10-Q 1 d377348d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2017

OR

 

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

For the transition period from                      to                     

Commission file number 000-04887

 

 

UMB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Missouri   43-0903811

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. – Employer

Identification Number)

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

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

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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   
Emerging growth company        

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

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

As of April 27, 2017, UMB Financial Corporation had 49,851,395 shares of common stock outstanding.

 

 

 


Table of Contents

UMB FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I – FINANCIAL INFORMATION

     3  

ITEM 1.

 

FINANCIAL STATEMENTS

     3  

CONSOLIDATED BALANCE SHEETS

     3  

CONSOLIDATED STATEMENTS OF INCOME

     4  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     5  

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

     6  

CONSOLIDATED STATEMENTS OF CASH FLOWS

     7  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     8  

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     34  

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     49  

ITEM 4.

 

CONTROLS AND PROCEDURES

     54  

PART II - OTHER INFORMATION

     55  

ITEM 1.

 

LEGAL PROCEEDINGS

     55  

ITEM 1A.

 

RISK FACTORS

     55  

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     55  

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     55  

ITEM 4.

 

MINE SAFETY DISCLOSURES

     55  

ITEM 5.

 

OTHER INFORMATION

     55  

ITEM 6.

 

EXHIBITS

     56  

SIGNATURES

     57  

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

     58  

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

     59  

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

     60  

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

     61  

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

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

 

     March 31,
2017
    December 31,
2016
 

ASSETS

    

Loans:

   $ 10,757,236     $ 10,540,383  

Allowance for loan losses

     (93,323     (91,649
  

 

 

   

 

 

 

Net loans

     10,663,913       10,448,734  

Loans held for sale

     1,934       5,279  

Investment securities:

    

Available for sale

     6,551,593       6,466,334  

Held to maturity (fair value of $1,114,163 and $1,106,027, respectively)

     1,206,639       1,115,932  

Trading securities

     75,494       39,536  

Other securities

     67,910       68,306  
  

 

 

   

 

 

 

Total investment securities

     7,901,636       7,690,108  

Federal funds sold and securities purchased under agreements to resell

     196,467       324,327  

Interest-bearing due from banks

     374,570       715,823  

Cash and due from banks

     373,671       422,117  

Premises and equipment, net

     282,398       289,007  

Accrued income

     97,035       99,045  

Goodwill

     228,396       228,396  

Other intangibles, net

     31,622       34,491  

Other assets

     424,495       425,205  
  

 

 

   

 

 

 

Total assets

   $ 20,576,137     $ 20,682,532  
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand

   $ 6,202,246     $ 6,654,584  

Interest-bearing demand and savings

     8,622,219       8,780,309  

Time deposits under $250,000

     594,967       613,589  

Time deposits of $250,000 or more

     475,752       522,132  
  

 

 

   

 

 

 

Total deposits

     15,895,184       16,570,614  

Federal funds purchased and repurchase agreements

     2,390,364       1,856,937  

Long-term debt

     76,104       76,772  

Accrued expenses and taxes

     142,987       172,967  

Other liabilities

     60,620       42,858  
  

 

 

   

 

 

 

Total liabilities

     18,565,259       18,720,148  
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $1.00 par value; 80,000,000 shares authorized, 55,056,730 shares issued, and 49,850,194 and 49,673,056 shares outstanding, respectively

     55,057       55,057  

Capital surplus

     1,033,225       1,033,419  

Retained earnings

     1,174,587       1,142,887  

Accumulated other comprehensive loss, net

     (44,159     (57,542

Treasury stock, 5,206,536 and 5,383,674 shares, at cost, respectively

     (207,832     (211,437
  

 

 

   

 

 

 

Total shareholders’ equity

     2,010,878       1,962,384  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 20,576,137     $ 20,682,532  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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

 

     Three Months Ended March 31,  
     2017     2016  

INTEREST INCOME

    

Loans

   $ 106,560     $ 90,544  

Securities:

    

Taxable interest

     19,190       19,357  

Tax-exempt interest

     17,183       12,735  
  

 

 

   

 

 

 

Total securities income

     36,373       32,092  

Federal funds and resell agreements

     919       507  

Interest-bearing due from banks

     551       891  

Trading securities

     287       52  
  

 

 

   

 

 

 

Total interest income

     144,690       124,086  
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

     5,966       4,055  

Federal funds and repurchase agreements

     3,469       1,230  

Other

     940       909  
  

 

 

   

 

 

 

Total interest expense

     10,375       6,194  
  

 

 

   

 

 

 

Net interest income

     134,315       117,892  

Provision for loan losses

     9,000       5,000  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     125,315       112,892  
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Trust and securities processing

     60,404       59,485  

Trading and investment banking

     7,542       4,630  

Service charges on deposit accounts

     22,075       21,461  

Insurance fees and commissions

     646       1,497  

Brokerage fees

     5,377       4,185  

Bankcard fees

     17,752       18,016  

Gain on sales of securities available for sale, net

     468       2,933  

Equity losses on alternative investments

     (614     (381

Other

     7,130       4,524  
  

 

 

   

 

 

 

Total noninterest income

     120,780       116,350  
  

 

 

   

 

 

 

NONINTEREST EXPENSE

    

Salaries and employee benefits

     113,834       106,850  

Occupancy, net

     11,148       10,972  

Equipment

     17,668       16,282  

Supplies and services

     4,281       4,949  

Marketing and business development

     4,503       4,441  

Processing fees

     11,301       11,462  

Legal and consulting

     5,300       4,799  

Bankcard

     4,903       5,815  

Amortization of other intangible assets

     2,869       3,226  

Regulatory fees

     3,833       3,429  

Other

     9,126       8,219  
  

 

 

   

 

 

 

Total noninterest expense

     188,766       180,444  
  

 

 

   

 

 

 

Income before income taxes

     57,329       48,798  

Income tax expense

     13,148       12,395  
  

 

 

   

 

 

 

NET INCOME

   $ 44,181     $ 36,403  
  

 

 

   

 

 

 

PER SHARE DATA

    

Net income – basic

   $ 0.90     $ 0.75  

Net income – diluted

     0.89       0.74  

Dividends

     0.255       0.245  

Weighted average shares outstanding – basic

     49,109,872       48,756,433  

Weighted average shares outstanding – diluted

     49,829,508       49,016,400  

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, dollars in thousands)

 

     Three Months Ended March 31,  
     2017     2016  

Net income

   $ 44,181     $ 36,403  

Other comprehensive income, net of tax:

    

Unrealized gains on securities:

    

Change in unrealized holding gains, net

     22,271       65,312  

Less: Reclassifications adjustment for gains included in net income

     (468     (2,933
  

 

 

   

 

 

 

Change in unrealized gains on securities during the period

     21,803       62,379  

Change in unrealized gains (losses) on derivative hedges

     246       (4,140
  

 

 

   

 

 

 

Income tax expense

     (8,666     (22,053
  

 

 

   

 

 

 

Other comprehensive income

     13,383       36,186  
  

 

 

   

 

 

 

Comprehensive income

   $ 57,564     $ 72,589  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

 

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

Balance - January 1, 2016

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

Total comprehensive income

     —          —         36,403       36,186       —         72,589  

Dividends ($0.245 per share)

     —          —         (12,104     —         —         (12,104

Purchase of treasury stock

     —          —         —         —         (12,880     (12,880

Issuance of equity awards

     —          (6,199     —         —         6,628       429  

Recognition of equity based compensation

     —          2,047       —         —         —         2,047  

Sale of treasury stock

     —          123       —         —         140       263  

Exercise of stock options

     —          1,294       —         —         2,519       3,813  

Cumulative effect adjustment (1)

     —          1,338       (856     —         —         482  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2016

   $ 55,057      $ 1,018,492     $ 1,057,433     $ 32,468     $ (215,117   $ 1,948,333  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - January 1, 2017

   $ 55,057      $ 1,033,419     $ 1,142,887     $ (57,542   $ (211,437   $ 1,962,384  

Total comprehensive income

     —          —         44,181       13,383       —         57,564  

Dividends ($0.255 per share)

     —          —         (12,481     —         —         (12,481

Purchase of treasury stock

     —          —         —         —         (4,028     (4,028

Issuance of equity awards

     —          (4,140     —         —         4,611       471  

Recognition of equity based compensation

     —          2,861       —         —         —         2,861  

Sale of treasury stock

     —          150       —         —         117       267  

Exercise of stock options

     —          935       —         —         2,905       3,840  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2017

   $ 55,057      $ 1,033,225     $ 1,174,587     $ (44,159   $ (207,832   $ 2,010,878  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

(1)

See Note 3, “New Accounting Pronouncements,” for a discussion of the Company’s adoption of ASU 2016-09.

 

6


Table of Contents

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

     Three Months Ended  
     March 31,  
     2017     2016  

Operating Activities

    

Net income

   $ 44,181     $ 36,403  

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

    

Provision for loan losses

     9,000       5,000  

Net accretion of premiums and discounts from acquisition

     (838     (604

Depreciation and amortization

     14,375       13,705  

Deferred income tax benefit

     (322     (1,417

Net (increase) decrease in trading securities and other earning assets

     (35,278     3,219  

Gains on sales of securities available for sale

     (468     (2,933

Gains on sales of assets

     (1,020     (268

Amortization of securities premiums, net of discount accretion

     12,081       14,553  

Originations of loans held for sale

     (10,818     (14,345

Net gains on sales of loans held for sale

     (299     (199

Proceeds from sales of loans held for sale

     14,462       10,303  

Equity based compensation

     3,332       2,476  

Net tax benefit (deficiency) related to equity compensation plans

     1,783       (34

Changes in:

    

Accrued income

     2,010       125  

Accrued expenses and taxes

     (29,980     (40,297

Other assets and liabilities, net

     (5,533     2,025  
  

 

 

   

 

 

 

Net cash provided by operating activities

     16,668       27,712  
  

 

 

   

 

 

 

Investing Activities

    

Proceeds from maturities of securities held to maturity

     16,682       8,672  

Proceeds from sales of securities available for sale

     86,069       282,031  

Proceeds from maturities of securities available for sale

     405,500       391,494  

Purchases of securities held to maturity

     (108,215     (146,670

Purchases of securities available for sale

     (550,920     (702,529

Net increase in loans

     (222,959     (274,053

Net decrease in fed funds sold and resell agreements

     127,860       2,803  

Net decrease in interest bearing balances due from other financial institutions

     22,362       33,693  

Purchases of premises and equipment

     (4,985     (8,499

Proceeds from sales of premises and equipment

     173       680  
  

 

 

   

 

 

 

Net cash used in investing activities

     (228,433     (412,378
  

 

 

   

 

 

 

Financing Activities

    

Net (decrease) increase in demand and savings deposits

     (610,428     543,871  

Net decrease in time deposits

     (65,002     (217,851

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

     533,427       (136,339

Repayment of long-term debt

     (938     (1,092

Payment of contingent consideration on acquisitions

     —         (3,031

Cash dividends paid

     (12,710     (12,082

Proceeds from exercise of stock options and sales of treasury shares

     4,107       4,076  

Purchases of treasury stock

     (4,028     (12,880
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (155,572     164,672  
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (367,337     (219,994

Cash and cash equivalents at beginning of period

     1,063,967       819,112  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 696,630     $ 599,118  
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Income taxes paid

   $ 668     $ 12,146  

Total interest paid

     10,250       6,539  

See Notes to Consolidated Financial Statements.

