10-Q 1 d51569d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(MARK ONE)

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

For the quarterly period ended June 30, 2015

OR

 

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

For the transition period from                      to                     

Commission file number 0-4887

 

 

UMB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Missouri   43-0903811

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1010 Grand Boulevard, Kansas City, Missouri   64106
(Address of principal executive offices)   (Zip Code)

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

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

As of July 30, 2015, UMB Financial Corporation had 49,312,382 shares of common stock outstanding.

 

 

 


Table of Contents

UMB FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I – FINANCIAL INFORMATION

     3   

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

     3   

CONSOLIDATED BALANCE SHEETS

     3   

CONSOLIDATED STATEMENTS OF INCOME

     4   

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     5   

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY

     6   

CONSOLIDATED STATEMENTS OF CASH FLOWS

     7   

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     8   

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     43   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     62   

ITEM 4. CONTROLS AND PROCEDURES

     66   

PART II - OTHER INFORMATION

     66   

ITEM 1. LEGAL PROCEEDINGS

     66   

ITEM 1A. RISK FACTORS

     66   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     66   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     67   

ITEM 4. MINE SAFETY DISCLOSURES

     67   

ITEM 5. OTHER INFORMATION

     67   

ITEM 6. EXHIBITS

     67   

SIGNATURES

     68   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

     69   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

     70   

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

     71   

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

     72   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

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

 

     June 30,
2015
    December 31,
2014
 

ASSETS

    

Loans:

   $ 8,916,128      $ 7,465,794   

Allowance for loan losses

     (77,721     (76,140
  

 

 

   

 

 

 

Net loans

     8,838,407        7,389,654   
  

 

 

   

 

 

 

Loans held for sale

     2,819        624   

Securities:

  

Available for sale

     6,925,115        6,911,936   

Held to maturity (fair value of $475,391 and $304,112, respectively)

     446,881        278,054   

Trading securities

     36,616        27,203   

Other securities

     77,800        68,474   
  

 

 

   

 

 

 

Total investment securities

     7,486,412        7,285,667   
  

 

 

   

 

 

 

Federal funds sold and securities purchased under agreements to resell

     91,326        118,105   

Interest-bearing due from banks

     698,940        1,539,386   

Cash and due from banks

     490,171        444,299   

Premises and equipment, net

     279,996        257,835   

Accrued income

     84,979        79,297   

Goodwill

     228,217        209,758   

Other intangibles, net

     53,649        43,991   

Other assets

     163,811        132,344   
  

 

 

   

 

 

 

Total assets

   $ 18,418,727      $ 17,500,960   
  

 

 

   

 

 

 

LIABILITIES

  

Deposits:

  

Noninterest-bearing demand

   $ 5,887,525      $ 5,643,989   

Interest-bearing demand and savings

     7,303,306        6,709,281   

Time deposits under $100,000

     479,820        424,925   

Time deposits of $100,000 or more

     825,995        838,664   
  

 

 

   

 

 

 

Total deposits

     14,496,646        13,616,859   

Federal funds purchased and repurchase agreements

     1,774,435        2,025,132   

Long-term debt

     88,346        8,810   

Accrued expenses and taxes

     155,246        180,074   

Other liabilities

     46,998        26,327   
  

 

 

   

 

 

 

Total liabilities

     16,561,671        15,857,202   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

  

Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 49,288,971 and 45,532,188 shares outstanding, respectively

     55,057        55,057   

Capital surplus

     1,009,965        894,602   

Retained earnings

     1,005,563        963,911   

Accumulated other comprehensive loss

     (2,141     11,006   

Treasury stock, 5,767,759 and 9,524,542 shares, at cost, respectively

     (211,388     (280,818
  

 

 

   

 

 

 

Total shareholders’ equity

     1,857,056        1,643,758   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 18,418,727      $ 17,500,960   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 
     2015     2014      2015     2014  

INTEREST INCOME

         

Loans

   $ 71,396      $ 60,309       $ 135,628      $ 119,209   

Securities:

         

Taxable interest

     19,163        19,021         37,971        37,982   

Tax-exempt interest

     10,607        9,798         20,522        19,705   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total securities income

     29,770        28,819         58,493        57,687   

Federal funds and resell agreements

     151        46         202        79   

Interest-bearing due from banks

     434        466         1,286        1,589   

Trading securities

     133        149         228        272   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     101,884        89,789         195,837        178,836   
  

 

 

   

 

 

    

 

 

   

 

 

 

INTEREST EXPENSE

         

Deposits

     3,522        3,092         6,570        6,151   

Federal funds and repurchase agreements

     470        454         962        935   

Other

     532        73         587        135   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     4,524        3,619         8,119        7,221   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     97,360        86,170         187,718        171,615   

Provision for loan losses

     5,000        5,000         8,000        9,500   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     92,360        81,170         179,718        162,115   
  

 

 

   

 

 

    

 

 

   

 

 

 

NONINTEREST INCOME

         

Trust and securities processing

     67,381        73,357         134,680        144,920   

Trading and investment banking

     5,568        6,409         11,690        10,732   

Service charges on deposit accounts

     21,625        20,627         43,166        42,185   

Insurance fees and commissions

     586        732         1,156        1,335   

Brokerage fees

     2,936        3,075         5,790        4,890   

Bankcard fees

     18,035        17,185         34,218        32,808   

Gain on sales of securities available for sale, net

     967        2,569         8,303        4,039   

Equity (loss) earnings on alternative investments

     (1,125     3,462         (1,967     5,992   

Other

     3,577        6,585         7,721        10,064   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     119,550        134,001         244,757        256,965   
  

 

 

   

 

 

    

 

 

   

 

 

 

NONINTEREST EXPENSE

         

Salaries and employee benefits

     99,585        89,532         198,122        178,413   

Occupancy, net

     10,312        9,705         20,322        19,410   

Equipment

     15,410        12,920         29,582        25,583   

Supplies and services

     4,603        5,554         8,928        10,191   

Marketing and business development

     6,530        6,307         11,148        10,909   

Processing fees

     12,654        14,817         25,437        28,468   

Legal and consulting

     5,917        4,632         10,295        8,004   

Bankcard

     4,953        4,997         9,721        8,685   

Amortization of other intangible assets

     2,569        3,074         5,324        6,176   

Regulatory fees

     2,873        2,709         5,629        5,225   

Contingency reserve

     —          5,272         —          20,272   

Other

     6,558        6,682         11,869        16,796   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     171,964        166,201         336,377        338,132   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     39,946        48,970         88,098        80,948   

Income tax expense

     9,732        14,298         24,119        22,863   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 30,214      $ 34,672       $ 63,979      $ 58,085   
  

 

 

   

 

 

    

 

 

   

 

 

 

PER SHARE DATA

         

Net income - basic

   $ 0.65      $ 0.77       $ 1.40      $ 1.30   

Net income - diluted

     0.65        0.76         1.39        1.28   

Dividends

     0.235        0.225         0.470        0.450   

Weighted average shares outstanding - basic

     46,240,869        44,823,370         45,624,276        44,782,944   

Weighted average shares outstanding - diluted

     46,611,096        45,421,148         46,029,978        45,409,289   

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, dollars in thousands)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2015     2014     2015     2014  

Net Income

   $ 30,214      $ 34,672      $ 63,979      $ 58,085   

Other comprehensive income, net of tax:

      

Unrealized (losses) gains on securities:

      

Change in unrealized holding (losses) gains, net

     (45,553     50,910        (12,877     83,369   

Less: Reclassifications adjustment for gains included in net income

     (967     (2,569     (8,303     (4,039
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (46,520     48,341        (21,180     79,330   

Income tax benefit (expense)

     17,569        (18,143     8,033        (29,789
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (28,951     30,198        (13,147     49,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,263      $ 64,870      $ 50,832      $ 107,626   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

 

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

Balance - January 1, 2014

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

Total comprehensive income

          58,085        49,541          107,626   

Dividends ($0.45 per share)

     —           —          (20,447     —          —          (20,447

Purchase of treasury stock

     —           —          —          —          (3,165     (3,165

Issuance of equity awards

     —           (3,395     —          —          3,865        470   

Recognition of equity based compensation

     —           4,733        —          —          —          4,733   

Net tax benefit related to equity compensation plans

     —           1,202        —          —          —          1,202   

Sale of treasury stock

     —           300        —          —          159        459   

Exercise of stock options

        1,839        —          —          2,560        4,399   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2014

   $ 55,057       $ 887,086      $ 922,268      $ 16,901      $ (279,970   $ 1,601,342   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - January 1, 2015

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

Total comprehensive income

          63,979        (13,147       50,832   

Dividends ($0.47 per share)

     —           —          (22,327     —          —          (22,327

Purchase of treasury stock

     —           —          —          —          (5,379     (5,379

Issuance of equity awards

     —           (5,509     —          —          5,969        460   

Recognition of equity based compensation

     —           5,779        —          —          —          5,779   

Net tax benefit related to equity compensation plans

     —           664        —          —          —          664   

Sale of treasury stock

     —           306        —          —          197        503   

Exercise of stock options

     —           1,488        —          —          1,541        3,029   

Common stock issuance for acquisition

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2015

   $ 55,057       $ 1,009,965      $ 1,005,563      $ (2,141   $ (211,388   $ 1,857,056   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

