10-Q 1 d21849d10q.htm FORM 10-Q Form 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 September 30, 2016

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 000-04887

 

 

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. (Check one):

 

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  ¨    No  x

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

As of October 27, 2016, UMB Financial Corporation had 49,562,002 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 SHAREHOLDERS’ 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

     67   

ITEM 1.

 

LEGAL PROCEEDINGS

     67   

ITEM 1A.

 

RISK FACTORS

     67   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     67   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     67   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     67   

ITEM 5.

 

OTHER INFORMATION

     68   

ITEM 6.

 

EXHIBITS

     68   

SIGNATURES

     69   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

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

 

     September 30,
2016
    December 31,
2015
 

ASSETS

    

Loans:

   $ 10,293,494      $ 9,430,761   

Allowance for loan losses

     (90,404     (81,143
  

 

 

   

 

 

 

Net loans

     10,203,090        9,349,618   
  

 

 

   

 

 

 

Loans held for sale

     11,880        589   

Investment securities:

  

Available for sale

     6,295,687        6,806,949   

Held to maturity (fair value of $1,097,988 and $691,379, respectively)

     1,009,117        667,106   

Trading securities

     58,062        29,617   

Other securities

     66,853        65,198   
  

 

 

   

 

 

 

Total investment securities

     7,429,719        7,568,870   
  

 

 

   

 

 

 

Federal funds sold and securities purchased under agreements to resell

     244,891        173,627   

Interest-bearing due from banks

     453,189        522,877   

Cash and due from banks

     354,184        458,217   

Premises and equipment, net

     287,267        281,471   

Accrued income

     93,016        90,127   

Goodwill

     228,396        228,346   

Other intangibles, net

     37,419        46,782   

Other assets

     383,095        373,721   
  

 

 

   

 

 

 

Total assets

   $ 19,726,146      $ 19,094,245   
  

 

 

   

 

 

 

LIABILITIES

  

Deposits:

  

Noninterest-bearing demand

   $ 6,008,326      $ 6,306,895   

Interest-bearing demand and savings

     8,288,670        7,529,972   

Time deposits under $250,000

     658,541        771,973   

Time deposits of $250,000 or more

     422,712        483,912   
  

 

 

   

 

 

 

Total deposits

     15,378,249        15,092,752   

Federal funds purchased and repurchase agreements

     2,021,123        1,818,062   

Short-term debt

     —          5,009   

Long-term debt

     75,418        86,070   

Accrued expenses and taxes

     163,221        161,245   

Other liabilities

     63,507        37,413   
  

 

 

   

 

 

 

Total liabilities

     17,701,518        17,200,551   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

  

Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 49,546,069 and 49,396,366 shares outstanding, respectively

     55,057        55,057   

Capital surplus

     1,028,869        1,019,889   

Retained earnings

     1,112,613        1,033,990   

Accumulated other comprehensive income (loss), net

     42,512        (3,718

Treasury stock, 5,510,661 and 5,660,364 shares, at cost, respectively

     (214,423     (211,524
  

 

 

   

 

 

 

Total shareholders’ equity

     2,024,628        1,893,694   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 19,726,146      $ 19,094,245   
  

 

 

   

 

 

 

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

September 30,

   

Nine Months Ended

September 30,

 
     2016      2015     2016      2015  

INTEREST INCOME

          

Loans

   $ 98,820       $ 84,686      $ 283,313       $ 220,314   

Securities:

          

Taxable interest

     17,012         18,498        55,221         56,469   

Tax-exempt interest

     14,797         11,320        41,377         31,842   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities income

     31,809         29,818        96,598         88,311   

Federal funds and resell agreements

     790         175        1,939         377   

Interest-bearing due from banks

     445         475        1,772         1,761   

Trading securities

     174         75        399         303   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     132,038         115,229        384,021         311,066   
  

 

 

    

 

 

   

 

 

    

 

 

 

INTEREST EXPENSE

          

Deposits

     4,626         3,863        12,817         10,433   

Federal funds and repurchase agreements

     1,894         427        4,750         1,389   

Other

     753         1,044        2,587         1,631   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     7,273         5,334        20,154         13,453   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     124,765         109,895        363,867         297,613   

Provision for loan losses

     13,000         2,500        25,000         10,500   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     111,765         107,395        338,867         287,113   
  

 

 

    

 

 

   

 

 

    

 

 

 

NONINTEREST INCOME

          

Trust and securities processing

     60,218         65,182        179,448         199,862   

Trading and investment banking

     6,114         2,969        16,382         14,659   

Service charges on deposit accounts

     21,832         21,663        65,713         64,829   

Insurance fees and commissions

     698         480        3,355         1,636   

Brokerage fees

     4,712         2,958        13,159         8,748   

Bankcard fees

     17,086         17,624        52,636         51,842   

Gain on sales of securities available for sale, net

     2,978         101        8,509         8,404   

Equity earnings (loss) on alternative investments

     1,594         (5,032     2,191         (6,999

Other

     6,716         3,153        18,352         10,874   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     121,948         109,098        359,745         353,855   
  

 

 

    

 

 

   

 

 

    

 

 

 

NONINTEREST EXPENSE

          

Salaries and employee benefits

     109,369         104,733        325,216         302,855   

Occupancy, net

     11,394         11,748        33,505         32,070   

Equipment

     16,231         17,228        49,545         46,810   

Supplies and services

     4,624         5,371        14,292         14,299   

Marketing and business development

     5,332         5,766        16,086         16,914   

Processing fees

     11,264         12,795        34,190         38,232   

Legal and consulting

     4,450         8,648        14,186         18,943   

Bankcard

     5,015         5,266        16,199         14,987   

Amortization of other intangible assets

     2,992         3,483        9,363         8,807   

Regulatory fees

     3,370         3,176        10,491         8,805   

Other

     5,742         7,065        22,497         18,934   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expense

     179,783         185,279        545,570         521,656   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     53,930         31,214        153,042         119,312   

Income tax expense

     11,984         8,763        37,175         32,882   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME

   $ 41,946       $ 22,451      $ 115,867       $ 86,430   
  

 

 

    

 

 

   

 

 

    

 

 

 

PER SHARE DATA

          

Net income - basic

   $ 0.86       $ 0.46      $ 2.37       $ 1.85   

Net income - diluted

     0.85         0.46        2.36         1.84   

Dividends

     0.245         0.235        0.735         0.705   

Weighted average shares outstanding - basic

     48,849,251         48,577,282        48,792,419         46,619,428   

Weighted average shares outstanding - diluted

     49,284,280         49,036,332        49,162,200         47,080,009   

See Notes to Consolidated Financial Statements.

 

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Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, dollars in thousands)

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2016     2015     2016     2015  

Net Income

   $ 41,946      $ 22,451      $ 115,867      $ 86,430   

Other comprehensive income, net of tax:

        

Unrealized (losses) gains on securities:

        

Change in unrealized holding (losses) gains, net

     (16,946     46,166        90,639        33,289   

Less: Reclassification adjustment for gains included in net income

     (2,978     (101     (8,509     (8,404
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (19,924     46,065        82,130        24,885   

Change in unrealized losses on derivative hedges

     (643     —          (7,677     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

     7,784        (17,394     (28,223     (9,361
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (12,783     28,671        46,230        15,524   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 29,163      $ 51,122      $ 162,097      $ 101,954   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
Income (Loss)
    Treasury
Stock
    Total  

Balance - January 1, 2015

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

Total comprehensive income

        86,430        15,524          101,954   

Cash dividends ($0.705 per share)

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

Purchase of treasury stock

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

Issuance of equity awards

    —          (4,180     —          —          4,639        459   

Recognition of equity-based compensation

    —          9,030        —          —          —          9,030   

Net tax benefit related to equity compensation plans

    —          732        —          —          —          732   

Sale of treasury stock

    —          475        —          —          315        790   

Exercise of stock options

      2,089        —          —          2,615        4,704   

Common stock issuance for acquisition

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - January 1, 2016

  $ 55,057      $ 1,019,889      $ 1,033,990      $ (3,718   $ (211,524   $ 1,893,694   

Total comprehensive income

        115,867        46,230        —          162,097   

Cash dividends ($0.735 per share)

    —          —          (36,388     —          —          (36,388

Purchase of treasury stock

    —          —          —          —          (14,189     (14,189

Issuance of equity awards

    —          (3,373     —          —          3,802        429   

Recognition of equity-based compensation

    —          8,253        —          —          —          8,253   

Sale of treasury stock

    —          362        —          —          474        836   

Exercise of stock options

    —          2,400        —          —          7,014        9,414   

Cumulative effect adjustment (1)

    —          1,338        (856     —          —          482   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2016

  $ 55,057      $ 1,028,869      $ 1,112,613      $ 42,512      $ (214,423   $ 2,024,628   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Related to the adoption of Accounting Standards Update 2016-09. See Note 3, New Accounting Pronouncements, for further detail.

