10-K 1 d317189d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended: December 31, 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 No.)
1010 Grand Boulevard, Kansas City, Missouri   64106
(Address of principal executive offices)   (Zip Code)

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

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

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $1.00 Par Value   The NASDAQ Global Select Market

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

 

 

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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      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 Act).    ☐  Yes    ☒  No

As of June 30, 2016, the aggregate market value of common stock outstanding held by nonaffiliates of the registrant was approximately $2,358,273,647 based on the closing price of the registrant’s common stock on the NASDAQ Global Select Market on that date.

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

 

Class

 

Outstanding at February 16, 2017

Common Stock, $1.00 Par Value   49,810,244

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Definitive Proxy Statement on Schedule 14A (“Proxy Statement”) to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on April 25, 2017, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

INDEX

 

PART I      3   
ITEM 1. BUSINESS      3   
ITEM 1A. RISK FACTORS      11   
ITEM 1B. UNRESOLVED STAFF COMMENTS      19   
ITEM 2. PROPERTIES      19   
ITEM 3. LEGAL PROCEEDINGS      19   
ITEM 4. MINE SAFETY DISCLOSURES      19   
PART II      20   

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

     20   
ITEM 6. SELECTED FINANCIAL DATA      21   

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

     22   
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      51   
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      59   

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

     117   
ITEM 9A. CONTROLS AND PROCEDURES      117   
ITEM 9B. OTHER INFORMATION      119   
PART III      119   
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      119   
ITEM 11. EXECUTIVE COMPENSATION      119   

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

     119   
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE      120   
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES      120   
PART IV      121   
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES      121   
ITEM 16. FORM 10-K SUMMARY      122   
SIGNATURES      123   
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT   
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT   

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

  

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

  


Table of Contents

PART I

ITEM 1. BUSINESS

General

UMB Financial Corporation (together with its consolidated subsidiaries, unless the context requires otherwise, the Company) is a diversified financial holding company that is headquartered in Kansas City, Missouri. The Company provides banking services, institutional investment management, and asset servicing to its customers in the United States and around the globe.

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

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

The Company’s significant nonbank subsidiaries include the following:

 

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

 

    UMB Fund Services, Inc. (UMBFS) is located in Milwaukee, Wisconsin, Chadds Ford, Pennsylvania, and Ogden, Utah, and provides fund accounting, transfer agency, and other services to mutual fund and alternative-investment groups.

On a full-time equivalent basis at December 31, 2016, the Company and its subsidiaries employed 3,688 persons.

Business Segments

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

These segments and their financial results are described in detail in (i) the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled Business Segments, which can be found in Part II, Item 7, pages 34 through 37, of this report and (ii) Note 12, “Business Segment Reporting,” in the Notes to the Consolidated Financial Statements, which can be found in Part II, Item 8, pages 97 through 98 of this report.

Competition

The Company faces intense competition in each of its business segments and in all of the markets and geographic regions that the Company serves. Competition comes from both traditional and non-traditional financial-services providers, including banks, savings associations, finance companies, investment advisors, asset managers, mutual funds, private-equity firms, hedge funds, brokerage firms, mortgage-banking companies, credit-card companies, insurance companies, trust companies, securities processing companies, and credit unions. Recently, financial-technology (fintech) companies have been partnering more often with financial-services providers to compete with the Company for lending, payments, and other business. Many competitors may not be subject to the same kind or degree of supervision and regulation as the Company.

 

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Competition is based on a number of factors. Banking customers are generally influenced by convenience, rates and pricing, personal experience, quality and availability of products and other services, lending limits, transaction execution, and reputation. Investment advisory services compete primarily on returns, expenses, third-party ratings, and the reputation and performance of managers. Asset servicing competes primarily on price, quality of services, and reputation. The Company and its competitors all are impacted by the overall economy and health of the financial markets. The degree of impact will vary based on the basis of risk of each competitor and their approach to managing them.

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

Government Monetary and Fiscal Policies

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

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

The FRB and its policies have a substantial impact on the availability and demand for loans and deposits, the rates and other aspects of pricing for loans and deposits, and the conditions in equity, fixed income, currency, and other markets in which the Company operates. Policies announced or implemented by other central banks around the world have a meaningful effect as well and sometimes may be coordinated with those of the FRB.

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

Regulation and Supervision

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

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

Overview

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

 

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

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

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

Restrictions on Permissible Activities and Corporate Matters

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

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

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

 

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Under amendments to the BHCA promulgated by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Dodd-Frank Act, the Company may acquire banks outside of its home State of Missouri, subject to specified limits and may establish new branches in other States to the same extent as banks chartered in those States. Under the BHCA, however, the Company must procure the prior approval of the FRB and possibly other government authorities to directly or indirectly acquire ownership or control of five percent or more of any class of voting securities of, or substantially all of the assets of, an unaffiliated bank, savings association, or bank holding company. In deciding whether to approve any acquisition or branch, the FRB, the OCC, and other government authorities will consider public or private interests that may not be aligned with those of the Company’s shareholders or non-deposit creditors. The FRB also has the power to require the Company to divest any depository institution that cannot maintain its “well capitalized” or “well managed” status.

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

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

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

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

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

In addition, under amendments to the BHCA set forth in the Dodd-Frank Act and commonly known as the Volcker Rule, the Company is subject to extensive limits on proprietary trading and on owning or sponsoring

 

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hedge funds and private-equity funds. The limits on proprietary trading are largely directed toward purchases or sales of financial instruments by a banking entity as principal primarily for the purpose of short-term resale, a benefit from actual or expected short-term price movements, or the realization of short-term arbitrage profits. The limits on owning or sponsoring hedge funds and private-equity funds are designed to ensure that banking entities generally maintain only small positions in managed or advised funds and are not exposed to significant losses arising directly or indirectly from them. The Volcker Rule also provides for increased capital charges, quantitative limits, rigorous compliance programs, and other restrictions on permitted proprietary trading and fund activities, including a prohibition on transactions with a covered fund that would constitute a covered transaction under Sections 23A and 23B of the Federal Reserve Act.

Additional Requirements under the Dodd-Frank Act

On an annual basis, the Company and the Bank are required under the Dodd-Frank Act to conduct forward-looking, company-run stress tests as an aid to ensuring that each entity would have sufficient capital to absorb losses and support operations during adverse economic conditions. Summaries of stress-test results for the Company and the Bank are expected to be disclosed each year in the fall.

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

Capital-Adequacy Standards

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

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

Prior to January 1, 2015, the Company and the Bank were subject to capital-adequacy standards that had originally been promulgated in 1989 and that are commonly known as Basel I. The Company and the Bank were required to maintain, under Basel I, a minimum total risk-based capital ratio of total qualifying capital to RWAs of 8.0%, a minimum tier 1 risk-based capital ratio of tier 1 capital to RWAs of 4.0%, and a minimum tier 1 leverage ratio of tier 1 capital to average on-balance-sheet exposures of 4.0%.

In July 2013, the FRB and the OCC issued comprehensive revisions to the capital-adequacy standards, commonly known as Basel III, to which the Company and the Bank began transitioning on January 1, 2015, with full compliance required by January 1, 2019. Basel III bolsters the quantity and quality of capital required under the capital-adequacy guidelines, in part, by (1) imposing a new minimum common-equity tier 1 risk-based capital ratio of 4.5%, (2) raising the minimum tier 1 risk-based capital ratio to 6.0%, (3) establishing a new capital conservation buffer of common-equity tier 1 capital to RWAs of 2.5%, (4) amending the definition of

 

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qualifying capital to be more conservative, and (5) limiting capital distributions and specified discretionary bonus payments whenever the capital conservation buffer is breached. Basel III also enhances the risk sensitivity of the standardized approach to determining a banking organization’s RWAs.

The capital ratios for the Company and the Bank as of December 31, 2016, are set forth below:

 

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

UMB Financial Corporation

     9.09         11.80         11.80         12.87   

UMB Bank, n.a.

     8.24         10.73         10.73         11.36   

These capital-to-assets ratios also play a central role in prompt corrective action (PCA), which is an enforcement framework used by the federal banking agencies to constrain the activities of banking organizations based on their levels of regulatory capital. Five categories have been established using thresholds for the total risk-based capital ratio, the tier 1 risk-based capital ratio, the common-equity tier 1 risk-based capital ratio, and the leverage ratio: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. While bank holding companies are not subject to the PCA framework, the FRB is empowered to compel a holding company to take measures—such as the execution of financial or performance guarantees—when prompt corrective action is required in connection with one of its depository-institution subsidiaries. At December 31, 2016, the Bank was well capitalized under the PCA framework.

Basel III includes a number of more rigorous provisions applicable only to banking organizations that are larger or more internationally active than the Company and the Bank. These include, for example, a supplementary leverage ratio incorporating off-balance-sheet exposures, a liquidity coverage ratio, and a net stable funding ratio. As with the Dodd-Frank Act, these standards may be informally applied or considered by the FRB and the OCC in their regulation, supervision, and examination of the Company and the Bank.

Deposit Insurance and Related Matters

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

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

 

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

Other Regulatory and Supervisory Matters

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

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

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

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

Statistical Disclosure

The information required by Guide 3, “Statistical Disclosure by Bank Holding Companies,” has been included in Part II, Items 6, 7, and 7A, pages 21 through 58, of this report.

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

 

Name

  

Age

  

Position with Registrant

Anthony J. Fischer    58    Mr. Fischer was named the President of UMB Fund Services, Inc. in July 2014. Prior to that, he served UMB Fund Services Inc. as an Executive Vice President in charge of Business Development from March 2013 until June 2014 and as a Senior Vice President in Business Development from February 2008 through February 2013.
Michael D. Hagedorn    50    Mr. Hagedorn has served as Vice Chairman of the Company since October 2009 and was named President and Chief Executive Officer of the Bank in January 2014. Between March 2005 and January 2014, and then again from October 2015 until August 2016 on an interim basis, he served as Chief Financial Officer of the Company. In addition from October 2009 to January 2014, he served as Chief Administrative Officer of the Company. He previously served as Senior Vice President and Chief Financial Officer of Wells Fargo, Midwest Banking Group, from April 2001 to March 2005.

 

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Name

  

Age

  

Position with Registrant

Andrew J. Iseman    52    Mr. Iseman joined Scout as Chief Executive Officer in August 2010. From February 2009 to June 2010, he served as Chief Operating Officer of RK Capital Management. He was previously employed by Janus Capital Group from January 2003 to April 2008, most recently serving as its Executive Vice President from January 2008 to April 2008 and also as its Chief Operating Officer from May 2007 to April 2008.
Shannon A. Johnson    37    Ms. Johnson has served as Executive Vice President and Chief Human Resources Officer of the Company since April of 2015. Ms. Johnson’s previous positions with the Company include Senior Vice President, Executive Director of Talent Management and Development, and Senior Vice President, Director of Talent Management. Ms. Johnson held these positions from May 2011 to April 2015, and December 2009 to May 2011, respectively.
J. Mariner Kemper    44    Mr. Kemper has served as the President of the Company since November 2015 and as the Chairman and Chief Executive Officer of the Company since May 2004. He served as the Chairman and Chief Executive Officer of the Bank between December 2012 and January 2014, and as the Chairman of UMB Bank Colorado, n.a. (a prior subsidiary of the Company) between 2000 and 2012. He was President of UMB Bank Colorado from 1997 to 2000. Mr. Kemper is the brother of Mr. Alexander C. Kemper, who currently serves on the Company’s Board of Directors.
Kevin M. Macke    44    Mr. Macke has served as Executive Vice President and Director of Operations for the Bank since November 2015. In addition, beginning in January 2014 and ending in December 2015, Mr. Macke served as the Chief Financial Officer of the Bank. Prior to this time, Mr. Macke held several other positions within the Company or the Bank, including Director of Strategic Technology Initiatives with the Bank from November 2010 to January 2014, and Director of Financial Planning and Analysis with the Company from August 2005 to November 2010.
Jennifer M. Payne    40    Ms. Payne was named as Executive Vice President and Chief Risk Officer of the Company in January 2016. Prior to this time, she served the Company as Director of Corporate Risk Services and Director of Corporate Audit Services, from May 2012 to December 2015, and August 2005 to May 2012, respectively.
Ram Shankar    44    Mr. Shankar was named as Executive Vice President and Chief Financial Officer of the Company effective August 2016. From September 2011 until his employment with the Company commenced, he worked at First Niagara Financial Group, most recently serving as managing director where he headed financial planning and analysis and investor relations. Prior to that, Shankar spent time at FBR Capital Markets as a senior research analyst and at M&T Bank Corporation in the financial planning measurement and corporate finance/mergers and acquisitions group.

 

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Name

  

Age

  

Position with Registrant

John C. Pauls    52    Mr. Pauls has served as Executive Vice President and General Counsel of the Company and the Bank since June 2016. Mr. Pauls previously served as Senior Vice President and Legal Counsel and served as interim General Counsel beginning in April 2016 until he was appointed General Counsel in June 2016. He has been with UMB for over 22 years, having served as a top legal advisor for the Company and the Bank for over 15 years.
Christian R. Swett    57    Mr. Swett has served as Executive Vice President and Chief Credit Officer of the Company since January 2011. Prior to this, Mr. Swett was an Executive Vice President.
Thomas S. Terry    53    Mr. Terry has served as Executive Vice President and Chief Lending Officer of the Company since January 2011. Prior to this time, Mr. Terry served as Executive Vice President.
Brian J. Walker    45    Mr. Walker has served as Executive Vice President and Chief Accounting Officer of the Company since June 2007. He previously served as Chief Financial Officer of the Company from January 2014 to October 2015. From July 2004 to June 2007, he served as a Certified Public Accountant for KPMG LLP, where he worked primarily as an auditor for financial institutions.

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

 

ITEM 1A. RISK FACTORS

Financial-services companies routinely encounter and address risks and uncertainties. In the following paragraphs, the Company describes some of the principal risks and uncertainties that could adversely affect its business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. These risks and uncertainties, however, are not the only ones faced by the Company. Other risks and uncertainties that are not presently known to the Company, that it has failed to identify, or that it currently considers immaterial may adversely affect the Company as well. Except where otherwise noted, the risk factors address risks and uncertainties that may affect the Company as well as its subsidiaries. These risk factors should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (which can be found in Part II, Item 7 of this report beginning on page 22) and the Notes to the Consolidated Financial Statements (which can be found in Part II, Item 8 of this report beginning on page 65).

The levels of, or changes in, interest rates could affect the Company’s business or performance. The Company’s business, results of operations, and financial condition are highly dependent on net interest income, which is the difference between interest income on earning assets (such as loans and investments) and interest expense on deposits and borrowings. Net interest income is significantly affected by market interest rates, which in turn are influenced by monetary and fiscal policies, general economic conditions, the regulatory environment, competitive pressures, and expectations about future changes in interest rates. The policies and regulations of the FRB, in particular, have a substantial impact on market interest rates. See “Government Monetary and Fiscal Policies” in Part I, Item 1 of this report beginning on page 4. The Company may be adversely affected by policies, regulations, or events that have the effect of altering the difference between long-term and short-term interest rates (commonly known as the yield curve), depressing the interest rates associated with its earning assets to levels near the rates associated with its interest expense, or changing the spreads among different interest-rate indices. The Company’s customers and counterparties also may be negatively impacted by the levels

 

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of, or changes in, interest rates, which could increase the risk of delinquency or default on obligations to the Company. The levels of, or changes in, interest rates, moreover, may have an adverse effect on the value of the Company’s investment portfolio, which includes long-term municipal bonds with fixed interest rates, and other financial instruments, the return on or demand for loans, the prepayment speed of loans (including, without limitation, the pace of pay-downs expected or forecasted for commercial real estate and construction loans), the cost or availability of deposits or other funding sources, or the purchase or sale of investment securities. In addition, a rapid change in interest rates could result in interest expense increasing faster than interest income because of differences in the maturities of the Company’s assets and liabilities. Further, if laws impacting taxation and interest rates materially change, or if new laws are enacted, certain of the Company’s services and products, including municipal bonds, may be subject to less favorable tax treatment or otherwise adversely impacted. The level of, and changes in, market interest rates—and, as a result, these risks and uncertainties—are beyond the Company’s control. The dynamics among these risks and uncertainties are also challenging to assess and manage. For example, while the highly accommodative monetary policy currently adopted by the FRB may benefit the Company to some degree by spurring economic activity among its customers, such a policy may ultimately cause the Company more harm by inhibiting its ability to grow or sustain net interest income. See “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk” in Part II, Item 7A of this report beginning on page 51 for a discussion of how the Company monitors and manages interest-rate risk.