 

7


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

1.    Financial Statement Presentation

The consolidated financial statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after elimination of all intercompany transactions. In the opinion of management of the Company, all adjustments, which were of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year ending December 31, 2017. The financial statements should be read in conjunction with “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” within this Quarterly Report on Form 10-Q and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission (SEC) on February 23, 2017 (the Form 10-K).

2.    Summary of Significant Accounting Policies

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

Cash and cash equivalents

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

This table provides a summary of cash and cash equivalents as presented on the Consolidated Statement of Cash Flows as of March 31, 2017 and March 31, 2016 (in thousands):

 

     March 31,  
     2017      2016  

Due from the Federal Reserve

   $ 322,959      $ 273,672  

Cash and due from banks

     373,671        325,446  
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 696,630      $ 599,118  
  

 

 

    

 

 

 

Also included in the Interest-bearing due from banks line, but not considered cash and cash equivalents, are interest-bearing accounts held at other financial institutions, which totaled $51.6 million and $128.3 million at March 31, 2017 and March 31, 2016, respectively.

Per Share Data

Basic income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted income per share includes the dilutive effect of 719,637 and 259,967 shares of common stock issuable upon the exercise of outstanding stock options at March 31, 2017 and 2016, respectively.

Options issued under employee benefit plans to purchase 151,002 and 845,157 shares of common stock were outstanding at March 31, 2017 and 2016, respectively, but were not included in the computation of diluted income per share because the options were anti-dilutive.

 

8


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

3.    New Accounting Pronouncements

Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 to annual reporting periods that begin after December 15, 2017. In March, April, and May 2016, the FASB issued implementation amendments to the May 2014 ASU (collectively, the “amended guidance”). The amended guidance affects any entity that enters into contracts with customers to transfer goods and services, unless those contracts are within the scope of other standards. The amended guidance specifically excludes interest income, as well as other revenues associated with financial assets and liabilities, including loans, leases, securities, and derivatives. The amended guidance permits the use of either the full retrospective approach or a modified retrospective approach. The Company plans to adopt the amended guidance using the modified retrospective approach on January 1, 2018. The Company is progressing through its process to implement the amended guidance. The Company has assessed its revenue streams to identify those contracts that are specifically excluded from the scope of the amended guidance and those that may be subject to the amended guidance. Subsequent to this initial scoping, the Company selected a representative sample of contracts from the in-scope revenue streams for review under the amended guidance (“key contracts”). The review of key contracts is in process. Upon completion of the review of the key contracts, the Company expects to group the remaining contracts based on the conclusions reached through the key contract review or to perform additional review of specific contracts that cannot be grouped. While progress has been made, the Company is currently evaluating the impact that the amended guidance will have on its Consolidated Financial Statements and related disclosures.

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

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

Extinguishments of Liabilities In March 2016, the FASB issued ASU No. 2016-04, “Recognition of Breakage for Certain Prepaid Stored-Value Products.” The amendment is intended to reduce the diversity in practice related to the recognition of breakage. Breakage refers to the portion of a prepaid stored-value product, such as a gift card, that goes unused wholly or partially for an indefinite period of time. This amendment requires that breakage be accounted for consistent with the breakage guidance within ASU No. 2014-09, “Revenue from Contracts with Customers.” The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The standard permits the use of either the modified retrospective or full retrospective transition method. Early adoption is permitted. The Company will adopt ASU No. 2016-04 in conjunction with its adoption of ASU No. 2014-09. The adoption of this accounting pronouncement will not have a significant impact on the Company’s Consolidated Financial Statements.

Equity-Based Compensation In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The amendment is part of the FASB’s simplification initiative and is intended to simplify the accounting around share-based payment award transactions. The amendments include changing the recording of excess tax benefits from being recognized as a part of surplus capital to being charged directly to the

 

9


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

income statement, changing the classification of excess tax benefits within the statement of cash flows, and allowing companies to account for forfeitures on an actual basis, as well as tax withholding changes. The amendment requires different transition methods for various components of the standard. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted.

In September 2016, the Company early adopted ASU No. 2016-09 with an effective date of January 1, 2016. As part of the adoption of this standard, the Company made an accounting policy election to account for forfeitures on an actual basis and discontinue the use of an estimated forfeiture approach. Additionally, the Company selected the retrospective transition method for the reclassification of the “Net tax benefit related to equity compensation plans” from the financing section to the operating section of the Company’s Consolidated Statement of Cash Flows. The impact to the Company’s Consolidated Statements of Income for adopting all provisions of the standard was an increase to net income of $158 thousand for the three-month period ended March 31, 2016 and an increase to net income of $220 thousand for the three-month period ended June 30, 2016. Upon adoption, the Company recorded a cumulative effect adjustment to the Company’s Consolidated Balance Sheets of $482 thousand as an increase to total equity. Prior period financial statements as of and for the three-month period ended March 31, 2016 have been recast throughout this document. Prior period financial statements as of and for the three-month and year-to-date periods ended June 30, 2016 will be recast when presented in future filings.

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

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

4.    Loans and Allowance for Loan Losses

Loan Origination/Risk Management

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

 

10


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

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

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

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

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

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

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

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

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

 

11


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Loan Aging Analysis

This table provides a summary of loan classes and an aging of past due loans at March 31, 2017 and December 31, 2016 (in thousands):

 

     March 31, 2017  
     30-89
Days Past
Due and
Accruing
     Greater
than 90
Days Past
Due and
Accruing
     Non-
Accrual
Loans
     Total Past
Due
     Current      Total Loans  

Loans

                 

Commercial:

                 

Commercial

   $ 15,034      $ 814      $ 35,110      $ 50,958      $ 4,505,403      $ 4,556,361  

Asset-based

     —          —          —          —          230,863        230,863  

Factoring

     —          —          —          —          158,673        158,673  

Commercial – credit card

     452        307        5        764        154,327        155,091  

Real estate:

                 

Real estate –construction

     118        —          93        211        849,421        849,632  

Real estate – commercial

     1,652        70        15,755        17,477        3,127,847        3,145,324  

Real estate – residential

     471        —          1,321        1,792        577,201        578,993  

Real estate – HELOC

     625        —          3,873        4,498        683,909        688,407  

Consumer:

                 

Consumer – credit card

     2,046        2,154        404        4,604        242,325        246,929  

Consumer – other

     379        48        33        460        107,820        108,280  

Leases

     —          —          —          —          38,683        38,683  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 20,777      $ 3,393      $ 56,594      $ 80,764      $ 10,676,472      $ 10,757,236  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2016  
     30-89
Days Past
Due and
Accruing
     Greater
than 90
Days Past
Due and
Accruing
     Non-
Accrual
Loans
     Total
Past
Due
     PCI
Loans
     Current      Total Loans  

Loans

                    

Commercial:

                    

Commercial

   $ 3,285      $ 49      $ 35,777      $ 39,111      $ —        $ 4,371,695      $ 4,410,806  

Asset-based

     —          —          —          —          —          225,878        225,878  

Factoring

     —          —          —          —          —          139,902        139,902  

Commercial – credit card

     612        10        8        630        —          146,105        146,735  

Real estate:

                    

Real estate –construction

     3        —          181        184        —          741,620        741,804  

Real estate – commercial

     1,303        1,004        16,423        18,730           3,147,192        3,165,922  

Real estate – residential

     1,034        6        1,344        2,384        —          545,966        548,350  

Real estate – HELOC

     588        —          4,736        5,324        —          706,470        711,794  

Consumer:

                    

Consumer – credit card

     2,228        2,115        475        4,818        —          265,280        270,098  

Consumer – other

     1,061        181        11,315        12,557        800        126,205        139,562  

Leases

     —          —          —          —          —          39,532        39,532  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 10,114      $ 3,365      $ 70,259      $ 83,738      $ 800      $ 10,455,845      $ 10,540,383  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

The Company had total purchased credit impaired (PCI) loans from its acquisition of Marquette Financial Companies (Marquette) of $800 thousand as of December 31, 2016, all of which were considered to be performing based on payment activity as of December 31, 2016. Of this amount, $713 thousand were current with their payment terms and $87 thousand were between 30-89 days past due.

The Company sold residential real estate loans with proceeds of $14.5 million and $10.3 million in the secondary market without recourse during the periods ended March 31, 2017 and March 31, 2016, respectively.

The Company has ceased the recognition of interest on loans with a carrying value of $56.6 million and $70.3 million at March 31, 2017 and December 31, 2016, respectively. Restructured loans totaled $54.1 million and $52.5 million at March 31, 2017 and December 31, 2016. Loans 90 days past due and still accruing interest amounted $3.4 million at both March 31, 2017 and December 31, 2016. There was an insignificant amount of interest recognized on impaired loans during 2017 and 2016.

