      Fair Value  

U.S. Treasury

   $ 110,789       $ 110,200   

U.S. Agencies

     1,258,176         1,257,663   

Mortgage-backed

     2,984,963         2,944,566   

State and political subdivisions

     2,003,509         1,995,246   

Corporates

     457,275         454,736   
  

 

 

    

 

 

 

Total

   $ 6,814,712       $ 6,762,411   
  

 

 

    

 

 

 

 

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   
  

 

 

    

 

 

 

 

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

December 31, 2013

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 150         1.01   $ 218,900         0.92

Due after 1 year through 5 years

     105,420         0.87        1,038,763         0.71   

Due after 5 years through 10 years

     4,630         1.75        —           —     

Due after 10 years

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 110,200         0.91   $ 1,257,663         0.74
  

 

 

    

 

 

   

 

 

    

 

 

 
     Mortgage-backed
Securities
    State and Political
Subdivisions
 

December 31, 2013

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 27,917         2.59   $ 288,887         2.51

Due after 1 year through 5 years

     2,561,318         2.11        806,912         2.63   

Due after 5 years through 10 years

     340,202         1.87        741,422         3.02   

Due after 10 years

     15,129         3.28        158,025         3.18   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,944,566         2.09   $ 1,995,246         2.80
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Corporates  

December 31, 2013

   Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 17,894         0.57

Due after 1 year through 5 years

     436,842         0.99   

Due after 5 years through 10 years

     —           —     

Due after 10 years

     —           —     
  

 

 

    

 

 

 

Total

   $ 454,736         0.97
  

 

 

    

 

 

 

 

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Table of Contents
     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
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Table 14

SECURITIES HELD TO MATURITY (in thousands)

 

December 31, 2013

   Amortized
Cost
     Fair Value      Weighted Average
Yield/Average Maturity

Due in one year or less

   $ 40       $ 44       2.84%

Due after 1 year through 5 years

     31,387         34,640       2.46

Due after 5 years through 10 years

     97,929         108,078       2.89

Due over 10 years

     80,414         88,748       2.97
  

 

 

    

 

 

    

 

Total

   $ 209,770       $ 231,510       10 yr. 4 mo.
  

 

 

    

 

 

    

 

December 31, 2012

                  

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.
  

 

 

    

 

 

    

 

 

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Table of Contents

FEDERAL BANK STOCK AND OTHER SECURITIES (in thousands)

 

2013

   Amortized
Cost
     Fair Value  

Federal Reserve Bank stock

   $ 16,279       $ 16,279   

Other securities—marketable

     20         16,632   

Other securities—non-marketable

     17,139         17,571   
  

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 33,438       $ 50,482   
  

 

 

    

 

 

 

2012

             

Federal Reserve Bank stock

   $ 11,779       $ 11,779   

Other securities—non-marketable

     14,281         14,554   
  

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 26,060       $ 26,333   
  

 

 

    

 

 

 

Other marketable and non-marketable securities include Prairie Capital Management alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. The fair value of other marketable securities includes alternative investment securities of $16.6 million at December 31, 2013. The fair value of other non-marketable securities includes the alternative investment securities fair of $4.7 million at December 31, 2013 and $2.2 million at December 31, 2012.

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 borrowed position was $1.0 million at December 31, 2013, and the net sold position was $32.7 million at December 31, 2012.

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 $270.1 million in 2013 and $348.6 million in 2012.

At December 31, 2013, the Company held securities bought under agreements to resell of $75.2 million compared to $57.2 million at year end 2012. 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 $31.8 million in 2013 and $22.0 million in 2012.

The Company also maintains an active securities trading inventory. The average holdings in the securities trading inventory in 2013 were $56.0 million, compared to $53.2 million in 2012, 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 52, 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 $2.1 billion as of December 31, 2013 compared to $720.5 million as of December 31, 2012 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 $2.1 billion and $698.6 million at December 31, 2013 and 2012, respectively. The amounts due from certificates of deposit totaled $30.5 million and $21.7 million at December 31, 2013 and 2012, respectively.

 

40


Table of Contents

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 services, as well as its asset management and mutual fund servicing segments in order to attract and retain additional core deposits. Deposits totaled $13.6 billion at December 31, 2013, and $11.7 billion at year end 2012. Deposits averaged $11.9 billion in 2013 and $10.5 billion in 2012. 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 $4.7 billion in 2013 and $4.3 billion in 2012. These deposits represented 39.5 percent of average deposits in 2013, compared to 40.5 percent in 2012. 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. As previously announced, a single Asset Servicing client is expected to migrate its deposits to another institution. As of December 31, 2013, this client’s deposits totaling $1.5 billion remained on the balance sheet.

Table 15

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

 

     December 31  
     2013      2012  

Maturing within 3 months

   $ 574,689       $ 364,449   

After 3 months but within 6 months

     103,730         99,700   

After 6 months but within 12 months

     104,883         122,514   

After 12 months

     174,548         155,402   
  

 

 

    

 

 

 

Total

   $ 957,850       $ 742,065   
  

 

 

    

 

 

 

Table 16

ANALYSIS OF AVERAGE DEPOSITS (in thousands)

 

     2013     2012     2011     2010     2009  

Amount

          

Noninterest-bearing demand

   $ 4,709,643      $ 4,256,618      $ 3,414,843      $ 2,795,458      $ 2,372,456   

Interest-bearing demand and savings

     6,073,516        5,021,526        4,731,300        4,059,615        3,631,486   

Time deposits under $100,000

     527,281        577,656        661,957        728,804        782,469   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     11,310,440        9,855,800        8,808,100        7,583,877        6,786,411   