See Notes to Consolidated Financial Statements.

 

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Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

     Nine Months Ended  
     September 30,  
     2016     2015  

Operating Activities

    

Net Income

   $ 115,867      $ 86,430   

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

    

Provision for loan losses

     25,000        10,500   

Net accretion of premiums and discounts from acquisition

     (1,711     (1,255

Depreciation and amortization

     40,949        38,498   

Deferred income tax expense (benefit)

     911        (6,276

Net (increase) decrease in trading securities

     (30,635     10,505   

Gains on sales of securities available for sale, net

     (8,509     (8,404

Gains on sales of assets

     (136     (99

Amortization of securities premiums, net of discount accretion

     43,467        40,971   

Originations of loans held for sale

     (71,726     (78,931

Net gains on sales of loans held for sale

     (1,281     (1,131

Proceeds from sales of loans held for sale

     61,716        79,673   

Equity-based compensation

     8,682        9,489   

Net tax benefit related to equity compensation plans

     (261     732   

Changes in:

    

Accrued income

     (2,889     (4,811

Accrued expenses and taxes

     4,789        146   

Other assets and liabilities, net

     (14,466     (2,582
  

 

 

   

 

 

 

Net cash provided by operating activities

     169,767        173,455   
  

 

 

   

 

 

 

Investing Activities

    

Proceeds from maturities of securities held to maturity

     29,757        31,410   

Proceeds from sales of securities available for sale

     951,263        782,789   

Proceeds from maturities of securities available for sale

     1,300,372        925,017   

Purchases of securities held to maturity

     (373,520     (341,773

Purchases of securities available for sale

     (1,689,198     (1,293,123

Net increase in loans

     (876,784     (604,895

Net (increase) decrease in fed funds sold and resell agreements

     (71,264     29,675   

Net increase in interest bearing balances due from other financial institutions

     65,203        40,586   

Purchases of premises and equipment

     (38,950     (42,100

Net cash activity from acquisitions

     —          104,611   

Proceeds from sales of premises and equipment

     2,164        147   

Increase in COLI/BOLI cash surrender value

     (7,095     (204,647
  

 

 

   

 

 

 

Net cash used in investing activities

     (708,052     (572,303
  

 

 

   

 

 

 

Financing Activities

    

Net increase in demand and savings deposits

     460,129        854,302   

Net decrease in time deposits

     (173,783     (353,137

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

     203,061        (682,532

Net decrease in short-term debt

     (5,000     (112,133

Repayment of long-term debt

     (11,285     (10,597

Payment of contingent consideration on acquisitions

     (3,031     (18,702

Cash dividends paid

     (36,385     (34,104

Proceeds from exercise of stock options and sales of treasury shares

     10,250        5,494   

Purchases of treasury stock

     (14,189     (6,173
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     429,767        (357,582
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (108,518     (756,430

Cash and cash equivalents at beginning of period

     819,112        1,787,230   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 710,594      $ 1,030,800   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Income taxes paid

   $ 30,995      $ 36,404   

Total interest paid

     20,555        12,769   

Transactions related to bank acquisitions:

    

Assets acquired

     —          1,321,453   

Liabilities assumed

     —          1,159,920   

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 NINE MONTHS ENDED SEPTEMBER 30, 2016 (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 relating to items that are 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 “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” within this Quarterly Report on Form 10-Q (the Form 10-Q) and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission (SEC) on February 25, 2016 (the Form 10-K).

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 Missouri, Kansas, Colorado, Illinois, Oklahoma, Texas, Arizona, Nebraska, Pennsylvania, South Dakota, Indiana, Utah, Minnesota, California, and Wisconsin. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation is provided in the Notes to Consolidated Financial Statements in the Form 10-K.

Cash and cash equivalents

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

This table provides a summary of cash and cash equivalents as presented on the Consolidated Statements of Cash Flows as of September 30, 2016 and September 30, 2015 (in thousands):

 

     September 30,  
     2016      2015  

Due from the Federal Reserve Bank

   $ 356,410       $ 691,208   

Cash and due from banks

     354,184         339,592   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 710,594       $ 1,030,800   
  

 

 

    

 

 

 

Also included in the Interest-bearing due from banks, but not considered cash and cash equivalents, are interest-bearing accounts held at other financial institutions, which totaled $96.8 million and $155.9 million at September 30, 2016 and September 30, 2015, respectively.

Per Share Data

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted quarter-to-date net income per share includes the dilutive effect of 435,029 and 459,050 shares issuable upon the exercise of options granted by the Company and outstanding at September 30, 2016 and 2015, respectively. Diluted year-to-date net income per share includes the dilutive effect of 369,781 and 460,581 shares issuable upon the exercise of stock options granted by the Company and outstanding at September 30, 2016 and 2015, respectively.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Options issued under employee benefits plans to purchase 394,863 shares of common stock were outstanding at September 30, 2016, but were not included in the computation of quarter-to-date diluted EPS because the options were anti-dilutive. Options issued under employee benefits plans to purchase 628,698 shares of common stock were outstanding at September 30, 2016, but were not included in the computation of year-to-date diluted EPS because the options were anti-dilutive. Options issued under employee benefits plans to purchase 461,905 shares of common stock were outstanding at September 30, 2015, but were not included in the computation of quarter-to-date and year-to-date diluted EPS because the options were anti-dilutive.

3. New Accounting Pronouncements

Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” The issuance is part of a joint effort by the FASB and the International Accounting Standards Board (IASB) to enhance financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (IFRS) and, thereby, improving the consistency of requirements, comparability of practices and usefulness of disclosures. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In November 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 to annual reporting periods that begin after December 15, 2017. In March 2016, the FASB issued ASU No. 2016-08, which intends to improve the operability and understandability of the implementation guidance on principal versus agent considerations within ASU No. 2014-09. In April 2016, the FASB issued ASU No. 2016-10, which clarifies guidance related to identifying performance obligations and licensing implementation within ASU No. 2014-09. In May 2016, the FASB issued ASU Nos. 2016-11 and 2016-12, which further clarify guidance and provide practical expedients related to the adoption of ASU No. 2014-09. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that these standards will have on its Consolidated Financial Statements and related disclosures. The Company has not yet selected a transition method.

Equity-Based 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 were effective for interim and annual periods beginning after December 15, 2015. The adoption of this accounting pronouncement had no impact on the Company’s Consolidated Financial Statements.

Going Concern In November 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 impact the Company’s Consolidated Financial Statements.

Derivatives and Hedging In November 2014, the FASB issued ASU No. 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity.” The amendment is intended to address how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The amendments in this update were effective for interim and annual periods beginning after December 15, 2015. The adoption of this accounting pronouncement had no 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 were effective for interim and annual periods beginning after December 15, 2015. The standard permits the use of either the retrospective or cumulative effect transition method. The adoption of this accounting pronouncement had no 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 NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Financial Instruments In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendment is intended to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update are effective for interim and annual periods beginning after December 15, 2017. The standard requires the use of the cumulative effect transition method as of the beginning of the year of adoption. Except for certain provisions, early adoption is not permitted. The Company is currently evaluating the impact this will have on its Consolidated Financial Statements.

Leases In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The amendment changes the accounting treatment of leases, in that lessees will recognize most leases on-balance sheet. This will increase reported assets and liabilities, as lessees will be required to recognize a right-of-use asset along with a lease liability, measured on a discounted basis. Lessees are allowed to account for short-term leases (those with a term of twelve months or less) off-balance sheet. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard requires the use of the modified retrospective transition method. Early adoption is permitted. The Company is currently evaluating the impact this will have on its Consolidated Financial Statements.

Extinguishments of Liabilities In March 2016, the FASB issued ASU No. 2016-04, “Recognition of Breakage for Certain Prepaid Stored-Value Products.” The amendment is intended to reduce the diversity in practice related to the recognition of breakage. Breakage refers to the portion of a prepaid stored-value product, such as a gift card, that goes unused wholly or partially for an indefinite period of time. This amendment requires that breakage be accounted for consistent with the breakage guidance within ASU No. 2014-09, “Revenue from Contracts with Customers.” The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The standard permits the use of either the modified retrospective or full retrospective transition method. Early adoption is permitted. The Company is currently evaluating the effect that ASU No. 2016-04 will have on its Consolidated Financial Statements. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The Company will adopt ASU No. 2016-04 in conjunction with its adoption of ASU No. 2014-09.

Derivatives and Hedging In March 2016, the FASB issued ASU No. 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendment is intended to clarify that the novation of a derivative contract that has been designated to be in a hedging relationship under Accounting Standards Codification (ASC) Topic 815 does not, in and of itself, represent a termination event for the derivative and does not require dedesignation of the hedging relationship. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendment permits the use of either a prospective or modified retrospective transition method. Early adoption is permitted. The adoption of this accounting pronouncement will have no impact on the Company’s Consolidated Financial Statements.