    

Six Months Ended

June 30,

 
     2015     2014  

Operating Activities

    

Net Income

   $ 63,979      $ 58,085   

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

    

Provision for loan losses

     8,000        9,500   

Depreciation and amortization

     24,027        22,654   

Deferred income tax benefit

     (2,577     (4,361

Net increase in trading securities

     (7,446     (4,012

Gains on sales of securities available for sale, net

     (8,303     (4,039

Losses (gains) on sales of assets

     5        (3,234

Amortization of securities premiums, net of discount accretion

     26,465        25,889   

Originations of loans held for sale

     (59,422     (32,342

Net gains on sales of loans held for sale

     (827     (495

Proceeds from sales of loans held for sale

     58,054        31,038   

Equity based compensation

     6,239        5,203   

Advance payment on contingency reserve

     —          6,000   

Changes in:

    

Accrued income

     (1,927     4,411   

Accrued expenses and taxes

     (13,179     (9,043

Other assets and liabilities, net

     12,647        (14,676
  

 

 

   

 

 

 

Net cash provided by operating activities

     105,735        90,578   
  

 

 

   

 

 

 

Investing Activities

    

Proceeds from maturities of securities held to maturity

     26,663        7,761   

Proceeds from sales of securities available for sale

     705,238        409,804   

Proceeds from maturities of securities available for sale

     645,959        791,895   

Purchases of securities held to maturity

     (198,352     (48,830

Purchases of securities available for sale

     (1,238,323     (1,079,530

Net increase in loans

     (473,924     (409,806

Net decrease in fed funds sold and resell agreements

     37,111        4,366   

Net increase in interest bearing balances due from other financial institutions

     19,200        (79,772

Purchases of premises and equipment

     (29,479     (19,261

Net cash activity from acquisitions and branch sales

     104,539        (18,111

Proceeds from sales of premises and equipment

     117        4,747   
  

 

 

   

 

 

 

Net cash used in investing activities

     (401,251     (436,737
  

 

 

   

 

 

 

Financing Activities

    

Net increase (decrease) in demand and savings deposits

     239,367        (1,024,246

Net decrease in time deposits

     (303,635     (421,900

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

     (250,697     24,076   

Net decrease in short-term debt

     (112,133     (107

Proceeds from long-term debt

     —          1,820   

Repayment of long-term debt

     (10,580     (1,130

Payment of contingent consideration on acquisitions

     (18,702     (13,725

Cash dividends paid

     (22,295     (20,433

Net tax benefit related to equity compensation plans

     664        1,202   

Proceeds from exercise of stock options and sales of treasury shares

     3,532        4,858   

Purchases of treasury stock

     (5,379     (3,165
  

 

 

   

 

 

 

Net cash used in financing activities

     (479,858     (1,452,750
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (775,374     (1,798,909

Cash and cash equivalents at beginning of period

     1,787,230        2,582,428   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,011,856      $ 783,519   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Income taxes paid

   $ 25,089      $ 26,118   

Total interest paid

     7,360        7,427   

Transactions related to bank acquisitions

    

Assets acquired

     1,321,322        —     

Liabilities assumed

     1,160,044        —     

See Notes to Consolidated Financial Statements.

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

1. Financial Statement Presentation

The consolidated financial statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after elimination of all intercompany transactions. In the opinion of management of the Company, all adjustments, which were of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year. The financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Form 10-Q filing and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

2. Summary of Significant Accounting Policies

The Company is a financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices in the states of Missouri, Kansas, Colorado, Illinois, Oklahoma, Texas, Arizona, Nebraska, Pennsylvania, South Dakota, Indiana, Utah, Minnesota, and Wisconsin. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation is provided in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Cash and cash equivalents

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

This table provides a summary of cash and cash equivalents as presented on the Consolidated Statements of Cash Flows as of June 30, 2015 and June 30, 2014 (in thousands):

 

     June 30,  
     2015      2014  

Due from the Federal Reserve

   $ 521,685       $ 143,641   

Cash and due from banks

     490,171         639,878   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 1,011,856       $ 783,519   
  

 

 

    

 

 

 

Also included in the Interest-bearing due from banks line, but not considered cash and cash equivalents, are interest-bearing accounts held at other financial institutions, which totaled $177.3 million and $111.8 million at June 30, 2015 and June 30, 2014, respectively.

Per Share Data

Basic income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted quarterly per share data includes the dilutive effect of 370,227 and 597,778 shares issuable upon the exercise of options granted by the Company and outstanding at June 30, 2015 and 2014, respectively. Diluted year-to-date income per share includes the dilutive effect of 405,702 and 626,345 shares issuable upon the exercise of stock options granted by the Company and outstanding at June 30, 2015 and 2014, respectively.

Options issued under employee benefits plans to purchase 495,366 shares of common stock were outstanding at June 30, 2015, but were not included in the computation of quarter-to-date and year-to-date diluted EPS because the options were anti-dilutive. Options issued under employee benefits plans to purchase 253,149 shares of common stock were outstanding at June 30, 2014, but were not included in the computation of quarter-to-date and year-to-date diluted EPS because the options were anti-dilutive.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

3. New Accounting Pronouncements

Accounting for Investments in Qualified Affordable Housing Projects In January 2014, the FASB issued ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Regardless of whether the reporting entity chooses to elect the proportional amortization method, this ASU introduces new recurring disclosures about all investments in qualified affordable housing projects. The ASU was effective January 1, 2015, and the adoption of this accounting pronouncement did not have a significant impact on the Company’s consolidated financial statements or financial statement disclosures.

Reclassification of Residential Real Estate Loans In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendment is intended to reduce diversity in practice by clarifying when an in-substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real stated property recognized. The ASU was effective January 1, 2015, and the adoption of this accounting pronouncement did not have a significant impact on the Company’s consolidated financial statements.

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

Repurchase-to-Maturity Transactions In June 2014, the FASB issued ASU No. 2014-11, “Repurchase-to-Maturity Transactions, Repurchased Financings, and Disclosures.” The amendment changes the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with accounting for other repurchase agreements. Additionally, the amendment requires new disclosures on transfers accounted for as sales in transactions that are economically similar to repurchase agreements and requires increased transparency on collateral pledged in secured borrowings. The accounting changes in the standard and the disclosures for transactions accounted for as sales were effective January 1, 2015 and had no impact on the Company’s financial statements. The disclosures for repurchase agreements, securities lending transactions, and repos-to-maturity accounted for as secured borrowings are required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early application is not permitted. The adoption of this accounting pronouncement will have no impact on the Company’s consolidated financial statements except for additional financial statement disclosures.

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

Troubled Debt Restructurings by Creditors In August 2014, the FASB issued ASU No. 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The amendment is intended to reduce diversity in practice in the classification of mortgage loans extended under certain government-sponsored loan guarantee programs, such as those offered by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), that entitle the creditor to recover all or a portion of the unpaid principal balance from the government if a borrower defaults. This update requires government-guaranteed mortgage loans that meet certain criteria to be derecognized and a separate receivable be recognized upon foreclosure. The amendments in this update were effective January 1, 2015 and the adoption of this accounting pronouncement did not have a significant impact on the Company’s consolidated financial statements.

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

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

Consolidation In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” The amendment substantially changes the way reporting entities are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the new amendment. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership, and affect the consolidation analysis of reporting entities that are involved with VIEs. The amendments in this update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2015-02 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

4. Loans and Allowance for Loan Losses

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio. Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions. The Company maintains an independent loan review department that reviews and validates the risk assessment on a continual basis. Management regularly evaluates the results of the loan reviews. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Commercial loans are made based on the identified cash flows of the borrower and on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers. Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans including an analysis of the borrower’s cash flow, available business capital, and overall credit-worthiness of the borrower.

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

Factoring loans provide working capital through the purchase and/or financing of accounts receivable to borrowers in the transportation industry and to commercial borrowers that do not generally qualify for traditional bank financing. Credit risk is a potential loss resulting from nonpayment of either primary or secondary exposure. Credit risk is mitigated with formal risk management practices and a thorough initial credit-granting process including consistent underwriting standards and approval process. Control factors or techniques to minimize credit risk include knowing the client, understanding total exposure, analyzing the client and debtor’s financial capacity, and monitoring the clients’ activities. Credit risk and portions of the portfolio risk are managed through concentration considerations, average risk ratings, and other aggregate characteristics. It is necessary that policies, processes and practices implemented to control the risks of individual credit transactions and portfolio segments are sound and adhered to. Authority levels are established for the extension of credit to ensure consistency throughout the Company.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires an appraisal of the collateral be made at origination and on an as-needed basis, in conformity with current market conditions and regulatory requirements. The underwriting standards address both owner and non-owner occupied real estate.