Time deposits of $100,000 or more

     619,878        665,858        785,537        868,089        797,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

   $ 11,930,318      $ 10,521,658      $ 9,593,637      $ 8,451,966      $ 7,584,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a % of total deposits

          

Noninterest-bearing demand

     39.48     40.46     35.59     33.07     31.28

Interest-bearing demand and savings

     50.90        47.72        49.32        48.03        47.88   

Time deposits under $100,000

     4.42        5.49        6.90        8.63        10.32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total core deposits

     94.80        93.67        91.81        89.73        89.48   

Time deposits of $100,000 or more

     5.20        6.33        8.19        10.27        10.52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     100.00     100.00     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 $1.6 billion at December 31, 2013, and $1.8 billion at December 31, 2012. These agreements averaged $1.6 billion and $1.4 billion in 2013 and 2012, respectively. The Company enters into these transactions with its downstream correspondent banks, commercial customers, and various trust, mutual fund and local government relationships.

Table 17

SHORT-TERM DEBT (in thousands)

 

     2013     2012  
     Amount      Rate     Amount      Rate  

At December 31:

          

Federal funds purchased

   $ 12,834         0.04   $ —           —  

Repurchase agreements

     1,570,384         0.19        1,787,270         0.33   

Other

     107         5.89        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,583,325         0.19   $ 1,787,270         0.33
  

 

 

    

 

 

   

 

 

    

 

 

 

Average for year:

          

Federal funds purchased

   $ 56,934         0.08   $ 35,589         0.06

Repurchase agreements

     1,556,650         0.11        1,374,888         0.14   

Other

     224         5.36        5,656         1.17   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,613,808         0.11   $ 1,416,133         0.14
  

 

 

    

 

 

   

 

 

    

 

 

 

Maximum month-end balance:

          

Federal funds purchased

   $ 109,466         $ 65,343      

Repurchase agreements

     2,048,513           1,787,270      

Other

     —             —        

The Company had two fixed-rate advances at December 31, 2013, from the Federal Home Loan Banks each at rate 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. As previously announced, a single Asset Servicing client is expected to migrate its deposits to another institution. As of December 31, 2013, this client’s deposits totaling $1.5 billion remained on the balance sheet. Capital is managed for each subsidiary based upon its respective risks and growth opportunities as well as regulatory requirements.

Total shareholders’ equity was $1.5 billion at December 31, 2013, compared to $1.3 billion one year earlier. On September 16, 2013, the Company completed the issuance of 3.9 million shares of common stock with net proceeds of $201.2 million to be used for strategic growth purposes. On October 17, 2013, an additional 585 thousand shares were issued with net proceeds of $30.2 million as a result of the underwriter’s exercising the overallotment of shares. The total increase in shareholder’s equity as a result of the common stock issuance was $231.4 million for the year-ended December 31, 2013. 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 2013 and 2012, the Company acquired 66,462 shares and 472,956 shares of its common stock, respectively.

 

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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 13.61 percent and total capital ratio of 14.43 percent substantially exceed the regulatory minimums.

In July 2013 the Federal Reserve approved a final rule to implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The final rule increases minimum requirements for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rule also adjusted the methodology for calculating risk-weighted assets to enhance risk sensitivity. Beginning January 1, 2015, the Company must be compliant with revised minimum regulatory capital ratios and will begin the transitional period for definitions of regulatory capital and regulatory capital adjustments and deductions established under the final rule. Compliance with the risk-weighted asset calculations will be required on January 1, 2015. The Company believes its current capital ratios are higher than those required in the final rule.

For further discussion of capital and liquidity, see the “Liquidity Risk” section of Item 7A, Quantitative and Qualitative Disclosures about Market Risk on page 54 of this report.

 

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Table 18

RISK-BASED CAPITAL (in thousands)

This table computes risk-based capital in accordance with current regulatory guidelines. These guidelines as of December 31, 2013, 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

   $ —        $ —         $ 1,357      $ —         $ 1,357   

Loans and leases

     —          43,742         332,465        6,144,305         6,520,512   

Securities available for sale

     1,542,118        4,778,148         37,171        457,275         6,814,712   

Securities held to maturity

     —          209,770         —          —           209,770   

Federal funds and resell agreements

     —          87,018         —          —           87,018   

Trading securities

     400        516         3,072        24,476         28,464   

Cash and due from banks

     2,156,047        458,421         —          —           2,614,468   

All other assets

     16,279        —           —          480,981         497,260   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Category totals

     3,714,844        5,577,615         374,065        7,107,037         16,773,561   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Risk-weighted totals

     —          1,115,523         187,033        7,107,037         8,409,593   

Off-balance-sheet items (risk-weighted)

     —          3,148         1,107        1,028,166         1,032,421   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total risk-weighted assets

   $ —        $ 1,118,671       $ 188,140      $ 8,135,203       $ 9,442,014   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Tier1     Tier2      Total               

Regulatory Capital

            

Shareholders’ equity

   $ 1,506,065      $ —         $ 1,506,065        

Accumulated other comprehensive gains

     32,641        —           32,641        

Premium on purchased banks

     (251,650     —           (251,650     

Disallowed servicing assets and purchased credit card relationships

     (1,956     —           (1,956     

Allowance for loan losses (1)

     —          76,915         76,915        
  

 

 

   

 

 

    

 

 

      

Total capital

   $ 1,285,100      $ 76,915       $ 1,362,015        
  

 

 

   

 

 

    

 

 

      
                  Company               

Capital ratios

            

Tier 1 capital to risk-weighted assets

          13.61     

Total capital to risk-weighted assets

          14.43     

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

          8.41