Equity-Based Compensation In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The amendment is part of the FASB’s simplification initiative and is intended to simplify the accounting around share-based payment award transactions. The amendments include changing the recording of excess tax benefits from being recognized as a part of surplus capital to being charged directly to the income statement, changing the classification of excess tax benefits within the statement of cash flows, and allowing companies to account for forfeitures on an actual basis, as well as tax withholding changes. The amendment requires different transition methods for various components of the standard. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted.

In September 2016, the Company early adopted ASU No. 2016-09 with an effective date of January 1, 2016. As part of the adoption of this standard, the Company made an accounting policy election to account for forfeitures on an actual basis and discontinue the use of an estimated forfeiture approach. Additionally, the Company selected the retrospective transition method for the reclassification of the “Net tax benefit related to equity compensation plans” from the financing section to the operating section of the Company’s Consolidated Statement of Cash Flows. The

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

impact to the Company’s Consolidated Statements of Income for adopting all provisions of the standard was an increase to net income of $158 thousand for the three-month period ended March 31, 2016 and an increase to net income of $220 thousand for the three-month period ended June 30, 2016. Upon adoption, the Company recorded a cumulative effect adjustment of $482 thousand as an increase to the opening balance of total equity. Prior period financial statements as of and for the three-month and year-to-date periods ended March 31, 2016 and June 30, 2016 will be recast when presented in future filings.

Credit Losses In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This update replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This amendment broadens the information that an entity must consider in developing its expected credit loss estimates. Additionally, the update amends the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This update requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption in fiscal years beginning after December 15, 2018 is permitted. The amendment requires the use of the modified retrospective approach for adoption. The Company is currently evaluating the impact this will have on its Consolidated Financial Statements.

Statement of Cash Flows In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Receipts and Cash Payments.” This amendment adds to and clarifies existing guidance regarding the classification of certain cash receipts and payments in the statement of cash flows with the intent of reducing diversity in practice with respect to eight types of cash flows. The amendments in this update require full retrospective adoption and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this will have on its Consolidated Statement of Cash Flows.

4. Loans and Allowance for Loan Losses

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio. Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions. Authority levels are established for the extension of credit to ensure consistency throughout the Company. It is necessary that policies, processes and practices implemented to control the risks of individual credit transactions and portfolio segments are sound and adhered to. The Company maintains an independent loan review department that reviews and validates the risk assessment on a continual basis. Management regularly evaluates the results of the loan reviews. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

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

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

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

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

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

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

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

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

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

At the Acquisition Date, gross loans purchased from the Marquette acquisition had a fair value of $980.4 million split between Non-PCI loans totaling $972.6 million and PCI loans totaling $7.8 million 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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

expected over the life of the loan are also a component of the initial fair value. In determining the Acquisition Date fair value of PCI loans, and in subsequent accounting, the Company generally aggregated purchased commercial, real estate, and consumer loans into pools of loans with common risk characteristics.

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

Loans accounted for under ASC Topic 310-30

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

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

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

The PCI loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt Securities Purchased with Deteriorated Credit Quality. At September 30, 2016, the net recorded carrying amount of loans accounted for under ASC 310-30 was $1.0 million and the contractual amount due was $1.2 million.

Below is the composition of the net book value for the PCI loans accounted for under ASC 310-30 at September 30, 2016 (in thousands):

 

     September 30, 2016  

PCI Loans:

  

Contractual cash flows

   $ 1,224   

Non-accretable difference

     (152

Accretable yield

     (37
  

 

 

 

Loans accounted for under ASC 310-30

   $ 1,035   
  

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Loan Aging Analysis

This table provides a summary of loan classes and an aging of past due loans at September 30, 2016 and December 31, 2015 (in thousands):

 

     September 30, 2016  
     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

   $ 8,665       $ 24       $ 51,880       $ 60,569       $ —         $ 4,378,010       $ 4,438,579   

Asset-based

     —           —           —           —           —           236,566         236,566   

Factoring

     —           —           —           —           —           107,762         107,762   

Commercial – credit card

     201         306         19         526         —           164,908         165,434   

Real estate:

                    

Real estate – construction

     1,723         —           225         1,948         —           680,757         682,705   

Real estate – commercial

     1,384         —           19,132         20,516         —           2,990,053         3,010,569   

Real estate – residential

     1,006         —           869         1,875         —           509,257         511,132   

Real estate – HELOC

     643         —           4,336         4,979         —           716,868         721,847   

Consumer:

                    

Consumer – credit card

     1,967         2,005         434         4,406         —           258,345         262,751   

Consumer – other

     11,602         343         2,725         14,670         1,035         108,915         124,620   

Leases

     —           —           —           —           —           31,529         31,529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 27,191       $ 2,678       $ 79,620       $ 109,489       $ 1,035       $ 10,182,970       $ 10,293,494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2016  
     30-89
Days
Past
Due
     Greater
than 90
Days Past
Due
     Current      Total Loans  

PCI Loans

           

Commercial:

           

Commercial

   $ —         $ —         $ —         $ —     

Asset-based

     —           —           —           —     

Factoring

     —           —           —           —     

Commercial – credit card

     —           —           —           —     

Real estate:

           

Real estate – construction

     —           —           —           —     

Real estate – commercial

     —           —           —           —     

Real estate – residential

     —           —           —           —     

Real estate – HELOC

     —           —           —           —     

Consumer:

           

Consumer – credit card

     —           —           —           —     

Consumer – other

     42         3         990         1,035   

Leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

   $ 42       $ 3       $ 990       $ 1,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

     December 31, 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

   $ 5,821       $ 2,823       $ 43,841       $ 52,485       $ —         $ 4,153,251       $ 4,205,736   

Asset-based

     —           —           —           —           —           219,244         219,244   

Factoring

     —           —           —           —           —           90,686         90,686   

Commercial – credit card

     614         24         13         651         —           124,710         125,361   

Real estate:

                    

Real estate – construction

     1,828         548         331         2,707         —           413,861         416,568   

Real estate – commercial

     2,125         1,630         9,578         13,333         1,055         2,648,384         2,662,772   

Real estate – residential

     612         35         800         1,447         —           490,780         492,227   

Real estate – HELOC

     129         —           3,524         3,653         —           726,310         729,963   

Consumer:

                    

Consumer – credit card

     2,256         2,089         468         4,813         —           286,757         291,570   

Consumer – other

     5,917         175         2,597         8,689         2,001         144,087         154,777   

Leases

     —           —           —           —           —           41,857         41,857   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 19,302       $ 7,324       $ 61,152       $ 87,778       $ 3,056       $ 9,339,927       $ 9,430,761   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2015  
     30-89
Days
Past
Due
     Greater
than 90
Days Past
Due
     Current      Total Loans  

PCI Loans

           

Commercial:

           

Commercial

   $ —         $ —         $ —         $ —     

Asset-based

     —           —           —           —     

Factoring

     —           —           —           —     

Commercial – credit card

     —           —           —           —     

Real estate:

           

Real estate – construction

     —           —           —           —     

Real estate – commercial

     —           1,055         —           1,055   

Real estate – residential

     —           —           —           —     

Real estate – HELOC

     —           —           —           —     

Consumer:

           

Consumer – credit card

     —           —           —           —     

Consumer – other

     58         105         1,838         2,001   

Leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PCI loans

   $ 58       $ 1,160       $ 1,838       $ 3,056   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

The Company sold residential real estate loans with proceeds of $61.7 million and $79.7 million in the secondary market without recourse during the nine months ended September 30, 2016 and September 30, 2015, respectively.

The Company has ceased the recognition of interest on loans with a carrying value of $79.6 million and $61.2 million at September 30, 2016 and December 31, 2015, respectively. Restructured loans totaled $54.4 million and $36.6 million at September 30, 2016 and December 31, 2015, respectively. Loans 90 days past due and still accruing interest amounted to $2.7 million and $7.3 million at September 30, 2016 and December 31, 2015, respectively. There was an insignificant amount of interest recognized on impaired loans during 2016 and 2015.