Credit Quality Indicators

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

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

 

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

 

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

 

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

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

 

13


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

This table provides an analysis of the credit risk  profile of each loan class excluded from ASC 310-30 at March 31, 2017 and December 31, 2016 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating

 

     Commercial      Asset-based      Factoring  
     March 31,
2017
     December 31,
2016
     March 31,
2017
     December 31,
2016
     March 31,
2017
     December 31,
2016
 

Non-watch list

   $ 4,162,814      $ 4,043,704      $ 204,616      $ 198,695      $ 157,777      $ 139,358  

Watch

     110,167        99,815        —          —          —          —    

Special Mention

     53,652        32,240        19,476        24,809        503        129  

Substandard

     229,728        235,047        6,771        2,374        393        415  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,556,361      $ 4,410,806      $ 230,863      $ 225,878      $ 158,673      $ 139,902  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Real estate – construction      Real estate – commercial  
     March 31,
2017
     December 31,
2016
     March 31,
2017
     December 31,
2016
 

Non-watch list

   $ 845,080      $ 741,022      $ 3,048,240      $ 3,071,804  

Watch

     4,002        149        51,424        43,015  

Special Mention

     —          —          6,305        5,140  

Substandard

     550        633        39,355        45,963  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 849,632      $ 741,804      $ 3,145,324      $ 3,165,922  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

 

     Commercial – credit card      Real estate – residential      Real estate – HELOC  
     March 31,
2017
     December 31,
2016
     March 31,
2017
     December 31,
2016
     March 31,
2017
     December 31,
2016
 

Performing

   $ 155,086      $ 146,727      $ 577,672      $ 547,006      $ 684,534      $ 707,058  

Non-performing

     5        8        1,321        1,344        3,873        4,736  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 155,091      $ 146,735      $ 578,993      $ 548,350      $ 688,407      $ 711,794  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Consumer – credit card      Consumer – other      Leases  
     March 31,
2017
     December 31,
2016
     March 31,
2017
     December 31,
2016
     March 31,
2017
     December 31,
2016
 

Performing

   $ 246,525      $ 269,623      $ 108,247      $ 127,447      $ 38,683      $ 39,532  

Non-performing

     404        475        33        11,315        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 246,929      $ 270,098      $ 108,280      $ 138,762      $ 38,683      $ 39,532  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Allowance for Loan Losses

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

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

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

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

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

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

 

15


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

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

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

This table provides arollforward of the allowance for loan losses by portfolio segment for three months ended March 31, 2017 (in thousands):

 

     Three Months Ended March 31, 2017  
     Commercial     Real estate     Consumer     Leases     Total  

Allowance for loan losses:

          

Beginning balance

   $ 71,657     $ 10,569     $ 9,311     $ 112     $ 91,649  

Charge-offs

     (5,981     (186     (2,537     —         (8,704

Recoveries

     698       61       619       —         1,378  

Provision

     6,823       68       2,117       (8     9,000  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 73,197     $ 10,512     $ 9,510     $ 104     $ 93,323  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 8,173     $ 67     $ —       $ —       $ 8,240  

Ending balance: collectively evaluated for impairment

     65,024       10,445       9,510       104       85,083  

Loans:

          

Ending balance: loans

   $ 5,100,988     $ 5,262,356     $ 355,209     $ 38,683     $ 10,757,236  

Ending balance: individually evaluated for impairment

     69,314       18,136       33       —         87,483  

Ending balance: collectively evaluated for impairment

     5,031,674       5,244,220       355,176       38,683       10,669,753  

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

This table provides a rollforward of the allowance for loan losses by portfolio segment for three months ended March 31, 2016 (in thousands):

 

     Three Months Ended March 31, 2016  
     Commercial     Real estate     Consumer     Leases     Total  

Allowance for loan losses:

          

Beginning balance

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

Charge-offs

     (5,075     (1,445     (2,515     —         (9,035

Recoveries

     2,489       144       657       —         3,290  

Provision

     47       2,990       1,969       (6     5,000  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 61,308     $ 9,909     $ 9,060     $ 121     $ 80,398  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 4,163     $ 1,210     $ —       $ —       $ 5,373  

Ending balance: collectively evaluated for impairment

     57,145       8,699       9,060       121       75,025  

Loans:

          

Ending balance: loans

   $ 4,794,302     $ 4,474,762     $ 387,529     $ 43,038     $ 9,699,631  

Ending balance: individually evaluated for impairment

     67,486       6,278       2,612       —         76,376  

Ending balance: collectively evaluated for impairment

     4,726,816       4,467,461       383,403       43,038       9,620,718  

Ending Balance: PCI Loans

     —         1,023       1,514       —         2,537  

 

16


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Impaired Loans

This table provides an analysis of impaired loans by class at March 31,  2017 and December 31, 2016 (in thousands):

 

     As of March 31, 2017  
     Unpaid
Principal
Balance
     Recorded
Investment
with No
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial:

                 

Commercial

   $ 73,412      $ 44,560      $ 24,754      $ 69,314      $ 8,173      $ 71,831  

Asset-based

     —          —          —          —          —          —    

Factoring

     —          —          —          —          —          —    

Commercial – credit card

     —          —          —          —          —          —    

Real estate:

                 

Real estate – construction

     220        93        111        204        67        249  

Real estate – commercial

     16,902        11,866        954        12,820        —          12,805  

Real estate – residential

     125        125        —          125        —          178  

Real estate – HELOC

     —          —          —          —          —          —    

Consumer:

                 

Consumer – credit card

     —          —          —          —          —          —    

Consumer – other

     37        33        —          33        —          17  

Leases

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 90,696      $ 56,677      $ 25,819      $ 82,496      $ 8,240      $ 85,080  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2016  
     Unpaid
Principal
Balance
     Recorded
Investment
with No
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

Commercial:

                 

Commercial

   $ 80,405      $ 43,260      $ 31,091      $ 74,351      $ 7,866      $ 69,776  

Asset-based

     —          —          —          —          —          —    

Factoring

     —          —          —          —          —          —    

Commercial – credit card

     —          —          —          —          —          —    

Real estate:

                 

Real estate – construction

     510        181        113        294        68        405  

Real estate – commercial

     18,107        12,303        487        12,790        —          8,956  

Real estate – residential

     231        230        —          230        —          520  

Real estate – HELOC

     —          —          —          —          —          79  

Consumer:

                 

Consumer – credit card

     —          —          —          —          —          —    

Consumer – other

     —          —          —          —          —          1,981  

Leases

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 99,253      $ 55,974      $ 31,691      $ 87,665      $ 7,934      $ 81,717  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Troubled Debt Restructurings

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

The Company had $24 thousand and $823 thousand in commitments to lend to borrowers with loan modifications classified as TDRs as of March 31, 2017 and March 31, 2016, respectively. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term.

For the three months ended March 31, 2017, the Company had one commercial TDR with a pre- and post-modification loan balance of $7.2 million. For the three months ended March 31, 2016, the Company had two commercial TDRs with a pre- and post-modification balance of $12.1 million.

5.    Securities

Securities Available for Sale

This table provides detailed information about securities available for sale at March 31, 2017 and December 31, 2016 (in thousands):

 

March 31, 2017    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. Treasury

   $ 65,069      $ 29      $ (1,404    $ 63,694  

U.S. Agencies

     82,104        25        (6      82,123  

Mortgage-backed

     3,948,616        6,424        (64,890      3,890,150  

State and political subdivisions

     2,459,630        11,997        (22,662      2,448,965  

Corporates

     66,751        —          (90      66,661  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,622,170      $ 18,475      $ (89,052    $ 6,551,593  
  

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2016    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. Treasury

   $ 95,315      $ 37      $ (1,526    $ 93,826  

U.S. Agencies

     198,158        67        (48      198,177  

Mortgage-backed

     3,773,090        7,069        (68,460      3,711,699  

State and political subdivisions

     2,425,155        7,391        (36,789      2,395,757  

Corporates

     66,997        5        (127      66,875  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,558,715      $ 14,569      $ (106,950    $ 6,466,334  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

The following table presents contractual maturity information for securities available for sale at March 31, 2017 (in thousands):

 

     Amortized
Cost
     Fair
Value
 
     

Due in 1 year or less

   $ 405,459      $ 405,729  

Due after 1 year through 5 years

     1,138,224        1,142,747  

Due after 5 years through 10 years

     821,982        814,622  

Due after 10 years

     307,889        298,345  
  

 

 

    

 

 

 

Total

     2,673,554        2,661,443  

Mortgage-backed securities

     3,948,616        3,890,150  
  

 

 

    

 

 

 

Total securities available for sale

   $ 6,622,170      $ 6,551,593  
  

 

 

    

 

 

 

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

For the three months ended March 31, 2017, proceeds from the sales of securities available for sale were $86.1 million compared to $282.0 million for the same period in 2016. Securities transactions resulted in gross realized gains of $0.5 million and $2.9 million for the three months ended March 31, 2017 and 2016. There were no gross realized losses for the three months ended March 31, 2017 and 2016.

Securities available for sale with a fair value of $5.5 billion at March 31, 2017 and $5.7 billion at December 31, 2016 were pledged to secure U.S. Government deposits, other public deposits and certain trust deposits as required by law. Of this amount, securities with a market value of $1.7 billion at March 31, 2017 and $1.8 billion at December 31, 2016 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.

The following table shows the Company’s available for sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2017 and December 31, 2016 (in thousands).

 

March 31, 2017

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

U.S. Treasury

   $ 53,780      $ (1,404   $ —        $ —       $ 53,780      $ (1,404

U.S. Agencies

     9,996        (2     9,997        (4     19,993        (6

Mortgage-backed

     2,784,982        (50,387     302,054        (14,503     3,087,036        (64,890

State and political subdivisions

     1,275,251        (22,148     22,322        (514     1,297,573        (22,662

Corporates

     48,675        (65     17,986        (25     66,661        (90
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily-impaired debt securities available for sale

   $ 4,172,684      $ (74,006   $ 352,359      $ (15,046   $ 4,525,043      $ (89,052
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

19


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

December 31, 2016

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

U.S. Treasury

   $ 48,678      $ (1,526   $ —        $ —       $ 48,678      $ (1,526

U.S. Agencies

     103,979        (34     9,989        (14     113,968        (48

Mortgage-backed

     2,735,868        (55,035     269,637        (13,425     3,005,505        (68,460

State and political subdivisions

     1,748,922        (36,639     8,565        (150     1,757,487        (36,789

Corporates

     41,966        (90     17,982        (37     59,948        (127
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily-impaired debt securities available for sale

   $ 4,679,413      $ (93,324   $ 306,173      $ (13,626   $ 4,985,586      $ (106,950
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses in the Company’s investments in U.S. treasury obligations, U.S. government agencies, Government Sponsored Entity (GSE) mortgage-backed securities, municipal securities, and corporates were caused by changes in interest rates. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at March 31, 2017.

Securities Held to Maturity

The following table shows the Company’s held to maturity investments’ amortized cost, fair value, and gross unrealized gains and losses at March 31, 2017 and net unrealized gains, aggregated by maturity category, at December 31, 2016, respectively (in thousands):

 

March 31, 2017

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
          
          

State and political subdivisions:

          

Due in 1 year or less

   $ 5,590      $ 2      $ (47   $ 5,545  

Due after 1 year through 5 years

     95,548        1,964        (2,262     95,250  

Due after 5 years through 10 years

     316,425        3,606        (18,182     301,849  

Due after 10 years

     789,076        12,055        (89,612     711,519  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total state and political subdivisions

   $ 1,206,639      $ 17,627      $ (110,103   $ 1,114,163  
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2016

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
          
          

State and political subdivisions:

          

Due in 1 year or less

   $ 6,077      $ 5      $ (947   $ 5,135  

Due after 1 year through 5 years

     82,650        2,376        (1,474     83,552  

Due after 5 years through 10 years

     341,741        8,854        (3,021     347,574  

Due after 10 years

     685,464        15,717        (31,415     669,766  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total state and political subdivisions

   $ 1,115,932      $ 26,952      $ (36,857   $ 1,106,027  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

There were no sales of securities held to maturity during the three months ended March 31, 2017 or 2016.