Construction loans are underwritten using feasibility studies, independent appraisal reviews, sensitivity analysis or absorption and lease rates and financial analysis of the developers and property owners. Construction loans are based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their repayment being sensitive to interest rate changes, governmental regulation of real property, economic conditions, and the availability of long-term financing.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

Underwriting standards for residential real estate and home equity loans are based on the borrower’s loan-to-value percentage, collection remedies, and overall credit history.

Consumer loans are underwritten based on the borrower’s repayment ability. The Company monitors delinquencies on all of its consumer loans and leases and periodically reviews the distribution of FICO scores relative to historical periods to monitor credit risk on its credit card loans. The underwriting and review practices combined with the relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Consumer loans and leases that are 90 days past due or more are considered non-performing.

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

At Acquisition Date, gross loans purchased from the Marquette acquisition had a fair value of $980.3 million split between Non-PCI loans totaling $972.5 million and PCI loans totaling $7.8 million of loans. The gross contractually required principal and interest payments receivable for the Non-PCI loans and PCI loans totaled $983.9 million and $9.3 million, respectively.

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

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

Loans accounted for under ASC Topic 310-30

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

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

The PCI loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt Securities Purchased with Deteriorated Credit Quality. At June 30, 2015, the net recorded carrying amount of loans accounted for under ASC 310-30 was $7.7 million and the contractual amount due was $9.1 million.

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

 

PCI Loans:

   At May 31, 2015  

Contractually required principal and interest at acquisition

   $ 9,282   

Non-accretable difference

     (1,307
  

 

 

 

Expected cash flows at acquisition

     7,975   

Accretable yield

     (164
  

 

 

 

Fair value of purchased loans

   $ 7,811   
  

 

 

 

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

 

PCI Loans:

   June 30, 2015  

Contractual cash flows

   $ 9,101   

Non-accretable difference

     (1,307

Accretable yield

     (102
  

 

 

 

Loans accounted for under ASC 310-30

   $ 7,692   
  

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

Loan Aging Analysis

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

June 30, 2015

 

     30-89
Days
Past Due
and
Accruing
     Greater
than 90
Days
Past Due
and
Accruing
     Non-
Accrual
Loans
     Total
Past Due
     PCI
Loans
     Current      Total Loans  

Loans

                    

Commercial:

                    

Commercial

   $ 11,249       $ 629       $ 19,322       $ 31,200       $ 2,490       $ 4,098,881       $ 4,132,571   

Asset-based

     —           —           —           —           —           211,302         211,302   

Factoring

     12,892         188         —           13,080         —           96,132         109,212   

Commercial – credit card

     285         94         25         404         —           126,122         126,526   

Real estate:

                    

Real estate – construction

     1,719         —           813         2,532         532         392,784         395,848   

Real estate – commercial

     3,643         575         9,276         13,494         1,934         2,372,129         2,387,557   

Real estate – residential

     2,279         198         2,250         4,727         —           428,560         433,287   

Real estate – HELOC

     76         —           3,998         4,074         47         694,693         698,814   

Consumer:

                    

Consumer – credit card

     1,789         1,709         679         4,177         —           282,301         286,478   

Consumer – other

     2,627         4,252         1,286         8,165         2,689         83,606         94,460   

Leases

     —           —           —           —           —           40,073         40,073   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 36,559       $ 7,645       $ 37,649       $ 81,853       $ 7,692       $ 8,826,583       $ 8,916,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2015

 

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

PCI Loans

           

Commercial:

           

Commercial

   $ —         $ 2,490       $ —         $ 2,490   

Asset-based

     —           —           —           —     

Factoring

     —           —           —           —     

Commercial – credit card

     —           —           —           —     

Real estate:

           

Real estate – construction

     —           532         —           532   

Real estate – commercial

     —           1,934         —           1,934   

Real estate – residential

     —           —           —           —     

Real estate – HELOC

     —           47         —           47   

Consumer:

           

Consumer – credit card

     —           —           —           —     

Consumer – other

     171         20         2,498         2,689   

Leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

   $ 171       $ 5,023       $ 2,498       $ 7,692   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

    

 

 

14


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

     December 31, 2014  
     30-89
Days Past
Due and
Accruing
     Greater
than 90
Days Past
Due and
Accruing
     Non-Accrual
Loans
     Total
Past Due
     Current      Total
Loans
 

Commercial:

                 

Commercial

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

Commercial – credit card

     267         147         37         451         115,258         115,709   

Real estate:

                 

Real estate – construction

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

Real estate – commercial

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

Real estate – residential

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

Real estate – HELOC

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

Consumer:

                 

Consumer – credit card

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

Consumer – other

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

Leases

     —           —           —           —           39,090         39,090   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include troubled debt restructurings on non-accrual status. Loan delinquency for all loans is shown in the tables above at June 30, 2015 and December 31, 2014, respectively.

Non-PCI loans that become nonperforming are put on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

The Company has ceased the recognition of interest on loans with a carrying value of $37.6 million and $27.4 million at June 30, 2015 and December 31, 2014, respectively. Restructured loans totaled $27.0 million and $9.3 million at June 30, 2015 and December 31, 2014, respectively. Loans 90 days past due and still accruing interest amounted to $7.6 million and $3.8 million at June 30, 2015 and December 31, 2014, respectively. There was an insignificant amount of interest recognized on impaired loans during 2015 and 2014.

The Company sold residential real estate loans with a face value of $58.1 million and $31.0 million in the secondary market without recourse during the six-month periods ended June 30, 2015 and June 30, 2014, respectively.

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans, net charge-offs, non-performing loans, and general economic conditions.

The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. The loan rankings are summarized into the following categories: Non-watch list, Watch, Special Mention, and Substandard. Any loan not classified in one of the categories described below is considered to be a Non-watch list loan. A description of the general characteristics of the loan ranking categories is as follows:

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

    Watch – This rating represents credit exposure that presents higher than average risk and warrants greater than routine attention by Company personnel due to conditions affecting the borrower, the borrower’s industry or the economic environment. These conditions have resulted in some degree of uncertainty that results in higher than average credit risk.

 

    Special Mention – This rating reflects a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institution’s credit position at some future date. The rating is not adversely classified and does not expose an institution to sufficient risk to warrant adverse classification.

 

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

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

Credit Exposure

Credit Risk Profile by Risk Rating

Originated and Non-PCI Loans

 

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

Non-watch list

   $ 3,863,331       $ 3,532,611       $ 168,138       $ —         $ 105,116       $ —     

Watch

     55,914         72,283         —           —           —           —     

Special Mention

     82,110         98,750         40,740         —           —           —     

Substandard

     128,726         110,365         2,424         —           4,096         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,130,081       $ 3,814,009       $ 211,302       $ —         $ 109,212       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Real estate-construction      Real estate-commercial  
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
 

Non-watch list

   $ 392,754       $ 253,895       $ 2,297,846       $ 1,780,323   

Watch

     716         181         38,451         31,984   

Special Mention

     —           756         17,597         8,691   

Substandard

     1,846         1,174         31,729         45,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 395,316       $ 256,006       $ 2,385,623       $ 1,866,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

Originated and Non-PCI Loans

 

     Commercial-credit card      Real estate-residential      Real estate-HELOC  
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
 

Performing

   $ 126,501       $ 115,672       $ 431,037       $ 319,265       $ 694,769       $ 643,567   

Non-performing

     25         37         2,250         562         3,998         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 126,526       $ 115,709       $ 433,287       $ 319,827       $ 698,767       $ 643,586   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Consumer-credit card         Consumer-other         Leases   
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
 

Performing

   $ 285,799       $ 309,736       $ 90,485       $ 100,900       $ 40,073       $ 39,090   

Non-performing

     679         560         1,286         70         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 286,478       $ 310,296       $ 91,771       $ 100,970       $ 40,073       $ 39,090   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

Credit Exposure

Credit Risk Profile by Risk Rating

PCI Loans

 

     Commercial      Real estate-construction      Real estate-commercial  
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
 

Non-watch list

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

Watch

     —           —           —           —           —           —     

Special Mention

     —           —           —           —           —           —     

Substandard

     1,451         —           532         —           1,934         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,490       $ —         $ 532       $ —         $ 1,934       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

PCI Loans

 

     Real estate-HELOC      Consumer-other  
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
 

Performing

   $ 47       $ —         $ 2,689       $ —     

Non-performing

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47       $ —         $ 2,689       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s judgment of inherent probable losses within the Company’s loan portfolio as of the balance sheet date. The allowance is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Accordingly, the methodology is based on historical loss trends. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for probable loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and estimated losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and changes in the regulatory environment.

The Company’s allowance for loan losses consists of specific valuation allowances and general valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, general economic conditions and other qualitative risk factors both internal and external to the Company.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of impaired loans. Loans are classified based on an internal risk grading process that evaluates the obligor’s ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. When a loan is considered impaired, the loan is analyzed to determine the need, if any, to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk ranking of the loan and economic conditions affecting the borrower’s industry.