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:

 

    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 borrower’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 NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

This table provides an analysis of the credit risk profile of each loan class excluded from ASC 310-30 at September 30, 2016 and December 31, 2015 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating

Originated and Non-PCI Loans

 

     Commercial      Asset-based      Factoring  
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
 

Non-watch list

   $ 4,045,383       $ 3,880,109       $ 211,605       $ 198,903       $ 106,642       $ 90,449   

Watch

     130,364         105,539         —           —           —           —     

Special Mention

     41,303         29,397         20,809         18,163         461         237   

Substandard

     221,529         190,691         4,152         2,178         659         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,438,579       $ 4,205,736       $ 236,566       $ 219,244       $ 107,762       $ 90,686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Real estate – construction      Real estate – commercial  
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
 

Non-watch list

   $ 677,305       $ 415,258       $ 2,892,722       $ 2,561,401   

Watch

     284         370         49,945         51,774   

Special Mention

     —           —           7,144         22,544   

Substandard

     5,116         940         60,758         25,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 682,705       $ 416,568       $ 3,010,569       $ 2,661,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

Originated and Non-PCI Loans

 

     Commercial – credit card      Real estate – residential      Real estate – HELOC  
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
 

Performing

   $ 165,415       $ 125,348       $ 510,263       $ 491,427       $ 717,511       $ 726,439   

Non-performing

     19         13         869         800         4,336         3,524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 165,434       $ 125,361       $ 511,132       $ 492,227       $ 721,847       $ 729,963   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Consumer – credit card      Consumer – other      Leases  
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
 

Performing

   $ 262,317       $ 291,102       $ 120,860       $ 152,180       $ 31,529       $ 41,857   

Non-performing

     434         468         2,725         2,597         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 262,751       $ 291,570       $ 123,585       $ 154,777       $ 31,529       $ 41,857   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

This table provides an analysis of the credit risk profile of each loan class accounted for under ASC 310-30 at September 30, 2016 and December 31, 2015 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating

PCI Loans

 

     Real estate – commercial  
     September 30,
2016
     December 31,
2015
 

Non-watch list

   $ —         $ —     

Watch

     —           —     

Special Mention

     —           —     

Substandard

     —           1,055   
  

 

 

    

 

 

 

Total

   $ —         $ 1,055   
  

 

 

    

 

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

PCI Loans

 

     Consumer – other  
     September 30,
2016
     December 31,
2015
 

Performing

   $ 1,035       $ 2,001   

Non-performing

     —           —     
  

 

 

    

 

 

 

Total

   $ 1,035       $ 2,001   
  

 

 

    

 

 

 

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 at the time, 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

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

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.

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.

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

This table provides a roll forward of the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2016 (in thousands):

 

     Three Months Ended September 30, 2016  
     Commercial     Real estate     Consumer     Leases     Total  

Allowance for loan losses:

          

Beginning balance

   $ 64,561      $ 10,683      $ 9,319      $ 103      $ 84,666   

Charge-offs

     (5,667     (142     (2,335     —          (8,144

Recoveries

     129        209        544        —          882   

Provision

     4,844        6,280        1,888        (12     13,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 63,867      $ 17,030      $ 9,416      $ 91      $ 90,404   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2016  
     Commercial     Real estate     Consumer     Leases     Total  

Allowance for loan losses:

          

Beginning balance

   $ 63,847      $ 8,220      $ 8,949      $ 127      $ 81,143   

Charge-offs

     (11,542     (2,938     (6,951     —          (21,431

Recoveries

     3,477        540        1,675        —          5,692   

Provision

     8,085        11,208        5,743        (36     25,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 63,867      $ 17,030      $ 9,416      $ 91      $ 90,404   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,759      $ 4,726      $ —        $ —        $ 6,485   

Ending balance: collectively evaluated for impairment

     62,108        12,304        9,416        91        83,919   

Loans:

          

Ending balance: loans

   $ 4,948,341      $ 4,926,253      $ 387,371      $ 31,529      $ 10,293,494   

Ending balance: individually evaluated for impairment

     80,769        16,122        2,158        —          99,049   

Ending balance: collectively evaluated for impairment

     4,867,572        4,910,131        384,178        31,529        10,193,410   

Ending balance: PCI Loans

     —          —          1,035        —          1,035   

 

20


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

This table provides a roll forward of the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 (in thousands):

 

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

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

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

Recoveries

     488        133        643        —          1,264   

Provision

     540        448        1,525        (13     2,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

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

Recoveries

     1,387        225        1,983        —          3,595   

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

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

Ending balance: collectively evaluated for impairment

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

Loans:

          

Ending balance: loans

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

Ending balance: individually evaluated for impairment

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

Ending balance: collectively evaluated for impairment

     4,500,836        4,041,244        391,798        40,386        8,974,264   

Ending balance: PCI Loans

     2,497        2,269        2,324        —          7,090   

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Impaired Loans

This table provides an analysis of impaired loans by class at September 30, 2016 and December 31, 2015 (in thousands):

 

     As of September 30, 2016  
     Unpaid
Principal
Balance
     Recorded
Investment
with No
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial:

                 

Commercial

   $ 95,272       $ 59,619       $ 21,150       $ 80,769       $ 1,759       $ 68,633   

Asset-based

     —           —           —           —           —           —     

Factoring

     —           —           —           —           —           —     

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     961         306         114         420         24         433   

Real estate – commercial

     17,490         10,425         5,028         15,453         4,702         7,997   

Real estate – residential

     249         249         —           249         —           592   

Real estate – HELOC

     —           —           —           —           —           99   

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     2,158         2,158         —           2,158         —           2,476   

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 116,130       $ 72,757       $ 26,292       $ 99,049       $ 6,485       $ 80,230   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2015  
     Unpaid
Principal
Balance
     Recorded
Investment
with No
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial:

                 

Commercial

   $ 72,739       $ 40,648       $ 27,356       $ 68,004       $ 5,668       $ 41,394   

Asset-based

     —           —           —           —           —           —     

Factoring

     —           —           —           —           —           —     

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     782         331         118         449         42         802   

Real estate – commercial

     7,117         4,891         1,275         6,166         154         7,768   

Real estate – residential

     1,054         939         —           939         —           1,433   

Real estate – HELOC

     214         193         —           193         —           162   

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     2,574         2,574         —           2,574         —           1,795   

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 84,480       $ 49,576       $ 28,749       $ 78,325       $ 5,864       $ 53,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

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 loss as described above in the Allowance for Loan Losses section of this note.

Purchased loans restructured after acquisition are not considered or reported as troubled debt restructurings if the loans evidenced credit deterioration as of the Acquisition Date and are accounted for in pools. For the three and nine months ended September 30, 2016, no purchased loans were modified as troubled debt restructurings after the Acquisition Date.

The Company had $148 thousand and $217 thousand in commitments to lend to borrowers with loan modifications classified as TDRs as of September 30, 2016 and September 30, 2015, respectively. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term. During the nine month period ended September 30, 2015, the Company had one commercial real estate loan classified as a TDR with a payment default totaling $178 thousand. A specific valuation allowance for the full amount of this loan had previously been established within the Company’s allowance for loan losses, and this loan was charged off against the allowance for loan losses during that period.

This table provides a summary of loans restructured by class during the three and nine months ended September 30, 2016 (in thousands):

 

     Three Months Ended September 30, 2016      Nine Months Ended September 30, 2016  
     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       $ 12,721       $ 12,721         3       $ 24,778       $ 24,778   

Asset-based

     —           —           —           —           —           —     

Factoring

     —           —           —           —           —           —     

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     —           —           —           —           —           —     

Real estate – commercial

     —           —           —           —           —           —     

Real estate – residential

     —           —           —           —           —           —     

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     —           —           —           —           —           —     

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 12,721       $ 12,721         3       $ 24,778       $ 24,778   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

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

 

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

Troubled Debt Restructurings

                 

Commercial:

                 

Commercial

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

Asset-based

     —           —           —           —           —           —     

Factoring

     —           —           —           —           —           —     

Commercial – credit card

     —           —           —           —           —           —     

Real estate:

                 

Real estate – construction

     —           —           —           —           —           —     

Real estate – commercial

     —           —           —           1         261         261   

Real estate – residential

     1         261         261         1         121         121   

Real estate – HELOC

     —           —           —           —           —           —     

Consumer:

                 

Consumer – credit card

     —           —           —           —           —           —     

Consumer – other

     —           —           —           —           —           —     

Leases

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

5. Securities

Securities Available for Sale

This table provides detailed information about securities available for sale at September 30, 2016 and December 31, 2015 (in thousands):

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

September 30, 2016

           

U.S. Treasury

   $ 249,461       $ 291       $ (226    $ 249,526   

U.S. Agencies

     289,244         247         (51      289,440   

Mortgage-backed

     3,322,340         45,857         (5,901      3,362,296   

State and political subdivisions

     2,291,316         37,450         (1,546      2,327,220   

Corporates

     67,242         30         (67      67,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,219,603       $ 83,875       $ (7,791    $ 6,295,687   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

December 31, 2015

           

U.S. Treasury

   $ 350,354       $ 1       $ (576    $ 349,779   

U.S. Agencies

     667,414         7         (1,032      666,389   

Mortgage-backed

     3,598,115         12,420         (38,089      3,572,446   

State and political subdivisions

     2,116,543         23,965         (2,095      2,138,413   

Corporates

     80,585         —           (663      79,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,813,011       $ 36,393       $ (42,455    $ 6,806,949   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

The following table presents contractual maturity information for securities available for sale at September 30, 2016 (in thousands):

 

     Amortized      Fair  
     Cost      Value  

Due in 1 year or less

   $ 743,207       $ 743,589   

Due after 1 year through 5 years

     1,065,114         1,078,518   

Due after 5 years through 10 years

     844,091         864,353   

Due after 10 years

     244,851         246,931   
  

 

 

    

 

 

 

Total

     2,897,263         2,933,391   

Mortgage-backed securities

     3,322,340         3,362,296   
  

 

 

    

 

 

 

Total securities available for sale

   $ 6,219,603       $ 6,295,687   
  

 

 

    

 

 

 

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

For the nine months ended September 30, 2016, proceeds from the sales of securities available for sale were $951.3 million compared to $782.8 million for the same period in 2015. Securities transactions resulted in gross realized gains of $8.5 million and $8.5 million for the nine months ended September 30, 2016 and 2015, respectively. The gross realized losses for the nine months ended September 30, 2016 and 2015 were $1 thousand and $48 thousand, respectively.