 

20


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Trading Securities

There were no net unrealized gains or losses on trading securities at March 31, 2017. The net unrealized gains on trading securities at March 31, 2016 were $48 thousand and were included in trading and investment banking income on the consolidated statements of income. In order to offset interest rate risk exposure within the trading portfolio, the Company has begun short selling U.S. Treasury and Corporate securities in which the Company enters into agreements to sell securities at a fixed price on a fixed date prior to purchasing the related securities. Securities sold not yet purchased totaled $22.8 million at March 31, 2017 and is classified within the Other liabilities line of the Company’s consolidated balance sheets.

Other Securities

The table below provides detailed information for Federal Reserve Bank (FRB) stock and Federal Home Loan Bank (FHLB) stock and other securities at March 31, 2017 and December 31, 2016 (in thousands):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

March 31, 2017

           

FRB and FHLB stock

   $ 33,262      $ —        $ —        $ 33,262  

Other securities – marketable

     4        9,280        —          9,284  

Other securities – non-marketable

     24,546        818        —          25,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other securities

   $ 57,812      $ 10,098      $ —        $ 67,910  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

FRB and FHLB stock

   $ 33,262      $ —        $ —        $ 33,262  

Other securities – marketable

     4        9,948        —          9,952  

Other securities – non-marketable

     24,272        820        —          25,092  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other securities

   $ 57,538      $ 10,768      $ —        $ 68,306  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost. Other marketable and non-marketable securities include Prairie Capital Management (PCM) alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. The fair value of other marketable securities includes alternative investment securities of $9.3 million at March 31, 2017 and $10.0 million at December 31, 2016. The fair value of other non-marketable securities includes alternative investment securities of $2.1 million at March 31, 2017 and $2.0 million at December 31, 2016. Unrealized gains or losses on alternative investments are recognized in the Equity earnings (losses) on alternative investments line of the Company’s Consolidated Statements of Income.

6.    Goodwill and Other Intangibles

Changes in the carrying amount of goodwill for the periods ended March 31, 2017 and December 31, 2016 by reportable segment are as follows (in thousands):

 

     Bank      Institutional
Investment
Management
     Asset
Servicing
     Total  

Balances as of January 1, 2017

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

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of March 31, 2017

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

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of January 1, 2016

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

Acquisition of Marquette Financial Companies

     50        —          —          50  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances as of December 31, 2016

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

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Following are the finite-lived intangible assets that continue to be subject to amortization as of March 31, 2017 and December 31, 2016 (in thousands):

 

     As of March 31, 2017  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Core deposit intangible assets

   $ 47,527      $ 39,857      $ 7,670  

Customer relationships

     107,460        83,708        23,752  

Other intangible assets

     4,198        3,998        200  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 159,185      $ 127,563      $ 31,622  
  

 

 

    

 

 

    

 

 

 
     As of December 31, 2016  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Core deposit intangible assets

   $ 47,527      $ 39,040      $ 8,487  

Customer relationships

     107,460        81,832        25,628  

Other intangible assets

     4,198        3,822        376  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 159,185      $ 124,694      $ 34,491  
  

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended
March 31,
 
     2017      2016  

Aggregate amortization expense

   $ 2,869      $ 3,226  
  

 

 

    

 

 

 

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

 

For the nine months ending December 31, 2017

   $ 7,311  

For the year ending December 31, 2018

     7,202  

For the year ending December 31, 2019

     5,822  

For the year ending December 31, 2020

     4,487  

For the year ending December 31, 2021

     3,101  

For the year ending December 31, 2022

     2,036  

7.    Securities Sold Under Agreements to Repurchase

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

 

22


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

The table below presents the remaining contractual maturities of repurchase agreements outstanding at March 31, 2017, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings (in thousands).

 

     As of March 31, 2017  
     Remaining Contractual Maturities of the Agreements  
     Overnight &
Continuous
     Over 90 Days      Total  

Repurchase agreements, secured by:

        

U.S. Treasury

   $ 6,129      $ —        $ 6,129  

U.S. Agencies

     1,330,428        1,600        1,332,028  
  

 

 

    

 

 

    

 

 

 

Total repurchase agreements

   $ 1,336,557      $ 1,600      $ 1,338,157  
  

 

 

    

 

 

    

 

 

 

8.    Business Segment Reporting

The Company has strategically aligned its operations into the following three reportable segments (collectively, the Business Segments): Bank, Institutional Investment Management, and Asset Servicing. Senior executive officers regularly evaluate business segment financial results produced by the Company’s internal management reporting system in deciding how to allocate resources and assess performance for individual Business Segments. The Company’s reportable segments include certain corporate overhead, technology and service costs that are allocated based on methodologies that are applied consistently between periods. For comparability purposes, amounts in all periods are based on methodologies in effect at March 31, 2017. Previously reported results have been reclassified to conform to the current organizational structure.

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

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

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

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

 

23


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Business Segment Information

Segment financial results were as follows (in thousands):

 

     Three Months Ended March 31, 2017  
     Bank      Institutional
Investment
Management
     Asset
Servicing
     Total  

Net interest income

   $ 131,663      $ —        $ 2,652      $ 134,315  

Provision for loan losses

     9,000        —          —          9,000  

Noninterest income

     79,215        19,254        22,311        120,780  

Noninterest expense

     150,251        17,676        20,839        188,766  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     51,627        1,578        4,124        57,329  

Income tax expense

     11,861        345        942        13,148  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 39,766      $ 1,233      $ 3,182      $ 44,181  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 19,341,000      $ 61,000      $ 832,000      $ 20,234,000  

 

     Three Months Ended March 31, 2016  
     Bank      Institutional
Investment
Management
     Asset
Servicing
     Total  

Net interest income

   $ 115,271      $ —        $ 2,621      $ 117,892  

Provision for loan losses

     5,000        —          —          5,000  

Noninterest income

     75,417        18,425        22,508        116,350  

Noninterest expense

     142,967        17,266        20,211        180,444  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     42,721        1,159        4,918        48,798  

Income tax expense

     10,855        287        1,253        12,395  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 31,866      $ 872      $ 3,665      $ 36,403  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 17,885,000      $ 63,000      $ 1,387,000      $ 19,335,000  

9.    Commitments, Contingencies and Guarantees

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

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

 

24


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

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

Contract or Notional Amount (in thousands):

 

     March 31,
2017
     December 31,
2016
 

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

   $ 6,255,921      $ 6,471,404  

Commitments to extend credit under credit card loans

     2,865,533        2,798,433  

Commercial letters of credit

     3,990        1,098  

Standby letters of credit

     334,269        376,617  

Forward contracts

     51,188        49,352  

Spot foreign exchange contracts

     3,309        3,725  

10.    Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

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

Fair Values of Derivative Instruments on the Consolidated Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as of March 31, 2017 and December 31, 2016. The Company’s derivative asset and derivative liability are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets.

This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of March 31, 2017 and December 31, 2016 (in thousands):

 

     Asset Derivatives      Liability Derivatives  
Fair value    March 31,
2017
     December 31,
2016
     March 31,
2017
     December 31,
2016
 

Interest Rate Products:

           

Derivatives not designated as hedging instruments

   $ 9,801      $ 10,555      $ 5,290      $ 10,581  

Derivatives designated as hedging instruments

     238        318        284        748  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,039      $ 10,873      $ 5,574      $ 11,329  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed rate assets and liabilities due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve either making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments, or making variable rate payments to a counterparty in exchange for the Company receiving fixed rate payments, over the life of the agreements without the exchange of the underlying notional amount. As of March 31, 2017, the Company had two interest rate swaps with a notional amount of $15.7 million that were designated as fair value hedges of interest rate risk associated with the Company’s fixed rate loan assets and brokered time deposits.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.

Cash Flow Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its variable-rate liabilities due to changes in the benchmark interest rate, LIBOR. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of March 31, 2017, the Company had two interest rate swaps with a notional amount of $51.5 million that were designated as cash flow hedges of interest rate risk associated with the Company’s variable rate subordinated debentures issued by Marquette Capital Trusts III and IV. For derivatives designated and that qualify as cash flow hedges, the effective portion of changes in fair value is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly into earnings gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. During the three months ended March 31, 2017, the Company recognized net gains of $246 thousand in AOCI for the effective portion of the change in fair value of these cash flow hedges. During the three months ended March 31, 2017, the Company did not record any hedge ineffectiveness in earnings. Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are received or paid on the Company’s derivatives. The Company does not expect to reclassify any amounts from AOCI to Interest expense during the next 12 months as the Company’s derivatives are effective after December 2018. As of March 31, 2017, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 19.5 years.

Non-designated Hedges

The remainder of the Company’s derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers which the Company implemented in 2010. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of March 31, 2017, the Company had 58 interest rate swaps with an aggregate notional amount of $758.1 million related to this program. During the three months ended March 31, 2017 and 2016, the Company recognized net losses of $348 thousand and $352 thousand, respectively, related to changes in the fair value of these swaps.

 

26


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Effect of Derivative Instruments on the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income

This table provides a summary of the amount of gain or loss recognized in other noninterest expense in the Consolidated Statements of Income related to the Company’s derivative assets and liabilities as of March 31, 2017 and March 31, 2016 (in thousands):

 

     Amount of Gain (Loss) Recognized
For the Three Months Ended
March 31,
 
     2017      2016  

Interest Rate Products

     

Derivatives not designated as hedging instruments

   $ (348    $ (352
  

 

 

    

 

 

 

Total

   $ (348    $ (352
  

 

 

    

 

 

 

Interest Rate Products

     

Derivatives designated as hedging instruments

     

Fair value adjustments on derivatives

   $ (46    $ (193

Fair value adjustments on hedged items

     46        192  
  

 

 

    

 

 

 

Total

   $ —        $ (1
  

 

 

    

 

 

 

This table provides a summary of the amount of gain or loss recognized in AOCI in the Consolidated Statements of Comprehensive Income related to the Company’s derivative assets and liabilities as of March 31, 2017 and March 31, 2016 (in thousands):

 

     Amount of Gain (Loss) Recognized in Other
Comprehensive Income on Derivatives
(Effective Portion)
For the Three Months  Ended
March 31,
 

Derivatives in Cash Flow Hedging Relationships

   2017      2016  

Interest rate products

     

Derivatives designed as cash flow hedging instruments

   $ 246      $ (4,140
  

 

 

    

 

 

 

Total

   $ 246      $ (4,140
  

 

 

    

 

 

 

Credit-risk-related Contingent Features

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

As of March 31, 2017 the termination value of derivatives is in a net liability position, which includes accrued interest, related to these agreements was $7.8 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties but has not yet reached its minimum collateral posting threshold under these agreements. If the Company had had a default of indebtedness under any of these provisions at March 31, 2017, it could have been required to settle its obligations under the agreements at the termination value.