Weak or deteriorating economic conditions, more liberal origination or underwriting standards, or financial or systemic shocks could increase the Company’s credit risk and adversely affect its lending or other banking businesses and the value of its loans or investment securities. The Company’s business and results of operations depend significantly on general economic conditions. When those conditions are weak or deteriorating in any of the markets or regions where the Company operates, its business or performance could be adversely affected. The Company’s lending and other banking businesses, in particular, are susceptible to weak or deteriorating economic conditions, which could result in reduced loan demand or utilization rates and at the same time increased delinquencies or defaults. These kinds of conditions also could dampen the demand for products and other services in the Company’s investment-management, asset-servicing, insurance, brokerage, or related businesses. Increased delinquencies or defaults could result as well from the Company adopting—for strategic, competitive, or other reasons—more liberal origination or underwriting standards for extensions of credit or other dealings with its customers or counterparties. If delinquencies or defaults on the Company’s loans or investment securities increase, their value and the income derived from them could be adversely affected, and the Company could incur administrative and other costs in seeking a recovery on its claims and any collateral. Weak or deteriorating economic conditions also may negatively impact the market value and liquidity of the Company’s investment securities, and the Company may be required to record additional impairment charges if investment securities suffer a decline in value that is determined to be other-than-temporary. In addition, to the extent that loan charge-offs exceed estimates, an increase to the amount of provision expense related to the allowance for loan losses would reduce the Company’s income. See “Quantitative and Qualitative Disclosures About Market Risk—Credit Risk Management” in Part II, Item 7A of this report beginning on page 56 for a discussion of how the Company monitors and manages credit risk. A financial or systemic shock and a failure of a significant counterparty or a significant group of counterparties could negatively impact the Company, possibly to a severe degree, due to its role as a financial intermediary and the interconnectedness of the financial system.

A meaningful part of the Company’s loan portfolio is secured by real estate and, as a result, could be negatively impacted by deteriorating or volatile real-estate markets or associated environmental liabilities. At December 31, 2016, 42.2 percent of the Company’s aggregate loan portfolio—comprised of commercial real-estate loans (representing 30.0 percent of the aggregate loan portfolio), construction real-estate loans (representing 7.0 percent of the aggregate loan portfolio), and residential real-estate loans (representing 5.2 percent of the aggregate loan portfolio)—was primarily secured by interests in real estate predominantly located in the States where the Company operates. Other credit extended by the Company may be secured in part by real estate as well. Real-estate values in the markets where this collateral is located may be different from, and in some instances worse than, real-estate values in other markets or in the United States as a whole and may be affected by general economic conditions and a variety of other factors outside of the control of the Company or

 

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its customers. Any deterioration or volatility in these real-estate markets could result in increased delinquencies or defaults, could adversely affect the value of the loans and the income to be derived from them, could give rise to unreimbursed recovery costs, and could reduce the demand for new or additional credit and related banking products and other services, all to the detriment of the Company’s business and performance. In addition, if hazardous or toxic substances were found on any real estate that the Company acquires in foreclosure or otherwise, substantial liability may arise for compliance and remediation costs, personal injury, or property damage.

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

The Company’s investment-management and asset-servicing businesses could be negatively impacted by declines in assets under management or administration or by shifts in the mix of assets under management or administration. The revenues of Scout, Prairie Capital Management (PCM), and the Company’s other investment-management businesses are highly dependent on advisory fee income. These businesses generally earn higher fees on equity-based or alternative investments and strategies and lower fees on fixed income investments and strategies. Advisory-fee income may be negatively impacted by an absolute decline in assets under management or by a shift in the mix of assets under management from equities or alternatives to fixed income. Such a decline or shift could be caused or influenced by any number of factors, such as underperformance in absolute or relative terms, loss of key advisers or other talent, changes in investing preferences or trends, market downturns or volatility, drops in investor confidence, reputational damage, increased competition, or general economic conditions. Any of these factors also could affect clients of UMBFS, and if this were to cause a decline in assets under administration at UMBFS or an adverse shift in the mix of those assets, the performance of UMBFS could suffer.

To the extent that the Company continues to maintain a sizeable portfolio of available-for-sale investment securities, its income may be adversely affected and its reported equity more volatile. As of December 31, 2016, the Company’s securities portfolio totaled approximately $7.7 billion, which represented approximately 37.2 percent of its total assets. Regulatory restrictions and the Company’s investment policies generally result in the acquisition of securities with lower yields than loans. For the year-ended December 31, 2016, the weighted average yield of the Company’s securities portfolio was 2.1 percent as compared to 3.9 percent for its loan portfolio. Accordingly, to the extent that the Company is unable to effectively deploy its funds to originate or acquire loans or other assets with higher yields than those of its investment securities, the Company’s income may be negatively impacted. Additionally, approximately $6.5 billion, or 84.1 percent, of the Company’s investment securities are classified as available for sale and reported at fair value. Unrealized gains or losses on these securities are excluded from earnings and reported in other comprehensive income, which in turn affects the Company’s reported equity. As a result, to the extent that the Company continues to maintain a significant portfolio of available-for-sale securities, its reported equity may experience greater volatility.

The trading volume in the Company’s common stock at times may be low, which could adversely affect liquidity and stock price. Although the Company’s common stock is listed for trading on the NASDAQ Global Select Market, the trading volume in the stock may at times be low and, in relative terms, less than that of

 

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other financial-services companies. A public trading market that is deep, liquid, and orderly depends on the presence in the marketplace of a large number of willing buyers and sellers and narrow bid-ask spreads. These market features, in turn, depend on a number of factors, such as the individual decisions of investors and general economic and market conditions, over which the Company has no control. During any period of lower trading volume in the Company’s common stock, the share price could be more volatile, and the liquidity of the stock could suffer.

The Company operates in a highly regulated industry, and its business or performance could be adversely affected by the legal, regulatory and supervisory frameworks applicable to it, changes in those frameworks, and other legal and regulatory risks and uncertainties. The Company is subject to expansive legal and regulatory frameworks in the United States—at the federal, State, and local levels—and in the foreign jurisdictions where its business segments operate. In addition, the Company is subject to the direct supervision of government authorities charged with overseeing the kinds of financial activities conducted by its business segments. These legal, regulatory, and supervisory frameworks are often designed to protect public or private interests that differ from the interests of the Company’s shareholders or non-deposit creditors. See “Regulation and Supervision” in Part I, Item 1 of this report beginning on page 4. In the wake of the recent global economic crisis, moreover, government scrutiny of all financial-services companies has been amplified, fundamental changes have been made to the banking, securities, and other laws that govern financial services (with the Dodd-Frank Act and Basel III being two of the more prominent examples), and a host of related business practices have been reexamined and reshaped. As a result, the Company expects to continue devoting increased time and resources to risk management, compliance, and regulatory change management. Risks also exist that government authorities could judge the Company’s business or other practices as unsafe, unsound, or otherwise unadvisable and bring formal or informal corrective or enforcement actions against it, including fines or other penalties and directives to change its products or other services. For practical or other reasons, the Company may not be able to effectively defend itself against these actions, and they in turn could give rise to litigation by private plaintiffs. Further, if the laws, rules, and regulations affecting the Company become materially more restrictive, including any changes that would negatively impact the tax treatment of the Company, or its products and services, the Company may be adversely impacted. All of these and other regulatory risks and uncertainties could adversely affect the Company’s reputation, business, results of operations, financial condition, or prospects.

Regulatory or supervisory requirements, future growth, operating results, or strategic plans may prompt the Company to raise additional capital, but that capital may not be available at all or on favorable terms and, if raised, may be dilutive. The Company is subject to safety-and-soundness and capital-adequacy standards under applicable law and to the direct supervision of government authorities. See “Regulation and Supervision” in Part I, Item 1 of this report beginning on page 4. If the Company is not or is at risk of not satisfying these standards or applicable supervisory requirements—whether due to inadequate operating results that erode capital, future growth that outpaces the accumulation of capital through earnings, or otherwise—the Company may be required to raise capital or limit originations of certain types of commercial and mortgage loans. If the Company is required to limit originations of certain types of commercial and mortgage loans, it would thereby reduce the amount of credit available to borrowers and limit opportunities to earn interest income from the loan portfolio. The Company also may be compelled to raise capital if regulatory or supervisory requirements change. In addition, the Company may elect to raise capital for strategic reasons even when it is not required to do so. The Company’s ability to raise capital on favorable terms or at all will depend on general economic and market conditions, which are outside of its control, and on the Company’s operating and financial performance. Accordingly, the Company cannot be assured of its ability to raise capital when needed or on favorable terms. An inability to raise capital when needed or on favorable terms could damage the performance and value of its business, prompt regulatory intervention, and harm its reputation, and if the condition were to persist for any appreciable period of time, its viability as a going concern could be threatened. If the Company is able to raise capital and does so by issuing common shares or convertible securities, the ownership interest of our existing shareholders could be diluted, and the market price of our common shares could decline.

 

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The market price of the Company’s common stock could be adversely impacted by banking, antitrust, or corporate laws that have or are perceived as having an anti-takeover effect. Banking and antitrust laws, including associated regulatory-approval requirements, impose significant restrictions on the acquisition of direct or indirect control over any bank holding company, including the Company. Acquisition of ten percent or more of any class of voting stock of a bank holding company or depository institution, including shares of our common stock, generally creates a rebuttable presumption that the acquirer “controls” the bank holding company or depository institution. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any bank, including our bank.

In addition, a non-negotiated acquisition of control over the Company may be inhibited by provisions of the Company’s restated articles of incorporation and bylaws that have been adopted in conformance with applicable corporate law, such as the ability to issue shares of preferred stock and to determine the rights, terms, conditions and privileges of such preferred stock without shareholder approval. If any of these restrictions were to operate or be perceived as operating to hinder or deter a potential acquirer for the Company, the market price of the Company’s common stock could suffer.

The Company’s business relies on systems, employees, service providers, and counterparties, and failures or errors by any of them or other operational risks could adversely affect the Company. The Company engages in a variety of businesses in diverse markets and relies on systems, employees, service providers, and counterparties to properly oversee, administer, and process a high volume of transactions. This gives rise to meaningful operational risk—including the risk of fraud by employees or outside parties, unauthorized access to its premises or systems, errors in processing, failures of technology, breaches of internal controls or compliance safeguards, inadequate integration of acquisitions, human error, and breakdowns in business continuity plans. Significant financial, business, reputational, regulatory, or other harm could come to the Company as a result of these or related risks and uncertainties. For example, the Company could be negatively impacted if financial, accounting, data-processing, or other systems were to fail or not fully perform their functions. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a pandemic, natural disaster, war, act of terrorism, accident, or other reason. These same risks arise as well in connection with the systems and employees of the service providers and counterparties on whom the Company depends as well as their own third-party service providers and counterparties. See “Quantitative and Qualitative Disclosures About Market Risk—Operational Risk” in Part II, Item 7A of this report beginning on page 58 for a discussion of how the Company monitors and manages operational risk.

Cyber incidents and other security breaches at the Company, at its service providers or counterparties, or in the business community or markets may negatively impact the Company’s business or performance. In the ordinary course of its business, the Company collects, stores, and transmits sensitive, confidential, or proprietary data and other information, including intellectual property, business information, funds-transfer instructions, and the personally identifiable information of its customers and employees. The secure processing, storage, maintenance, and transmission of this information is critical to the Company’s operations and reputation, and if any of this information were mishandled, misused, improperly accessed, lost, or stolen or if the Company’s operations were disrupted, the Company could suffer significant financial, business, reputational, regulatory, or other damage. For example, despite security measures, the Company’s information technology and infrastructure may be breached through cyber-attacks, computer viruses or malware, pretext calls, electronic phishing, or other means. These risks and uncertainties are rapidly evolving and increasing in complexity, and the Company’s failure to effectively mitigate them could negatively impact its business and operations.

Service providers and counterparties also present a source of risk to the Company if their own security measures or other systems or infrastructure were to be breached or otherwise fail. Likewise, a cyber-attack or other security breach affecting the business community, the markets, or parts of them may cycle or cascade through the financial system and adversely affect the Company or its service providers or counterparties. Many of these risks and uncertainties are beyond the Company’s control.

 

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Even when an attempted cyber incident or other security breach is successfully avoided or thwarted, the Company may need to expend substantial resources in doing so, may be required to take actions that could adversely affect customer satisfaction or behavior, and may be exposed to reputational damage. If a breach were to occur, moreover, the Company could be exposed to contractual claims, regulatory actions, and litigation by private plaintiffs, and would additionally suffer reputational harm. Despite the Company’s efforts to safeguard the integrity of systems and controls and to manage third-party risk, the Company may not be able to anticipate or implement effective measures to prevent all security breaches or all risks to the sensitive, confidential, or proprietary information that it or its service providers or counterparties collect, store, or transmit.

The Company is heavily reliant on technology, and a failure or delay in effectively implementing technology initiatives or anticipating future technology needs or demands could adversely affect the Company’s business or performance. Like most financial-services companies, the Company significantly depends on technology to deliver its products and other services and to otherwise conduct business. To remain technologically competitive and operationally efficient, the Company invests in system upgrades, new solutions, and other technology initiatives. Many of these initiatives have a significant duration, are tied to critical systems, and require substantial internal and external resources. Although the Company takes steps to mitigate the risks and uncertainties associated with these initiatives, there is no guarantee that they will be implemented on time, within budget, or without negative operational or customer impact. The Company also may not succeed in anticipating its future technology needs, the technology demands of its customers, or the competitive landscape for technology. In addition, the Company relies upon the expertise and support of service providers to help implement, maintain and/or service certain of its core technology solutions. If the Company cannot effectively manage these service providers, the service parties fail to materially perform, or the Company was to falter in any of the other noted areas, its business or performance could be negatively impacted.

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

The Company faces intense competition from other financial-services and financial-services technology companies, and competitive pressures could adversely affect the Company’s business or performance. The Company faces intense competition in each of its business segments and in all of its markets and geographic regions, and the Company expects competitive pressures to intensify in the future—especially in light of legislative and regulatory initiatives arising out of the recent global economic crisis, technological innovations that alter the barriers to entry, current economic and market conditions, and government monetary and fiscal policies. Competition with financial-services technology companies, or technology companies partnering with financial-services companies, may be particularly intense, due to, among other things, differing regulatory environments. See “Competition” in Part I, Item 1 of this report beginning on page 3. Competitive pressures may drive the Company to take actions that the Company might otherwise eschew, such as lowering the interest rates or fees on loans or raising the interest rates on deposits in order to keep or attract high-quality customers. These pressures also may accelerate actions that the Company might otherwise elect to defer, such as substantial investments in technology or infrastructure. Whatever the reason, actions that the Company takes in response to competition may adversely affect its results of operations and financial condition. These consequences could be exacerbated if the Company is not successful in introducing new products and other services, achieving market acceptance of its products and other services, developing and maintaining a strong customer base, or prudently managing expenses.

 

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The Company’s risk-management and compliance programs or functions may not be effective in mitigating risk and loss. The Company maintains an enterprise risk-management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These include interest-rate risk, credit risk, liquidity risk, market risk, operational risk, reputational risk, and compliance risk. The Company also maintains a compliance program to identify, measure, assess, and report on its adherence to applicable law, policies, and procedures. While the Company assesses and improves these programs on an ongoing basis, there can be no assurance that its frameworks or models for risk management, compliance, and related controls will effectively mitigate risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Company’s risk-management or compliance programs or if its controls break down, the performance and value of the Company’s business could be adversely affected. The Company could be negatively impacted as well if, despite adequate programs being in place, its risk-management or compliance personnel are ineffective in executing them and mitigating risk and loss.

Liquidity is essential to the Company and its business or performance could be adversely affected by constraints in, or increased costs for, funding. The Company defines liquidity as the ability to fund increases in assets and meet obligations as they come due, all without incurring unacceptable losses. Banks are especially vulnerable to liquidity risk because of their role in the maturity transformation of demand or short-term deposits into longer-term loans or other extensions of credit. The Company, like other financial-services companies, relies to a significant extent on external sources of funding (such as deposits and borrowings) for the liquidity needed to conduct its business. A number of factors beyond the Company’s control, however, could have a detrimental impact on the availability or cost of that funding and thus on its liquidity. These include market disruptions, changes in its credit ratings or the sentiment of its investors, the state of the regulatory environment and monetary and fiscal policies, declines in the value of its investment securities, the loss of substantial deposit relationships, financial or systemic shocks, significant counterparty failures, and reputational damage. Unexpected declines or limits on the dividends declared and paid by the Company’s subsidiaries also could adversely affect its liquidity position. While the Company’s policies and controls are designed to ensure that it maintains adequate liquidity to conduct its business in the ordinary course even in a stressed environment, there can be no assurance that its liquidity position will never become compromised. In such an event, the Company may be required to sell assets at a loss in order to continue its operations. This could damage the performance and value of its business, prompt regulatory intervention, and harm its reputation, and if the condition were to persist for any appreciable period of time, its viability as a going concern could be threatened. See “Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk” in Part II, Item 7A of this report beginning on page 57 for a discussion of how the Company monitors and manages liquidity risk.