Securities available for sale with a market value of $5.1 billion at September 30, 2016 and $5.9 billion at December 31, 2015 were pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements. Of this amount, securities with a market value of $1.4 billion at September 30, 2016 and $1.6 billion at December 31, 2015 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.

The following table shows the Company’s available for sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2016 and December 31, 2015 (in thousands):

 

September 30, 2016

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

U.S. Treasury

   $ 75,083       $ (226   $ —         $ —        $ 75,083       $ (226

U.S. Agencies

     62,425         (33     12,994         (18     75,419         (51

Mortgage-backed

     424,586         (1,395     291,636         (4,506     716,222         (5,901

State and political subdivisions

     427,223         (1,513     6,159         (33     433,382         (1,546

Corporates

     20,979         (21     30,539         (46     51,518         (67
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,010,296       $ (3,188   $ 341,328       $ (4,603   $ 1,351,624       $ (7,791
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

25


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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

December 31, 2015

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

U.S. Treasury

   $ 344,556       $ (576   $ —         $ —        $ 344,556       $ (576

U.S. Agencies

     615,993         (1,032     —           —          615,993         (1,032

Mortgage-backed

     2,056,316         (21,013     426,959         (17,076     2,483,275         (38,089

State and political subdivisions

     479,197         (1,316     60,324         (779     539,521         (2,095

Corporates

     29,126         (183     50,796         (480     79,922         (663
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,525,188       $ (24,120   $ 538,079       $ (18,335   $ 4,063,267       $ (42,455
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses in the Company’s investments in U.S. treasury obligations, U.S. government agencies, Government Sponsored Entity (GSE) mortgage-backed securities, municipal securities, and corporates were caused by changes in interest rates. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at September 30, 2016.

Securities Held to Maturity

The table below provides detailed information for securities held to maturity at September 30, 2016 and December 31, 2015 (in thousands):

 

            Net         
     Amortized      Unrealized      Fair  
     Cost      Gains      Value  

September 30, 2016

        

State and political subdivisions

   $ 1,009,117       $ 88,871       $ 1,097,988   
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

State and political subdivisions

   $ 667,106       $ 24,273       $ 691,379   
  

 

 

    

 

 

    

 

 

 

The following table presents contractual maturity information for securities held to maturity at September 30, 2016 (in thousands):

 

     Amortized      Fair  
     Cost      Value  

Due in 1 year or less

   $ 17,219       $ 18,735   

Due after 1 year through 5 years

     83,572         90,932   

Due after 5 years through 10 years

     565,141         614,912   

Due after 10 years

     343,185         373,409   
  

 

 

    

 

 

 

Total securities held to maturity

   $ 1,009,117       $ 1,097,988   
  

 

 

    

 

 

 

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 nine months ended September 30, 2016 or 2015.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Trading Securities

The net unrealized gains on trading securities at September 30, 2016 and September 30, 2015 were $14 thousand and $8 thousand, respectively, and were included in trading and investment banking income on the Consolidated Statements of Income.

Other Securities

The table below provides detailed information for Federal Reserve Bank (FRB) stock and Federal Home Loan Bank (FHLB) stock and other securities at September 30, 2016 and December 31, 2015 (in thousands):

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

September 30, 2016

           

FRB and FHLB stock

   $ 33,397       $ —         $ —         $ 33,397   

Other securities – marketable

     4         9,578         —           9,582   

Other securities – non-marketable

     23,185         700         (11      23,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other securities

   $ 56,586       $ 10,278       $ (11    $ 66,853   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

FRB and FHLB stock

   $ 33,215       $ —         $ —         $ 33,215   

Other securities – marketable

     5         7,159         —           7,164   

Other securities – non-marketable

     23,855         964         —           24,819   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other securities

   $ 57,075       $ 8,123       $ —         $ 65,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost. Other marketable and non-marketable securities include Prairie Capital Management (PCM) alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. The fair value of other marketable securities includes alternative investment securities of $9.6 million at September 30, 2016 and $7.2 million at December 31, 2015. The fair value of other non-marketable securities includes alternative investment securities of $1.8 million at September 30, 2016 and $2.0 million at December 31, 2015. Unrealized gains or losses on alternative investments are recognized in the Equity earnings (loss) on alternative investments of the Company’s Consolidated Statements of Income.

6. Goodwill and Other Intangibles

Changes in the carrying amount of goodwill for the periods ended September 30, 2016 and December 31, 2015 by reportable segment are as follows (in thousands):

 

     Bank      Institutional
Investment
Management
     Asset
Servicing
     Total  

Balances as of January 1, 2016

   $ 161,341       $ 47,529       $ 19,476       $ 228,346   

Acquisition of Marquette

     50         —           —           50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of September 30, 2016

   $ 161,391       $ 47,529       $ 19,476       $ 228,396   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of January 1, 2015

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

Acquisition of Marquette

     18,588         —           —           18,588   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of December 31, 2015

   $ 161,341       $ 47,529       $ 19,476       $ 228,346   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

The following table lists the finite-lived intangible assets that continue to be subject to amortization as of September 30, 2016 and December 31, 2015 (in thousands):

 

     As of September 30, 2016  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Core deposit intangible assets

   $ 47,527       $ 38,218       $ 9,309   

Customer relationships

     107,460         79,902         27,558   

Other intangible assets

     4,198         3,646         552   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 159,185       $ 121,766       $ 37,419   
  

 

 

    

 

 

    

 

 

 
     As of December 31, 2015  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Core deposit intangible assets

   $ 36,497       $ 33,613       $ 2,884   

Core deposit intangible-Marquette acquisition

     11,030         1,838         9,192   

Customer relationships

     104,560         73,496         31,064   

Customer relationship-Marquette acquisition

     2,900         338         2,562   

Other intangible assets

     3,247         2,841         406   

Other intangible assets-Marquette acquisition

     951         277         674   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 159,185       $ 112,403       $ 46,782   
  

 

 

    

 

 

    

 

 

 

The following table has the aggregate amortization expense recognized in each period (in thousands):

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2016      2015      2016      2015  

Aggregate amortization expense

   $ 2,992       $ 3,483       $ 9,363       $ 8,807   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table lists estimated amortization expense of intangible assets in future periods (in thousands):

 

For the three months ending December 31, 2016

   $ 2,928   

For the year ending December 31, 2017

     10,180   

For the year ending December 31, 2018

     7,202   

For the year ending December 31, 2019

     5,822   

For the year ending December 31, 2020

     4,487   

For the year ending December 31, 2021

     3,101   

 

28


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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

7. Securities Sold Under Agreements to Repurchase

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

The table below presents the remaining contractual maturities of repurchase agreements outstanding at September 30, 2016, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings (in thousands):

 

    

As of September 30, 2016

Remaining Contractual Maturities of the Agreements

 
     Overnight & Continuous      Over 90 Days      Total  

Repurchase agreements, secured by:

        

U.S. Treasury

   $ 176,297       $ —         $ 176,297   

U.S. Agencies

     1,247,635         1,600         1,249,235   
  

 

 

    

 

 

    

 

 

 

Total repurchase agreements

   $ 1,423,932       $ 1,600       $ 1,425,532   
  

 

 

    

 

 

    

 

 

 

8. Business Segment Reporting

The Company has strategically aligned its operations into the following three reportable segments (collectively, the Business Segments): Bank, Institutional Investment Management, and Asset Servicing. Senior executive officers regularly evaluate business segment financial results produced by the Company’s internal reporting system in deciding how to allocate resources and assess performance for individual Business Segments. Previously, the Company had the following four Business Segments: Bank, Institutional Investment Management, Asset Servicing, and Payment Solutions. In the first quarter of 2016, the Company merged the Payments Solutions segment into the Bank segment to better reflect how the core businesses, products and services are being evaluated by management currently. The Company’s Payment Solutions leadership structure and financial performance assessments are now included in the Bank segment, and accordingly, the reportable segments were realigned to reflect these changes. For comparability purposes, amounts in all periods are based on methodologies in effect at September 30, 2016. Previously reported results have been reclassified in this filing 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, consumer and commercial credit and debit card, prepaid debit card solutions, healthcare services, institutional cash management, merchant bankcard, wealth management, brokerage, insurance, capital markets, investment banking, corporate trust, and correspondent banking.