 

27


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

11.    Fair Value Measurements

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of March 31, 2017, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

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

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 (in thousands):

 

     Fair Value Measurement As of March 31, 2017  

Description

   March 31,
2017
     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

U.S. Treasury

   $ 1,807      $ 1,807      $ —        $ —    

U.S. Agencies

     4,298        —          4,298        —    

Mortgage- backed

     10,227        —          10,227        —    

State and political subdivisions

     25,031        —          25,031        —    

Corporates

     2,535        2,535        —          —    

Trading - other

     31,596        30,124        1,472        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     75,494        34,466        41,028        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     63,694        63,694        

U.S. Agencies

     82,123        —          82,123        —    

Mortgage-backed

     3,890,150        —          3,890,150        —    

State and political subdivisions

     2,448,965        —          2,448,965        —    

Corporates

     66,661        66,661        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,551,593        130,355        6,421,238        —    

Company-owned life insurance

     43,251        —          43,251        —    

Bank-owned life insurance

     211,230        —          211,230        —    

Derivatives

     10,039        —          10,039        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,891,607      $ 164,821      $ 6,726,786      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 53,111      $ 53,111      $ —        $ —    

Derivatives

     5,574        —          5,574        —    

Securities sold not yet purchased

     22,840        —          22,840        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 81,525      $ 53,111      $ 28,414      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

     Fair Value Measurement as of December 31, 2016  

Description

   December 31,
2016
     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

U.S. Treasury

   $ —        $ —        $ —        $ —    

U.S. Agencies

     1,306        —          1,306        —    

Mortgage-backed

     313        —          313        —    

State and political subdivisions

     9,295        —          9,295        —    

Trading - other

     28,622        28,495        127        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

     39,536        28,495        11,041        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury

     93,826        93,826        —          —    

U.S. Agencies

     198,177        —          198,177        —    

Mortgage-backed

     3,711,699        —          3,711,699        —    

State and political subdivisions

     2,395,757        —          2,395,757        —    

Corporates

     66,875        66,875        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for sale securities

     6,466,334        160,701        6,305,633        —    

Company-owned life insurance

     41,333        —          41,333        —    

Bank-owned life insurance

     209,686        —          209,686        —    

Derivatives

     10,873        —          10,873        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,767,762      $ 189,196      $ 6,578,566      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation

   $ 42,797      $ 42,797      $ —        $ —    

Derivatives

     11,329        —          11,329        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,126      $ 42,797      $ 11,329      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

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

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

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

 

29


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

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

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

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

Securities sold not yet purchased Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Prices are provided by third-party pricing services and are based on observable market inputs.

Assets measured at fair value on a non-recurring basis as of March 31, 2017 and December 31, 2016 (in thousands):

 

     Fair Value Measurement at March 31, 2017 Using  

Description

   March 31,
2017
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Gains
(Losses)
Recognized
During the
Three Months
Ended

March 31
 

Impaired loans

   $ 17,578      $ —        $ —        $ 17,578      $ (306

Other real estate owned

     124        —          —          124        (32
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,702      $ —        $ —        $ 17,702      $ (338
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurement at December 31, 2016 Using  

Description

   December 31,
2016
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

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

Impaired loans

   $ 23,757      $ —        $ —        $ 23,757      $ (2,070

Other real estate owned

     89        —          —          89        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,846      $ —        $ —        $ 23,846      $ (2,070
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

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

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

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

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

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

 

31


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value of the Company’s financial instruments at March 31, 2017 and December 31, 2016 were as follows (in thousands):

 

     Fair Value Measurement at March 31, 2017 Using  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Estimated Fair
Value
 

FINANCIAL ASSETS

              

Cash and short-term investments

   $ 944,708      $ 749,307      $ 195,401      $ —        $ 944,708  

Securities available for sale

     6,551,593        130,355        6,421,238        —          6,551,593  

Securities held to maturity

     1,206,639           1,114,163        —          1,114,163  

Trading securities

     75,494        34,466        41,028        —          75,494  

Other securities

     67,910           67,910        —          67,910  

Loans (exclusive of allowance for loan loss)

     10,759,170           10,790,779        —          10,790,779  

Derivatives

     10,039           10,039        —          10,039  

FINANCIAL LIABILITIES

              

Demand and savings deposits

     14,824,465        14,824,465           —          14,824,465  

Time deposits

     1,070,719           1,070,719        —          1,070,719  

Other borrowings

     2,390,364        1,052,207        1,338,157        —          2,390,364  

Long-term debt

     76,104           74,350        —          74,350  

Derivatives

     5,574           5,574        —          5,574  

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 1,879,215  

Commercial letters of credit

                 31,636  

Standby letters of credit

                 673,883  

 

     Fair Value Measurement at December 31, 2016 Using  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Estimated Fair
Value
 

FINANCIAL ASSETS

              

Cash and short-term investments

   $ 1,462,267      $ 1,138,850      $ 323,417      $ —        $ 1,462,267  

Securities available for sale

     6,466,334        160,701        6,305,633        —          6,466,334  

Securities held to maturity

     1,115,932        —          1,106,027        —          1,106,027  

Trading securities

     39,536        28,495        11,041        —          39,536  

Other securities

     68,306        —          68,306        —          68,306  

Loans (exclusive of allowance for loan loss)

     10,545,662        —          10,572,292        —          10,572,292  

Derivatives

     10,873        —          10,873        —          10,873  

FINANCIAL LIABILITIES

              

Demand and savings deposits

     15,434,893        15,434,893        —          —          15,434,893  

Time deposits

     1,135,721        —          1,135,721        —          1,135,721  

Other borrowings

     1,856,937        419,843        1,437,094        —          1,856,937  

Long-term debt

     76,772        —          77,025        —          77,025  

Derivatives

     11,329        —          11,329        —          11,329  

OFF-BALANCE SHEET ARRANGEMENTS

              

Commitments to extend credit for loans

                 5,603,807  

Commercial letters of credit

                 142,383  

Standby letters of credit

                 2,526,859  

 

32


Table of Contents

UMB FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

 

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

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

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

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

Demand and savings deposits The fair value of demand deposits and savings accounts is the amount payable on demand at March 31, 2017 and December 31, 2016.

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

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

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

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

12.    Subsequent Event

On April 20, 2017, the Company announced the execution of an agreement to sell all of the outstanding stock of Scout Investments, Inc. (Scout), its institutional investment management subsidiary, for $172.5 million in cash, subject to customary purchase price adjustments at closing. This transaction is expected to be accretive to both income and capital. The Company plans to use the proceeds from the transaction for general corporate purposes and to support its continued organic growth in the commercial, consumer, private wealth, institutional banking, healthcare, and asset servicing businesses. See Items 1.01 and 5.02 in the Company’s Current Report on Form 8K that was filed April 20, 2017.

 

33


Table of Contents

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

This review highlights the material changes in the results of operations and changes in financial condition for the three month period ended March 31, 2017. It should be read in conjunction with the accompanying consolidated financial statements, notes to consolidated financial statements and other financial statistics appearing elsewhere in this report and in the Company’s Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

 

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

 

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

 

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

 

    changes in accounting standards or policies;

 

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

 

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

 

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

 

    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;

 

34


Table of Contents
    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, acquisitions or dispositions, including the Company’s ability to integrate acquisitions and divest assets;

 

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

Any forward-looking statement made by the Company or on its behalf speaks only as of the date that it was made. The Company does not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except to the extent required by 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.

 

35


Table of Contents

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 maintaining a focus to improve net income and strengthen the balance sheet.

The first strategic objective is a focus on improving operating efficiencies. The Company has 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 remaining savings are expected to be phased in throughout 2017. In addition, the Company has identified 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 the first quarter of 2017, total revenue increased 8.9 percent compared to the first quarter of 2016, while noninterest expense increased 4.6 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 the first quarter of 2017, the Company continued to make progress on this strategy as illustrated by an increase in net interest income of $16.4 million, or 13.9 percent, from the same period in 2016. The Company has continued to show increased net interest income in a historically low rate environment through the effects of favorable loan repricing driven by recent rate increases, increased volume and mix of average earning assets, and a low cost of funds in its Consolidated Balance Sheets. Average earning assets increased $849.8 million, or 4.7 percent from March 31, 2016. The funding for these assets was driven primarily by a 7.4 percent increase in average interest-bearing liabilities. Average loan balances increased $1.0 billion, or 10.6 percent compared to the same period in 2016. Net interest margin, on a tax-equivalent basis, increased 30 basis points compared to the same period in 2016.

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, helped to reduce the impact of sustained low interest rates and positioned the Company to benefit in periods of growth. During the first quarter of 2017, noninterest income increased $4.4 million, or 3.8 percent, to $120.8 million for the three months ended March 31, 2017, compared to the same period in 2016. This change is discussed in greater detail below under Noninterest Income. The Company continues to emphasize its asset management, brokerage, bankcard services, healthcare services, and treasury management businesses. At March 31, 2017, noninterest income represented 47.3 percent of total revenues, compared to 49.7 percent at March 31, 2016.

The fourth strategic objective is a focus on capital management. The Company places a significant emphasis on the maintenance of a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on 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 March 31, 2017, the Company had a total risk-based capital ratio of 12.96 percent and $2.0 billion in total shareholders’ equity, an increase of $62.5 million, or 3.2 percent, compared to total shareholders’ equity at March 31, 2016. The Company repurchased 52,689 shares of common stock at an average price of $76.46 per share during the first quarter of 2017.

On April 20, 2017, the Company announced the execution of an agreement to sell all of the outstanding stock of Scout Investments, Inc. (Scout), its institutional investment management subsidiary, for $172.5 million in cash, subject to customary purchase price adjustments at closing. This transaction is expected to be accretive to both income and capital. The Company plans to use the proceeds from the transaction for general corporate purposes and to support its continued organic growth in the commercial, consumer, private wealth, institutional banking, healthcare, and asset servicing businesses. See Items 1.01 and 5.02 in the Company’s Current Report on Form 8-K that was filed April 20, 2017.