If the Company’s subsidiaries are unable to make dividend payments or distributions to the Company, it may be unable to satisfy its obligations to counterparties or creditors or make dividend payments to its shareholders. The Company is a legal entity separate and distinct from its bank and nonbank subsidiaries and depends on dividend payments and distributions from those subsidiaries to fund its obligations to counterparties and creditors and its dividend payments to shareholders. See “Regulation and Supervision—Requirements Affecting the Relationships among the Company, Its Subsidiaries, and Other Affiliates” in Part I, Item 1 of this report beginning on page 6. Any of the Company’s subsidiaries, however, may be unable to make dividend payments or distributions to the Company, including as a result of a deterioration in the subsidiary’s performance, investments in the subsidiary’s own future growth, or regulatory or supervisory requirements. If any subsidiary were unable to remain viable as a going concern, moreover, the Company’s right to participate in a distribution of assets would be subject to the prior claims of the subsidiary’s creditors (including, in the case of the Bank, its depositors and the FDIC).

An inability to attract, retain, or motivate qualified employees could adversely affect the Company’s business or performance. Skilled employees are the Company’s most important resource, and competition for talented people is intense. Even though compensation is among the Company’s highest expenses, it may not be able to locate and hire the best people, keep them with the Company, or properly motivate them to perform at a high level. Recent scrutiny of compensation practices, especially in the financial-services industry, has made this

 

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only more difficult. In addition, some parts of the Company’s business are particularly dependent on key personnel, including investment management, asset servicing, and commercial lending. If the Company were to lose and find itself unable to replace these personnel or other skilled employees or if the competition for talent drove its compensation costs to unsustainable levels, the Company’s business, results of operations, and financial condition could be negatively impacted.

The Company is subject to a variety of litigation and other proceedings, which could adversely affect its business or performance. The Company is involved from time to time in a variety of judicial, alternative-dispute, and other proceedings arising out of its business or operations. The Company establishes reserves for claims when appropriate under generally accepted accounting principles, but costs often can be incurred in connection with a matter before any reserve has been created. The Company also maintains insurance policies to mitigate the cost of litigation and other proceedings, but these policies have deductibles, limits, and exclusions that may diminish their value or efficacy. Despite the Company’s efforts to appropriately reserve for claims and insure its business and operations, the actual costs associated with resolving a claim may be substantially higher than amounts reserved or covered. Substantial legal claims, even if not meritorious, could have a detrimental impact on the Company’s business, results of operations, and financial condition and could cause reputational harm.

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

The Company’s selection of accounting methods, assumptions, and estimates could impact its financial statements and reported earnings. To comply with generally accepted accounting principles, management must sometimes exercise judgment in selecting, determining, and applying accounting methods, assumptions, and estimates. This can arise, for example, in the determination of the allowance for loan losses, the calculation of deferred tax assets, the evaluation of goodwill for potential impairments, or the determination of the fair value of assets or liabilities. Furthermore, accounting methods, assumptions and estimates are part of acquisition purchase accounting and the calculation of the fair value of assets and liabilities that have been purchased, including credit-impaired loans. The judgments required of management can involve difficult, subjective, or complex matters with a high degree of uncertainty, and several different judgments could be reasonable under the circumstances and yet result in significantly different results being reported. See “Critical Accounting Policies and Estimates” in Part II, Item 7 of this report beginning on page 48. If management’s judgments are later determined to have been inaccurate, the Company may experience unexpected losses that could be substantial.

The Company’s ability to successfully make opportunistic acquisitions is subject to significant risks, including the risk that government authorities will not provide the requisite approvals, the risk that integrating acquisitions may be more difficult, costly, or time consuming than expected, and the risk that the value of acquisitions may be less than anticipated. The Company may make opportunistic acquisitions of other financial-services companies or businesses from time to time. These acquisitions may be subject to regulatory approval, and there can be no assurance that the Company will be able to obtain that approval in a timely manner or at all. Even when the Company is able to obtain regulatory approval, the failure of other closing conditions to be satisfied or waived could delay the completion of an acquisition for a significant period of time or prevent it from occurring altogether. Any failure or delay in closing an acquisition could adversely affect the Company’s reputation, business, results of operations, financial condition, or prospects.

Additionally, acquisitions involve numerous risks and uncertainties, including lower-than-expected performance or higher-than-expected costs, difficulties related to integration, diversion of management’s attention from other business activities, changes in relationships with customers or counterparties, and the potential loss of key employees. An acquisition also could be dilutive to the Company’s current shareholders if its common stock were issued to fully or partially pay or fund the purchase price. The Company, moreover, may

 

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not be successful in identifying acquisition candidates, integrating acquired companies or businesses, or realizing the expected value from acquisitions. There is significant competition for valuable acquisition targets, and the Company may not be able to acquire other companies or businesses on attractive terms or at all. There can be no assurance that the Company will pursue future acquisitions, and the Company’s ability to grow and successfully compete in its markets and regions may be impaired if it chooses not to pursue or is unable to successfully complete acquisitions.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved comments from the staff of the SEC required to be disclosed herein as of the date of this report.

 

ITEM 2. PROPERTIES

The Company’s headquarters building, the UMB Bank Building, is located at 1010 Grand Boulevard in downtown Kansas City, Missouri, and opened in July 1986. All 250,000 square feet is occupied by departments and customer service functions of the Bank, as well as offices of the Company.

Other main facilities of the Bank in downtown Kansas City, Missouri are located at 928 Grand Boulevard (185,000 square feet); 906 Grand Boulevard (140,000 square feet); and 1008 Oak Street (180,000 square feet). Both the 928 Grand and 906 Grand buildings house backroom support functions. The 928 Grand building also houses Scout. Additionally, within the 906 Grand building there is 8,000 square feet of space leased to several small tenants. The 928 Grand building underwent a major renovation during 2004 and 2005. The 928 Grand building is connected to the UMB Bank Building (1010 Grand) by an enclosed elevated pedestrian walkway. The 1008 Oak building, which opened during the second quarter of 1999, houses the Company’s operations and data processing functions.

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

As of December 31, 2016, the Bank operated a total of 106 banking centers and three wealth management offices.

UMBFS leases 88,944 square feet at 235 West Galena Street in Milwaukee, Wisconsin, for its fund services operations headquarters. Additionally, UMBFS leases 37,300 square feet at 2225 Washington Boulevard in Ogden, Utah, and 6,302 square fee in 223 Wilmington West Chester Pike in Chadds Ford, Pennsylvania.

Additional information with respect to properties, premises and equipment is presented in Note 1, “Summary of Significant Accounting Policies,” and Note 8, “Premises and Equipment,” in the Notes to the Consolidated Financial Statements in Item 8, pages 67 and 89 of this report.

 

ITEM 3. LEGAL PROCEEDINGS

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

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

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

The Company’s common stock is traded on the NASDAQ Global Select Stock Market under the symbol “UMBF.” As of February 16, 2017, the Company had 2,430 shareholders of record. Information regarding the Company’s common stock for each quarterly period within the two most recent fiscal years is set forth in the table below.

 

Per Share    Three Months Ended  
2016    March 31      June 30      Sept 30      Dec 31  

Dividend

     $0.245       $ 0.245       $ 0.245       $ 0.255   

Book value

     39.38         40.44         40.86         39.51   

Market price:

           

High

     53.89         58.89         61.24         81.11   

Low

     39.55         48.49         50.60         58.71   

Close

     51.63         53.21         59.45         77.12   
Per Share    Three Months Ended  
2015    March 31      June 30      Sept 30      Dec 31  

Dividend

   $ 0.235       $ 0.235       $ 0.235       $ 0.245   

Book value

     36.76         37.68         38.56         38.34   

Market price:

           

High

     57.32         58.84         58.44         54.87   

Low

     47.26         49.41         47.03         45.14   

Close

     52.89         57.02         50.81         46.55   

Information concerning restrictions on the ability of the Company to pay dividends and the Company’s subsidiaries to transfer funds to the Company is presented in Item 1, page 6 and Note 10, “Regulatory Requirements,” in the Notes to the Consolidated Financial Statements provided in Item 8, pages 92 and 93 of this report. Information concerning securities the Company issued under its equity compensation plans is contained in Item 12, pages 119 and 120 and in Note 11, “Employee Benefits,” in the Notes to the Consolidated Financial Statements provided in Item 8, pages 94 through 97 of this report.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about share repurchase activity by the Company during the quarter ended December 31, 2016:

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period    Total
Number of
Shares
Purchased
     Average
Price
Paid per
Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
 

October 1 – October 31, 2016

     655       $ 60.96         655         1,976,415   

November 1 – November 30, 2016

     23,842         70.12         23,842         1,952,573   

December 1 – December 31, 2016

     5,937         78.54         5,937         1,946,636   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     30,434       $ 71.57         30,434      
  

 

 

    

 

 

    

 

 

    

On April 26, 2016, the Company announced a plan to repurchase up to two million shares of common stock. This plan will terminate on April 25, 2017. The Company has not made any repurchases other than through this plan. All open market share purchases under the share repurchase plans are intended to be within the scope of Rule 10b-18 promulgated under the Exchange Act.

 

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ITEM 6. SELECTED FINANCIAL DATA

For a discussion of factors that may materially affect the comparability of the information below, please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, pages 22 through 51, of this report.

FIVE-YEAR FINANCIAL SUMMARY

(in thousands except per share data)

As of and for the years ended December 31,

 

     2016     2015     2014     2013     2012  
EARNINGS           

Interest income

   $ 523,031      $ 430,681      $ 363,871      $ 348,341      $ 339,685   

Interest expense

     27,708        18,614        13,816        15,072        19,629   

Net interest income

     495,323        412,067        350,055        333,269        320,056   

Provision for loan losses

     32,500        15,500        17,000        17,500        17,500   

Noninterest income

     476,075        466,454        498,688        491,833        458,122   

Noninterest expense

     731,894        703,736        665,680        623,204        589,669   

Net income

     158,801        116,073        120,655        133,965        122,717   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AVERAGE BALANCES

          

Assets

   $ 19,592,685      $ 17,786,442      $ 15,998,893      $ 15,030,762      $ 13,389,192   

Loans and loans held for sale

     9,992,874        8,425,107        6,975,338        6,221,318        5,251,278   

Total investment securities

     7,665,012        7,330,246        7,053,837        7,034,542        6,528,523   

Interest-bearing due from banks

     410,163        664,752        843,134        663,818        547,817   

Deposits

     15,338,741        14,078,290        12,691,273        11,930,318        10,521,658   

Long-term debt

     81,905        58,571        6,059        4,748        5,879   

Shareholders’ equity

     1,983,749        1,805,856        1,599,765        1,337,107        1,258,284   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

YEAR-END BALANCES

          

Assets

   $ 20,682,532      $ 19,094,245      $ 17,500,960      $ 16,911,852      $ 14,927,196   

Loans and loans held for sale

     10,545,662        9,431,350        7,466,418        6,521,869        5,690,626   

Total investment securities

     7,690,108        7,568,870        7,285,667        7,051,127        7,134,316   

Interest-bearing due from banks

     715,823        522,877        1,539,386        2,093,467        720,500   

Deposits

     16,570,614        15,092,752        13,616,859        13,640,766        11,653,365   

Long-term debt

     76,772        86,070        8,810        5,055        5,879   

Shareholders’ equity

     1,962,384        1,893,694        1,643,758        1,506,065        1,279,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PER SHARE DATA

          

Earnings - basic

   $ 3.25      $ 2.46      $ 2.69      $ 3.25      $ 3.07   

Earnings - diluted

     3.22        2.44        2.65        3.20        3.04   

Cash dividends

     0.99        0.95        0.91        0.87        0.83   

Dividend payout ratio

     30.46     38.62     33.83     26.77     27.04

Book value

   $ 39.51      $ 38.34      $ 36.10      $ 33.30      $ 31.71   

Market price

          

High

     81.11        58.84        68.27        65.44        52.61   

Low

     39.55        45.14        51.87        43.27        37.68   

Close

     77.12        46.55        56.89        64.28        43.82   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average assets

     0.81     0.65     0.75     0.89     0.92

Return on average equity

     8.01        6.43        7.54        10.02        9.75   

Average equity to average assets

     10.12        10.15        10.00        8.90        9.40   

Total risk-based capital ratio

     12.87        12.80        14.04        14.43        11.92   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

MANAGEMENT’S DISCUSSION AND ANALYSIS

This Management’s Discussion and Analysis highlights the material changes in the results of operations and changes in financial condition for each of the three years in the period ended December 31, 2016. It should be read in conjunction with the accompanying Consolidated Financial Statements, Notes to Consolidated Financial Statements, and other financial statistics appearing elsewhere in this Annual Report on Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

 

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

 

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

 

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

 

    changes in accounting standards or policies;

 

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

 

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

 

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

 

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

 

    adverse publicity or other reputational harm to the Company;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    the adequacy of the Company’s corporate governance, risk-management framework, compliance programs, or internal control over financial reporting, 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 or retain qualified employees;

 

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

 

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

Results of Operations

Overview

The Company focuses on the following four core strategic objectives. Management believes these strategic objectives will guide its efforts to achieving its vision, to deliver the unparalleled customer experience, all the while seeking to improve net income and strengthen the balance sheet while undertaking prudent risk management.

 

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The first strategic objective is a focus to continuously improve operating efficiencies. The Company has recently focused on identifying efficiencies that simplify our organizational and reporting structures, streamline back office functions and take advantage of synergies and newer technologies among various platforms and distribution networks. During 2015, the Company identified a total of $32.9 million in annualized savings related to the elimination of employee positions and business process improvements. At December 31, 2016, all but $3 million of these savings had been recognized, which decelerated the growth rate of the Company’s operating expenses. The remainder of such savings is expected to be phased in throughout 2017. In addition, the Company has and expects to continue identifying ongoing efficiencies through the normal course of business that, when combined with increased revenue, will contribute to improved operating leverage. During 2016, total revenue increased 10.6 percent, while noninterest expense increased 4.0 percent. As part of this initiative, the Company continues to invest in technological advances that it believes will help management drive operating leverage 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 profitable loan and deposit growth and the optimization of the balance sheet. During 2016, we made progress on this strategy, as illustrated by an increase in net interest income of $83.3 million, or 20.2 percent, from the previous year. The Company has continued to show increased net interest income in a historically low interest rate environment through the effects of increased volume and mix of average earning assets and a low cost of funds in its Consolidated Balance Sheets. In addition, on May 31, 2015 (the Acquisition Date), the Company acquired all of the outstanding common stock of Marquette Financial Companies (Marquette). Information related to the acquisition is set forth in Note 15, “Acquisitions,” in the Notes to the Consolidated Financial Statements, which can be found in Part II, Item 8, pages 101 through 103 of this report. The Marquette acquisition added earning assets with an acquired value of $1.2 billion to the Company’s Consolidated Balance Sheets. Average earning assets at December 31, 2016, increased $1.8 billion, or 10.7 percent from December 31, 2015. The funding for these assets was driven primarily by a 17.6 percent increase in average interest-bearing liabilities. Average loan balances increased $1.6 billion, or 18.6 percent compared to the same period in 2015. Net interest margin, on a tax-equivalent basis, increased 24 basis points compared to the same period in 2015.

The third strategic objective is to grow the Company’s revenue from noninterest sources. The Company has continued to emphasize its diverse operations throughout all economic cycles. This strategy has provided revenue diversity, helping to reduce the impact of sustained low interest rates and position the Company to benefit in periods of growth. During 2016, noninterest income increased $9.6 million, or 2.1 percent, to $476.1 million for the year ended December 31, 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, institutional banking, and treasury management businesses. At December 31, 2016, noninterest income represented 49.0 percent of total revenues, compared to 53.1 percent at December 31, 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 organic growth, new business development, 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 appropriately utilizing a share repurchase program. At December 31, 2016, the Company had a total risk-based capital ratio of 12.87 percent and $2.0 billion in total shareholders’ equity, an increase of $68.7 million, or 3.6 percent, compared to total shareholders’ equity at December 31, 2015. The Company repurchased 323,058 shares of common stock at an average price of $50.66 per share during 2016 and paid $49.0 million in dividends, which represents a 6.6 percent increase compared to dividends paid during 2015.

 

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Table of Contents

Earnings Summary

The Company recorded consolidated net income of $158.8 million for the year-ended December 31, 2016. This represents a 36.8 percent increase over 2015. Net income for 2015 was $116.1 million, or a decrease of 3.8 percent compared to 2014. Basic earnings per share for the year ended December 31, 2016, were $3.25 per share compared to $2.46 per share in 2015, an increase of 32.1 percent. Basic earnings per share were $2.69 per share in 2014, or a decrease of 8.6 percent from 2014 to 2015. Fully diluted earnings per share increased 32.0 percent from 2015 to 2016, and decreased 7.9 percent from 2014 to 2015.