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

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Business Segment Information

Segment financial results were as follows (in thousands):

 

     Three Months Ended September 30, 2016  
     Bank      Institutional
Investment
Management
     Asset Servicing      Total  

Net interest income

   $ 121,963       $ —         $ 2,802       $ 124,765   

Provision for loan losses

     13,000         —           —           13,000   

Noninterest income

     80,454         19,413         22,081         121,948   

Noninterest expense

     142,836         16,874         20,073         179,783   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     46,581         2,539         4,810         53,930   

Income tax expense

     10,427         519         1,038         11,984   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 36,154       $ 2,020       $ 3,772       $ 41,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 18,384,000       $ 61,000       $ 1,247,000       $ 19,692,000   
     Three Months Ended September 30, 2015  
     Bank      Institutional
Investment
Management
     Asset Servicing      Total  

Net interest income

   $ 108,424       $ 49       $ 1,422       $ 109,895   

Provision for loan losses

     2,500         —           —           2,500   

Noninterest income

     65,207         21,398         22,493         109,098   

Noninterest expense

     149,269         16,495         19,515         185,279   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     21,862         4,952         4,400         31,214   

Income tax expense

     6,120         1,409         1,234         8,763   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 15,742       $ 3,543       $ 3,166       $ 22,451   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 17,045,000       $ 66,000       $ 1,009,000       $ 18,120,000   

 

30


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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

     Nine Months Ended September 30, 2016  
     Bank      Institutional
Investment
Management
     Asset Servicing      Total  

Net interest income

   $ 355,847       $ —         $ 8,020       $ 363,867   

Provision for loan losses

     25,000         —           —           25,000   

Noninterest income

     235,915         56,965         66,865         359,745   

Noninterest expense

     431,594         52,993         60,983         545,570   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     135,168         3,972         13,902         153,042   

Income tax expense

     32,928         899         3,348         37,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 102,240       $ 3,073       $ 10,554       $ 115,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 18,147,000       $ 62,000       $ 1,279,000       $ 19,488,000   

 

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

Net interest income

   $ 294,210       $ 27       $ 3,376       $ 297,613   

Provision for loan losses

     10,500         —           —           10,500   

Noninterest income

     210,695         74,182         68,978         353,855   

Noninterest expense

     407,997         52,799         60,860         521,656   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     86,408         21,410         11,494         119,312   

Income tax expense

     23,859         5,899         3,124         32,882   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 62,549       $ 15,511       $ 8,370       $ 86,430   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 16,419,000       $ 71,000       $ 970,000       $ 17,460,000   

9. Acquisition

As previously disclosed, on May 31, 2015, the Company acquired 100% of the outstanding common shares of Marquette. Marquette was a privately held financial services company with a portfolio of businesses that operated thirteen branches in Arizona and Texas, two national commercial specialty-lending businesses focused on asset-based lending and accounts receivable factoring, and an asset-management firm. As a result of the acquisition, the Company increased its presence in Arizona and Texas and supplemented 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 Company’s closing stock price of $51.79 on May 29, 2015. The transaction was accounted for using the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations. Accordingly, the purchase price was allocated based on the estimated fair market values of the assets and liabilities acquired.

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

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

 

     Fair Value
May 31, 2015
 

Assets

  

Loans

   $ 980,404   

Investment securities

     177,694   

Cash and due from banks

     95,351   

Premises and equipment, net

     11,508   

Identifiable intangible assets

     14,881   

Other assets

     32,336   
  

 

 

 

Total assets acquired

     1,312,174   

Liabilities

  

Noninterest-bearing deposits

     226,161   

Interest-bearing deposits

     708,675   

Short-term debt

     112,133   

Long-term debt

     89,971   

Other liabilities

     14,135   
  

 

 

 

Total liabilities assumed

     1,151,075   

Net identifiable assets acquired

     161,099   

Goodwill acquired

     18,638   
  

 

 

 

Net assets acquired

   $ 179,737   
  

 

 

 

Consideration:

  

Company’s common shares issued

     3,470   

Purchase price per share of the Company’s common stock

   $ 51.79   
  

 

 

 

Fair value of total consideration transferred

   $ 179,737   
  

 

 

 

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

The Company assumed long-term debt obligations of Marquette 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. Interest rates on trust preferred securities trusts are tied to the three-month London Interbank Offered Rate (LIBOR) with spreads ranging from 133 basis points to 160 basis points and reset quarterly. The trust preferred securities have maturity dates ranging from January 2036 to September 2036.

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

The results of operations of Marquette are included in the results of operations of the Company subsequent to the Acquisition Date. For the nine months ended September 30, 2016, acquisition expenses recognized in Noninterest expense in the Company’s Consolidated Statements of Income totaled $4.5 million. This total included $880 thousand of severance in Salaries and employee benefits and $1.7 million in Legal and consulting fees.

10. Commitments, Contingencies and Guarantees

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, 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 contractual 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):

 

     September 30,      December 31,  
     2016      2015  

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

   $ 6,517,542       $ 6,671,794   

Commitments to extend credit under credit card loans

     2,735,487         2,986,581   

Commercial letters of credit

     1,393         11,541   

Standby letters of credit

     381,284         360,468   

Forward contracts

     64,012         75,611   

Spot foreign exchange contracts

     4,145         10,391   

11. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the 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.

 

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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Fair Values of Derivative Instruments on the Consolidated Balance Sheets

The Company’s derivative assets and derivative liabilities are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets. This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of September 30, 2016 and December 31, 2015 (in thousands):

 

     Asset Derivatives      Liability Derivatives  
     September 30,
2016
     December 31,
2015
     September 30,
2016
     December 31,
2015
 

Fair Value

           

Interest Rate Products:

           

Derivatives not designated as hedging instruments

   $ 21,499       $ 11,700       $ 22,588       $ 11,921   

Derivatives designated as hedging instruments

     426         603         8,233         337   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,925       $ 12,303       $ 30,821       $ 12,258   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed rate assets and liabilities due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve either making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments, or making variable rate payments to a counterparty in exchange for the Company receiving fixed rate payments, over the life of the agreements without the exchange of the underlying notional amount. As of September 30, 2016, the Company had two interest rate swaps with a notional amount of $15.8 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.

Cash Flow Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its variable-rate liabilities due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of September 30, 2016, the Company had two interest rate swaps with a notional amount of $51.5 million that were designated as cash flow hedges of interest rate risk associated with the Company’s variable rate subordinated debentures issued by Marquette Capital Trusts III and IV. For derivatives designated and that qualify as cash flow hedges, the effective portion of changes in fair value is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly into earnings for the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk. During the three and nine months ended September 30, 2016, the Company recognized net losses of $643 thousand and $7.7 million, respectively, in AOCI for the effective portion of the change in fair value of these cash flow hedges. During the three and nine months ended September 30, 2016, the Company did not record any hedge ineffectiveness in earnings. Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are received or paid on the Company’s derivatives. The Company does not expect to reclassify any amounts from AOCI to Interest expense during the next 12 months as the Company’s derivatives are effective after December 2018. As of September 30, 2016, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 20 years.

 

34


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Non-designated Hedges

The remainder of the Company’s derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of September 30, 2016, the Company had 50 interest rate swaps with an aggregate notional amount of $595.8 million related to this program. During the three and nine months ended September 30, 2016, the Company recognized $76 thousand and $868 thousand of net losses, respectively, related to changes in fair value of these swaps. During the three and nine months ended September 30, 2015, the Company recognized $125 thousand and $211 thousand of net losses, respectively, related to changes in the fair value of these swaps.