 

36


Table of Contents

Earnings Summary

The Company recorded consolidated net income of $44.2 million for the three month period ended March 31, 2017, compared to $36.4 million for the same period a year earlier. This represents a 21.4 percent increase over the three month period ended March 31, 2016. Basic earnings per share for the first quarter of 2017 were $0.90 per share ($0.89 per share fully-diluted) compared to $0.75 per share ($0.74 per share fully-diluted) for the first quarter of 2016. Return on average assets and return on average common shareholders’ equity for the three month period ended March 31, 2017 were 0.89 and 9.04 percent, respectively, compared to 0.76 and 7.54 percent for the three month period ended March 31, 2016.

Net interest income for the three month period ended March 31, 2017 increased $16.4 million, or 13.9 percent, compared to the same period in 2016. Average earning assets increased by $849.8 million, or 4.7 percent, compared to the first quarter of 2016. Net interest margin, on a tax-equivalent basis, increased to 3.09 percent or a 30 basis point increase for the three months ended March 31, 2017, compared to 2.79 percent for the same period in 2016.

The provision for loan losses increased by $4.0 million for the three month period ended March 31, 2017, compared to the same period in 2016. This increase is a direct result of applying the Company’s methodology for computing the allowance for loan losses. The allowance for loan losses as a percentage of total loans increased to 0.87 percent as of March 31, 2017, compared to 0.83 as of March 31, 2016. For a description of the Company’s methodology for computing the allowance for loan losses, please see the summary discussion of the Allowance for Loan Losses within the Critical Accounting Policies and Estimates subsection of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section on the Company’s Form 10-K.

Noninterest income increased by $4.4 million, or 3.8 percent, for the three month period ended March 31, 2017, compared to the same period in 2016. This increase is primarily due to an increase in trading and investment banking income and other income, partially offset by a reduction of gains on sales of securities as compared to first quarter one year ago. These changes are discussed in greater detail below under Noninterest Income.

Noninterest expense increased by $8.3 million, or 4.6 percent, for the three month period ended March 31, 2017, compared to the same period in 2016. This increase was primarily driven by increases in salaries and employee benefits expense and equipment expense. These changes are discussed in greater detail below under Noninterest Expense.

Net Interest Income

Net interest income is a significant source of the Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. For the three month period ended March 31, 2017, net interest income increased by $16.4 million, or 13.9 percent, as compared to the same period in 2016.

Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. As illustrated in this table, net interest spread and margin for the three months ended March 31, 2017 increased by 25 basis points and 30 basis points compared to the same period in 2016, respectively. These results are primarily due to a favorable volume and rate variance on earning assets, partially offset by an unfavorable rate variance on interest-bearing liabilities. The combined impact of these variances has led to an increase in the Company’s net interest income compared to results one year ago. While noninterest-bearing demand deposits remained relatively flat, as compared to the first quarter of 2016, the contribution from the improvement in yield on tax-equivalent earning assets of 38 basis points outperformed the impact of an increased cost of interest-bearing liabilities, resulting in a positive impact by increasing the contribution from free funds. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and rates have resulted in the changes in net interest income.

 

37


Table of Contents

Table 1

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

The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax equivalent basis adjustment would have been 3.11 percent for the three month period ended March 31, 2017 and 2.77 percent for the same period in 2016.

 

     Three Months Ended March 31,  
     2017     2016  
     Average
Balance
     Average
Yield/Rate
    Average
Balance
     Average
Yield/Rate
 

Assets

          

Loans, net of unearned interest

   $ 10,560,134        4.09   $ 9,550,291        3.81

Securities:

          

Taxable

     4,198,795        1.85       4,826,822        1.61  

Tax-exempt

     3,487,456        3.07       2,805,514        2.81  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

     7,686,251        2.40       7,632,336        2.05  

Federal funds and resell agreements

     238,201        1.56       146,791        1.39  

Interest-bearing due from banks

     309,125        0.72       648,635        0.55  

Other earning assets

     60,462        2.45       26,358        1.01  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total earning assets

     18,854,173        3.31       18,004,411        2.93  

Allowance for loan losses

     (93,106        (80,820   

Other assets

     1,473,282          1,411,260     
  

 

 

      

 

 

    

Total assets

   $ 20,234,349        $ 19,334,851     
  

 

 

      

 

 

    

Liabilities and Shareholders’ Equity

          

Interest-bearing deposits

   $ 9,644,005        0.25   $ 9,429,774        0.17

Federal funds and repurchase agreements

     2,329,630        0.60       1,696,555        0.29  

Borrowed funds

     76,468        4.99       92,558        3.95  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     12,050,103        0.35       11,218,887        0.22  

Noninterest-bearing demand deposits

     5,998,943          6,014,820     

Other liabilities

     202,248          159,883     

Shareholders’ equity

     1,983,055          1,941,261     
  

 

 

      

 

 

    

Total liabilities and shareholders’ equity

   $ 20,234,349        $ 19,334,851     
  

 

 

      

 

 

    

Net interest spread

        2.96        2.71

Net interest margin

        3.09          2.79  

Table 2 presents the dollar amount of change in net interest income and margin due to volume and rate. Table 2 also reflects the effect that interest-free funds have on net interest margin. The average balance of interest free funds (total earning assets less interest-bearing liabilities) increased $18.5 million for the three month period ended March 31, 2017 compared to the same period in 2016, resulting in an increase in the benefit from interest free funds of five basis points to 0.13 percent.

 

38


Table of Contents

Table 2

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

ANALYSIS OF CHANGES IN NET INTEREST INCOME

 

     Three Months Ended  
     March 31, 2017 and 2016  
     Volume      Rate      Total  

Change in interest earned on:

        

Loans

   $ 9,463      $ 6,553      $ 16,016  

Securities:

        

Taxable

     (2,746      2,579        (167

Tax-exempt

     3,221        1,227        4,448  

Federal funds sold and resell agreements

     342        70        412  

Interest-bearing due from banks

     (557      217        (340

Trading

     112        123        235  
  

 

 

    

 

 

    

 

 

 

Interest income

     9,835        10,769        20,604  

Change in interest incurred on:

        

Interest-bearing deposits

     91        1,820        1,911  

Federal funds purchased and repurchase agreements

     579        1,660        2,239  

Other borrowed funds

     (176      207        31  
  

 

 

    

 

 

    

 

 

 

Interest expense

     494        3,687        4,181  
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 9,341      $ 7,082      $ 16,423  
  

 

 

    

 

 

    

 

 

 

ANALYSIS OF NET INTEREST MARGIN

 

     Three Months Ended March 31,  
     2017     2016     Change  

Average earning assets

   $ 18,854,173     $ 18,004,411     $ 849,762  

Interest-bearing liabilities

     12,050,103       11,218,887       831,216  
  

 

 

   

 

 

   

 

 

 

Interest-free funds

   $ 6,804,070     $ 6,785,524     $ 18,546  
  

 

 

   

 

 

   

 

 

 

Free funds ratio (free funds to earning assets)

     36.09     37.69     (1.60 )% 

Tax-equivalent yield on earning assets

     3.31     2.93     0.38

Cost of interest-bearing liabilities

     0.35       0.22       0.13  
  

 

 

   

 

 

   

 

 

 

Net interest spread

     2.96     2.71     0.25

Benefit of interest-free funds

     0.13       0.08       0.05  
  

 

 

   

 

 

   

 

 

 

Net interest margin

     3.09     2.79     0.30
  

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

Provision and Allowance for Loan Losses

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

Based on the factors above, management of the Company expensed $9.0 million related to the provision for loan losses for the three month period ended March 31, 2017, compared to $5.0 million for the same period in 2016. As illustrated in Table 3 below, the ALL increased to 0.87 percent of total loans as of March 31, 2017, compared to 0.83 percent of total loans as of the same period in 2016.

Table 3 presents a summary of the Company’s ALL for the three months ended March 31, 2017 and 2016 and for the year ended December 31, 2016. Net charge-offs were $7.3 million for the first three months of 2017, compared to $5.7 million for the same period in 2016. See “Credit Risk Management” under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.

Table 3

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

 

     Three Months Ended     Year Ended  
     March 31,     December 31,  
     2017     2016     2016  

Allowance-January 1

   $ 91,649     $ 81,143     $ 81,143  

Provision for loan losses

     9,000       5,000       32,500  
  

 

 

   

 

 

   

 

 

 

Charge-offs:

      

Commercial

     (5,981     (5,075     (12,788

Consumer:

      

Credit card

     (2,337     (2,349     (8,436

Other

     (200     (166     (843

Real estate

     (186     (1,445     (6,756
  

 

 

   

 

 

   

 

 

 

Total charge-offs

     (8,704     (9,035     (28,823
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial

     698       2,489       3,596  

Consumer:

      

Credit card

     522       568       1,730  

Other

     97       89       518  

Real estate

     61       144       985  
  

 

 

   

 

 

   

 

 

 

Total recoveries

     1,378       3,290       6,829  
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (7,326     (5,745     (21,994
  

 

 

   

 

 

   

 

 

 

Allowance-end of period

   $ 93,323     $ 80,398     $ 91,649  
  

 

 

   

 

 

   

 

 

 

Average loans, net of unearned interest

   $ 10,558,148     $ 9,548,972     $ 9,986,151  

Loans at end of period, net of unearned interest

     10,757,236       9,699,631       10,540,383  

Allowance to loans at end of period

     0.87     0.83     0.87

Allowance as a multiple of net charge-offs

     3.14     3.48     4.17

Net charge-offs to:

      

Provision for loan losses

     81.40     114.90     67.67

Average loans

     0.28       0.24       0.22  

 

40


Table of Contents

Noninterest Income

A key objective of the Company is the growth of noninterest income to enhance profitability and provide steady income. Fee-based businesses are typically non-credit related and not generally affected by fluctuations in interest rates.

The Company’s fee-based businesses provide the opportunity to offer multiple products and services, which management believes will more closely align the customer with the Company. The Company is currently emphasizing fee-based businesses, including trust and securities processing, bankcard, brokerage, healthcare services, and treasury management. Management believes it can offer these products and services both efficiently and profitably, as most share common platforms and support structure.