The Company’s net interest income increased to $495.3 million in 2016 compared to $412.1 million in 2015 and $350.1 million in 2014. In total, a favorable volume variance coupled with a favorable rate variance, resulted in an $83.3 million increase in net interest income in 2016, compared to 2015. See Table 2 on page 28. The favorable volume variance on earning assets was predominantly driven by the increase in average loan balances of $1.6 billion, or 18.6 percent, for 2016 compared to the same period in 2015. Net interest margin, on a tax-equivalent basis, increased to 2.88 percent for 2016, compared to 2.64 percent for the same period 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. Marquette 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. Despite the current low interest rate environment, the Company continues to see benefit from interest-free funds. The impact of this benefit increased one basis point compared to 2015 and is illustrated on Table 3 on page 29. The current economic environment has made it difficult to anticipate the future of the Company’s margins. The magnitude and duration of this impact will be largely dependent upon the FRB’s policy decisions and market movements. See Table 19 in Item 7A on page 52 for an illustration of the impact of an interest rate increase or decrease on net interest income as of December 31, 2016.

The Company had an increase of $9.6 million, or 2.1 percent, in noninterest income in 2016, as compared to 2015, and a $32.2 million, or 6.5 percent, decrease in 2015, compared to 2014. The increase in 2016 is primarily attributable to unrealized equity gains on alternative investments, increase in bank-owned and company-owned life insurance income, and brokerage income, partially offset by lower trust and securities processing income. The change in noninterest income in 2016 from 2015, and 2015 from 2014 is illustrated on Table 6 on page 32.

Noninterest expense increased in 2016 by $28.2 million, or 4.0 percent, compared to 2015 and increased by $38.1 million, or 5.7 percent, in 2015 compared to 2014. The increase in 2016 is primarily driven by an increase of $26.3 million, or 6.5 percent, in salary and employee benefit expense. The increase in noninterest expense in 2016 from 2015, and 2015 from 2014 is illustrated on Table 7 on page 33.

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 interest rates paid on each affect net interest income. Table 2 summarizes the change in net interest income resulting from changes in volume and rates for 2016, 2015 and 2014.

Net interest margin, presented in Table 1 on page 26, is calculated as net interest income on a fully tax equivalent basis (FTE) as a percentage of average earning assets. Net interest income is presented on a tax-equivalent basis to adjust for the tax-exempt status of earnings from certain loans and investments, which are primarily obligations of state and local governments. A critical component of net interest income and related net interest margin is the percentage of earning assets funded by interest-free sources. Table 3 analyzes net interest margin for the three years ended December 31, 2016, 2015 and 2014. Net interest income, average balance sheet amounts and the corresponding yields earned and rates paid for the years 2014 through 2016 are presented in Table 1 below.

 

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The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates.

Table 1

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

(in millions)    

 

     2016     2015  
     Average
Balance
    Interest
Income/
Expense
(1)
     Rate
Earned/
Paid (1)
    Average
Balance
    Interest
Income/
Expense
(1)
     Rate
Earned/
Paid (1)
 

ASSETS

              

Loans and loans held for sale (FTE) (2) (3)

   $ 9,992.9      $ 386.3         3.87   $ 8,425.1      $ 308.3         3.66

Securities:

              

Taxable

     4,545.0        73.6         1.62        4,823.7        75.3         1.56   

Tax-exempt (FTE)

     3,077.6        88.3         2.87        2,473.8        67.3         2.72   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total securities

     7,622.6        161.9         2.12        7,297.5        142.6         1.95   

Federal funds sold and resell agreements

     188.5        2.7         1.44        76.1        0.7         0.92   

Interest-bearing

     410.2        2.3         0.57        664.8        2.4         0.35   

Other earning assets (FTE)

     42.4        0.8         1.85        32.7        0.5         1.46   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets (FTE)

     18,256.6        554.0         3.03        16,496.2        454.5         2.75   

Allowance for loan losses

     (85.2          (77.9     

Cash and due from banks

     394.7             496.4        

Other assets

     1,026.5             871.7        
  

 

 

        

 

 

      

Total assets

   $ 19,592.6           $ 17,786.4        
  

 

 

        

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

Interest-bearing demand and savings deposits

   $ 8,267.6      $ 11.4         0.14   $ 7,010.3      $ 7.9         0.11

Time deposits under $250,000

     601.4        3.3         0.55        700.9        3.9         0.56   

Time deposits of $250,000 or more

     563.7        3.2         0.57        439.4        2.5         0.57   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     9,432.7        17.9         0.19        8,150.6        14.3         0.18   

Short-term debt

     3.8        —           —          1.9        —           —     

Long-term debt

     81.9        3.2         3.91        57.3        2.5         4.36   

Federal funds purchased and repurchase agreements

     2,005.6        6.6         0.33        1,590.8        1.8         0.11   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     11,524.0        27.7         0.24        9,800.6        18.6         0.19   

Noninterest bearing demand deposits

     5,906.0             5,927.6        

Other

     178.9             252.3        
  

 

 

             

Total

     17,608.9             15,980.5        
  

 

 

        

 

 

      

Total shareholders’ equity

     1,983.7             1,805.9        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 19,592.6           $ 17,786.4        
  

 

 

        

 

 

      

Net interest income (FTE)

     $ 526.3           $ 435.9      

Net interest spread (FTE)

          2.79          2.56

Net interest margin (FTE)

          2.88          2.64
       

 

 

        

 

 

 

 

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(1) Interest income and yields are stated on a fully tax-equivalent (FTE) basis, using a marginal tax rate of 35%. The tax-equivalent interest income and yields give effect to tax-exempt interest income net of the disallowance of interest expense, for federal income tax purposes related to certain tax-free assets. Rates earned/paid may not compute to the rates shown due to presentation in millions. The tax-equivalent interest income totaled $31.0 million, $23.8 million, and $21.2 million in 2016, 2015, and 2014, respectively.
(2) Loan fees are included in interest income. Such fees totaled $13.3 million, $11.4 million, and $9.9 million in 2016, 2015, and 2014, respectively.
(3) Loans on non-accrual are included in the computation of average balances. Interest income on these loans is also included in loan income.

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

(in millions)    

 

     2014  
     Average
Balance
    Interest
Income/
Expense
(1)
     Rate
Earned/
Paid (1)
 

ASSETS

       

Loans and loans held for sale (FTE) (2) (3)

   $ 6,975.3     $ 245.3        3.52

Securities:

       

Taxable

     4,898.8       76.2        1.56  

Tax-exempt (FTE)

     2,122.8       60.4        2.84  
  

 

 

   

 

 

    

 

 

 

Total securities

     7,021.6       136.6        1.94  

Federal funds sold and resell agreements

     48.9       0.2        0.53  

Interest-bearing

     843.2       2.5        0.30  

Other earning assets (FTE)

     32.2       0.5        1.46  
  

 

 

   

 

 

    

 

 

 

Total earning assets (FTE)

     14,921.2       385.1        2.58  

Allowance for loan losses

     (76.5     

Cash and due from banks

     435.3       

Other assets

     718.9       
  

 

 

      

Total assets

   $ 15,998.9       
  

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

       

Interest-bearing demand and savings deposits

   $ 6,403.5     $ 6.2        0.10

Time deposits under $250,000

     549.6       3.0        0.55  

Time deposits of $250,000 or more

     541.6       3.0        0.55  
  

 

 

   

 

 

    

 

 

 

Total interest bearing deposits

     7,494.7       12.2        0.16  

Short-term debt

     —         —          —    

Long-term debt

     6.1       —          —    

Federal funds purchased and repurchase agreements

     1,535.0       1.6        0.11  
  

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     9,035.8       13.8        0.15  

Noninterest bearing demand deposits

     5,196.5       

Other

     166.8       
  

 

 

      

Total

     14,399.1       
  

 

 

      

Total shareholders’ equity

     1,599.8       
  

 

 

      

Total liabilities and shareholders’ equity

   $ 15,998.9       
  

 

 

      

Net interest income (FTE)

     $ 371.3     

Net interest spread (FTE)

          2.43

Net interest margin (FTE)

          2.49
       

 

 

 

 

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Table 2

RATE-VOLUME ANALYSIS (in thousands)

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

 

Average Volume      Average Rate    

2016 vs. 2015

   Increase (Decrease)  
2016      2015      2016     2015        Volume     Rate     Total  
         

Change in interest earned on:

      
  $  9,992,874      $ 8,425,107        3.87     3.66  

Loans

   $ 59,847     $ 18,102     $ 77,949  
         

Securities:

      
  4,545,013        4,823,710        1.62       1.56    

Taxable

     (4,450     2,683       (1,767
  3,077,562        2,473,811        2.87       2.72    

Tax-exempt

     11,330       2,588       13,918  
  188,572        76,108        1.44       0.92    

Federal funds and resell agreements

     1,453       558       2,011  
  410,163        664,752        0.57       0.35    

Interest-bearing due from banks

     (1,114     1,099       (15
  42,437        32,725        1.85       1.46    

Other

     134       120       254  

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
  18,256,621        16,496,213        3.03       2.75    

Total

     67,200       25,150       92,350  
         

Change in interest incurred on:

      
  9,432,720        8,150,588        0.19       0.18    

Interest-bearing deposits

     2,370       1,297       3,667  
  2,005,631        1,590,776        0.33       0.11    

Federal funds and repurchase agreements

     573       4,166       4,739  
  85,658        59,174        3.79       4.33    

Trading securities

     1,035       (347     688  

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
  $11,524,009      $ 9,800,538        0.24     0.19  

Total

     3,978       5,116       9,094  

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
          Net interest income    $ 63,222     $ 20,034     $ 83,256  
            

 

 

   

 

 

   

 

 

 

 

Average Volume      Average Rate    

2015 vs. 2014

   Increase (Decrease)  
2015      2014      2015     2014        Volume     Rate     Total  
         

Change in interest earned on:

      
  $8,425,107      $ 6,975,338        3.66     3.52  

Loans

   $ 53,057     $ 9,990     $ 63,047  
         

Securities:

      
  4,823,710        4,898,826        1.56       1.56    

Taxable

     (1,173     296       (877
  2,473,811        2,122,822        2.72       2.84    

Tax-exempt

     7,565       (3,176     4,389  
  76,108        48,869        0.92       0.53    

Federal funds and resell agreements

     249       189       438  
  664,752        843,134        0.35       0.30    

Interest-bearing due from banks

     (632     463       (169
  32,725        32,189        1.46       1.46    

Other

     (14     (4     (18

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
  16,496,213        14,921,178        2.75       2.58    

Total

     59,052       7,758       66,810  
         

Change in interest incurred on:

      
  8,150,588        7,494,744        0.18       0.16    

Interest-bearing deposits

     1,148       879       2,027  
  1,590,776        1,535,038        0.11       0.11    

Federal funds and repurchase agreements

     63       106       169  
  59,174        6,059        4.33       (0.69  

Trading securities

     2,298       304       2,602  

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
  $9,800,538      $ 9,035,841        0.19     0.15  

Total

     3,509       1,289       4,798  

 

 

    

 

 

    

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
          Net interest income    $ 55,543     $ 6,469     $ 62,012  
            

 

 

   

 

 

   

 

 

 

 

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Table 3

ANALYSIS OF NET INTEREST MARGIN (in thousands)

 

     2016     2015     2014  

Average earning assets

   $ 18,256,621      $ 16,496,213      $ 14,921,178   

Interest-bearing liabilities

     11,524,009        9,800,538        9,035,841   
  

 

 

   

 

 

   

 

 

 

Interest-free funds

   $ 6,732,612      $ 6,695,675      $ 5,885,337   
  

 

 

   

 

 

   

 

 

 

Free funds ratio (interest free funds to average earning assets)

     36.88     40.59     39.44
  

 

 

   

 

 

   

 

 

 

Tax-equivalent yield on earning assets

     3.03     2.75     2.58

Cost of interest-bearing liabilities

     0.24        0.19        0.15   
  

 

 

   

 

 

   

 

 

 

Net interest spread

     2.79     2.56     2.43

Benefit of interest-free funds

     0.09        0.08        0.06   
  

 

 

   

 

 

   

 

 

 

Net interest margin

     2.88     2.64     2.49
  

 

 

   

 

 

   

 

 

 

The Company experienced an increase in net interest income of $83.3 million, or 20.2 percent, for the year-ended December 31, 2016, compared to 2015. This follows an increase of $62.0 million, or 17.7 percent, for the year-ended December 31, 2015, compared to 2014. As noted above, the impact of the Marquette acquisition is included in these results. Average earning assets increased by $1.8 billion, or 10.7 percent, compared to the same period in 2015. Net interest margin, on a tax-equivalent basis, increased to 2.88 percent for 2016 compared to 2.64 percent in 2015. As illustrated in Table 2, the 2016 and 2015 increases are primarily due to the favorable volume variances in earning assets.    

The Company funds a significant portion of its balance sheet with noninterest-bearing demand deposits. Noninterest-bearing demand deposits represented 40.2 percent, 41.8 percent and 41.4 percent of total outstanding deposits at December 31, 2016, 2015 and 2014, respectively. As illustrated in Table 3, the impact from these interest-free funds was nine basis points in 2016, compared to eight basis points in 2015 and six basis points in 2014.    

The Company has experienced an increase in net interest income during the 2016 due to a volume variance of $63.0 million and a rate variance of $20.2 million. The Marquette acquisition also influenced these variances as 2016 was the first full year of Marquette’s earning assets being included in the Company’s Consolidated Balance Sheets. The average rate on earning assets during 2016 has increased by 28 basis points, while the average rate on interest-bearing liabilities increased by five basis points, resulting in a 23 basis point increase in spread. The volume of loans has increased from an average of $8.4 billion in 2015 to an average of $10.0 billion in 2016. Loan-related earning assets tend to generate a higher spread than those earned in the Company’s investment portfolio. By design, the Company’s investment portfolio is moderate in duration and liquid in its composition of assets.

During 2017, approximately $1.1 billion of available for sale securities are expected to have principal repayments. This includes approximately $386 million which will have principal repayments during the first quarter of 2017. The available for sale investment portfolio had an average life of 54.3 months, 44.8 months, and 43.6 months as of December 31, 2016, 2015, and 2014, respectively.

Provision and Allowance for Loan Losses

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

 

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Table of Contents

Table 4 presents the components of the allowance by loan portfolio segment. The Company manages the ALL against the risk in the entire loan portfolio and therefore, the allocation of the ALL to a particular loan segment may change in the future. Management of the Company believes the present ALL is adequate considering the Company’s loss experience, delinquency trends and current economic conditions. Future economic conditions and borrowers’ ability to meet their obligations, however, are uncertainties which could affect the Company’s ALL and/or need to change its current level of provision. For more information on loan portfolio segments and ALL methodology refer to Note 3, “Loans and Allowance for Loan Losses,” in the Notes to the Consolidated Financial Statements.

Table 4

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (in thousands)

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

 

     December 31,  
Loan Category    2016      2015      2014      2013      2012  

Commercial

   $ 71,657       $ 63,847       $ 55,349       $ 48,886       $ 43,390   

Real estate

     10,569         8,220         10,725         15,342         15,506   

Consumer

     9,311         8,949         9,921         10,447         12,470   

Leases

     112         127         145         76         60   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance

   $ 91,649       $ 81,143       $ 76,140       $ 74,751       $ 71,426   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Table 5 presents a five-year summary of the Company’s ALL. Also, please see “Quantitative and Qualitative Disclosures About Market Risk—Credit Risk Management” on page 56 in this report for information relating to nonaccrual, past due, restructured loans, and other credit risk matters. For more information on loan portfolio segments and ALL methodology refer to Note 3, “Loans and Allowance for Loan Losses,” in the Notes to the Consolidated Financial Statements.

As illustrated in Table 5 below, the ALL increased as a percentage of total loans to 0.87 percent as of December 31, 2016, compared to 0.86 percent as of December 31, 2015. Based on the factors above, provision for loan loss totaled $32.5 million for the year-ended December 31, 2016, which is an increase of $17.0 million, or 109.7 percent, compared to the same period in 2015. This provision for loan losses totaled $15.5 million and $17.0 million for the years-ended December 31, 2015 and 2014, respectively.