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

General valuation allowances are calculated based on the historical loss experience of specific types of loans including an evaluation of the time span and volume of the actual charge-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated based on actual charge-off experience. A valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio, time span to charge-off, and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similarly risk-graded groups of commercial loans, commercial real estate loans, commercial credit card, home equity loans, consumer real estate loans and consumer and other loans. The Company also considers a loan migration analysis for criticized loans. This analysis includes an assessment of the probability that a loan will move to a loss position based on its risk rating. The consumer credit card pool is evaluated based on delinquencies and credit scores. In addition, a portion of the allowance is determined by a review of qualitative factors by management.

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

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

In accordance with purchase accounting rules, purchased loans were recorded at fair value at the Acquisition Date and the prior allowance was eliminated. No allowance has been established on these purchased loans through June 30, 2015.

 

19


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

This table provides a rollforward of the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2015 (in thousands):

 

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

Allowance for loan losses:

           

Beginning balance

   $ 55,659      $ 11,912      $ 9,780      $ 128       $ 77,479   

Charge-offs

     (3,088     (68     (2,446     —           (5,602

Recoveries

     89        77        678        —           844   

Provision

     6,718        (3,029     1,276        35         5,000   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six Months Ended June 30, 2015  
     Commercial     Real estate     Consumer     Leases      Total  

Allowance for loan losses:

           

Beginning balance

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

Charge-offs

     (3,500     (100     (5,150     —           (8,750

Recoveries

     899        92        1,340        —           2,331   

Provision

     6,630        (1,825     3,177        18         8,000   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,266      $ 295      $ —        $ —         $ 1,561   

Ending balance: collectively evaluated for impairment

     58,112        8,597        9,288        163         76,160   

Loans:

           

Ending balance: loans

   $ 4,579,611      $ 3,915,506      $ 380,938      $ 40,073       $ 8,916,128   

Ending balance: individually evaluated for impairment

     32,818        9,113        1,240        —           43,171   

Ending balance: collectively evaluated for impairment

     4,546,793        3,906,393        379,698        40,073         8,872,957   

 

20


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

 

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

Allowance for loan losses:

           

Beginning balance

   $ 48,363      $ 16,091      $ 10,984      $ 76       $ 75,514   

Charge-offs

     (1,476     (55     (3,048     —           (4,579

Recoveries

     201        8        658        —           867   

Provision

     5,345        (1,827     1,480        2         5,000   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six Months Ended June 30, 2014  
     Commercial     Real estate     Consumer     Leases      Total  

Allowance for loan losses:

           

Beginning balance

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

Charge-offs

     (2,947     (181     (6,136     —           (9,264

Recoveries

     268        17        1,530        —           1,815   

Provision

     6,226        (961     4,233        2         9,500   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 2,497      $ 1,118      $ —        $ —         $ 3,615   

Ending balance: collectively evaluated for impairment

     49,936        13,099        10,074        78         73,187   

Loans:

           

Ending balance: loans

   $ 3,658,124      $ 2,859,563      $ 379,203      $ 23,793       $ 6,920,683   

Ending balance: individually evaluated for impairment

     14,517        12,407        1        —           26,925   

Ending balance: collectively evaluated for impairment

     3,643,607        2,847,156        379,202        23,793         6,893,758   

 

21


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

Impaired Loans

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

 

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

Commercial:

                 

Commercial

   $ 36,941       $ 20,925       $ 11,893       $ 32,818       $ 1,266       $ 21,239   

Asset-based

     —           —           —           —           —           —     

Factoring

     —           —           —           —           —           —     

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     1,453         813         121         934         59         960   

Real estate – commercial

     6,254         3,960         1,579         5,539         236         8,930   

Real estate – residential

     2,544         2,410         —           2,410         —           1,433   

Real estate – HELOC

     255         230         —           230         —           77   

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     1,240         1,240         —           1,240         —           414   

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 48,687       $ 29,578       $ 13,593       $ 43,171       $ 1,561       $ 33,053   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Commercial:

                 

Commercial

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

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     1,540         983         —           983         —           939   

Real estate – commercial

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

Real estate – residential

     1,083         909         —           909         —           1,006   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     1         1         —           1         —           12   

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

Troubled Debt Restructurings

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

Purchased loans restructured after acquisition are not considered or reported as troubled debt restructurings if the loans evidenced credit deterioration as of the Acquisition Date and are accounted for in pools. No purchased loans were modified as troubled debt restructurings after the Acquisition Date.

The Company had $293 thousand in commitments to lend to borrowers with loan modifications classified as TDR’s. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term. During the six month period ended June 30, 2015, the Company had one commercial real estate loan classified as a TDR with a payment default totaling $178 thousand. A specific valuation allowance for the full amount of this loan had previously been established within the Company’s allowance for loan losses, and this loan was charged off against the allowance for loan losses during the current period.

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

 

     Three Months Ended June 30, 2015      Six Months Ended June 30, 2015  
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

                 

Commercial:

                 

Commercial

     14       $ 19,463       $ 19,463         14       $ 19,463       $ 19,463   

Asset-based

     —           —           —           —           —           —     

Factoring

     —           —           —           —           —           —     

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     —           —           —           —           —           —     

Real estate – commercial

     —           —           —           —           —           —     

Real estate – residential

     1         121         121         1         121         121   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     —           —           —           —           —           —     

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15       $ 19,584       $ 19,584         15       $ 19,584       $ 19,584   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

 

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

Troubled Debt Restructurings

                 

Commercial:

                 

Commercial

     —         $ —         $ —           1       $ 469       $ 469   

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     —           —           —           —           —           —     

Real estate – commercial

     —           —           —           —           —           —     

Real estate – residential

     3         210         234         3         210         234   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     —           —           —           —           —           —     

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 210       $ 234         4       $ 679       $ 703   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

5. Securities

Securities Available for Sale

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

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

June 30, 2015

           

U.S. Treasury

   $ 353,174       $ 747       $ (6    $ 353,915   

U.S. Agencies

     807,484         1,162         (491      808,155   

Mortgage-backed

     3,535,277         20,064         (31,050      3,524,291   

State and political subdivisions

     2,151,526         18,032         (11,460      2,158,098   

Corporates

     81,122         27         (493      80,656   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,928,583       $ 40,032       $ (43,500    $ 6,925,115   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

December 31, 2014

           

U.S. Treasury

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

U.S. Agencies

     991,084         780         (1,175      990,689   

Mortgage-backed

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

State and political subdivisions

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

Corporates

     124,096         —           (1,270      122,826   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

 

   
     Amortized      Fair  
     Cost      Value  

Due in 1 year or less

   $ 638,122       $ 639,044   

Due after 1 year through 5 years

     1,811,855         1,821,535   

Due after 5 years through 10 years

     863,778         862,706   

Due after 10 years

     79,551         77,539   
  

 

 

    

 

 

 

Total

     3,393,306         3,400,824   

Mortgage-backed securities

     3,535,277         3,524,291   
  

 

 

    

 

 

 

Total securities available for sale

   $ 6,928,583       $ 6,925,115   
  

 

 

    

 

 

 

Securities may be disposed of before contractual maturities due to sales by the Company or because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the six months ended June 30, 2015, proceeds from the sales of securities available for sale were $705.2 million compared to $409.8 million for the same period in 2014. Securities transactions resulted in gross realized gains of $8.4 million and $4.1 million for the six months ended June 30, 2015 and 2014, respectively. The gross realized losses for the six months ended June 30, 2015 and 2014 were $48 thousand and $11 thousand, respectively.

Securities available for sale with a market value of $5.6 billion at June 30, 2015 and $5.7 billion at December 31, 2014 were pledged to secure U.S. Government deposits, other public deposits, and certain trust deposits as required by law. Of this amount, securities with a market value of $1.5 billion at June 30, 2015 and $1.2 billion at December 31, 2014 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.

The following table shows the Company’s available for sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2015 and December 31, 2014 (in thousands):

 

     Less than 12 months     12 months or more     Total  

June 30, 2015

   Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Description of Securities

               

U.S. Treasury

   $ 9,965       $ (6   $ —         $ —        $ 9,965       $ (6

U.S. Agencies

     104,031         (176     64,711         (315     168,742         (491

Mortgage-backed

     1,503,100         (16,552     399,744         (14,498     1,902,844         (31,050

State and political subdivisions

     875,725         (9,166     73,175         (2,294     948,900         (11,460

Corporates

     17,831         (73     51,045         (420     68,876         (493
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily- impaired debt securities available for sale

   $ 2,510,652       $ (25,973   $ 588,675       $ (17,527   $ 3,099,327       $ (43,500
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

 

25


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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

December 31, 2014

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

Description of Securities

               

U.S. Treasury

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

U.S. Agencies

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

Mortgage-backed

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

State and political subdivisions

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

Corporates

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily- impaired debt securities available for sale

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses in the Company’s investments in U.S. treasury obligations, U.S. government agencies, Government Sponsored Entity (GSE) mortgage-backed securities, municipal securities, and corporates were caused by changes in interest rates. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at June 30, 2015.