Table 4

SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)

 

     Three Months Ended
March 31,
     Dollar
Change
     Percent
Change
 
     2017      2016      17-16      17-16  

Trust and securities processing

   $ 60,404      $ 59,485      $ 919        1.5

Trading and investment banking

     7,542        4,630        2,912        62.9  

Service charges on deposits accounts

     22,075        21,461        614        2.9  

Insurance fees and commissions

     646        1,497        (851      (56.8

Brokerage fees

     5,377        4,185        1,192        28.5  

Bankcard fees

     17,752        18,016        (264      (1.5

Gains on sales of securities available for sale, net

     468        2,933        (2,465      (84.0

Equity losses on alternative investments

     (614      (381      (233      (61.2

Other

     7,130        4,524        2,606        57.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 120,780      $ 116,350      $ 4,430        3.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Fee-based, or noninterest income, increased by $4.4 million, or 3.8 percent, during the three months ended March 31, 2017, compared to the same period in 2016. Table 4 above summarizes the components of noninterest income and the respective year-over-year comparison for each category.

Trading and investment banking increased by $2.9 million, or 62.9 percent, during the three months ended March 31, 2017, compared to the same period in 2016. This increase was driven by a $1.4 million increase in unrealized gains on the Company’s investments in certain Scout funds and a $0.7 million increase in bond underwriting fees.

Brokerage fees increased $1.2 million, or 28.5 percent, during the three months ended March 31, 2017, compared to the same period in 2016. This increase was driven by a $1.3 million increase in 12b-1 fee income.

In the first quarter of 2017, $0.5 million in pre-tax gains were recognized on the sales of securities available for sale, as compared to $2.9 million one year ago. The investment portfolio is continually evaluated for opportunities to improve its performance and risk profile relative to market conditions and the Company’s interest rate expectations. This can result in differences from quarter to quarter in the amount of realized gains.

Other noninterest income increased $2.6 million, or 57.6 percent, during the three months ended March 31, 2017, compared to the same period in 2016. This increase was primarily driven by a $2.0 million increase in the fair value of company-owned life insurance.

 

41


Table of Contents

Noninterest Expense

The components of noninterest expense are shown below on Table 5.

Table 5

SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)

 

     Three Months Ended
March 31,
     Dollar
Change
     Percent
Change
 
     2017      2016      17-16      17-16  

Salaries and employee benefits

   $ 113,834      $ 106,850      $ 6,984        6.5

Occupancy, net

     11,148        10,972        176        1.6  

Equipment

     17,668        16,282        1,386        8.5  

Supplies and services

     4,281        4,949        (668      (13.5

Marketing and business development

     4,503        4,441        62        1.4  

Processing fees

     11,301        11,462        (161      (1.4

Legal and consulting

     5,300        4,799        501        10.4  

Bankcard

     4,903        5,815        (912      (15.7

Amortization of other intangible assets

     2,869        3,226        (357      (11.1

Regulatory fees

     3,833        3,429        404        11.8  

Other

     9,126        8,219        907        11.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $ 188,766      $ 180,444      $ 8,322        4.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense increased by $8.3 million, or 4.6 percent, for the three months ended March 31, 2017 compared to the same period in 2016. Table 5 above summarizes the components of noninterest expense and the respective year-over-year comparison for each category.

Salaries and employee benefits increased by $7.0 million, or 6.5 percent, for the three months ended March 31, 2017, compared to the same period in 2016. The increase is primarily due to a $1.9 million, or 3.0 percent, increase in salaries and wages, a $1.9 million, or 8.8 percent, increase in commissions and bonuses, and a $3.1 million, or 15.5 percent, increase in employee benefits expense for the three months ended March 31, 2017, compared to the same period of 2016.

Equipment expense increased by $1.4 million, or 8.5 percent, for the three months ended March 31, 2017, compared to the same period in 2016. The increase is primarily due to increases in computer and hardware costs related to investments for regulatory requirements, cyber security, and the ongoing modernization of the Company’s core systems.

Income Tax Expense

The Company’s effective tax rate was 22.9 percent for the three months ended March 31, 2017, compared to 25.4 percent for the same period a year earlier. The effective tax rate decreased primarily as a result of an increase in excess tax benefits associated with stock compensation recorded in the first quarter of 2017 compared to the same period a year earlier.

 

42


Table of Contents

Strategic Lines of Business

Table 6

Bank Operating Results (unaudited, dollars in thousands)

 

     Three Months Ended
March 31,
     Dollar
Change
     Percent
Change
 
     2017      2016      17-16      17-16  

Net interest income

   $ 131,663      $ 115,271      $ 16,392        14.2

Provision for loan losses

     9,000        5,000        4,000        80.0  

Noninterest income

     79,215        75,417        3,798        5.0  

Noninterest expense

     150,251        142,967        7,284        5.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     51,627        42,721        8,906        20.8  

Income tax expense

     11,861        10,855        1,006        9.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 39,766      $ 31,866      $ 7,900        24.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Bank net income increased by $7.9 million, or 24.8 percent, to $39.8 million compared to the prior year. Net interest income increased $16.4 million, or 14.2 percent over the first quarter of 2016, primarily driven by strong loan growth and improved yields. Provision for loan losses increased by $4.0 million, due to characteristics of the loan portfolio driving an increased allowance for loan loss reserve for this segment. Noninterest income increased $3.8 million, or 5.0 percent, over the same period in 2016 primarily driven by the following increases: bond trading income of $1.5 million, brokerage and mutual fund income of $1.2 million due to an increase in 12b-1 fees, trust and securities processing income of $1.5 million, derivative income of $0.7 million, and company-owned life insurance income of $0.6 million. These increases were offset by a decrease of $2.4 million in gains on sales of available-for-sale securities.

Noninterest expense increased $7.3 million, or 5.1 percent, to $150.3 million compared to the prior year. The increase in noninterest expense is due to the following increases: $4.0 million in technology, service, and overhead expenses due to the ongoing modernization of our core systems, $3.4 million in salary and benefit expense, and a $1.0 million write-down on other real estate owned property. These increases were partially offset by decreases of $1.5 million in consulting expense.

Table 7

Institutional Investment Management Operating Results (unaudited, dollars in thousands)

 

     Three Months Ended
March 31,
     Dollar
Change
     Percent
Change
 
     2017      2016      17-16      17-16  

Net interest income

   $ —        $ —        $ —          —  

Provision for loan losses

     —          —          —          —    

Noninterest income

     19,254        18,425        829        4.5  

Noninterest expense

     17,676        17,266        410        2.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     1,578        1,159        419        36.2  

Income tax expense

     345        287        58        20.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,233      $ 872      $ 361        41.4
  

 

 

    

 

 

    

 

 

    

 

 

 

 

43


Table of Contents

Institutional Investment Management net income increased $0.4 million, or 41.4 percent, to $1.2 million as compared to the prior year. Noninterest income increased $0.8 million, or 4.5 percent, primarily due to a $1.4 million increase in corporate-owned life insurance income and a $0.3 million increase in advisory fees from separately managed accounts. These increases were offset by a decrease of $0.9 million in advisory and administrative fees from the Scout Funds, driven by a change in the mix of assets under management in the funds. Overall assets under management have increased to $27.9 billion compared to $27.3 billion a year ago. However, the mix of assets under management in Scout has shifted between the two periods from 80 percent fixed income and 20 percent equity as of March 31, 2016 to 83 percent fixed income and 17 percent equity as of March 31, 2017. Noninterest expense increased $0.4 million, or 2.4 percent, primarily due to a $0.9 million increase in salary and benefit expense, offset by a decrease of $0.4 million in fees paid by the advisor to third-party distributors of the Scout Funds.

As previously mentioned in Note 12 above, on April 20, 2017, the Company announced the execution of an agreement to sell all of the outstanding stock of Scout Investments, Inc. (Scout), its institutional investment management subsidiary, for $172.5 million in cash, subject to customary purchase price adjustments at closing. This transaction is expected to be accretive to both income and capital. The Company plans to use the proceeds from the transaction for general corporate purposes and to support its continued organic growth in the commercial, consumer, private wealth, institutional banking, healthcare, and asset servicing businesses. See Items 1.01 and 5.02 in the Company’s Current Report on Form 8-K that was filed April 20, 2017

Table 8

Asset Servicing Operating Results (unaudited, dollars in thousands)

 

     Three Months Ended
March 31,
     Dollar
Change
     Percent
Change
 
     2017      2016      17-16      17-16  

Net interest income

   $ 2,652      $ 2,621      $ 31        1.2

Provision for loan losses

     —          —          —          —    

Noninterest income

     22,311        22,508        (197      (0.9

Noninterest expense

     20,839        20,211        628        3.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     4,124        4,918        (794      (16.1

Income tax expense

     942        1,253        (311      (24.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 3,182      $ 3,665      $ (483      (13.2 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Asset Servicing net income decreased $0.5 million, or 13.2 percent, to $3.2 million compared to the same period last year. Net interest income and noninterest income were flat as compared to the prior year. Assets under administration stood at $191.6 billion at March 31, 2017, as compared to $180.7 billion at March 31, 2016. Noninterest expense increased $0.6 million, or 3.1 percent, primarily due to an increase of $0.8 million in salary and benefit expense.

Balance Sheet Analysis

Total assets of the Company decreased by $106.4 million, or 0.5 percent, as of March 31, 2017, compared to December 31, 2016, primarily driven by a decrease in due from Federal Reserve balances of $318.9 million, or 49.7 percent, and a decrease in resell agreements of $128.0 million, or 39.6 percent. These decreases were partially offset by an increase in total loans of $216.9 million, or 2.1 percent, an increase in held-to-maturity securities of $90.7 million, or 8.1 percent, and an increase in available-for-sale securities of $85.3 million or 1.3 percent. The decrease in total assets is directly related to a corresponding decrease in deposit balances of $675.4 million, or 4.1 percent, which was partially offset by an increase in federal funds purchased and repurchase agreements of $533.4 million, or 28.7 percent, from December 31, 2016 to March 31, 2017.

 

44


Table of Contents

Total assets of the Company increased $1.3 billion, or 6.6 percent, from March 31, 2016 to March 31, 2017. This increase is a result of an increase in loans of $1.1 billion, or 10.9 percent, and an increase in held-to-maturity securities of $402.0 million, or 50.0 percent. The overall increase in total assets from March 31, 2016 to March 31, 2017 was funded by an increase in federal funds purchased and resell agreements of $708.6 million and an increase in total deposits of $476.8 million.

Table 9

SELECTED BALANCE SHEET INFORMATION (unaudited, dollars in thousands)

 

     March 31,      December 31,  
     2017      2016      2016  

Total assets

   $ 20,576,137      $ 19,302,913      $ 20,682,532  

Loans and loans held for sale

     10,759,170        9,704,461        10,545,662  

Total investment securities

     7,901,636        7,779,334        7,690,108  

Interest-bearing due from banks

     374,570        401,961        715,823  

Total earning assets

     19,138,520        17,976,182        19,184,271  

Total deposits

     15,895,184        15,418,373        16,570,614  

Total borrowed funds

     2,466,468        1,771,967        1,933,709  

Loans

Loans represent the Company’s largest source of interest income. In addition to growing the commercial loan portfolio, management believes its middle market commercial business and its consumer business, including home equity and credit card loan products, are the market niches that represent its best opportunity to cross-sell fee-related services.