 

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Table 5    

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (in thousands)

 

     2016     2015     2014     2013     2012  

Allowance-beginning of year

   $ 81,143      $ 76,140      $ 74,751      $ 71,426      $ 72,017   

Provision for loan losses

     32,500        15,500        17,000        17,500        17,500   

Charge-offs:

          

Commercial

     (12,788     (5,239     (7,307     (4,748     (8,446

Consumer

          

Credit card

     (8,436     (8,555     (10,104     (10,531     (11,148

Other

     (843     (1,103     (1,323     (1,600     (1,530

Real estate

     (6,756     (214     (259     (775     (932
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (28,823     (15,111     (18,993     (17,654     (22,056

Recoveries:

          

Commercial

     3,596        1,824        848        867        1,136   

Consumer

          

Credit card

     1,730        1,802        1,803        1,720        1,766   

Other

     518        667        687        815        1,035   

Real estate

     985        321        44        77        28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     6,829        4,614        3,382        3,479        3,965   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (21,994     (10,497     (15,611     (14,175     (18,091
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance-end of year

   $ 91,649      $ 81,143      $ 76,140      $ 74,751      $ 71,426   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loans, net of unearned interest

   $ 9,986,151      $ 8,423,997      $ 6,974,246      $ 6,217,240      $ 5,243,264   

Loans at end of year, net of unearned interest

     10,540,383        9,430,761        7,465,794        6,520,512        5,686,749   

Allowance to loans at year-end

     0.87     0.86     1.02     1.15     1.26

Allowance as a multiple of net charge-offs

     4.17     7.73     4.88     5.27     3.95

Net charge-offs to:

          

Provision for loan losses

     67.67     67.72     91.83     81.00     103.38

Average loans

     0.22        0.12        0.22        0.23        0.35   

Noninterest Income

A key objective of the Company is the growth of noninterest income to provide a diverse source of revenue not directly tied to interest rates. Fee-based services are typically non-credit related and are not generally affected by fluctuations in interest rates. Noninterest income increased in 2016 by $9.6 million, or 2.1 percent, compared to 2015 and decreased in 2015 by $32.2 million, or 6.5 percent, compared to 2014. The increase in 2016 is primarily attributable to higher unrealized equity gains on alternative investments, increases in bank-owned and company-owned life insurance income, and brokerage income, offset by lower trust and securities processing income. The decrease in 2015, compared to 2014, is primarily attributable to lower trust and securities processing income and unrealized equity losses on alternative investments, which was partially offset by an increase in gains on securities available for sale.

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

 

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Table 6

SUMMARY OF NONINTEREST INCOME (in thousands)

 

     Year Ended December 31,      Dollar Change     Percent Change  
     2016      2015     2014      16-15     15-14     16-15     15-14  

Trust and securities processing

   $ 239,879       $ 262,056      $ 288,054       $ (22,177   $ (25,998     (8.5 )%      (9.0 )% 

Trading and investment banking

     21,422         20,218        19,398         1,204        820        6.0        4.2   

Service charges on deposit accounts

     86,662         86,460        85,299         202        1,161        0.2        1.4   

Insurance fees and commissions

     4,188         2,530        3,011         1,658        (481     65.5        (16.0

Brokerage fees

     17,833         11,753        10,761         6,080        992        51.7        9.2   

Bankcard fees

     68,749         69,211        67,250         (462     1,961        (0.7     2.9   

Gains on sales of securities available for sale, net

     8,509         10,402        4,127         (1,893     6,275        (18.2     >100.0   

Equity earnings (losses) on alternative investments

     2,695         (12,188     3,975         14,883        (16,163     >100.0        (>100.0

Other

     26,138         16,012        16,813         10,126        (801     63.2        (4.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 476,075       $ 466,454      $ 498,688       $ 9,621      $ (32,234     2.1     (6.5 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income and the year-over-year changes in noninterest income are summarized in Table 6 above. The dollar change and percent change columns highlight the respective net increase or decrease in the categories of noninterest income in 2016 compared to 2015, and in 2015 compared to 2014.

Trust and securities processing income consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and investment management services, and mutual fund assets servicing. This income category decreased by $22.2 million, or 8.5 percent in 2016, compared to 2015, and decreased by $26.0 million, or 9.0 percent in 2015, compared to 2014. The Company increased fee income from institutional and personal investment management services by $1.8 million in 2016, compared to 2015, and $5.3 million in 2015, compared to 2014. Increases of $1.4 million and $2.4 million were attributable to Marquette in 2016 and 2015, respectively. Fund administration and custody services fee income decreased by $2.8 million in 2016, compared to 2015, and increased by $2.9 million in 2015, compared to 2014. Advisory fee income from the Scout funds decreased $22.9 million to $33.1 million in 2016 compared to 2015 and decreased $35.6 million in 2015 compared to 2014 due to changes in the underlying assets under management. During the period of December 31, 2015 to December 31, 2016 total Scout AUM increased from $27.2 billion to $27.3 billion, while during the period of December 31, 2014 to December 31, 2015 Scout AUM decreased from $31.2 billion to $27.2 billion. Additionally, the mix of AUM has shifted between the two periods from 78.5 percent fixed income and 21.5 percent equity as of December 31, 2015 to 82.8 percent fixed income and 17.2 percent equity as of December 31, 2016.

Brokerage fees increased $6.1 million, or 51.7 percent, in 2016 compared to 2015 primarily due to an increase in 12b-1 income driven by an increase in interest rates.

Gains on sales of securities available for sale decreased $1.9 million in 2016 compared to 2015 and increased by $6.3 million in 2015 compared to 2014. The Company’s goal in the management of its available-for-sale securities portfolio is to maximize return within the Company’s parameters of liquidity goals, interest rate risk and credit risk. This can result in differences from period to period in the amount of realized gains.

Equity earnings on alternative investments increased $14.9 million to an unrealized gain position in 2016 compared to a loss position in 2015 and decreased $16.2 million in 2015 compared to 2014, primarily due to changes in the valuation of the underlying PCM fund investments.

 

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Noninterest Expense

Noninterest expense increased in 2016 by $28.2 million, or 4.0 percent, compared to 2015 and increased in 2015 by $38.1 million, or 5.7 percent, compared to 2014. The main drivers of this increase from 2015 to 2016 were salaries and employee benefits expense, other noninterest expense, and equipment expense. The main drivers of this increase from 2014 to 2015 were salaries and employee benefits expense, equipment expense, and legal and professional expense. Table 7 below summarizes the components of noninterest expense and the respective year-over-year changes for each category.

Table 7    

SUMMARY OF NONINTEREST EXPENSE (in thousands)

 

     Year Ended December 31,      Dollar Change     Percent Change  
     2016      2015      2014      16-15     15-14     16-15     15-14  

Salaries and employee benefits

   $ 432,754       $ 406,472       $ 358,569       $ 26,282      $ 47,903        6.5     13.4

Occupancy, net

     44,926         43,861         40,197         1,065        3,664        2.4        9.1   

Equipment

     67,271         63,533         53,609         3,738        9,924        5.9        18.5   

Supplies and services

     19,080         18,579         20,411         501        (1,832     2.7        (9.0

Marketing and business development

     22,342         23,730         24,148         (1,388     (418     (5.8     (1.7

Processing fees

     45,235         51,328         56,049         (6,093     (4,721     (11.9     (8.4

Legal and consulting

     21,242         26,390         20,407         (5,148     5,983        (19.5     29.3   

Bankcard

     20,757         20,288         19,594         469        694        2.3        3.5   

Amortization of other intangible assets

     12,291         12,090         12,193         201        (103     1.7        (0.8

Regulatory fees

     14,178         12,125         10,445         2,053        1,680        16.9        16.1   

Contingency reserve

     —           —           20,272         —          (20,272     —          (100.0

Other

     31,818         25,340         29,786         6,478        (4,446     25.6        (14.9
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 731,894       $ 703,736       $ 665,680       $ 28,158      $ 38,056        4.0     5.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and employee benefits expense increased $26.3 million, or 6.5 percent, in 2016 and $47.9 million, or 13.4 percent, in 2015. The increase in both 2016 and 2015 is primarily due to higher employee base salaries, higher commissions and bonuses, and higher cost of benefits. The Marquette acquisition contributed $8.2 million of increased salary and employee benefits expense in 2016 since it was the first full year of salary and benefits expense after the Marquette acquisition. From 2015 to 2016, base salaries increased by $9.1 million, or 3.6 percent, commissions and bonuses increased by $11.4 million, or 12.8 percent, and employee benefits increased by $5.8 million, or 9.1 percent. Included within commission and bonuses expense in 2016 and 2015 is acquisition related severance expense of $0.9 million and $2.4 million, respectively, non-acquisition related expense of $4.2 million and $4.6 million, respectively.

Equipment expense increased $3.7 million, or 5.9 percent and $9.9 million, or 18.5 percent in 2016 and 2015, respectively. This increase is driven by increased computer hardware and software expenses for investments for regulatory requirements, cyber security and the ongoing modernization of our core systems in both years.

Legal and consulting expense decreased $5.1 million, or 19.5 percent, in 2016 and increased $6.0 million, or 29.3 percent in 2015. This decrease in 2016 and increase in 2015 were driven by $4.8 million in legal and consulting expense related expense related to the Marquette acquisition recognized in 2015.

Processing fees expense decreased $6.1 million, or 11.9 percent, and $4.7 million, or 8.4 percent in 2016 and 2015, respectively. This reduction is primarily driven by decreased fees paid by the advisor to distributors of the Scout Funds.

 

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A contingency reserve of $20.3 million was recognized in the Company’s Consolidated Statements of Income in 2014 due to a settlement agreement entered into on June 30, 2014, to resolve objections to its calculation of the earn-out amount owed to the sellers of PCM and a related incentive bonus calculation for the employees of PCM. Fair value adjustments subsequent to the settlement date were included in Other noninterest expense.

Other noninterest expense increased $6.5 million, or 25.6 percent and decreased $4.4 million, or 14.9 percent, in 2016 and 2015, respectively. The increase in 2016 was primarily driven by an increase of $3.1 million in fair value adjustments to the contingent consideration liabilities on acquisitions and $2.7 million of expense related to the buy-out and termination of certain marketing and referral agreements in the Company’s institutional investment management business. The decrease in 2015 was primarily driven by fair value adjustments to the contingent consideration liabilities on acquisitions.

Total acquisition related expenses recognized in noninterest expense during 2016 totaled $5.0 million, and in 2015 totaled $9.8 million.

Income Taxes

Income tax expense totaled $48.2 million, $43.2 million and $45.4 million in 2016, 2015 and 2014, respectively. These amounts equate to effective rates of 23.3 percent, 27.1 percent and 27.3 percent for 2016, 2015 and 2014, respectively. The decrease from 2015 to 2016 is primarily attributable to an increase in federal tax credits and a larger portion of income earned from excludable life insurance policy gains. The decrease in the effective tax rate from 2014 to 2015 results from changes in the portion of income earned from tax-exempt municipal securities. Due to the early adoption of ASU No. 2016-09, all excess tax benefits related to share-based awards were recognized in income tax expense for the year ended December 31, 2016.

For further information on income taxes refer to Note 16, “Income Taxes,” in the Notes to the Consolidated Financial Statements.

Business Segments

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. The management accounting system assigns balance sheet and income statement items to each Business Segment using methodologies that are refined on an ongoing basis.

 

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Table 8    

Bank Operating Results     

 

     Year Ended
December 31,
     Dollar
Change
     Percent
Change
 
     2016      2015      16-15      16-15  

Net interest income

   $ 484,716       $ 406,884       $ 77,832         19.1

Provision for loan losses

     32,500         15,500         17,000         >100.0   

Noninterest income

     311,309         279,897         31,412         11.2   

Noninterest expense

     577,683         552,514         25,169         4.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     185,842         118,767         67,075         56.5   

Income tax expense

     43,039         32,208         10,831         33.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 142,803       $ 86,559       $ 56,244         65.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Bank net income increased by $56.2 million, or 65.0 percent, to $142.8 million for the year ended December 31, 2016, compared to the same period in 2015. Net interest income increased $77.8 million, or 19.1 percent, for the year ended December 31, 2016, compared to the same period in 2015, primarily driven by strong loan growth, a change in the Company’s earning asset mix, higher loan yields, and the acquisition of Marquette. As of the Acquisition Date, Marquette added earning assets with an acquired value of $1.2 billion primarily from loan balances with an acquired value of $980.4 million. Provision for loan losses increased by $17.0 million to adjust the related ALL to the appropriate level based on the inherent risk in the loan portfolio for this segment.

Noninterest income increased $31.4 million, or 11.2 percent, over the same period in 2015 primarily driven by the following increases: unrealized gains on PCM equity method investments of $14.9 million, brokerage and mutual fund income of $6.1 million driven by an increase in 12b-1 fees, bank-owned and company-owned life insurance income of $4.1 million, healthcare deposit service charges of $3.5 million, trust and securities processing income of $2.8 million, insurance and annuities income of $1.7 million, and miscellaneous noninterest income of $1.6 million due to increased gains on the sale of other assets in the current year. These increases were partially offset by decreases of $1.9 million in gains on securities available for sale and $1.0 million in commercial and consumer deposit service charges.

Noninterest expense increased $25.2 million, or 4.6 percent, to $577.7 million for the year ended December 31, 2016, compared to the same period in 2015. This increase was primarily driven by increases of $19.7 million in salaries and benefits, $1.7 million in regulatory fees, $1.6 million in software and equipment expense, $1.6 million in services and supplies, and $1.0 million in amortization of intangibles. The increase in salaries and benefits is driven by increases of $11.3 million in salary and wage expense, $6.8 million of which is related to the acquisition of Marquette, $5.4 million in bonus and commission expense, of which Marquette represented a decrease of $0.4 million, and $3.0 million in employee benefit expense, of which $1.8 million is related to Marquette. The increase in employee benefit expense was driven, in part, by a $1.6 million increase in the fair value of the Company’s deferred compensation plan. Additionally, there was an increase in other noninterest expense of $2.9 million, largely due to an increase of $2.5 million in fair value adjustments to contingent consideration liabilities incurred in 2015, each being partially offset by a decline in operational losses in the comparative periods. These increases were partially offset by a decrease of $1.8 million in legal and professional fees expense due to decreased acquisition costs related to Marquette in 2016 as compared to the prior period.

 

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Table 9    

Institutional Investment Management Operating Results     

 

     Year Ended
December 31,
     Dollar
Change
     Percent
Change
 
     2016      2015      16-15      16-15  

Net interest income

   $ —         $ —         $ —           —  

Provision for loan losses

     —           —           —           —     

Noninterest income

     75,822         95,064         (19,242      (20.2

Noninterest expense

     73,442         71,498         1,944         2.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     2,380         23,566         (21,186      (89.9

Income tax expense

     798         6,469         (5,671      (87.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,582       $ 17,097       $ (15,515      (90.7 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2016, Institutional Investment Management net income decreased $15.5 million, or 90.7 percent, compared to the same period in 2015. Noninterest income decreased $19.2 million, or 20.2 percent, due to a $22.2 million decrease in advisory fees from the Scout Funds which was partially offset by an increase of $0.6 million in advisory fees from separately managed accounts, both of which are driven by changes in AUM. During the period of December 31, 2015 to December 31, 2016 total Scout AUM increased from $27.2 billion to $27.3 billion, while during the period of December 31, 2014 to December 31, 2015 Scout AUM decreased from $31.2 billion to $27.2 billion. Additionally, the mix of AUM has shifted between the two periods from 78.5 percent fixed income and 21.5 percent equity as of December 31, 2015 to 82.8 percent fixed income and 17.2 percent equity as of December 31, 2016. The increase in noninterest expense of $1.9 million, or 2.7 percent, as compared to the prior year was primarily driven by an increase of $7.3 million in salaries and benefits expense driven by severance and increased incentives and increases in the fair value of the deferred compensation plan. Additionally, other noninterest expense increased $3.3 million in 2016 due to a $2.7 million buy-out and termination of certain marketing and referral agreements and $0.6 million in fair value adjustments to contingent consideration liabilities incurred in 2015. These increases were offset by decreases of $6.0 million in fees paid by the advisor to third-party distributors of the Scout Funds, $1.3 million in technology, service and overhead expenses as compared to the prior year, and $0.8 million in marketing and business development expense. Noninterest expense included $4.5 million and $5.8 million of services and overhead allocations in 2016 and 2015, respectively.

Table 10    

Asset Servicing Operating Results     

 

     Year Ended
December 31,
     Dollar
Change
     Percent
Change
 
     2016      2015      16-15      16-15  

Net interest income

   $ 10,607       $ 5,183       $ 5,424         >100.0

Provision for loan losses

     —           —           —           —     

Noninterest income

     88,944         91,493         (2,549      (2.8

Noninterest expense

     80,769         79,724         1,045         1.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     18,782         16,952         1,830         10.8   

Income tax expense

     4,366         4,535         (169      (3.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 14,416       $ 12,417       $ 1,999         16.1
  

 

 

    

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2016, Asset Servicing net income increased $2.0 million, or 16.1 percent, to $14.4 million as compared to the same period in 2015. Net interest income increased $5.4 million compared to the same period last year due to an increase in deposits coupled with an overall increase in deposit funds transfer

 

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credit. Noninterest income decreased $2.5 million, or 2.8 percent, largely due to decreased fund administration, fund transfer agency, and custody fees. As of December 31, 2016, assets under administration totaled $188.7 billion compared to $185.6 billion at December 31, 2015 and $198.3 billion at December 31, 2014. For the year ended December 31, 2016, noninterest expense increased $1.0 million, or 1.3 percent, as compared to the same period last year, primarily due to an increase of $2.2 million in salary and benefits expense, which was partially offset by decreases of $0.3 million in marketing and business development expense, $0.3 million in processing fees, and $0.3 million in legal and professional fees expense.