Securities Held to Maturity

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

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

June 30, 2015

           

State and political subdivisions

   $ 446,881       $ 28,510       $ —         $ 475,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           
  

 

 

    

 

 

    

 

 

    

 

 

 

State and political subdivisions

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

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Amortized      Fair  
     Cost      Value  

Due in 1 year or less

   $ 2,157       $ 2,295   

Due after 1 year through 5 years

     74,653         79,416   

Due after 5 years through 10 years

     284,028         302,148   

Due after 10 years

     86,043         91,532   
  

 

 

    

 

 

 

Total securities held to maturity

   $ 446,881       $ 475,391   
  

 

 

    

 

 

 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

There were no sales of securities held to maturity during the first six months of 2015 or 2014.

 

26


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

Trading Securities

The net unrealized gains on trading securities at June 30, 2015 and June 30, 2014 were $156 thousand and $41 thousand, respectively, and were included in trading and investment banking income on the Consolidated Statements of Income.

Other Securities

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

 

   
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

June 30, 2015

           

FRB and FHLB stock

   $ 37,300       $ —         $ —         $ 37,300   

Other securities – marketable

     —           17,031         —           17,031   

Other securities – non-marketable

     21,939         1,609         (79      23,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 59,239       $ 18,640       $ (79    $ 77,800   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

FRB and FHLB stock

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

Other securities – marketable

     —           16,668         —           16,668   

Other securities – non-marketable

     21,669         3,937         (79      25,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

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

 

 

    

 

 

    

 

 

    

 

 

 

Investment in Federal Reserve Bank (FRB) stock is based on the capital structure of the investing bank, and investment in Federal Home Loan Bank (FHLB) stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost. Other marketable and non-marketable securities include Prairie Capital Management (PCM) alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. The fair value of other marketable securities includes alternative investment securities of $17.0 million at June 30, 2015 and $16.7 million at December 31, 2014. The fair value of other non-marketable securities includes alternative investment securities of $2.4 million at June 30, 2015 and $8.5 million at December 31, 2014. Unrealized gains or losses on alternative investments are recognized in the Equity earnings on alternative investments line of the Company’s Consolidated Statements of Income.

6. Goodwill and Other Intangibles

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

 

     Bank      Institutional
Investment
Management
     Asset
Servicing
     Total  

Balances as of January 1, 2015

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

Acquisition of Marquette Financial Companies

     18,459         —           —           18,459   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of June 30, 2015

   $ 161,212       $ 47,529       $ 19,476       $ 228,217   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of January 1, 2014

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

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of December 31, 2014

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

 

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

Core deposit intangible assets

   $ 36,497       $ 33,186       $ 3,311   

Core deposit – Marquette Acquisition

     10,931         153         10,778   

Customer relationships

     104,560         69,503         35,057   

Customer Relationships – Marquette Acquisition

     3,100         29         3,071   

Other intangible assets

     3,247         2,726         521   

Other intangible assets – Marquette Acquisition

     951         40         911   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 159,286       $ 105,637       $ 53,649   
  

 

 

    

 

 

    

 

 

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

Core deposit intangible assets

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

Customer relationships

     104,560         64,980         39,580   

Other intangible assets

     3,247         2,612         635   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

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

 

 

    

 

 

    

 

 

 

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

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 
     2015      2014      2015      2014  

Aggregate amortization expense

   $ 2,569       $ 3,074       $ 5,324       $ 6,176   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

For the six months ending December 31, 2015

   $ 5,854   

For the year ending December 31, 2016

     11,069   

For the year ending December 31, 2017

     9,549   

For the year ending December 31, 2018

     7,160   

For the year ending December 31, 2019

     6,370   

For the year ending December 31, 2020

     5,624   

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

7. Business Segment Reporting

The Company has strategically aligned its operations into the following four reportable segments (collectively, “Business Segments”): Bank, Payment Solutions, Institutional Investment Management, and Asset Servicing. Business segment financial results produced by the Company’s internal management reporting system are evaluated regularly by senior executive officers in deciding how to allocate resources and assess performance for individual Business Segments. The management reporting system assigns balance sheet and income statement items to each business segment using methodologies that are refined on an ongoing basis. For comparability purposes, amounts in all periods presented are based on methodologies in effect at June 30, 2015. Previously reported results have been reclassified to conform to the current organizational structure.

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

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

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

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

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

Business Segment Information

Segment financial results were as follows (in thousands):

 

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

Net interest income

   $ 82,758       $ 13,599       $ —         $ 1,003       $ 97,360   

Provision for loan losses

     2,612         2,388         —           —           5,000   

Noninterest income

     47,548         23,293         25,684         23,025         119,550   

Noninterest expense

     107,293         26,399         18,285         19,987         171,964   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     20,401         8,105         7,399         4,041         39,946   

Income tax expense

     4,915         2,046         1,785         986         9,732   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 15,486       $ 6,059       $ 5,614       $ 3,055       $ 30,214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 13,423,000       $ 2,980,000       $ 70,000       $ 940,000       $ 17,413,000   

 

29


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

Net interest income

   $ 72,481       $ 12,390       $ (1   $ 1,300       $ 86,170   

Provision for loan losses

     2,686         2,314         —          —           5,000   

Noninterest income

     56,024         21,201         33,999        22,777         134,001   

Noninterest expense

     100,788         24,506         22,053        18,854         166,201   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income before taxes

     25,031         6,771         11,945        5,223         48,970   

Income tax expense

     7,482         1,931         3,389        1,496         14,298   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 17,549       $ 4,840       $ 8,556      $ 3,727       $ 34,672   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average assets

   $ 12,008,000       $ 2,148,000       $ 69,000      $ 1,393,000       $ 15,618,000   

 

     Six Months Ended June 30, 2015  
     Bank      Payment
Solutions
     Institutional
Investment
Management
    Asset
Servicing
     Total  

Net interest income

   $ 158,085       $ 27,632       $ 1      $ 2,000       $ 187,718   

Provision for loan losses

     4,211         3,789         —          —           8,000   

Noninterest income

     99,099         46,432         52,768        46,458         244,757   

Noninterest expense

     207,861         51,062         36,227        41,227         336,377   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income before taxes

     45,112         19,213         16,542        7,231         88,098   

Income tax expense

     12,313         5,373         4,511        1,922         24,119   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 32,799       $ 13,840       $ 12,031      $ 5,309       $ 63,979   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average assets

   $ 13,089,000       $ 3,031,000       $ 72,000      $ 932,000       $ 17,124,000   
     Six Months Ended June 30, 2014  
     Bank      Payment
Solutions
     Institutional
Investment
Management
    Asset
Servicing
     Total  

Net interest income

   $ 143,602       $ 24,778       $ (3   $ 3,238       $ 171,615   

Provision for loan losses

     5,112         4,388         —          —           9,500   

Noninterest income

     103,458         41,420         68,094        43,993         256,965   

Noninterest expense

     208,337         45,453         47,943        36,399         338,132   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income before taxes

     33,611         16,357         20,148        10,832         80,948   

Income tax expense

     9,801         4,524         5,532        3,006         22,863   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 23,810       $ 11,833       $ 14,616      $ 7,826       $ 58,085   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average assets

   $ 12,204,000       $ 2,023,000       $ 71,000      $ 1,767,000       $ 16,065,000   

 

30


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

8. Acquisition

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

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

 

Assets

  

Loans

   $ 980,250   

Investment securities

     177,803   

Cash and due from banks

     104,539   

Premises and equipment, net

     11,508   

Identifiable intangible assets

     14,982   

Other assets

     32,240   
  

 

 

 

Total Assets Acquired

   $ 1,321,322   

Liabilities

  

Noninterest-bearing deposits

   $ 235,426   

Interest-bearing deposits

     708,629   

Short-term debt

     112,133   

Long-term debt

     89,971   

Other liabilities

     13,885   
  

 

 

 

Total liabilities assumed

   $ 1,160,044   

Net identifiable assets acquired

   $ 161,278   

Preliminary goodwill

     18,459   
  

 

 

 

Net assets acquired

   $ 179,737   
  

 

 

 

 

Consideration:

  

Company’s common shares issued

     3,470   

Purchase price per share of the Company’s common stock

   $ 51.79   
  

 

 

 

Fair value of total consideration transferred

   $ 179,737   
  

 

 

 

In the acquisition, the Company purchased $980.3 million of loans at fair value. All non-performing loans and select other classified loan relationships considered by management to be credit impaired are accounted for pursuant to ASC Topic 310-30, as previously discussed within Note 4, “Loans and Allowance for Loan Losses.”

 

31


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

The amount of goodwill arising from the acquisition reflects the Company’s increased market share and related synergies that are expected to result from combining the operations of UMB and Marquette. All of the goodwill was assigned to the Bank segment. In accordance with ASC 350, Intangibles-Goodwill and Other, goodwill will not be amortized, but will be subject to at least an annual impairment test. As the Company acquired tax deductible goodwill in excess of the amount reported in the consolidated financial statements, the goodwill is expected to be deductible for tax. The fair value of the acquired identifiable intangible assets of $15.0 million is comprised of a core deposit intangible of $10.9 million, customer lists of $3.1 million and non-compete agreements of $1.0 million.