Total loan balances increased $216.9 million, or 2.1 percent, to $10.8 billion from December 31, 2016 to March 31, 2017. This increase was primarily driven by increases in commercial loans of $145.6 million, or 3.3 percent, and construction real estate loans of $107.8 million, or 14.5 percent.

Total loan balances increased $1.1 billion, or 10.9 percent, compared from March 31, 2016 to March 31, 2017. This increase in driven by increases in the following loan categories: commercial real estate loans of $378.1 million, or 13.7 percent, construction real estate loans of $352.1 million, or 70.8 percent, and commercial loans of $209.3 million, or 4.8 percent.

Nonaccrual, past due, and restructured loans are discussed under “Credit Risk Management” within “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in 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, FHLB stock, and other miscellaneous investments. Investment securities totaled $7.9 billion as of March 31, 2017 and $7.7 billion as of December 31, 2016 and comprised 41.3 percent and 40.1 percent of the Company’s earning assets, respectively, as of those dates.

The Company’s AFS securities portfolio comprised 82.9 percent of the Company’s investment securities portfolio at March 31, 2017, compared to 84.1 percent at December 31, 2016. 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 43.4 months at March 31, 2016 to 54.9 months at March 31, 2017. 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 $5.5 billion of AFS securities

 

45


Table of Contents

pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, and repurchase agreements at March 31, 2017. Of this amount, securities with a market value of $1.7 billion at March 31, 2017 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 $1.2 billion as of March 31, 2017, an increase of $90.7 million, or 8.1 percent, from December 31, 2016. The average life of the HTM portfolio remained flat at 7.3 years as of March 31, 2017, compared to 7.4 years at December 31, 2016.

The securities portfolio generates the Company’s second largest component of interest income. The securities portfolio achieved an average yield on a tax-equivalent basis of 2.40 percent for the three months ended March 31, 2017, compared to 2.05 percent for the same period in 2016.

Deposits and Borrowed Funds

Deposits decreased $675.4 million, or 4.1 percent, from December 31, 2016 to March 31, 2017. Of this decline, $452.3 million was related to non-interest bearing deposits and $223.1 million was related to interest-bearing deposits. From March 31, 2016 to March 31, 2017, total deposits increased $476.8 million, or 3.1 percent, and the entire increase was comprised of interest-bearing deposits.

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 trust and mutual fund servicing segments, in order to attract and retain additional core deposits. Management believes a strong core deposit composition is one of the Company’s key competencies.

Long-term debt totaled $76.1 million at March 31, 2017, which is relatively flat compared to December 31, 2016 and a decrease of $9.1 million from March 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 have an aggregate contractual balance of $103.1 million and a carrying value of $67.5 million at March 31, 2017. Interest rates on trust preferred securities are tied to the three-month London Interbank Offered Rate (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.

Federal funds purchased and securities sold under agreement to repurchase totaled $2.4 billion at March 31, 2017, compared to $1.9 billion at December 31, 2016 and $1.7 billion at March 31, 2016. 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 securities at an agreed-upon price and date.

Capital and Liquidity

The Company places a significant emphasis on maintaining a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. 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 March 31, 2017, a $48.5 million increase compared to December 31, 2016, and a $62.5 million increase compared to March 31, 2016.

The Company’s Board of Directors authorized, at its April 25, 2017 and April 26, 2016 meetings, the repurchase of up to two million shares of the Company’s common stock during the twelve months following the meetings. During the three months ended March 31, 2017 and 2016, the Company acquired 52,689 shares and 269,522 shares under the 2016 and 2015 plans, respectively, of its common stock. The Company has not made any repurchase of its securities other than through these plans.

 

46


Table of Contents

On April 25, 2017, the Board of Directors declared a dividend of $0.255 per share. The dividend will be paid on July 3, 2017 to shareholders of record at the close of business on June 12, 2017.

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 $842.2 million as of March 31, 2017. The Company had no outstanding FHLB advances at FHLB of Des Moines as of March 31, 2017.

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 calculated as ratio of tier 1 core capital to total average assets, less goodwill and intangibles. The Company’s capital position as of March 31, 2017 is summarized in the table below and exceeded regulatory requirements.

Table 10

 

     Three Months Ended
March 31,
 

RATIOS

   2017     2016  

Common equity tier 1 capital ratio

     11.89     11.80

Tier 1 risk-based capital ratio

     11.89       11.80  

Total risk-based capital ratio

     12.96       12.85  

Leverage ratio

     9.11       8.78  

Return on average assets

     0.89       0.76  

Return on average equity

     9.04       7.54  

Average equity to assets

     9.80       10.04  

The Company’s per share data is summarized in the table below.

 

    

Three Months Ended

March 31,

 

Per Share Data

   2017     2016  

Earnings basic

   $ 0.90     $ 0.75  

Earnings diluted

     0.89       0.74  

Cash dividends

     0.255       0.245  

Dividend payout ratio

     28.33     32.67

Book value

   $ 40.34     $ 39.39  

 

47


Table of Contents

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. Please see Note 9, “Commitments, Contingencies and Guarantees” in the Notes to the Consolidated Financial Statements for detailed information on these arrangements.

Critical Accounting Policies and Estimates

The preparation of these Consolidated Financial 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.

A summary of critical accounting policies is listed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Form 10-K.

 

48


Table of Contents
ITEM 3. 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 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 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 10 “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 11 shows the net interest income increase or decrease over the next twelve months as of March 31, 2017 and 2016 based on hypothetical changes in interest rates and a constant sized balance sheet with runoff being replaced.

 

49


Table of Contents

Table 11

MARKET RISK (unaudited, dollars in thousands)

 

     Hypothetical change in interest rate – Rate Ramp  
     Year One     Year Two  
     March 31, 2017     March 31, 2016     March 31, 2017     March 31, 2016  

(basis points)

   Amount of change     Amount of change     Amount of change     Amount of change  

300

     1.8     5.0     8.2     12.6

200

     0.6       3.1       4.8       8.3  

100

     (0.6     1.3       1.3       4.0  

Static

     —         —         —         —    

(100)

     (1.8     N/A       (6.6     N/A  
     Hypothetical change in interest rate – Rate Shock  
     Year One     Year Two  
     March 31, 2017     March 31, 2016     March 31, 2017     March 31, 2016  

(basis points)

   Amount of change     Amount of change     Amount of change     Amount of change  

300

     4.3     11.9     8.9     17.8

200

     2.3       7.8       5.2       11.9  

100

     0.3       3.6       1.6       5.8  

Static

     —         —         —         —    

(100)

     (4.9     N/A       (8.5     N/A  

The Company is positioned to benefit from increases in interest rates in all but the year one 100 basis point upward rate ramp scenario. Net interest income is projected to increase in rising interest rate scenarios due to expected increases in earning asset yields at a pace that is greater and earlier than the impacts on cost of interest bearing liabilities. The Company’s level of sensitivity has declined over the past year due primarily to: 1) balance sheet changes and recent rate increases which have significantly increased actual and projected static net interest income, resulting in a larger base net interest income and 2) the Company’s modeling assumptions that deposit pricing will revert to projected or historical levels under these scenarios. Since actual sensitivity on deposit pricing has been lower than projected to date, the Company’s modeling continues to assume a reversion of expected deposit re-pricing to historical norms.

Trading Account

The Company carries securities in a trading account that is maintained according to 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 utilizing financial instruments including exchange-traded financial futures as well as short sales of U.S. Treasury and Corporate securities. The trading securities and related hedging instruments are marked-to-market daily. The trading account had a balance of $75.5 million as of March 31, 2017, $39.5 million as of December 31, 2016, and $26.8 million as of March 31, 2016. Securities sold not yet purchased (i.e. short positions) totaled $22.8 million at March 31, 2017 and is classified within the Other liabilities line of the Company’s consolidated balance sheets.

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 11 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.

 

50


Table of Contents

Other Market Risk

The Company does have foreign currency risk that it does not consider material as a result of foreign exchange contracts. See Note 9 “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 non-accrual. At March 31, 2017, the Company’s nonperforming loans totaled $56.6 million, which was a decrease of $13.7 million, compared to December 31, 2016 and an increase of $1.7 million, compared to March 31, 2016.

The Company had $0.2 million of other real estate owned as of March 31, 2017 and December 31, 2016, compared to $3.3 million as of March 31, 2016. Loans past due more than 90 days totaled $3.4 million as of March 31, 2017, which was flat with both December 31, 2016 and March 31, 2016.

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 $54.1 million of restructured loans at March 31, 2017, compared to $52.5 million at December 31, 2016, and $46.0 million at March 31, 2016.

Table 12 summarizes the various aspects of credit quality discussed above.

Table 12

LOAN QUALITY (dollars in thousands)

 

     March 31,     December 31,  
     2017     2016     2016  

Nonaccrual loans

   $ 33,759     $ 33,602     $ 41,765  

Restructured loans on non-accrual

     22,835       21,331       28,494  
  

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     56,594       54,933       70,259  

Other real estate owned

     225       3,281       194  
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 56,819     $ 58,214     $ 70,453  
  

 

 

   

 

 

   

 

 

 

Loans past due 90 days or more

   $ 3,393     $ 3,334     $ 3,365  

Restructured loans accruing

     31,299       24,717       24,013  

Allowance for Loan Losses

     93,323       80,398       91,649  

Ratios

      

Nonperforming loans as a % of loans

     0.53     0.57     0.67

Nonperforming assets as a % of loans plus other real estate owned

     0.53       0.60       0.67  

Nonperforming assets as a % of total assets

     0.28       0.30       0.34  

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

     0.03       0.03       0.03  

Allowance for Loan Losses as a % of loans

     0.87       0.83       0.87  

Allowance for Loan Losses as a multiple of nonperforming loans

     1.65     1.46     1.30

 

51


Table of Contents

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 $6.6 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 March 31, 2017, $5.5 billion, or 83.8 percent, of the securities available-for-sale were pledged or used as collateral, compared to $5.7 billion, or 88.6 percent, at December 31, 2016. However of these amounts, securities with a market value of $1.7 billion at March 31, 2017 and $1.8 billion at December 31, 2016 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 March 31, 2017 was $9.5 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.

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 the 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