Effect of Derivative Instruments on the Consolidated Statements of Income

This table provides a summary of the amount of gain or loss recognized in other noninterest expense in the Consolidated Statements of Income related to the Company’s derivative assets and liabilities for the three and nine months ended September 30, 2016 and September 30, 2015 (in thousands):

 

    Amount of Gain (Loss) Recognized  
    For the Three Months Ended     For the Nine Months Ended  
    September 30,
2016
    September 30,
2015
    September 30,
2016
    September 30,
2015
 

Interest Rate Products

       

Derivatives not designated as hedging instruments

  $ (76   $ (125   $ (868   $ (211
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (76   $ (125   $ (868   $ (211
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest Rate Products

       

Derivatives designated as hedging instruments:

       

Fair value adjustments on derivatives

  $ (64   $ (178   $ (395   $ (172

Fair value adjustments on hedged items

    63        177        392        173   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (1   $ (1   $ (3   $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

 

This table provides a summary of the amount of gain or loss recognized in AOCI in the Consolidated Statements of Comprehensive Income related to the Company’s derivative assets and liabilities as of September 30, 2016 and September 30, 2015 (in thousands):

 

    Amount of Loss Recognized in Other Comprehensive Income on
Derivatives (Effective Portion)
 
    For the Three Months Ended     For the Nine Months Ended  

Derivatives in Cash Flow Hedging Relationships

  September 30,
2016
    September 30,
2015
    September 30,
2016
    September 30,
2015
 

Interest rate products

       

Derivatives designated as cash flow hedging instruments

  $ (643   $ —        $ (7,677   $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (643   $ —        $ (7,677   $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Credit-risk-related Contingent Features

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

As of September 30, 2016, the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $31.1 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 September 30, 2016, it could have been required to settle its obligations under the agreements at the termination value.

12. Fair Value Measurements

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of September 30, 2016, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

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

Assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (in thousands):

 

     Fair Value Measurement at September 30, 2016  

Description

   September 30,
2016
     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

     2,349         —           2,349         —     

Mortgage-backed

     7,068         —           7,068         —     

State and political subdivisions

     18,645         —           18,645         —     

Trading - other

     29,600         29,161         439         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     58,062         29,561         28,501         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     249,526         249,526         —           —     

U.S. Agencies

     289,440         —           289,440         —     

Mortgage-backed

     3,362,296         —           3,362,296         —     

State and political subdivisions

     2,327,220         —           2,327,220         —     

Corporates

     67,205         67,205            —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,295,687         316,731         5,978,956         —     

Company-owned life insurance

     40,274         —           40,274         —     

Bank-owned life insurance

     208,095         —           208,095         —     

Derivatives

     21,925         —           21,925         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,624,043       $ 346,292       $ 6,277,751       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 40,804       $ 40,804       $ —         $ —     

Derivatives

     30,821         —           30,821         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 71,625       $ 40,804       $ 30,821       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

36


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

     Fair Value Measurement at December 31, 2015  

Description

   December 31,
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

   $ 400       $ 400       $ —         $ —     

U.S. Agencies

     1,309         —           1,309         —     

State and political subdivisions

     10,200         —           10,200         —     

Trading - other

     17,708         17,708         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     29,617         18,108         11,509         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     349,779         349,779         —           —     

U.S. Agencies

     666,389         —           666,389         —     

Mortgage-backed

     3,572,446         —           3,572,446         —     

State and political subdivisions

     2,138,413         —           2,138,413         —     

Corporates

     79,922         79,922         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,806,949         429,701         6,377,248         —     

Company-owned life insurance

     31,205         —           31,205         —     

Bank-owned life insurance

     202,991         —           202,991         —     

Derivatives

     12,303         —           12,303         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,083,065       $ 447,809       $ 6,635,256       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 32,937       $ 32,937       $ —         $ —     

Contingent consideration liability

     17,718         —           —           17,718   

Derivatives

     12,258         —           12,258         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 62,913       $ 32,937       $ 12,258       $ 17,718   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reconciles the beginning and ending balances of the contingent consideration liability for the nine months ended September 30, 2016 and 2015 (in thousands):

 

     Nine Months Ended September 30,  
     2016      2015  

Beginning balance

   $ 17,718       $ 53,411   

Payment of contingent consideration on acquisitions

     (17,784      (18,702

Fair value adjustments

     66         (3,477
  

 

 

    

 

 

 

Ending balance

   $ —         $ 31,232   
  

 

 

    

 

 

 

 

37


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

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

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

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

Securities Available for Sale Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Prices are provided by third-party pricing services and are based on observable market inputs. On an annual basis, the Company compares a sample of these prices to other independent sources for the same 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 reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate.

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

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

Derivatives Fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from 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.

Contingent Consideration The fair value of contingent consideration liabilities are derived from a discounted cash flow model of future contingent payments. The valuation of these liabilities are estimated by a collaborative effort of the Company’s mergers and acquisitions group, business unit management, and the corporate accounting group. 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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Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

Assets measured at fair value on a non-recurring basis as of September 30, 2016 and December 31, 2015 (in thousands):

 

     Fair Value Measurement at September 30, 2016 Using  

Description

   September 30,
2016
     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 Nine
Months Ended
September 30
 

Impaired loans

   $ 19,807       $ —         $ —         $ 19,807       $ (621

Other real estate owned

     202         —           —           202         32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,009       $ —         $ —         $ 20,009       $ (589
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurement at December 31, 2015 Using  

Description

   December 31,
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
Twelve Months
Ended
December 31
 

Impaired loans

   $ 22,885       $ —         $ —         $ 22,885       $ (3,957

Other real estate owned

     3,269         —           —           3,269         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,154       $ —         $ —         $ 26,154       $ (3,957
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 appraised 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.

 

39


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

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

Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value of the Company’s financial instruments at September 30, 2016 and December 31, 2015 are as follows (in millions):

 

     Fair Value Measurement at September 30, 2016 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

   $ 1,052.3       $ 826.8       $ 225.5       $ —         $ 1,052.3   

Securities available for sale

     6,295.7         316.7         5,979.0         —           6,295.7   

Securities held to maturity

     1,009.1         —           1,098.0         —           1,098.0   

Trading securities

     58.1         29.6         28.5         —           58.1   

Other securities

     66.9         —           66.9         —           66.9   

Loans (exclusive of allowance for loan loss)

     10,305.4         —           10,426.9         —           10,426.9   

Derivatives

     21.9         —           21.9         —           21.9   

FINANCIAL LIABILITIES

              

Demand and savings deposits

     14,297.0         14,297.0         —           —           14,297.0   

Time deposits

     1,081.3         —           1,081.3         —           1,081.3   

Other borrowings

     2,021.1         595.6         1,425.5         —           2,021.1   

Long-term debt

     75.4         —           75.8         —           75.8   

Derivatives

     30.8         —           30.8         —           30.8   

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 4.2   

Commercial letters of credit

                 0.2   

Standby letters of credit

                 1.9   

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

     Fair Value Measurement at December 31, 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

   $ 1,154.7       $ 997.0       $ 157.7       $ —         $ 1,154.7   

Securities available for sale

     6,806.9         429.7         6,377.2         —           6,806.9   

Securities held to maturity

     667.1         —           691.4         —           691.4   

Trading securities

     29.6         18.1         11.5         —           29.6   

Other securities

     65.2         —           65.2         —           65.2   

Loans (exclusive of allowance for loan loss)

     9,431.3         —           9,452.1         —           9,452.1   

Derivatives

     12.3         —           12.3         —           12.3   

FINANCIAL LIABILITIES

              

Demand and savings deposits

     13,836.9         13,836.9         —           —           13,836.9   

Time deposits

     1,255.9         —           1,255.9         —           1,255.9   

Other borrowings

     1,823.1         66.9         1,756.2         —           1,823.1   

Long-term debt

     86.1         —           86.4         —           86.4   

Derivatives

     12.3         —           12.3         —           12.3   

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 4.9   

Commercial letters of credit

                 0.3   

Standby letters of credit

                 2.6   

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 carrying amount of the FRB and FHLB stock equals its fair value because the shares can only be redeemed by the FRB and FHLB at their carrying amount. The fair value of PCM marketable equity-method investments are based on quoted market prices used to estimate the value of the underlying investment. For non-marketable equity-method investments, the Company’s proportionate share of the income or loss is recognized on a one-quarter lag based on the valuation of the underlying investment(s).

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

Demand and savings deposits The fair value of demand deposits and savings accounts is the amount payable on demand at September 30, 2016 and December 31, 2015.

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

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

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

 

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UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED)

 

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

 

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations highlights the material changes in the results of operations and changes in financial condition of the Company for the three-month and nine-month periods ended September 30, 2016. It should be read in conjunction with the accompanying consolidated financial statements, notes to consolidated financial statements and other financial information appearing elsewhere in this Form 10-Q and the 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 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;

 

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

 

    adverse publicity or other reputational harm to the Company;

 

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

 

    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, control expenses, or attract and 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 of Financial Condition and Results of Operations (Item 2) in this Form 10-Q, in the Risk Factors (Item 1A) in the 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 except to the extent required by

 

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applicable securities laws. 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.

Overview

The Company focuses on the following four core strategic objectives. 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 a focus on improving operating efficiencies. During the second half of 2015, an in-depth review of the organization was completed to identify efficiencies. The Company plans to continue to utilize the results of this review to simplify our organizational and reporting structures, streamline back office functions and take advantage of synergies among various platforms and distribution networks. The Company identified a total of $32.9 million in annual savings that are expected to be realized in the future as a result of the elimination of certain employee positions and business process improvements. This total does not include the additional cost savings recognized related to the Marquette integration, or any ongoing efficiencies identified through our normal course of business. The Company continues to invest in technological advances that will help management drive operating efficiencies in the future through improved data analysis and automation. The Company also continues to evaluate core systems and will invest in enhancements that it believes will yield operating efficiencies.