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

The results of Marquette are included in the results of the Company subsequent to the Acquisition Date. Included in Salaries and employee benefits and Legal and consulting expenses in the Company’s Consolidated Statements of Income for the six months ending June 30, 2015 were $1.5 million of expenses related to the acquisition of Marquette.

The following pro forma information combines the historical results of Marquette and the Company. The pro forma financial information does not include the potential impacts of possible business model changes, current market conditions, revenue enhancements, expense efficiencies, or other factors. The pro forma information below reflects adjustments made to exclude the impact of acquisition-related expenses of $1.5 million, amortization and accretion of purchase discounts and premiums of $402 thousand, and amortization of acquired identifiable intangibles of $220 thousand during the six month period ended June 30, 2015. The pro forma information is theoretical in nature and not necessarily indicative of future consolidated results of operations of the Company or the consolidated results of operations which would have resulted had the Company acquired Marquette during the periods presented.

If the Marquette acquisition had been completed on January 1, 2014, total revenue would have been approximately $452.6 million and $460.7 million for the six month periods ended June 30, 2015 and June 30, 2014, respectively. Net income would have been approximately $62.9 million and $62.3 million, respectively, for the same periods. Basic earnings per share would have been $1.34 for both periods.

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

9. Commitments, Contingencies and Guarantees

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, futures contracts, forward foreign exchange contracts and spot foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. Many of the commitments expire without being drawn upon; therefore, the total amount of these commitments does not necessarily represent the future cash requirements of the Company.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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

Contract or Notional Amount (in thousands):

 

     June 30,      December 31,  
     2015      2014  

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

   $ 4,464,244       $ 3,509,841   

Commitments to extend credit under credit card loans

     2,851,533         2,690,752   

Commercial letters of credit

     6,403         1,334   

Standby letters of credit

     364,826         375,003   

Futures contracts

     5,200         —     

Forward foreign exchange contracts

     90,584         144,950   

Spot foreign exchange contracts

     6,390         14,721   

10. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

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

Fair Values of Derivative Instruments on the Consolidated Balance Sheets

The Company’s derivative asset and derivative liability are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets. This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of June 30, 2015 and December 31, 2014 (in thousands):

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

     Asset Derivatives      Liability Derivatives  

Fair Value

   June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
 

Interest Rate Products:

   $ 6,437       $ 7,138       $ 6,635       $ 7,250   

Derivatives not designated as hedging instruments

           

Derivatives designated as hedging instruments

     757         —           240         285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,194       $ 7,138       $ 6,875       $ 7,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed rate assets and liabilities due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve either making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments, or making variable rate payments to a counterparty in exchange for the Company receiving fixed rate payments, over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2015, the Company had two interest rate swaps with a notional amount of $16.2 million that were designated as fair value hedges of interest rate risk associated with the Company’s fixed rate loan assets and brokered time deposits.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2015, the Company recognized net gains of $7 thousand and $2 thousand, respectively, related to hedge ineffectiveness. During the three and six months ended June 30, 2014, the Company recognized net losses of $8 thousand and $18 thousand, respectively, related to hedge ineffectiveness.

Non-designated Hedges

The remainder of the Company’s derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2015, the Company had 34 interest rate swaps with an aggregate notional amount of $391.9 million related to this program. During the three and six months ended June 30, 2015, the Company recognized $20 thousand of net gains and $86 thousand of net losses, respectively, related to changes in fair value of these swaps. During the three and six months ended June 30, 2014, the Company recognized $31 thousand of net gains and $52 thousand of net losses, respectively, related to changes in the fair value of these swaps.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

Effect of Derivative Instruments on the Consolidated Statements of Income

This table provides a summary of the amount of gain (loss) recognized in other noninterest expense in the Consolidated Statements of Income related to the Company’s derivative asset and liability for the three and six months ended June 30, 2015 and June 30, 2014 (in thousands):

 

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

Interest Rate Products

     

Derivatives not designated as hedging instruments

   $ 20       $ 31       $ (86    $ (52
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20       $ 31       $ (86    $ (52
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Rate Products

           

Derivatives designated as hedging instruments

           

Fair value adjustments on derivatives

   $ 121       $ (116    $ 6       $ (235

Fair value adjustments on hedged items

     (114      108         (4      217   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7       $ (8    $ 2       $ (18
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit-risk-related Contingent Features

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

As of June 30, 2015 the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $6.8 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has not yet reached its minimum collateral posting threshold under these agreements. If the Company had breached any of these provisions at June 30, 2015, it could have been required to settle its obligations under the agreements at the termination value.

11. Fair Value Measurements

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of June 30, 2015, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

 

     Fair Value Measurement at June 30, 2015  

Description

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

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

U.S. Treasury

   $ 3,455       $ 3,455       $ —         $ —     

U.S. Agencies

     3,524         —           3,524         —     

Mortgage-backed

     5,464         —           5,464         —     

State and political subdivisions

     5,386         —           5,386         —     

Trading - other

     18,787         18,785         2         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     36,616         22,240         14,376         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     353,915         353,915         —           —     

U.S. Agencies

     808,155         —           808,155         —     

Mortgage-backed

     3,524,291         —           3,524,291         —     

State and political subdivisions

     2,158,098         —           2,158,098         —     

Corporates

     80,656         80,656         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,925,115         434,571         6,490,544         —     

Company-owned life insurance

     27,488         —           27,488         —     

Derivatives

     7,194         —           7,194         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,996,413       $ 456,811       $ 6,539,602       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 34,310       $ 34,310       $ —         $ —     

Contingent consideration liability

     31,291         —           —           31,291   

Derivatives

     6,875         —           6,875         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 72,476       $ 34,310       $ 6,875       $ 31,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

     Fair Value Measurement at December 31, 2014  

Description

   December 31,
2014
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

U.S. Treasury

   $ 400       $ 400       $ —         $ —     

U.S. Agencies

     1,315         —           1,315         —     

Mortgage-backed

     —           —           —           —     

State and political subdivisions

     7,381         —           7,381         —     

Trading—other

     18,107         18,106         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     27,203         18,506         8,697         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     519,460         519,460         —           —     

U.S. Agencies

     990,689         —           990,689         —     

Mortgage-backed

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

State and political subdivisions

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

Corporates

     122,826         122,826         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

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

Company-owned life insurance

     26,886         —           26,886         —     

Derivatives

     7,138         —           7,138         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

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

Contingent consideration liability

     53,411         —           —           53,411   

Derivatives

     7,535         —           7,535         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Six Months Ended June 30,  
     2015      2014  

Beginning balance

   $ 53,411       $ 46,201   

Payment of contingent considerations on acquisitions

     (18,702      (13,725

Contingency reserve

     —           14,272   

Fair value adjustments

     (3,418      5,279   
  

 

 

    

 

 

 

Ending balance

   $ 31,291       $ 52,027   
  

 

 

    

 

 

 

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

 

Description

  

Valuation Techniques

  

Significant

Unobservable Inputs

  

Range

Liabilities

        

Contingent consideration liability

   Discounted cash flows    Revenue and expense growth percentage    (1%) - 102%

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

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

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

Securities Available for Sale and Investment Securities Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities. Additionally, throughout the year if securities are sold, comparisons are made between the pricing services prices and the market prices at which the securities were sold. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing services. Based on this research, the pricing services may affirm or revise their quoted price. No significant adjustments have been made to the prices provided by the pricing services. The pricing services also provide documentation on an ongoing basis that includes referenced data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate.

Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

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

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

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

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

 

     Fair Value Measurement at June 30, 2015 Using  

Description

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

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Gains
(Losses)
Recognized
During the Six
Months Ended
June 30
 

Impaired loans

   $ 12,032       $ —         $ —         $ 12,032       $ 346   

Other real estate owned

     2,495         —           —           2,495         (18
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,527       $ —         $ —         $ 14,527       $ 328   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement at December 31, 2014 Using  

Description

   December 31,
2014
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

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

Impaired loans

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

Other real estate owned

     208         —           —           208         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

Impaired loans While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans to reflect write-downs that are based on the external appraisal value of the underlying collateral. The external appraisals are generally based on recent sales of comparable properties which are then adjusted for the unique characteristics of the property being valued. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists within the Company’s property management group and the Company’s credit department. The valuation of the impaired loans is reviewed on a quarterly basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

Other real estate owned Other real estate owned consists of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, recreational and marine vehicles. Other real estate owned is recorded as held for sale initially at the lower of the loan balance or fair value of the collateral. The initial valuation of the foreclosed property is obtained through an appraisal process similar to the process described in the impaired loans paragraph above. Subsequent to foreclosure, valuations are reviewed quarterly and updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods and those measurements are classified as Level 3.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value of the Company’s financial instruments at June 30, 2015 and December 31, 2014 are as follows (in millions):

 

     Fair Value Measurement at June 30, 2015 Using  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Estimated
Fair Value
 