Balance Sheet Analysis

Loans and Loans Held For Sale

Loans represent the Company’s largest source of interest income. Loan balances held for investment increased by $1.1 billion, or 11.8 percent, in 2016. This increase was primarily driven by an increase of $503.2 million, or 18.9 percent, in commercial real estate loans, $325.2 million, or 78.1 percent, in construction real estate loans, and $205.1 million, or 4.9 percent, in commercial loans.

Table 11    

ANALYSIS OF LOANS BY TYPE (in thousands)

 

     December 31,  
     2016     2015     2014     2013     2012  

Commercial

   $ 4,410,806      $ 4,205,736      $ 3,814,009      $ 3,301,503      $ 2,873,694   

Asset-based

     225,878        219,244        —          —          —     

Factoring

     139,902        90,686        —          —          —     

Commercial - credit card

     146,735        125,361        115,709        103,270        104,320   

Real estate - construction

     741,804        416,568        256,006        152,875        78,486   

Real estate - commercial

     3,165,922        2,662,772        1,866,301        1,702,151        1,435,811   

Leases

     39,532        41,857        39,090        23,981        19,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total business-related

     8,870,579        7,762,224        6,091,115        5,283,780        4,511,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate - residential

     548,350        492,227        319,827        289,356        212,363   

Real estate - HELOC

     711,794        729,963        643,586        566,128        573,923   

Consumer - credit card

     270,098        291,570        310,296        318,336        334,518   

Consumer - other

     139,562        154,777        100,970        62,912        54,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer-related

     1,669,804        1,668,537        1,374,679        1,236,732        1,175,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans before allowance and loans held for sale

     10,540,383        9,430,761        7,465,794        6,520,512        5,686,749   

Allowance for loan losses

     (91,649     (81,143     (76,140     (74,751     (71,426
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans

     10,448,734        9,349,618        7,389,654        6,445,761        5,615,323   

Loans held for sale

     5,279        589        624        1,357        3,877   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and loans held for sale

   $ 10,454,013      $ 9,350,207      $ 7,390,278      $ 6,447,118      $ 5,619,200   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     December 31,  
     2016     2015     2014     2013     2012  

As a % of total loans and loans held for sale

          

Commercial

     41.84     44.60     51.08     50.63     50.49

Asset-based

     2.14        2.32        —          —          —     

Factoring

     1.33        0.96        —          —          —     

Commercial - credit card

     1.39        1.33        1.55        1.58        1.83   

Real estate – construction

     7.03        4.42        3.43        2.34        1.38   

Real estate – commercial

     30.02        28.23        25.00        26.10        25.23   

Leases

     0.37        0.44        0.52        0.37        0.34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total business-related

     84.12        82.30        81.58        81.02        79.27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate - residential

     5.20        5.22        4.28        4.44        3.73   

Real estate - HELOC

     6.75        7.74        8.62        8.68        10.09   

Consumer - credit card

     2.56        3.09        4.16        4.88        5.88   

Consumer - other

     1.32        1.64        1.35        0.96        0.96   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer-related

     15.83        17.69        18.41        18.96        20.66   

Loans held for sale

     0.05        0.01        0.01        0.02        0.07   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and loans held for sale

     100.00     100.00     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in Table 11 is a five-year breakdown of loans by type. Business-related loans continue to represent the largest segment of the Company’s loan portfolio, comprising approximately 84.1 percent and 82.3 percent of total loans and loans held for sale at the end of 2016 and 2015, respectively.

Commercial loans represent the largest percent of total loans. Commercial loans at December 31, 2016 have increased $205.1 million, or 4.9 percent, as compared to December 31, 2015, to 41.8 percent of total loans. Commercial loans represented 44.6 percent of total loans at December 31, 2015. Despite the Company increasing its capacity to lend through increased commitments during 2016, commercial line utilization has remained low.

As a percentage of total loans, commercial real estate and construction real estate loans now comprise 37.1 percent of total loans compared to 32.7 percent in 2015. Commercial real estate increased $503.2 million, or 18.9 percent, and construction real estate loans increased $325.2 million, or 78.1 percent, compared to 2015. Generally, these loans are made for working capital or expansion purposes and are primarily secured by real estate with a maximum loan-to-value of 80 percent. Most of these properties are owner-occupied and/or have other collateral or guarantees as security.

Asset based loans totaled $225.9 million and represented 2.1 percent of total loans as of December 31, 2016. Factoring loans totaled $139.9 million and represented 1.3 percent of total loans as of December 31, 2016.

Residential real estate increased $56.1 million, or 11.4 percent, and represented 5.2 percent of total loans. HELOC loans decreased $18.2 million, or 2.5 percent, and represent 6.8 percent of total loans.

Nonaccrual, past due and restructured loans are discussed under “Quantitative and Qualitative Disclosure about Market Risk – Credit Risk Management” in Item 7A on page 56 of this report.

Investment Securities

The Company’s investment portfolio contains trading, available-for-sale (AFS), and held-to-maturity (HTM) securities as well as FRB stock, Federal Home Loan Bank (FHLB) stock, and other miscellaneous investments. Investment securities totaled $7.7 billion as of December 31, 2016 and $7.6 billion as of December 31, 2015 and comprised 40.1 percent and 43.0 percent of the Company’s earning assets, respectively, as of those dates.

 

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The Company’s AFS securities portfolio comprised 84.1 percent of the Company’s investment securities portfolio at December 31, 2016, compared to 89.9 percent at year-end 2015. The Company’s AFS securities portfolio provides liquidity as a result of the composition and average life of the underlying securities. This liquidity can be used to fund loan growth or to offset the outflow of traditional funding sources. The average life of the AFS securities portfolio increased from 44.8 months at December 31, 2015 to 54.3 months at December 31, 2016 due to portfolio mix changes, a strategic decision to invest in longer-term securities, and rising interest rates driving down prepayment speeds on mortgage-backed securities. In addition to providing a potential source of liquidity, the AFS securities portfolio can be used as a tool to manage interest rate sensitivity. The Company’s goal in the management of its AFS securities portfolio is to maximize return within the Company’s parameters of liquidity goals, interest rate risk and credit risk.

Management expects collateral pledging requirements for public funds, loan demand, and deposit funding to be the primary factors impacting changes in the level of AFS securities. There were $5.7 billion of AFS securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements at December 31, 2016. Of this amount, securities with a market value of $1.8 billion at December 31, 2016 were pledged at the Federal Reserve Discount Window but were unencumbered as of that date.

The Company’s HTM securities portfolio consists of private placement bonds, which are issued primarily to refinance existing revenue bonds in the healthcare and education sectors. The HTM portfolio totaled $1.1 billion as of December 31, 2016, an increase of $448.8 million, or 67.3 percent, from December 31, 2015. The average life of the HTM portfolio was 89 months at December 31, 2016, compared to 81 months at December 31, 2015.

The securities portfolio generates the Company’s second largest component of interest income. The AFS and HTM securities portfolios achieved an average yield on a tax-equivalent basis of 2.1 percent for 2016, compared to 2.0 percent in 2015, and 1.9 percent in 2014. Securities available for sale had a net unrealized loss of $92.2 million at year-end, compared to a net unrealized loss of $5.9 million the preceding year. This market value change primarily reflects the impact of mid and longer-term market interest rate increases as of December 31, 2016, compared to December 31, 2015. These amounts are reflected, on an after-tax basis, in the Company’s Accumulated other comprehensive income (loss) in shareholders’ equity, as an unrealized loss of $57.5 million at year-end 2016, compared to an unrealized loss of $3.7 million for 2015.The available-for-sale securities portfolio contains securities that have unrealized losses and are not deemed to be other-than-temporarily impaired (see the table of these securities in Note 4, “Securities,” in the Notes to the Consolidated Financial Statements on page 84 of this document). The unrealized losses in the Company’s investments in direct obligations of U.S. Treasury obligations, U.S. government agencies, federal agency mortgage-backed securities, municipal securities, and corporates were caused by changes in interest rates. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of fair value. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at December 31, 2016.

 

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

Table 12

SECURITIES AVAILABLE FOR SALE (in thousands)

 

December 31, 2016

   Amortized Cost      Fair Value  

U.S. Treasury

   $ 95,315       $ 93,826   

U.S. Agencies

     198,158         198,177   

Mortgage-backed

     3,773,090         3,711,699   

State and political subdivisions

     2,425,155         2,395,757   

Corporates

     66,997         66,875   
  

 

 

    

 

 

 

Total

   $ 6,558,715       $ 6,466,334   
  

 

 

    

 

 

 

December 31, 2015

   Amortized Cost      Fair Value  

U.S. Treasury

   $ 350,354       $ 349,779   

U.S. Agencies

     667,414         666,389   

Mortgage-backed

     3,598,115         3,572,446   

State and political subdivisions

     2,116,543         2,138,413   

Corporates

     80,585         79,922   
  

 

 

    

 

 

 

Total

   $ 6,813,011       $ 6,806,949   
  

 

 

    

 

 

 

December 31, 2014

   Amortized Cost      Fair Value  

U.S. Treasury

   $ 519,484       $ 519,460   

U.S. Agencies

     991,084         990,689   

Mortgage-backed

     3,276,009         3,277,604   

State and political subdivisions

     1,983,549         2,001,357   

Corporates

     124,096         122,826   
  

 

 

    

 

 

 

Total

   $ 6,894,222       $ 6,911,936   
  

 

 

    

 

 

 

 

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

December 31, 2016

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 55,240         0.72   $ 181,209         0.83

Due after 1 year through 5 years

     29,260         1.21        16,968         1.31   

Due after 5 years through 10 years

     9,326         1.48        —           —     

Due after 10 years

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 93,826         0.95   $ 198,177         0.87
  

 

 

    

 

 

   

 

 

    

 

 

 
     Mortgage-backed Securities     State and Political
Subdivisions
 

December 31, 2016

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 21,906         3.00   $ 221,261         1.99

Due after 1 year through 5 years

     2,853,678         2.01        1,035,482         2.46   

Due after 5 years through 10 years

     812,041         1.98        853,368         2.83   

Due after 10 years

     24,074         3.18        285,646         3.05   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,711,699         2.02   $ 2,395,757         2.62
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     Corporates  

December 31, 2016

   Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 53,205         1.09

Due after 1 year through 5 years

     13,670         1.31   

Due after 5 years through 10 years

     —           —     

Due after 10 years

     —           —     
  

 

 

    

 

 

 

Total

   $ 66,875         1.13
  

 

 

    

 

 

 

 

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

December 31, 2015

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 284,452         0.59   $ 416,993         0.60

Due after 1 year through 5 years

     65,327         0.85        246,298         0.92   

Due after 5 years through 10 years

     —           —          3,098         —     

Due after 10 years

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 349,779         0.64   $ 666,389         0.72
  

 

 

    

 

 

   

 

 

    

 

 

 
     Mortgage-backed
Securities
    State and Political
Subdivisions
 

December 31, 2015

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 43,570         3.30   $ 296,543         1.69

Due after 1 year through 5 years

     3,130,350         2.02        894,275         2.46   

Due after 5 years through 10 years

     381,369         1.99        866,060         2.92   

Due after 10 years

     17,157         3.28        81,535         3.34   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,572,446         2.03   $ 2,138,413         2.57
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Corporates  

December 31, 2015

   Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ —           —  

Due after 1 year through 5 years

     79,922         1.11   

Due after 5 years through 10 years

     —           —     

Due after 10 years

     —           —     
  

 

 

    

 

 

 

Total

   $ 79,922         1.11
  

 

 

    

 

 

 

 

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

December 31, 2014

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 82,990         0.29   $ 182,699         0.63

Due after 1 year through 5 years

     431,492         0.67        807,990         0.72   

Due after 5 years through 10 years

     4,978         1.75        —           —     

Due after 10 years

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 519,460         0.62   $ 990,689         0.70
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     Mortgage-backed
Securities
    State and Political
Subdivisions
 

December 31, 2014

   Fair Value      Weighted
Average
Yield
    Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ 63,114         3.25   $ 343,741         1.98

Due after 1 year through 5 years

     2,567,443         2.06        868,959         2.40   

Due after 5 years through 10 years

     626,017         2.10        677,431         3.05   

Due after 10 years

     21,030         3.32        111,226         3.26   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,277,604         2.09   $ 2,001,357         2.58
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Corporates  

December 31, 2014

   Fair Value      Weighted
Average
Yield
 

Due in one year or less

   $ —           —  

Due after 1 year through 5 years

     122,826         1.13   

Due after 5 years through 10 years

     —           —     

Due after 10 years

     —           —     
  

 

 

    

 

 

 

Total

   $ 122,826         1.13
  

 

 

    

 

 

 

Table 13

SECURITIES HELD TO MATURITY (in thousands)

 

December 31, 2016

   Amortized
Cost
     Fair Value      Weighted
Average
Yield/Average
Maturity
 

Due in one year or less

   $ 6,077       $ 5,135         2.13

Due after 1 year through 5 years

     82,650         83,552         2.66   

Due after 5 years through 10 years

     341,741         347,574         2.21   

Due over 10 years

     685,464         669,766         2.59   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,115,932       $ 1,106,027         2.48
  

 

 

    

 

 

    

 

 

 

December 31, 2015

                    

Due in one year or less

   $ 17,265       $ 17,893         2.27

Due after 1 year through 5 years

     77,237         80,047         2.28   

Due after 5 years through 10 years

     370,631         384,117         2.52   

Due over 10 years

     201,973         209,322         2.00   
  

 

 

    

 

 

    

 

 

 

Total

   $ 667,106       $ 691,379         2.33
  

 

 

    

 

 

    

 

 

 

December 31, 2014

                    

Due in one year or less

   $ 15       $ 16         2.75

Due after 1 year through 5 years

     31,389         34,331         2.89   

Due after 5 years through 10 years

     165,062         180,531         2.68   

Due over 10 years

     81,588         89,234         2.92   
  

 

 

    

 

 

    

 

 

 

Total

   $ 278,054       $ 304,112         2.78
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

FEDERAL RESERVE BANK STOCK AND OTHER SECURITIES (in thousands)

 

2016

   Amortized
Cost
     Fair
Value
 

FRB and FHLB stock

   $ 33,262       $ 33,262   

Other securities – marketable

     4         9,952   

Other securities – non-marketable

     24,272         25,092   
  

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 57,538       $ 68,306   
  

 

 

    

 

 

 

2015

             

FRB and FHLB stock

   $ 33,215       $ 33,215   

Other securities – marketable

     5         7,164   

Other securities – non-marketable

     23,855         24,819   
  

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 57,075       $ 65,198   
  

 

 

    

 

 

 

2014

             

FRB stock

   $ 26,279       $ 26,279   

Other securities – marketable

     —           16,668   

Other securities – non-marketable

     21,669         25,527   
  

 

 

    

 

 

 

Total Federal Reserve Bank stock and other

   $ 47,948       $ 68,474   
  

 

 

    

 

 

 

Other marketable and non-marketable securities include 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 $10.0 million at December 31, 2016, compared to $7.2 million at December 31, 2015. The fair value of other non-marketable securities includes the alternative investment securities fair value of $2.0 million at December 31, 2016 and December 31, 2015.

Other Earning Assets

Federal funds transactions essentially are overnight loans between financial institutions, which allow for either the daily investment of excess funds or the daily borrowing of another institution’s funds in order to meet short-term liquidity needs. The net borrowed position was $418.9 million at December 31, 2016, and $50.9 million at December 31, 2015.

The Bank buys and sells federal funds as agent for non-affiliated banks. Because the transactions are pursuant to agency arrangements, these transactions do not appear on the balance sheet and averaged $224.8 million in 2016 and $197.0 million in 2015.

At December 31, 2016, the Company held securities purchased under agreements to resell of $323.4 million compared to $157.7 million at December 31, 2015. The Company uses these instruments as short-term secured investments, in lieu of selling federal funds, or to acquire securities required for collateral purposes. Balances will fluctuate based on the Company’s liquidity and investment decisions as well as the Company’s correspondent bank borrowing levels. These investments averaged $180.7 million in 2016 and $65.9 million in 2015.

The Company also maintains an active securities trading inventory. The average holdings in the securities trading inventory in 2016 were $42.4 million, compared to $32.7 million in 2015, and were recorded at market value. As discussed in “Quantitative and Qualitative Disclosures About Market Risk — Trading Account” in Part II, Item 7A on page 55, the Company offsets the trading account securities by the sale of exchange-traded financial futures contracts, with both the trading account and futures contracts marked to market daily.

 

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Interest-bearing due from banks totaled $715.8 million as of December 31, 2016 compared to $522.9 million as of December 31, 2015 and includes amounts due from the FRB and interest-bearing accounts held at other financial institutions. The amount due from the FRB totaled $641.9 million and $360.9 million at December 31, 2016 and 2015, respectively. The increase in the FRB balance from 2015 to 2016 is primarily due an increase in public fund and repurchase agreement balances. The interest-bearing accounts held at other financial institutions totaled $74.0 million and $162.0 million at December 31, 2016 and 2015, respectively.    

Deposits and Borrowed Funds

Deposits represent the Company’s primary funding source for its asset base. In addition to the core deposits garnered by the Company’s retail branch structure, the Company continues to focus on its cash management services, as well as its asset management and mutual fund servicing segments in order to attract and retain additional core deposits. Deposits totaled $16.6 billion at December 31, 2016 and $15.1 billion at December 31, 2015, an increase of $1.5 billion or 9.8 percent. Deposits averaged $15.3 billion in 2016, and $14.1 billion in 2015.

Noninterest-bearing demand deposits averaged $5.9 billion in 2016 and 2015. These deposits represented 38.5 percent of average deposits in 2016, compared to 42.1 percent in 2015. The Company’s large commercial customer base provides a significant source of noninterest-bearing deposits. Many of these commercial accounts do not earn interest; however, they receive an earnings credit to offset the cost of other services provided by the Company.

Table 14

MATURITIES OF TIME DEPOSITS OF $250,000 OR MORE (in thousands)

 

     December 31,  
     2016      2015      2014  

Maturing within 3 months

   $ 295,395       $ 300,729       $ 448,122   

After 3 months but within 6 months

     111,043         26,250         50,374   

After 6 months but within 12 months

     47,664         55,988         46,054   

After 12 months

     68,030         100,945         82,532   
  

 

 

    

 

 

    

 

 

 

Total

   $ 522,132       $ 483,912       $ 627,082   
  

 

 

    

 

 

    

 

 

 

Table 15

ANALYSIS OF AVERAGE DEPOSITS (in thousands)

 

     December 31,  
     2016     2015     2014  

Amount

      

Noninterest-bearing demand

   $ 5,906,021      $ 5,927,702      $ 5,196,529   

Interest-bearing demand and savings

     8,267,634        7,010,302        6,403,504   

Time deposits under $250,000

     601,383        700,916        549,690   
  

 

 

   

 

 

   

 

 

 

Total core deposits

     14,775,038        13,638,920        12,149,723   

Time deposits of $250,000 or more

     563,703        439,370        541,550   
  

 

 

   

 

 

   

 

 

 

Total deposits

   $ 15,338,741      $ 14,078,290      $ 12,691,273   
  

 

 

   

 

 

   

 

 

 

As a % of total deposits

      

Noninterest-bearing demand

     38.50     42.11     40.95

Interest-bearing demand and savings

     53.90        49.79        50.45   

Time deposits under $250,000

     3.92        4.98        4.33   
  

 

 

   

 

 

   

 

 

 

Total core deposits

     96.32        96.88        95.73   

Time deposits of $250,000 or more

     3.68        3.12        4.27   
  

 

 

   

 

 

   

 

 

 

Total deposits

     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

 

 

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Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company, under an agreement to repurchase the same issues at an agreed-upon price and date. Securities sold under agreements to repurchase and federal funds purchased totaled $1.9 billion at December 31, 2016, and $1.8 billion at December 31, 2015. These agreements averaged $2.0 billion in 2016 and $1.6 billion in 2015. The Company enters into these transactions with its downstream correspondent banks, commercial customers, and various trust, mutual fund and local government relationships.

The Company is a member bank with the FHLB of Des Moines, and through this relationship, the Company owns $10.0 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. The Company’s borrowing capacity is dependent upon the amount of collateral the Company places at the FHLB. The Company had $805.9 million of HELOC and residential real estate loans pledged at the FHLB at December 31, 2016. In December 2016, the FHLB issued two letters of credit totaling $300.0 million on behalf of the Company to secure public fund deposits, both of which expired in January 2017. The letters of credit reduced the Company’s borrowing capacity with the FHLB to $505.9 million as of December 31, 2016. The Company had no outstanding advances at FHLB Des Moines as of December 31, 2016.

The Company acquired a relationship with the FHLB of San Francisco as part of the Marquette acquisition. The Company paid-off one $5.0 million advance with the FHLB of San Francisco when it matured in 2016, which reduced the Company’s short-term debt balance to zero. Additionally, during 2016, the Company pre-paid the remaining two advances with the FHLB of San Francisco totaling $10.0 million, which was the primary driver of the long-term debt balance decrease of $9.3 million from December 31, 2015 to December 31, 2016.

Table 16

SHORT-TERM BORROWINGS (in thousands)

 

     2016     2015     2014  
At December 31:    Amount      Rate     Amount      Rate     Amount      Rate  

Federal funds purchased

   $ 419,843         0.50   $ 66,855         0.19   $ 42,048         0.06

Repurchase agreements

     1,437,094         0.45        1,751,207         0.30        1,983,084         0.19   

Other

     —           —          5,009         0.98        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,856,937         0.46   $ 1,823,071         0.30   $ 2,025,132         0.18
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Average for year:

               

Federal funds purchased

   $ 439,062         0.60   $ 48,318         0.28   $ 41,269         0.07

Repurchase agreements

     1,566,569         0.30        1,542,459         0.11        1,493,769         0.11   

Other

     3,753         0.72        1,853         0.98        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,009,384         0.33   $ 1,592,630         0.11   $ 1,535,038         0.11
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Maximum month-end balance:

               

Federal funds purchased

   $ 1,094,017         $ 269,379         $ 265,804      

Repurchase agreements

     1,815,830           1,907,468           1,983,084      

Other

     —             109,522           —        

Long-term debt totaled $76.8 million at December 31, 2016. The majority of the Company’s long-term debt was assumed from the acquisition of Marquette and consists of debt obligations payable to four unconsolidated trusts (Marquette Capital Trust I, Marquette Capital Trust II, Marquette Capital Trust III, and Marquette Capital Trust IV) that previously issued trust preferred securities. These long-term debt obligations had an aggregate contractual balance of $103.1 million and had an aggregate fair value of $65.5 million as of May 31, 2015 and a carrying value of $67.3 million at December 31, 2016. The interest rate on the trust preferred securities issued by Marquette Capital Trust II was fixed at 6.30 percent per year until January 2016, and is currently a variable rate tied to the three-month London Interbank Offered Rate (LIBOR) rate plus 133 basis points. Interest rates on trust preferred securities issued by the remaining three trusts are tied to the three-month LIBOR rate with spreads ranging from 133 basis points to 160 basis points, and reset quarterly. The trust preferred securities have maturity dates ranging from January 2036 to September 2036. For further information on long-term debt refer to Note 9, “Borrowed Funds,” in the Notes to the Consolidated Financial Statements.

 

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Table of Contents

Capital Resources and Liquidity

The Company places a significant emphasis on the maintenance of a strong capital position, which it 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. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. The Company manages capital for each subsidiary based upon the subsidiary’s respective risks and growth opportunities as well as regulatory requirements.

Total shareholders’ equity was $2.0 billion at December 31, 2016, compared to $1.9 billion at December 31, 2015, an increase of $68.7 million or 3.6 percent, compared to December 31, 2015.

The Company’s Board of Directors (the Board) authorized, at its April 26, 2016 and April 28, 2015 meetings, the repurchase of up to two million shares of the Company’s common stock during the twelve month periods following each of the meetings. During 2016 and 2015, the Company acquired 323,058 shares and 164,335 shares of its common stock, respectively. The Company has not made any repurchases other than through these plans.

Through the Company’s relationship with the FHLB of Des Moines, the Company owns $10.0 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. The Company’s borrowing capacity is dependent upon the amount of collateral the Company places at the FHLB. The Company’s borrowing capacity with the FHLB was $505.9 million as of December 31, 2016. The Company had no outstanding FHLB advances at FHLB of Des Moines as of December 31, 2016.

Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institution’s assets. The Company has implemented the Basel III regulatory capital rules adopted by the FRB. Basel III capital rules include a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a minimum tier 1 risk-based capital ratio of 6 percent. A financial institution’s total capital is also required to equal at least 8 percent of risk-weighted assets. At least half of that 8 percent must consist of tier 1 core capital, and the remainder may be tier 2 supplementary capital. The Basel III regulatory capital rules include transitional periods for various components of the rules that require full compliance for the Company by January 1, 2019, including a capital conservation buffer requirement of 2.5 percent of risk-weighted assets for which the transitional period began on January 1, 2016.

The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. The Company is also required to maintain a leverage ratio equal to or greater than 4 percent. The leverage ratio is tier 1 core capital to total average assets less goodwill and intangibles. The Company’s capital position as of December 31, 2016 is summarized in the table below and exceeded regulatory requirements.

For further discussion of capital and liquidity, see the “Quantitative and Qualitative Disclosures about Market Risk – Liquidity Risk” in Item 7A on pages 57 and 58 of this report.

 

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Table 17

RISK-BASED CAPITAL (in thousands)

This table computes risk-based capital in accordance with current regulatory guidelines. These guidelines as of December 31, 2016, excluded net unrealized gains or losses on securities available for sale from the computation of regulatory capital and the related risk-based capital ratios.

 

     Risk-Weighted Category  
Risk-Weighted Assets    0%      20%      50%      100%      150%      Total  

Loans held for sale

   $ —         $ —         $ 5,279       $ —         $ —         $ 5,279   

Loans and leases

     17,693         59,899         819,464         9,393,753         249,574         10,540,383   

Securities available for sale

     878,833         5,593,302         19,583         66,997         —           6,558,715   

Securities held to maturity

     —           16,946         1,098,986         —           —           1,115,932   

Federal funds and resell agreements

     —           910         —           —           —           910   

Trading securities

     —           1,619         9,295         28,622         —           39,536   

Cash and due from banks

     774,010         363,930         —           —           —           1,137,940   

All other assets

     24,712         18,617         24,074         816,363         —           883,766   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Category totals

   $ 1,695,248       $ 6,055,223       $ 1,976,681       $ 10,305,735       $ 249,574       $ 20,282,461   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Risk-weighted totals

     —           1,211,044         988,341         10,305,735         374,361         12,879,481   

Off-balance-sheet items (3)

     —           32,304         93,880         2,110,187         49,206         2,285,577   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total risk-weighted assets

   $ —         $ 1,243,348       $ 1,082,221       $ 12,415,922       $ 423,567       $ 15,165,058   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Regulatory Capital    Total  

Shareholders’ equity

   $ 1,962,384   

Less adjustments (1)

     (172,803
  

 

 

 

Common equity Tier 1/Tier 1 capital

     1,789,581   

Additional Tier 2 capital (2)

     161,497   
  

 

 

 

Total capital

   $ 1,951,078   
  

 

 

 

 

Capital ratios    Company  

Common Equity Tier 1 capital to risk-weighted assets

     11.80

Tier 1 capital to risk-weighted assets

     11.80

Total capital to risk-weighted assets

     12.87

Leverage ratio (Tier 1 capital to total average assets less adjustments (1))

     9.09
  

 

 

 

 

(1) Adjustments include a portion of goodwill and intangibles as well as unrealized gains/losses on available-for-sale securities.
(2) Includes the Company’s ALLL (inclusive of the reserve for off-balance sheet arrangements) and trust preferred subordinated notes.
(3) After credit conversion factor and risk weighting is applied.

For further discussion of regulatory capital requirements, see Note 10, “Regulatory Requirements” within the Notes to Consolidated Financial Statements under Item 8 on pages 92 and 93.

 

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Commitments, Contractual Obligations and Off-balance Sheet Arrangements

The Company’s main off-balance sheet arrangements are loan commitments, commercial and standby letters of credit, futures contracts and forward exchange contracts, which have maturity dates rather than payment due dates. These commitments and contingent liabilities are not required to be recorded on the Company’s balance sheet. Since commitments associated with letters of credit and lending and financing arrangements may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. See Table 18 below, as well as Note 14, “Commitments, Contingencies and Guarantees” in the Notes to Consolidated Financial Statements under Item 8 on pages 99 through 101 for detailed information and further discussion of these arrangements. Management does not anticipate any material losses from its off-balance sheet arrangements.

Table 18

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

The table below details the contractual obligations for the Company as of December 31, 2016, and includes principal payments only. The Company has no capital leases or long-term purchase obligations

 

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

Fed funds purchased and repurchase agreements

  $ 1,856,937      $ 1,856,937      $ —        $ —        $ —     

Long-term debt obligations

    76,772        1,474        3,216        2,619        69,463   

Operating lease obligations

    77,595        11,338        20,165        15,108        30,984   

Time deposits

    1,135,721        836,787        231,567        51,407        15,960   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,147,025      $ 2,706,536      $ 254,948      $ 69,134      $ 116,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Maturities due by Period  
Commitments, Contingencies and Guarantees   Total     Less than 1
year
    1-3 years     3-5 years     More than 5
years
 

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

  $ 6,471,404      $ 2,867,019      $ 1,555,140      $ 929,535      $ 1,119,710   

Commitments to extend credit under credit card loans

    2,798,433        2,798,433        —          —          —     

Commercial letters of credit

    1,098        1,098        —          —          —     

Standby letters of credit

    376,617        275,051        69,953        31,538        75   

Forward contracts

    49,352        49,352        —          —          —     

Spot foreign exchange contracts

    3,725        3,725        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 9,700,629      $ 5,994,678      $ 1,625,093      $ 961,073      $ 1,119,785   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2016, our total liabilities for unrecognized tax benefits were $4.4 million. The Company cannot reasonably estimate the timing of the future payments of these liabilities. Therefore, these liabilities have been excluded from the table above. See Note 16, “Income Taxes,” in the Notes to the Consolidated Financial Statements for information regarding the liabilities associated with unrecognized tax benefits.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Consolidated Financial

 

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Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customers and suppliers, allowance for loan losses, bad debts, investments, financing operations, long-lived assets, taxes, other contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from the recorded estimates.

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

Allowance for Loan Losses

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

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

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

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

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

Goodwill and Other Intangibles

Goodwill is tested for impairment annually as of October 1 and more frequently whenever events or changes in circumstance indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. To test goodwill for impairment, the Company performs a qualitative assessment of each reporting unit. If the

 

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

For customer-based identifiable intangibles, the Company amortizes the intangibles over their estimated useful lives of up to 17 years. When facts and circumstances indicate potential impairment of amortizing intangible assets, the Company evaluates the fair value of the asset and compares it to the carrying value for possible impairment. For more information see “Goodwill and Other Intangibles” in Note 7 in the Notes to the Consolidated Financial Statements.

Revenue Recognition

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

Accounting for Uncertainty in Income Taxes

The Company is subject to income taxes in the U.S. federal and various state jurisdictions. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in these jurisdictions. The Company records the financial statement effects of an income tax position when it is more likely than not, based on the technical merits, that it will be sustained upon examination. The estimate for any uncertain tax issue is based on management’s best judgment. These estimates may change as a result of changes in tax laws and regulations, interpretations of law by taxing authorities, and income tax examinations among other factors. Due to the complexity of these uncertainties, the ultimate resolution may differ from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to Income tax expense in the period in which they are determined. See the discussion of “Liabilities Associated with Unrecognized Tax Benefits” under Note 16 in the Notes to the Consolidated Financial Statements.

Fair Value Measurements

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

 

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

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

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

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

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

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices, or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading.

The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The following discussion of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading because the instruments held for trading represent such a small portion of the Company’s portfolio that the interest rate risk associated with them is immaterial.

Interest Rate Risk

In the banking industry, a major risk exposure is changing interest rates. To minimize the effect of interest rate changes to net interest income and exposure levels to economic losses, the Company manages its exposure to changes in interest rates through asset and liability management within guidelines established by its Asset Liability Committee (ALCO) and approved by the Board. The ALCO is responsible for approving and ensuring compliance with asset/liability management policies, including interest rate exposure. The Company’s primary method for measuring and analyzing consolidated interest rate risk is the Net Interest Income Simulation

 

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Analysis. The Company also uses a Net Portfolio Value model to measure market value risk under various rate change scenarios and a gap analysis to measure maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time. On a limited basis, the Company uses hedges such as swaps and futures contracts to manage interest rate risk on certain loans, trading securities, trust preferred securities, and deposits. See further information in Note 17 “Derivatives and Hedging Activities” in the Notes to the Company’s Consolidated Financial Statements.

Overall, the Company attempts to manage interest rate risk by positioning the balance sheet to maximize net interest income while maintaining an acceptable level of interest rate and credit risk, remaining mindful of the relationship among profitability, liquidity, interest rate risk and credit risk.

Net Interest Income Modeling

The Company’s primary interest rate risk tool, the Net Interest Income Simulation Analysis, measures interest rate risk and the effect of interest rate changes on net interest income and net interest margin. This analysis incorporates all of the Company’s assets and liabilities together with assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on net interest income of a 300 basis point upward or a 100 basis point downward gradual change (e.g. ramp) and immediate change (e.g. shock) of market interest rates over a two year period. In ramp scenarios, rates change gradually for a one year period and remain constant in year two. In shock scenarios, rates change immediately and the change is sustained for the remainder of the two year scenario horizon. Assumptions are made to project rates for new loans and deposits based on historical analysis, management outlook and repricing strategies. Asset prepayments and other market risks are developed from industry estimates of prepayment speeds and other market changes. The results of these simulations can be significantly influenced by assumptions utilized and management evaluates the sensitivity of the simulation results on a regular basis.    

Table 19 shows the net interest income percentage increase or decrease over the next twelve and twenty-four month periods as of December 31, 2016 and 2015 based on hypothetical changes in interest rates and a constant sized balance sheet with runoff being replaced.    

Table 19

MARKET RISK (unaudited)

 

     Hypothetical change in interest rate – Rate Ramp  
     Year One     Year Two  

(basis points)

   December 31, 2016
Percentage change
    December 31, 2015
Percentage change
    December 31,
2016
Percentage
change
    December 31,
2015
Percentage
change
 

300

     2.2     5.3     7.8     14.2

200

     1.2        3.1        5.0        8.7   

100

     0.2        1.0        2.1        3.7   

Static

     —          —          —          —     

(100)

     N/A        N/A        N/A        N/A   
     Hypothetical change in interest rate – Rate Shock  
     Year One     Year Two  

(basis points)

   December 31, 2016
Percentage change
    December 31, 2015
Percentage change
    December 31,
2016
Percentage
change
    December 31,
2015
Percentage
change
 

300

     7.3     12.7     11.7     18.8

200

     4.6        8.1        7.6        12.2   

100

     2.0        3.4        3.5        5.6   

Static

     —          —          —          —     

(100)

     N/A        N/A        N/A        N/A   

 

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The Company is positioned to benefit from increases in interest rates. Net interest income is projected to increase in rising interest rate scenarios due to yields on earning assets increasing more due to changes in market rates than the cost of paying liabilities is projected to increase. The Company’s ability to price deposits in a rising rate environment consistent with our history is a key assumption in these scenarios. Due to the already low interest rate environment, the Company did not include a 100 basis point falling scenario. There is little room for projected yields on liabilities to decrease.

Repricing Mismatch Analysis

The Company also evaluates its interest rate sensitivity position in an attempt to maintain a balance between the amount of interest-bearing assets and interest-bearing liabilities which are expected to mature or reprice at any point in time. While a traditional repricing mismatch analysis (gap analysis) provides a snapshot of interest rate risk, it does not take into consideration that assets and liabilities with similar repricing characteristics may not, in fact, reprice at the same time or the same degree. Also, it does not necessarily predict the impact of changes in general levels of interest rates on net interest income.

Table 20 is a static gap analysis, which presents the Company’s assets and liabilities, based on their repricing or maturity characteristics and reflecting principal amortization. Table 21 presents the break-out of fixed and variable rate loans by repricing or maturity characteristics for each loan class.

 

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Table 20    

INTEREST RATE SENSITIVITY ANALYSIS (in millions)

 

     1-90     91-180     181-365           1-5     Over 5        
     Days     Days     Days     Total     Years     Years     Total  

December 31, 2016 Earning assets

              

Loans

   $ 5,687.9      $ 417.5      $ 654.8      $ 6,760.2      $ 2,900.9      $ 884.6      $ 10,545.7   

Securities

     512.7        332.9        439.1        1,284.7        3,107.5        3,258.4        7,650.6   

Federal funds sold and resell agreements

     324.3        —          —          324.3        —          —          324.3   

Other

     718.8        9.8        13.5        742.1        13.2        —          755.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

   $ 7,243.7      $ 760.2      $ 1,107.4      $ 9,111.3      $ 6,021.6      $ 4,143.0      $ 19,275.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total earning assets

     37.6     4.0     5.7     47.3     31.2     21.5     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funding sources

              

Interest-bearing demand and savings

   $ 1,536.9      $ 1,152.6      $ 2,305.3      $ 4,994.8      $ 309.0      $ 3,476.5      $ 8,780.3   

Time deposits

     431.2        220.1        185.4        836.7        283.0        16.0        1,135.7   

Federal funds purchased and repurchase agreements

     1,856.9        —          —          1,856.9        —          —          1,856.9   

Borrowed funds

     67.3        —          0.1        67.4        1.7        7.7        76.8   

Noninterest-bearing sources

     4,307.4        96.0        177.3        4,580.7        689.8        2,155.7        7,426.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total funding sources

   $ 8,199.7      $ 1,468.7      $ 2,668.1      $ 12,336.5      $ 1,283.5      $ 5,655.9      $ 19,275.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total earning assets

     42.6     7.6     13.8     64.0     6.7     29.3     100.0

Interest sensitivity gap

   $ (956.0   $ (708.5   $ (1,560.7   $ (3,225.2   $ 4,738.1      $ (1,512.9  

Cumulative gap

     (956.0     (1,664.5     (3,225.2     (3,225.2     1,512.9        —       

As a % of total earning assets

     (5.0 )%      (8.6 )%      (16.7 )%      (16.7 )%      7.8     —    

Ratio of earning assets to funding sources

     0.88        0.52        0.42        0.74        4.69        0.73     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative ratio of earning

assets to funding sources

              

2016

     0.88        0.83        0.74        0.74        1.11        1.00     

2015

     0.82        0.80        0.77        0.77        1.18        1.00     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

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Table 21

Maturities and Sensitivities to Changes in Interest Rates

This table details loan maturities by variable and fixed rates as of December 31, 2016 (in thousands):

 

     Due in one
year or less
     Due after one
year through
five years
     Due after five
years
     Total  

Variable Rate

           

Commercial

   $ 2,789,791       $ 26,973       $ 152       $ 2,816,916   

Asset-based

     225,878         —           —           225,878   

Factoring

     139,902         —           —           139,902   

Commercial – Credit Card

     146,735         —           —           146,735   

Real Estate – Construction

     624,386         4,495         1,181         630,062   

Real Estate – Commercial

     765,683         153,834         2,996         922,513   

Real Estate – Residential

     29,082         79,601         32,310         140,993   

Real Estate – HELOC

     392,523         309,647         3         702,173   

Consumer – Credit Card

     268,849         1,082         —           269,931   

Consumer – Other

     66,954         623         —           67,577   

Leases

     39,532         —           —           39,532   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total variable rate loans

     5,489,315         576,255         36,642         6,102,212   

Fixed Rate

           

Commercial

     510,351         957,434         126,105         1,593,890   

Asset-based

     —           —           —           —     

Factoring

     —           —           —           —     

Commercial – Credit Card

     —           —           —           —     

Real Estate – Construction

     39,809         46,982         24,951         111,742   

Real Estate – Commercial

     599,739         1,164,504         479,166         2,243,409   

Real Estate – Residential

     69,612         127,772         215,252         412,636   

Real Estate – HELOC

     5,860         2,641         1,120         9,621   

Consumer – Credit Card

     —           —           167         167   

Consumer – Other

     45,483         25,353         1,149         71,985   

Leases

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed rate loans

     1,270,854         2,324,686         847,910         4,443,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and loans held for sale

   $ 6,760,169       $ 2,900,941       $ 884,552       $ 10,545,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading Account

The Bank carries taxable governmental securities in a trading account that is maintained in accordance with Board-approved policy and procedures. The policy limits the amount and type of securities that can be carried in the trading account and requires compliance with any limits under applicable law and regulations, and mandates the use of a value-at-risk methodology to manage price volatility risks within financial parameters. The risk associated with the carrying of trading securities is offset by the sale of exchange-traded financial futures contracts, with both the trading account and futures contracts marked to market daily. This account had a balance of $39.5 million as of December 31, 2016, compared to $29.6 million as of December 31, 2015.

The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The discussion in Table 20 above of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading, because the instruments held for trading represent such a small portion of the Company’s portfolio that the interest rate risk associated with them is immaterial.

 

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Other Market Risk

The Company has minimal foreign currency risk as a result of foreign exchange contracts. See Note 10, “Commitments, Contingencies and Guarantees” in the Notes to the Consolidated Financial Statements.

Credit Risk Management

Credit risk represents the risk that a customer or counterparty may not perform in accordance with contractual terms. The Company utilizes a centralized credit administration function, which provides information on the Bank’s risk levels, delinquencies, an internal ranking system and overall credit exposure. Loan requests are centrally reviewed to ensure the consistent application of the loan policy and standards. In addition, the Company has an internal loan review staff that operates independently of the Bank. This review team performs periodic examinations of the bank’s loans for credit quality, documentation and loan administration. The respective regulatory authority of the Bank also reviews loan portfolios.                

A primary indicator of credit quality and risk management is the level of nonperforming loans. Nonperforming loans include both nonaccrual loans and restructured loans on nonaccrual. The Company’s nonperforming loans increased $9.1 million to $70.3 million at December 31, 2016, compared to December 31, 2015. This increase was primarily driven by the migration of two non-energy commercial credits during the third quarter of 2016. There was an immaterial amount of interest recognized on nonperforming loans during 2016, 2015, and 2014.

The Company had $0.2 million and $3.3 million of other real estate owned as of December 31, 2016 and 2015, respectively. Loans past due more than 90 days totaled $3.4 million as of December 31, 2016, compared to $7.3 million as of December 31, 2015.

A loan is generally placed on nonaccrual status when payments are past due 90 days or more and/or when management has considerable doubt about the borrower’s ability to repay on the terms originally contracted. The accrual of interest is discontinued and recorded thereafter only when actually received in cash.

Certain loans are restructured to provide a reduction or deferral of interest or principal due to deterioration in the financial condition of the respective borrowers. The Company had $52.5 million of restructured loans at December 31, 2016 and $36.6 million at December 31, 2015.

 

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Table 22

LOAN QUALITY (in thousands)

 

     December 31,  
     2016     2015     2014     2013     2012  

Nonaccrual loans

   $ 41,765      $ 45,589      $ 18,660      $ 19,305      $ 16,376   

Restructured loans on nonaccrual

     28,494        15,563        8,722        11,401        11,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     70,259        61,152        27,382        30,706        28,103   

Other real estate owned

     194        3,307        394        1,288        3,524   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 70,453      $ 64,459      $ 27,776      $ 31,994      $ 31,627   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans past due 90 days or more

   $ 3,365      $ 7,324      $ 3,830      $ 3,218      $ 3,554   

Restructured loans accruing

     24,013        21,029        583        665        752   

Allowance for loans losses

     91,649        81,143        76,140        74,751        71,426   

Ratios

          

Non-performing loans as a % of loans

     0.67     0.65     0.37     0.47     0.49

Non-performing assets as a % of loans plus other real estate owned

     0.67        0.68        0.37        0.49        0.56   

Non-performing assets as a % of total assets

     0.34        0.34        0.16        0.19        0.21   

Loans past due 90 days or more as a % of loans

     0.03        0.08        0.05        0.05        0.06   

Allowance for Loan Losses as a % of loans

     0.87        0.86        1.02        1.15        1.26   

Allowance for Loan Losses as a multiple of non-performing loans

     1.30     1.33     2.78     2.43     2.54

Liquidity Risk

Liquidity represents the Company’s ability to meet financial commitments through the maturity and sale of existing assets or availability of additional funds. The Company believes that the most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, the Company believes public confidence is generated through profitable operations, sound credit quality and a strong capital position. The primary source of liquidity for the Company is regularly scheduled payments on and maturity of assets, which include $6.5 billion of high-quality securities available for sale. The liquidity of the Company and the Bank is also enhanced by its activity in the federal funds market and by its core deposits. Additionally, management believes it can raise debt or equity capital on favorable terms in the future, should the need arise.

Another factor affecting liquidity is the amount of deposits and customer repurchase agreements that have pledging requirements. All customer repurchase agreements require collateral in the form of a security. The U.S. Government, other public entities, and certain trust depositors require the Company to pledge securities if their deposit balances are greater than the FDIC-insured deposit limitations. These pledging requirements affect liquidity risk in that the related security cannot otherwise be disposed due to the pledging restriction. At December 31, 2016, $5.7 billion, or 88.6 percent, of the securities available-for-sale were pledged or used as collateral, compared to $5.9 billion, or 86.7 percent, at December 31, 2015. However of these amounts, securities with a market value of $1.8 billion at December 31, 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 Company also has other commercial commitments that may impact liquidity. These commitments include unused commitments to extend credit, standby letters of credit and financial guarantees, and commercial letters of credit. The total amount of these commercial commitments at December 31, 2016 was $9.6 billion. Since many of these commitments expire without being drawn upon, the total amount of these commercial commitments does not necessarily represent the future cash requirements of the Company.

 

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The Company’s cash requirements consist primarily of dividends to shareholders, debt service, operating expenses, and treasury stock purchases. Management fees and dividends received from bank and non-bank subsidiaries traditionally have been sufficient to satisfy these requirements and are expected to be sufficient in the future. The Bank is subject to various rules regarding payment of dividends to the Company. For the most part, the Bank can pay dividends at least equal to its current year’s earnings without seeking prior regulatory approval. The Company also uses cash to inject capital into the Bank and its non-Bank subsidiaries to maintain adequate capital as well as to fund strategic initiatives.

To enhance general working capital needs, the Company has a revolving line of credit with Wells Fargo Bank, N.A. which allows the Company to borrow up to $75.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Company’s option, either 1.00 percent above LIBOR or 1.75 percent below the prime rate on the date of an advance. The Company pays a 0.3 percent unused commitment fee for unused portions of the line of credit. The Company had no advances outstanding at December 31, 2016.

The Company is a member bank of the FHLB. The Company owns $10.0 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. The Company has access to borrow up to $505.9 million through advances at the FHLB of Des Moines, but had no outstanding FHLB Des Moines advances as of December 31, 2016.

Operational Risk

Operational risk generally refers to the risk of loss resulting from the Company’s operations, including those operations performed for the Company by third parties. This would include but is not limited to the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees or others, errors relating to transaction processing, breaches of the internal control system and compliance requirements, and unplanned interruptions in service. This risk of loss also includes the potential legal or regulatory actions that could arise as a result of an operational deficiency, or as a result of noncompliance with applicable regulatory standards. Included in the legal and regulatory issues with which the Company must comply are a number of rules resulting from the enactment of the Sarbanes-Oxley Act of 2002, as amended.

The Company operates in many markets and relies on the ability of its employees and systems to properly process a high number of transactions. In the event of a breakdown in internal control systems, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation. In order to address this risk, management maintains a system of internal controls with the objective of providing proper transaction authorization and execution, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other data.

The Company maintains systems of internal controls that provide management with timely and accurate information about the Company’s operations. These systems have been designed to manage operational risk at appropriate levels given the Company’s financial strength, the environment in which it operates, and considering factors such as competition and regulation. The Company has also established procedures that are designed to ensure that policies relating to conduct, ethics and business practices are followed on a uniform basis. In certain cases, the Company has experienced losses from operational risk. Such losses have included the effects of operational errors that the Company has discovered and included as expense in the statement of income. While there can be no assurance that the Company will not suffer such losses in the future, management continually monitors and works to improve its internal controls, systems and corporate-wide processes and procedures.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

UMB Financial Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheets of UMB Financial Corporation and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), UMB Financial Corporation’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2017 expressed an unqualified opinion on the effectiveness of UMB Financial Corporation’s internal control over financial reporting.

/s/ KPMG LLP

Kansas City, Missouri

February 23, 2017

 

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UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

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

 

     December 31,  
     2016     2015  

ASSETS

    

Loans

   $ 10,540,383      $ 9,430,761   

Allowance for loan losses

     (91,649     (81,143
  

 

 

   

 

 

 

Net loans

     10,448,734        9,349,618   

Loans held for sale

     5,279        589   

Securities:

    

Available for sale

     6,466,334        6,806,949   

Held to maturity (fair value of $1,106,027 and $691,379, respectively)

     1,115,932        667,106   

Trading securities

     39,536        29,617   

Other securities

     68,306        65,198   
  

 

 

   

 

 

 

Total investment securities

     7,690,108        7,568,870   

Federal funds sold and securities purchased under agreements to resell

     324,327        173,627   

Interest-bearing due from banks

     715,823        522,877   

Cash and due from banks

     422,117        458,217   

Premises and equipment, net

     289,007        281,471   

Accrued income

     99,045        90,127   

Goodwill

     228,396        228,346   

Other intangibles, net

     34,491        46,782   

Other assets

     425,205        373,721   
  

 

 

   

 

 

 

Total assets

   $ 20,682,532      $ 19,094,245   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand

   $ 6,654,584      $ 6,306,895   

Interest-bearing demand and savings

     8,780,309        7,529,972   

Time deposits under $250,000

     613,589        771,973   

Time deposits of $250,000 or more

     522,132        483,912   
  

 

 

   

 

 

 

Total deposits

     16,570,614        15,092,752   

Federal funds purchased and repurchase agreements

     1,856,937        1,818,062   

Short-term debt

     —          5,009   

Long-term debt

     76,772        86,070   

Accrued expenses and taxes

     172,967        161,245   

Other liabilities

     42,858        37,413   
  

 

 

   

 

 

 

Total liabilities

     18,720,148        17,200,551   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $1.00 par value; 80,000,000 shares authorized, 55,056,730 shares issued and 49,673,056 and 49,396,366 shares outstand