The second strategic objective is a focus on net interest income through loan and deposit growth. During the third quarter of 2016, the Company continued to make progress on this strategy as illustrated by an increase in net interest income of $14.9 million, or 13.5 percent, from the same period in 2015. The Company has continued to show increased net interest income in a historically low interest rate environment through the effects of increased volume of average earning assets and a low cost of funds in its Consolidated Balance Sheets. Average earning assets for the third quarter of 2016 increased $1.5 billion, or 9.1 percent from the same period in 2015. The funding for these assets was driven primarily by a 14.8 percent increase in average interest-bearing liabilities. Average loan balances increased $1.2 billion, or 14.0 percent compared to the same period in 2015. Net interest margin, on a tax-equivalent basis, increased 14 basis points compared to the same period in 2015.

The third strategic objective is to grow the Company’s fee-based businesses. As the industry continues to experience economic uncertainty, the Company has continued to emphasize its fee-based operations. By maintaining a diverse source of revenues, the Company believes this strategy will help reduce the Company’s exposure to sustained low interest rates. During the third quarter of 2016, noninterest income increased $12.9 million, or 11.8 percent, to $121.9 million for the three months ended September 30, 2016, compared to the same period in 2015. This change is discussed in greater detail below under Noninterest Income. The Company continues to emphasize its asset management, brokerage, bankcard services, healthcare services, and treasury management businesses. At September 30, 2016, noninterest income represented 49.4 percent of total revenues, compared to 49.8 percent at September 30, 2015.

The fourth strategic objective is a focus on capital management. The Company places a significant emphasis on maintaining a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, evaluating acquisition opportunities that complement the strategies, increasing dividends over time, and properly utilizing a share repurchase program. At September 30, 2016, the Company had $2.0 billion in total shareholders’ equity. This is an increase of $123.8 million, or 6.5 percent, compared to total shareholders’ equity at September 30, 2015. At September 30, 2016, the Company had a total risk-based capital ratio of 12.82 percent. The Company repurchased 10,750 shares of common stock at an average price of $56.59 per share during the third quarter of 2016.

 

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Earnings Summary

The following is a summary regarding the Company’s earnings for the third quarter of 2016. The changes identified in the summary are explained in greater detail below. The Company recorded consolidated net income of $41.9 million for the three-month period ended September 30, 2016, compared to $22.5 million for the same period a year earlier. This represents an 86.8 percent increase over the three-month period ended September 30, 2015. Basic earnings per share for the third quarter of 2016 were $0.86 per share ($0.85 per share fully-diluted) compared to $0.46 per share ($0.46 per share fully-diluted) for the third quarter of 2015. Return on average assets and return on average common shareholders’ equity for the three-month period ended September 30, 2016 were 0.85 and 8.25 percent, respectively, compared to 0.49 and 4.72 percent, respectively, for the three-month period ended September 30, 2015.

The Company recorded consolidated net income of $115.9 million for the nine-month period ended September 30, 2016, compared to $86.4 million for the same period a year earlier. This represents a 34.1 percent increase over the nine-month period ended September 30, 2015. Basic earnings per share for the nine-month period ended September 30, 2016 were $2.37 per share ($2.36 per share fully-diluted) compared to $1.85 per share ($1.84 per share fully-diluted) for the same period in 2015. Return on average assets and return on average common shareholders’ equity for the nine-month period ended September 30, 2016 were 0.79 and 7.81 percent, respectively, compared to 0.66 and 6.53 percent for the same period in 2015.

Net interest income for the three and nine-month periods ended September 30, 2016 increased $14.9 million, or 13.5 percent, and $66.3 million, or 22.3 percent, respectively, compared to the same periods in 2015. For the three-month period ended September 30, 2016, average earning assets increased by $1.5 billion, or 9.1 percent, and for the nine-month period ended September 30, 2016, they increased by $2.0 billion, or 12.1 percent, compared to the same periods in 2015. Net interest margin, on a tax-equivalent basis, increased to 2.87 percent and 2.84 percent for the three and nine-month periods ended September 30, 2016, compared to 2.73 percent and 2.60 percent for the same periods in 2015. The Marquette acquisition added earning assets with an acquired value of $1.2 billion primarily from loan balances with an acquired value of $980.4 million at May 31, 2015. The Marquette acquisition also added interest-bearing liabilities with an acquired value of $910.8 million primarily from interest-bearing deposits of $708.7 million at May 31, 2015.

The provision for loan losses increased by $10.5 million to $13.0 million for the three-month period ended September 30, 2016, and increased by $14.5 million to $25.0 million for the nine-month period ended September 30, 2016, compared to the same periods in 2015. This increase is a result of applying the Company’s methodology for computing the allowance for loan losses. A significant driver of credit quality is nonperforming loans. The Company’s nonperforming loans increased $29.7 million to $79.6 million at September 30, 2016, compared to September 30, 2015, and increased $18.5 million, compared to December 31, 2015. This increase was primarily related to the migration of two large commercial credits to nonaccrual during the third quarter of 2016. The allowance for loan losses as a percentage of total loans increased to 0.88 percent as of September 30, 2016, compared to 0.86 percent at September 30, 2015. 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 Form 10-K.

Noninterest income increased by $12.9 million, or 11.8 percent, for the three-month period ended September 30, 2016, and increased by $5.9 million, or 1.7 percent, for the nine-month period ended September 30, 2016, compared to the same periods in 2015. These changes are discussed in greater detail below under Noninterest Income.

Noninterest expense decreased by $5.5 million, or 3.0 percent, for the three-month period ended September 30, 2016, and increased by $23.9 million, or 4.6 percent, for the nine-month period ended September 30, 2016, compared to the same periods in 2015. These changes are discussed in greater detail below under Noninterest Expense.

 

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Net Interest Income

Net interest income is a significant source of the Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. As noted above, the impacts of the Marquette acquisition are included in these results. For the three-month period ended September 30, 2016, average earning assets increased by $1.5 billion, or 9.1 percent, and for the nine-month period ended September 30, 2016, they increased by $2.0 billion, or 12.1 percent, compared to the same periods in 2015. Net interest margin, on a tax-equivalent basis, increased to 2.87 percent and 2.84 percent for the three and nine-month periods ended September 30, 2016, compared to 2.73 percent and 2.60 percent for the same periods in 2015.

 

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Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. As illustrated in this table, net interest spread and margin for the three months ended September 30, 2016 increased by 13 and 14 basis points, respectively, compared to the same period in 2015. Net interest spread and margin for the nine months ended September 30, 2016 increased by 23 and 24 basis points, respectively, compared to the same period in 2015. These increases are primarily due to favorable volume and rate variances on loans. These rate variances have led to an increase in interest income partially offset by an increase in interest expense, resulting in an increase in the Company’s net interest income during 2016 as compared to results for the same periods in 2015. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and rates have resulted in an increase in net interest income.

Table 1

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

The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.86 percent for the three-month period ended September 30, 2016 and 2.71 percent for the same period in 2015. The average yield on earning assets without the tax equivalent basis adjustment would have been 2.83 percent for the nine-month period ended September 30, 2016 and 2.57 percent for the same period in 2015.

 

     Three Months Ended September 30,  
     2016     2015  
     Average
Balance
     Average
Yield/Rate
    Average
Balance
     Average
Yield/Rate
 

Assets

          

Loans, net of unearned interest

   $ 10,181,819         3.86   $ 8,933,775         3.76

Securities:

          

Taxable

     4,449,485         1.52        4,750,122         1.54   

Tax-exempt

     3,158,966         2.86        2,557,629         2.70   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

     7,608,451         2.08        7,307,751         1.95   

Federal funds and resell agreements

     217,287         1.45        83,048         0.84   

Interest-bearing due from banks

     314,619         0.56        481,575         0.39   

Other earning assets

     51,280         1.75        36,171         1.04   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total earning assets

     18,373,456         3.03        16,842,320         2.86   

Allowance for loan losses

     (86,368        (78,419   

Other assets

     1,405,152           1,356,548      
  

 

 

      

 

 

    

Total assets

   $ 19,692,240         $ 18,120,449      
  

 

 

      

 

 

    

Liabilities and Shareholders’ Equity

          

Interest-bearing deposits

   $ 9,431,253         0.20   $ 8,532,814         0.18

Federal funds and repurchase agreements

     2,261,863         0.33        1,634,394         0.10   

Borrowed funds

     82,340         3.64        88,468         4.68   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     11,775,456         0.25        10,255,676         0.21   

Noninterest-bearing demand deposits

     5,690,838           5,800,870      

Other liabilities

     203,953           176,040      

Shareholders’ equity

     2,021,993       <