FINANCIAL ASSETS

              

Cash and short-term investments

   $ 1,280.4       $ 1,202.6       $ 77.8       $ —         $ 1,280.4   

Securities available for sale

     6,925.1         434.6         6,490.5         —           6,925.1   

Securities held to maturity

     446.9         —           475.4         —           475.4   

Other securities

     77.8         —           77.8         —           77.8   

Trading securities

     36.6         22.2         14.4         —           36.6   

Loans (exclusive of allowance for loan loss)

     8,918.9         —           8,946.2         —           8,946.2   

Derivatives

     7.2         —           7.2         —           7.2   

FINANCIAL LIABILITIES

              

Demand and savings deposits

     13,190.8         13,190.8         —           —           13,190.8   

Time deposits

     1,305.8         —           1,305.8         —           1,305.8   

Other borrowings

     1,774.4         41.4         1,733.0         —           1,774.4   

Long-term debt

     88.3         —           90.3         —           90.3   

Derivatives

     6.9         —           6.9         —           6.9   

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 2.3   

Commercial letters of credit

                 0.1   

Standby letters of credit

                 1.2   

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

     Fair Value Measurement at December 31, 2014 Using  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Estimated
Fair Value
 

FINANCIAL ASSETS

              

Cash and short-term investments

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

Securities available for sale

     6,911.9         642.3         6,269.6         —           6,911.9   

Securities held to maturity

     278.1         —           304.1         —           304.1   

Other securities

     68.5         —           68.5         —           68.5   

Trading securities

     27.2         18.5         8.7         —           27.2   

Loans (exclusive of allowance for loan loss)

     7,466.4         —           7,483.3         —           7,483.3   

Derivatives

     7.1         —           7.1         —           7.1   

FINANCIAL LIABILITIES

              

Demand and savings deposits

     12,353.3         12,353.3         —           —           12,353.3   

Time deposits

     1,263.6         —           1,263.6         —           1,263.6   

Other borrowings

     2,025.1         42.0         1,983.1         —           2,025.1   

Long-term debt

     8.8         —           9.1         —           9.1   

Derivatives

     7.5         —           7.5         —           7.5   

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 5.7   

Commercial letters of credit

                 0.2   

Standby letters of credit

                 2.4   

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

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

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

Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

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

Time deposits The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are currently offered for deposits of similar remaining maturities.

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

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

Other off-balance sheet instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair value at year-end are significant to the Company’s consolidated financial position.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This review highlights the material changes in the results of operations and changes in financial condition of the Company for the three-month and six-month periods ended June 30, 2015. It should be read in conjunction with the accompanying consolidated financial statements, notes to consolidated financial statements and other financial statistics appearing elsewhere in this report and the Company’s Annual Report on Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

 

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

 

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

 

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

 

    changes in accounting standards or policies;

 

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

 

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

 

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

 

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

 

    adverse publicity or other reputational harm to the Company;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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Overview

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

The first strategic objective is to expand the Company’s fee-based businesses. As the industry continues to experience economic uncertainty, the Company has continued to emphasize its fee-based operations to diversify its sources of revenue. With diverse sources of revenues, the Company’s exposure to sustained low interest rates is reduced. During the second quarter of 2015, noninterest income decreased $14.5 million, or 10.8 percent, compared to the same period of 2014. The Company continues to emphasize its asset management, brokerage, bankcard services, health care services, and treasury management businesses. At June 30, 2015, noninterest income represented 55.1 percent of total revenues, compared to 60.9 percent at June 30, 2014.

The second strategic objective is a focus on net interest income through loan and deposit growth. During the second quarter of 2015, continued progress on this strategy was illustrated by an increase in net interest income of $11.2 million, or 13.0 percent, from the previous year. The Company has continued to show increased net interest income in a historically low rate environment through the effects of increased volume of average earning assets and a low cost of funds in its balance sheet. On May 31, 2015 the previously announced merger with Marquette was completed adding earning assets with an acquired value of $1.2 billion to the Company’s balance sheet. Average earning assets increased by $1.4 billion, or 10.0 percent from June 30, 2014. The funding for these assets was driven primarily by a 11.1 percent increase in average interest-bearing liabilities. Average loan balances increased $1.2 billion, or 17.0 percent compared to the same period in 2014. Net interest margin and net interest spread, on a tax-equivalent basis, increased six and five basis points, respectively, compared to the same period in 2014.

The third strategic objective is a focus on improving operating efficiencies. At June 30, 2015, the Company had 117 banking centers and two wealth management offices. This includes the addition of the newly acquired Marquette locations. 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 integration of the Marquette operations will also be a target for improved efficiencies. The Company continues to invest in technological advances that will help management drive operating efficiencies in the future through improved data analysis and automation. The Company continues to evaluate core systems and will invest in enhancements that will yield operating efficiencies. The Company evaluates its cost structure for opportunities to moderate expense growth without sacrificing growth initiatives.

The fourth strategic objective is a focus on capital management. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, investing in acquisitions, evaluating increased dividends over time and utilizing a share buy-back strategy when appropriate. At June 30, 2015, the Company had $1.9 billion in total shareholders’ equity. This is an increase of $255.7 million, or 16.0 percent, compared to total shareholders’ equity at June 30, 2014. This increase is primarily attributable to the common stock issuance associated with the acquisition of Marquette of $179.7 million at May 31, 2015. At June 30, 2015, the Company had a total risk-based capital ratio of 13.77 percent, which is higher than the 10 percent regulatory minimum to be considered well-capitalized. The Company repurchased 105,218 shares at an average price of $51.12 per share during the first six months of 2015.

Earnings Summary

The following is a summary regarding the Company’s earnings for the second quarter of 2015. The changes identified in the summary are explained in greater detail below. The Company recorded consolidated net income of $30.2 million for the three-month period ended June 30, 2015, compared to $34.7 million for the same period a year earlier. This represents a 12.9 percent decrease over the three-month period ended June 30, 2014. Basic earnings per share for the second quarter of 2015 were $0.65 per share ($0.65 per share fully-diluted) compared to $0.77 per share ($0.76 per share fully-diluted) for the second quarter of 2014. Return on average assets and return on average common shareholders’ equity for the three-month period ended June 30, 2015 were 0.70 and 6.95 percent, respectively, compared to 0.89 and 8.77 percent for the three-month period ended June 30, 2014.

 

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The Company recorded consolidated net income of $64.0 million for the six-month period ended June 30, 2015, compared to $58.1 million for the same period a year earlier. This represents a 10.1 percent increase over the six-month period ended June 30, 2014. Basic earnings per share for the six-month period ended June 30, 2015 were $1.40 per share ($1.39 per share fully-diluted) compared to $1.30 per share ($1.28 per share fully-diluted) for the same period in 2014. Return on average assets and return on average common shareholders’ equity for the six-month period ended June 30, 2015 were 0.75 and 7.55 percent, respectively, compared to 0.73 and 7.48 percent for the same period in 2014.

Net interest income for the three and six-month periods ended June 30, 2015 increased $11.2 million, or 13.0 percent, and $16.1 million, or 9.4 percent, respectively, compared to the same periods in 2014. For the three-month period ended June 30, 2015, average earning assets increased by $1.4 billion, or 10.0 percent, and for the six-month period ended June 30, 2015, they increased by $0.9 billion, or 5.9 percent, compared to the same periods in 2014. Net interest margin, on a tax-equivalent basis, increased to 2.59 percent and 2.53 percent for the three and six-month periods ended June 30, 2015, compared to 2.53 percent and 2.45 percent for the same periods in 2014. The Marquette acquisition added earning assets with an acquired value of $1.2 billion primarily from loan balances with an acquired value of $980.3 million at May 31, 2015. Marquette also added interest-bearing liabilities with an acquired value of $910.7 million primarily from interest-bearing deposits of $708.6 million at May 31, 2015.

The provision for loan losses remained flat at $5.0 million for the three-month period ended June 30, 2015, and decreased by $1.5 million to $8.0 million for the six-month period ended June 30, 2015, compared to the same periods in 2014. This decrease is a direct result of applying the Company’s methodology for computing the allowance for loan losses. The allowance for loan losses as a percentage of total loans decreased to 0.87 percent as of June 30, 2015. As noted above, the Company added loans with an acquired value of $980.3 million with the acquisition of Marquette. For a description of the Company’s methodology for computing the allowance for loan losses, please see the summary discussion of the Allowance for Loan Losses within the Critical Accounting Policies and Estimates subsection of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2014.

Noninterest income decreased by $14.5 million, or 10.8 percent, for the three-month period ended June 30, 2015, and decreased by $12.2 million, or 4.8 percent, for the six-month period ended June 30, 2015, compared to the same periods one year ago. These changes are discussed in greater detail below under Noninterest Income. Noninterest expense increased by $5.8 million, or 3.5 percent, for the three-month period ended June 30, 2015, and decreased by $1.8 million, or 0.5 percent, for the six-month period ended June 30, 2015, compared to the same periods in 2014. These changes are discussed in greater detail below under Noninterest Expense.

Net Interest Income

Net interest income is a significant source of the Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. As noted above, the impacts of the Marquette acquisition are included in these results. For the three-month period ended June 30, 2015, average earning assets increased by $1.4 billion, or 10.0 percent, and for the six-month period ended June 30, 2015, they increased by $0.9 billion, or 5.9 percent, compared to the same periods in 2014. Net interest margin, on a tax-equivalent basis, increased to 2.59 percent and 2.53 percent for the three and six-months periods ended June 30, 2015, compared to 2.53 percent and 2.45 percent for the same periods in 2014.

Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. As illustrated in this table, net interest spread and margin for the three months ended June 30, 2015 increased by five and six basis points, respectively, compared to the same period in 2014. Net interest spread and margin for the six months ended June 30, 2015 increased by seven and eight basis points, respectively, compared to the same period in 2014. These results are primarily due to a favorable volume variance on loans offset by a small unfavorable rate variance. The combined impact of these variances has led to an increase in interest income and an increase in interest expense, or an increase in the Company’s net interest income as compared to results for the same periods in 2014. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and rates have resulted in an increase in net interest income.

 

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Table 1

AVERAGE BALANCES/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)

The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.56 percent for the three-month period ended June 30, 2015 and 2.48 percent for the same period in 2014. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.49 percent for the six-month period ended June 30, 2015 and 2.41 percent for the same period in 2014.

 

     Three Months Ended June 30,  
     2015     2014  
     Average      Average     Average      Average  

Assets

   Balance      Yield/Rate     Balance      Yield/Rate  

Loans, net of unearned interest

   $ 8,071,991         3.55   $ 6,897,840         3.51

Securities:

          

Taxable

     4,974,668         1.55        4,836,080         1.58   

Tax-exempt

     2,407,759         2.72        2,104,368         2.88   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

     7,382,427         1.93        6,940,448         1.97   

Federal funds and resell agreements

     69,053         0.88        32,692         0.56   

Interest-bearing due from banks

     414,446         0.42        619,094         0.30   

Other earning assets

     37,063         1.70        36,785         1.80   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total earning assets

     15,974,980         2.70        14,526,859         2.63   

Allowance for loan losses

     (77,667        (75,929   

Other assets

     1,515,687           1,167,262      
  

 

 

      

 

 

    

Total assets

   $ 17,413,000         $ 15,618,192      
  

 

 

      

 

 

    

Liabilities and Shareholders’ Equity

          

Interest-bearing deposits

   $ 7,924,696         0.18   $ 7,126,614         0.17

Federal funds and repurchase agreements

     1,715,836         0.11        1,592,986         0.11   

Borrowed funds

     49,827         4.28        5,771         5.07   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     9,690,359         0.19        8,725,371         0.17   

Noninterest-bearing demand deposits

     5,504,333           5,152,980      

Other liabilities

     473,676           154,229      

Shareholders’ equity

     1,744,632           1,585,612      
  

 

 

      

 

 

    

Total liabilities and shareholders’ equity

   $ 17,413,000         $ 15,618,192      
  

 

 

      

 

 

    

Net interest spread

        2.51        2.46

Net interest margin

        2.59           2.53   

 

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     Six Months Ended June 30,  
     2015     2014  
     Average      Average     Average      Average  
Assets    Balance      Yield/Rate     Balance      Yield/Rate  

Loans, net of unearned interest

   $ 7,772,709         3.52   $ 6,788,991         3.54

Securities:

          

Taxable

     4,921,907         1.56        4,861,475         1.58   

Tax-exempt

     2,331,422         2.73        2,107,119         2.90   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

     7,253,329         1.93        6,968,594         1.98   

Federal funds and resell agreements

     51,793         0.79        29,939         0.53   

Interest-bearing due from banks

     759,238         0.34        1,154,811         0.28   

Other earning assets

     33,661         1.76        37,682         1.63   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total earning assets

     15,870,730         2.63        14,980,017         2.55   

Allowance for loan losses

     (77,124        (75,466   

Other assets

     1,330,476           1,160,124      
  

 

 

      

 

 

    

Total assets

   $ 17,124,082         $ 16,064,675      
  

 

 

      

 

 

    

Liabilities and Shareholders’ Equity

          

Interest-bearing deposits

   $ 7,764,368         0.17   $ 7,545,182         0.16

Federal funds and repurchase agreements

     1,713,386         0.11        1,630,169         0.12   

Borrowed funds

     29,193         4.05        5,738         4.74   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     9,506,947         0.17        9,181,089         0.16   

Noninterest-bearing demand deposits

     5,582,180           5,160,206      

Other liabilities

     325,066           156,608      

Shareholders’ equity

     1,709,889           1,566,772      
  

 

 

      

 

 

    

Total liabilities and shareholders’ equity

   $ 17,124,082         $ 16,064,675      
  

 

 

      

 

 

    

Net interest spread

        2.46        2.39

Net interest margin

        2.53           2.45   

Table 2 presents the dollar amount of change in net interest income and margin due to volume and rate. Table 2 also reflects the effect that interest-free funds have on net interest margin. Although the average balance of interest-free funds (total earning assets less interest-bearing liabilities) increased $483.1 million for the three-month period and $564.9 million for the six-month period ended June 30, 2015 compared to the same periods in 2014, the benefit from interest free funds was relatively flat in the three-month and six-month periods due to decreases in interest rates.

 

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Table 2

ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands)

ANALYSIS OF CHANGES IN NET INTEREST INCOME

 

     Three Months Ended
June 30, 2015 and 2014
    Six Months Ended
June 30, 2015 and 2014
 
     Volume     Rate     Total     Volume     Rate     Total  

Change in interest earned on:

            

Loans

   $ 10,385      $ 702      $ 11,087      $ 17,167      $ (748   $ 16,419   

Securities:

            

Taxable

     534        (392     142        466        (477     (11

Tax-exempt

     1,744        (935     809        2,761        (1,944     817   

Federal funds sold and resell agreements

     80        25        105        85        38        123   

Interest-bearing due from banks

     (214     182        (32     (670     367        (303

Trading

     —          (16     (16     (55     11        (44
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     12,529        (434     12,095        19,754        (2,753     17,001   

Change in interest incurred on:

            

Interest-bearing deposits

     355        75        430        185        234        419   

Federal funds purchased and repurchase agreements

     34        (18     16        47        (20     27   

Other borrowed funds

     470        (11     459        472        (20     452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     859        46        905        704        194        898   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 11,670      $ (480   $ 11,190      $ 19,050      $ (2,947   $ 16,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ANALYSIS OF NET INTEREST MARGIN

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     Change     2015     2014     Change  

Average earning assets

   $ 15,974,980      $ 14,526,859      $ 1,448,121      $ 15,870,730      $ 14,980,017      $ 890,713   

Interest-bearing liabilities

     9,690,359        8,725,371        964,988        9,506,947        9,181,089        325,858   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-free funds

   $ 6,284,621      $ 5,801,488      $ 483,133      $ 6,363,783      $ 5,798,928      $ 564,855   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free funds ratio (free funds to earning assets)

     39.34     39.94     (0.60 )%      40.10     38.71     1.39

Tax-equivalent yield on earning assets

     2.70        2.63        0.07        2.63        2.55        0.08   

Cost of interest-bearing liabilities

     0.19        0.17        0.02        0.17        0.16        0.01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest spread

     2.51        2.46        0.05        2.46        2.39        0.07   

Benefit of interest-free funds

     0.08        0.07        0.01        0.07        0.06        0.01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     2.59     2.53     0.06     2.53     2.45     0.08
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Provision and Allowance for Loan Losses

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

Based on the factors above, management of the Company expensed $5.0 million and $8.0 million related to the provision for loan losses for the three and six-month periods ended June 30, 2015, compared to $5.0 million and $9.5 million for the same periods in 2014. As illustrated in Table 3 below, the ALL decreased to 0.87 percent of total loans as of June 30, 2015, compared to 1.11 percent of total loans as of the same period in 2014. As discussed above, these results include the impact of the acquisition of Marquette.

Table 3 presents a summary of the Company’s ALL for the six months ended June 30, 2015 and 2014, and for the year ended December 31, 2014. Net charge-offs were $6.4 million for the first six months of 2015, compared to $7.4 million for the same period in 2014. See “Credit Risk Management” under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.

Table 3

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)

 

     Six Months Ended     Year Ended  
     June 30,     December 31,  
     2015     2014     2014  

Allowance-January 1

   $ 76,140      $ 74,751      $ 74,751   

Provision for loan losses

     8,000        9,500        17,000   
  

 

 

   

 

 

   

 

 

 

Charge-offs:

      

Commercial

     (3,500     (2,947     (7,307

Consumer:

      

Credit card

     (4,618     (5,348     (10,104

Other

     (532     (788     (1,323

Real estate

     (100     (181     (259
  

 

 

   

 

 

   

 

 

 

Total charge-offs

     (8,750     (9,264     (18,993
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial

     899        268        848   

Consumer: