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 September 30, 2017March 31, 2018
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 number000-04887number001-38481
UMB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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(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):
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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. Yes ☐ No ☐
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 October 26, 2017, UMB Financial Corporation had 49,867,273 shares of common stock outstanding.
FORM 10-Q
INDEX
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PART I – FINANCIAL INFORMATION
UMB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Missouri | 43-0903811 | |
(State or other jurisdiction of | (I.R.S. Employer |
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. Yes ☐ No ☐
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, 2018, UMB Financial Corporation had 50,057,311 shares of common stock outstanding.
FORM 10-Q
INDEX
3 | ||
ITEM 1. | 3 | |
3 | ||
4 | ||
6 | ||
7 | ||
8 | ||
9 | ||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 38 |
ITEM 3. | 52 | |
ITEM 4. | 57 | |
58 | ||
ITEM 1. | 58 | |
ITEM 1A. | 58 | |
ITEM 2. | 58 | |
ITEM 3. | 58 | |
ITEM 4. | 58 | |
ITEM 5. | 58 | |
ITEM 6. | 59 | |
60 |
PART I – FINANCIAL INFORMATION
UMB FINANCIAL CORPORATION
(unaudited, dollars in thousands, except share and per share data)
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| September 30, |
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| December 31, |
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| March 31, |
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| December 31, |
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| 2017 |
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| 2016 |
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| 2018 |
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| 2017 |
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ASSETS |
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Loans: |
| $ | 10,997,028 |
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| $ | 10,540,383 |
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Loans |
| $ | 11,458,794 |
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| $ | 11,280,513 |
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Allowance for loan losses |
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| (98,389 | ) |
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| (91,649 | ) |
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| (100,302 | ) |
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| (100,604 | ) |
Net loans |
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| 10,898,639 |
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| 10,448,734 |
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| 11,358,492 |
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| 11,179,909 |
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Loans held for sale |
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| 4,525 |
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| 5,279 |
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| 4,586 |
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| 1,460 |
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Investment securities: |
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Securities: |
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Available for sale |
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| 5,848,960 |
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| 6,466,334 |
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| 6,139,346 |
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| 6,258,577 |
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Held to maturity (fair value of $1,181,747 and $1,106,027, respectively) |
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| 1,276,252 |
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| 1,115,932 |
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Held to maturity (fair value of $1,157,627 and $1,207,447, respectively) |
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| 1,246,466 |
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| 1,261,014 |
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Trading securities |
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| 60,660 |
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| 39,536 |
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| 65,389 |
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| 54,055 |
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Other securities |
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| 63,543 |
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| 68,306 |
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| 67,408 |
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| 65,897 |
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Total investment securities |
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| 7,249,415 |
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| 7,690,108 |
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| 7,518,609 |
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| 7,639,543 |
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Federal funds sold and securities purchased under agreements to resell |
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| 244,436 |
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| 324,327 |
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| 127,208 |
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| 191,601 |
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Interest-bearing due from banks |
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| 221,856 |
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| 715,823 |
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| 671,163 |
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| 1,351,760 |
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Cash and due from banks |
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| 366,169 |
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| 422,117 |
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| 279,838 |
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| 392,723 |
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Premises and equipment, net |
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| 277,454 |
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| 289,007 |
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| 272,632 |
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| 275,942 |
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Accrued income |
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| 103,076 |
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| 99,045 |
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| 97,632 |
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| 98,863 |
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Goodwill |
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| 180,867 |
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| 180,867 |
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| 180,867 |
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| 180,867 |
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Other intangibles, net |
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| 23,477 |
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| 26,630 |
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| 18,695 |
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| 20,257 |
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Other assets |
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| 655,846 |
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| 425,205 |
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| 458,182 |
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| 438,658 |
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Discontinued assets – goodwill and other intangibles, net |
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| 53,743 |
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| 55,390 |
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Total assets |
| $ | 20,279,503 |
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| $ | 20,682,532 |
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| $ | 20,987,904 |
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| $ | 21,771,583 |
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LIABILITIES |
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Deposits: |
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Noninterest-bearing demand |
| $ | 5,812,117 |
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| $ | 6,654,584 |
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| $ | 6,042,719 |
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| $ | 6,839,171 |
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Interest-bearing demand and savings |
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| 9,063,079 |
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| 8,780,309 |
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| 10,188,367 |
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| 9,903,565 |
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Time deposits under $250,000 |
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| 576,035 |
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| 613,589 |
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| 553,692 |
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| 547,990 |
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Time deposits of $250,000 or more |
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| 548,373 |
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| 522,132 |
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| 433,487 |
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| 732,274 |
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Total deposits |
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| 15,999,604 |
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| 16,570,614 |
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| 17,218,265 |
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| 18,023,000 |
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Federal funds purchased and repurchase agreements |
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| 1,856,837 |
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| 1,856,937 |
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| 1,354,615 |
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| 1,260,704 |
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Long-term debt |
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| 76,071 |
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| 76,772 |
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| 78,687 |
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| 79,281 |
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Accrued expenses and taxes |
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| 193,978 |
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| 172,967 |
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| 129,753 |
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| 191,464 |
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Other liabilities |
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| 51,470 |
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| 42,858 |
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| 39,198 |
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| 35,603 |
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Total liabilities |
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| 18,177,960 |
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| 18,720,148 |
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| 18,820,518 |
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| 19,590,052 |
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SHAREHOLDERS' EQUITY |
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Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 49,862,453 and 49,673,056 shares outstanding, respectively |
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| 55,057 |
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| 55,057 |
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Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 50,046,236 and 49,894,990 shares outstanding, respectively |
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| 55,057 |
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| 55,057 |
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Capital surplus |
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| 1,042,022 |
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| 1,033,419 |
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| 1,046,673 |
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| 1,046,095 |
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Retained earnings |
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| 1,239,865 |
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| 1,142,887 |
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| 1,393,485 |
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| 1,338,110 |
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Accumulated other comprehensive loss, net |
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| (22,668 | ) |
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| (57,542 | ) |
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| (117,391 | ) |
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| (45,525 | ) |
Treasury stock, 5,194,277 and 5,383,674 shares, at cost, respectively |
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| (212,733 | ) |
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| (211,437 | ) | ||||||||
Treasury stock, 5,010,494 and 5,161,740 shares, at cost, respectively |
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| (210,438 | ) |
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| (212,206 | ) | ||||||||
Total shareholders' equity |
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| 2,101,543 |
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| 1,962,384 |
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| 2,167,386 |
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| 2,181,531 |
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Total liabilities and shareholders' equity |
| $ | 20,279,503 |
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| $ | 20,682,532 |
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| $ | 20,987,904 |
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| $ | 21,771,583 |
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See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands, except share and per share data)
|
| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
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|
| September 30, |
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| September 30, |
|
| March 31, |
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| 2017 | �� |
| 2016 |
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| 2017 |
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| 2016 |
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| 2018 |
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| 2017 |
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INTEREST INCOME |
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Loans |
| $ | 119,132 |
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| $ | 98,820 |
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| $ | 338,416 |
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| $ | 283,313 |
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| $ | 126,134 |
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| $ | 106,560 |
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Securities: |
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Taxable interest |
|
| 17,720 |
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|
| 17,012 |
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|
| 55,351 |
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|
| 55,221 |
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|
| 19,780 |
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|
| 19,190 |
|
Tax-exempt interest |
|
| 18,893 |
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|
| 14,797 |
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|
| 54,372 |
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|
| 41,377 |
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|
| 18,703 |
|
|
| 17,183 |
|
Total securities income |
|
| 36,613 |
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|
| 31,809 |
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|
| 109,723 |
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|
| 96,598 |
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|
| 38,483 |
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|
| 36,373 |
|
Federal funds and resell agreements |
|
| 1,008 |
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|
| 790 |
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|
| 2,638 |
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|
| 1,939 |
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|
| 1,038 |
|
|
| 919 |
|
Interest-bearing due from banks |
|
| 753 |
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|
| 445 |
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|
| 1,884 |
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|
| 1,772 |
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|
| 1,580 |
|
|
| 551 |
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Trading securities |
|
| 389 |
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|
| 174 |
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|
| 1,135 |
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|
| 399 |
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|
| 430 |
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|
| 287 |
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Total interest income |
|
| 157,895 |
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|
| 132,038 |
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|
| 453,796 |
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|
| 384,021 |
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|
| 167,665 |
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|
| 144,690 |
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INTEREST EXPENSE |
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|
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Deposits |
|
| 10,181 |
|
|
| 4,626 |
|
|
| 23,982 |
|
|
| 12,817 |
|
|
| 13,835 |
|
|
| 5,966 |
|
Federal funds and repurchase agreements |
|
| 5,811 |
|
|
| 1,894 |
|
|
| 14,274 |
|
|
| 4,750 |
|
|
| 4,732 |
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|
| 3,469 |
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Other |
|
| 1,045 |
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|
| 753 |
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|
| 2,973 |
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|
| 2,587 |
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|
| 1,176 |
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|
| 940 |
|
Total interest expense |
|
| 17,037 |
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|
| 7,273 |
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|
| 41,229 |
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|
| 20,154 |
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|
| 19,743 |
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|
| 10,375 |
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Net interest income |
|
| 140,858 |
|
|
| 124,765 |
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|
| 412,567 |
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|
| 363,867 |
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|
| 147,922 |
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|
| 134,315 |
|
Provision for loan losses |
|
| 11,500 |
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|
| 13,000 |
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|
| 35,000 |
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|
| 25,000 |
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|
| 10,000 |
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|
| 9,000 |
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Net interest income after provision for loan losses |
|
| 129,358 |
|
|
| 111,765 |
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|
| 377,567 |
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|
| 338,867 |
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|
| 137,922 |
|
|
| 125,315 |
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NONINTEREST INCOME |
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
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Trust and securities processing |
|
| 45,060 |
|
|
| 41,812 |
|
|
| 132,412 |
|
|
| 123,984 |
|
|
| 44,002 |
|
|
| 42,541 |
|
Trading and investment banking |
|
| 4,453 |
|
|
| 6,114 |
|
|
| 18,168 |
|
|
| 16,382 |
|
|
| 4,101 |
|
|
| 7,542 |
|
Service charges on deposit accounts |
|
| 21,510 |
|
|
| 21,832 |
|
|
| 66,316 |
|
|
| 65,713 |
|
|
| 21,905 |
|
|
| 22,075 |
|
Insurance fees and commissions |
|
| 425 |
|
|
| 698 |
|
|
| 1,584 |
|
|
| 3,355 |
|
|
| 301 |
|
|
| 646 |
|
Brokerage fees |
|
| 5,815 |
|
|
| 4,712 |
|
|
| 17,081 |
|
|
| 13,159 |
|
|
| 6,353 |
|
|
| 5,377 |
|
Bankcard fees |
|
| 17,427 |
|
|
| 17,086 |
|
|
| 55,413 |
|
|
| 52,636 |
|
|
| 18,123 |
|
|
| 17,752 |
|
Gain on sales of securities available for sale, net |
|
| 2,390 |
|
|
| 2,978 |
|
|
| 4,138 |
|
|
| 8,509 |
|
|
| 139 |
|
|
| 468 |
|
Equity (losses) earnings on alternative investments |
|
| (584 | ) |
|
| 1,594 |
|
|
| (1,393 | ) |
|
| 2,191 |
| ||||||||
Other |
|
| 7,810 |
|
|
| 6,716 |
|
|
| 23,810 |
|
|
| 18,352 |
|
|
| 10,601 |
|
|
| 6,516 |
|
Total noninterest income |
|
| 104,306 |
|
|
| 103,542 |
|
|
| 317,529 |
|
|
| 304,281 |
|
|
| 105,525 |
|
|
| 102,917 |
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 99,749 |
|
|
| 99,403 |
|
|
| 306,174 |
|
|
| 293,294 |
|
|
| 107,968 |
|
|
| 103,652 |
|
Occupancy, net |
|
| 11,285 |
|
|
| 11,224 |
|
|
| 33,314 |
|
|
| 32,996 |
|
|
| 10,953 |
|
|
| 10,968 |
|
Equipment |
|
| 17,880 |
|
|
| 16,029 |
|
|
| 53,318 |
|
|
| 48,807 |
|
|
| 18,826 |
|
|
| 17,482 |
|
Supplies and services |
|
| 4,076 |
|
|
| 4,472 |
|
|
| 12,962 |
|
|
| 13,875 |
|
|
| 3,760 |
|
|
| 4,094 |
|
Marketing and business development |
|
| 5,056 |
|
|
| 5,090 |
|
|
| 14,929 |
|
|
| 15,273 |
|
|
| 5,034 |
|
|
| 4,141 |
|
Processing fees |
|
| 11,151 |
|
|
| 9,084 |
|
|
| 31,093 |
|
|
| 27,118 |
|
|
| 11,161 |
|
|
| 9,199 |
|
Legal and consulting |
|
| 5,844 |
|
|
| 4,437 |
|
|
| 17,361 |
|
|
| 14,107 |
|
|
| 3,844 |
|
|
| 5,050 |
|
Bankcard |
|
| 5,130 |
|
|
| 5,015 |
|
|
| 15,066 |
|
|
| 16,199 |
|
|
| 4,626 |
|
|
| 4,903 |
|
Amortization of other intangible assets |
|
| 1,715 |
|
|
| 2,088 |
|
|
| 5,685 |
|
|
| 6,644 |
|
|
| 1,562 |
|
|
| 2,046 |
|
Regulatory fees |
|
| 3,798 |
|
|
| 3,370 |
|
|
| 11,702 |
|
|
| 10,491 |
|
|
| 2,905 |
|
|
| 3,833 |
|
Other |
|
| 6,137 |
|
|
| 4,999 |
|
|
| 20,966 |
|
|
| 20,094 |
|
|
| 5,237 |
|
|
| 8,442 |
|
Total noninterest expense |
|
| 171,821 |
|
|
| 165,211 |
|
|
| 522,570 |
|
|
| 498,898 |
|
|
| 175,876 |
|
|
| 173,810 |
|
Income before income taxes |
|
| 61,843 |
|
|
| 50,096 |
|
|
| 172,526 |
|
|
| 144,250 |
|
|
| 67,571 |
|
|
| 54,422 |
|
Income tax expense |
|
| 12,971 |
|
|
| 10,674 |
|
|
| 36,907 |
|
|
| 34,016 |
|
|
| 10,038 |
|
|
| 12,446 |
|
Income from continuing operations |
|
| 48,872 |
|
|
| 39,422 |
|
|
| 135,619 |
|
|
| 110,234 |
|
|
| 57,533 |
|
|
| 41,976 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations before income taxes |
|
| (1,030 | ) |
|
| 3,834 |
|
|
| (722 | ) |
|
| 8,792 |
|
|
| (917 | ) |
|
| 2,907 |
|
Income tax (benefit) expense |
|
| (300 | ) |
|
| 1,310 |
|
|
| (247 | ) |
|
| 3,159 |
|
|
| (170 | ) |
|
| 702 |
|
(Loss) income from discontinued operations |
|
| (730 | ) |
|
| 2,524 |
|
|
| (475 | ) |
|
| 5,633 |
|
|
| (747 | ) |
|
| 2,205 |
|
NET INCOME |
| $ | 48,142 |
|
| $ | 41,946 |
|
| $ | 135,144 |
|
| $ | 115,867 |
|
| $ | 56,786 |
|
| $ | 44,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 0.99 |
|
| $ | 0.81 |
|
| $ | 2.76 |
|
| $ | 2.26 |
|
| $ | 1.16 |
|
| $ | 0.85 |
|
(Loss) income from discontinued operations |
|
| (0.01 | ) |
|
| 0.05 |
|
|
| (0.01 | ) |
|
| 0.11 |
|
|
| (0.01 | ) |
|
| 0.05 |
|
Net income – basic |
|
| 0.98 |
|
|
| 0.86 |
|
|
| 2.75 |
|
|
| 2.37 |
|
|
| 1.15 |
|
|
| 0.90 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
| 0.98 |
|
|
| 0.80 |
|
|
| 2.72 |
|
|
| 2.24 |
|
|
| 1.15 |
|
|
| 0.84 |
|
(Loss) income from discontinued operations |
|
| (0.01 | ) |
|
| 0.05 |
|
|
| (0.01 | ) |
|
| 0.12 |
|
|
| (0.01 | ) |
|
| 0.05 |
|
Net income - diluted |
|
| 0.97 |
|
|
| 0.85 |
|
|
| 2.71 |
|
|
| 2.36 |
|
|
| 1.14 |
|
|
| 0.89 |
|
Dividends |
|
| 0.255 |
|
|
| 0.245 |
|
|
| 0.765 |
|
|
| 0.735 |
|
|
| 0.290 |
|
|
| 0.255 |
|
Weighted average shares outstanding - basic |
|
| 49,283,322 |
|
|
| 48,849,251 |
|
|
| 49,221,629 |
|
|
| 48,792,419 |
|
|
| 49,420,606 |
|
|
| 49,109,872 |
|
Weighted average shares outstanding - diluted |
|
| 49,833,141 |
|
|
| 49,284,280 |
|
|
| 49,838,619 |
|
|
| 49,162,200 |
|
|
| 49,917,454 |
|
|
| 49,829,508 |
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net Income |
| $ | 48,142 |
|
| $ | 41,946 |
|
| $ | 135,144 |
|
| $ | 115,867 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gains (losses), net |
|
| 5,064 |
|
|
| (16,946 | ) |
|
| 62,646 |
|
|
| 90,639 |
|
Less: Reclassification adjustment for gains included in net income |
|
| (2,390 | ) |
|
| (2,978 | ) |
|
| (4,138 | ) |
|
| (8,509 | ) |
Change in unrealized gains (losses) on securities during the period |
|
| 2,674 |
|
|
| (19,924 | ) |
|
| 58,508 |
|
|
| 82,130 |
|
Change in unrealized losses on derivative hedges |
|
| (169 | ) |
|
| (643 | ) |
|
| (1,080 | ) |
|
| (7,677 | ) |
Income tax (expense) benefit |
|
| (1,548 | ) |
|
| 7,784 |
|
|
| (22,554 | ) |
|
| (28,223 | ) |
Other comprehensive income (loss) |
|
| 957 |
|
|
| (12,783 | ) |
|
| 34,874 |
|
|
| 46,230 |
|
Comprehensive income |
| $ | 49,099 |
|
| $ | 29,163 |
|
| $ | 170,018 |
|
| $ | 162,097 |
|
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Net income |
| $ | 56,786 |
|
| $ | 44,181 |
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
Unrealized gains and losses on debt securities: |
|
|
|
|
|
|
|
|
Change in unrealized holding gains and losses, net |
|
| (80,662 | ) |
|
| 22,271 |
|
Less: Reclassification adjustment for gains included in net income |
|
| (139 | ) |
|
| (468 | ) |
Change in unrealized gains and losses on debt securities during the period |
|
| (80,801 | ) |
|
| 21,803 |
|
Change in unrealized gains and losses on derivative hedges |
|
| 2,202 |
|
|
| 246 |
|
Income tax benefit (expense) |
|
| 19,782 |
|
|
| (8,666 | ) |
Other comprehensive (loss) income before reclassifications |
|
| (58,817 | ) |
|
| 13,383 |
|
Amounts reclassified from accumulated other comprehensive income(1)(2) |
|
| (13,049 | ) |
|
| — |
|
Net current-period other comprehensive (loss) income |
|
| (71,866 | ) |
|
| 13,383 |
|
Comprehensive (loss) income |
| $ | (15,080 | ) |
| $ | 57,564 |
|
(1) | See Note 3, “New Accounting Pronouncements”, for discussion of the Company’s adoption of Accounting Standards Update (ASU) No. 2016-01. |
(2) | See Note 3, “New Accounting Pronouncements”, for discussion of the Company’s adoption of ASU No. 2018-02. |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited, dollars in thousands, except per share data)
|
| Common Stock |
|
| Capital Surplus |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Treasury Stock |
|
| Total |
|
| Common Stock |
|
| Capital Surplus |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total |
| ||||||||||||
Balance - January 1, 2016 |
| $ | 55,057 |
|
| $ | 1,019,889 |
|
| $ | 1,033,990 |
|
| $ | (3,718 | ) |
| $ | (211,524 | ) |
| $ | 1,893,694 |
| ||||||||||||||||||||||||
Balance - January 1, 2017 |
| $ | 55,057 |
|
| $ | 1,033,419 |
|
| $ | 1,142,887 |
|
| $ | (57,542 | ) |
| $ | (211,437 | ) |
| $ | 1,962,384 |
| ||||||||||||||||||||||||
Total comprehensive income |
|
| — |
|
|
| — |
|
|
| 115,867 |
|
|
| 46,230 |
|
|
| — |
|
|
| 162,097 |
|
|
| — |
|
|
| — |
|
|
| 44,181 |
|
|
| 13,383 |
|
|
| — |
|
|
| 57,564 |
|
Cash dividends ($0.735 per share) |
|
| — |
|
|
| — |
|
|
| (36,388 | ) |
|
| — |
|
|
| — |
|
|
| (36,388 | ) | ||||||||||||||||||||||||
Cash dividends ($0.255 per share) |
|
| — |
|
|
| — |
|
|
| (12,481 | ) |
|
| — |
|
|
| — |
|
|
| (12,481 | ) | ||||||||||||||||||||||||
Purchase of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,189 | ) |
|
| (14,189 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,028 | ) |
|
| (4,028 | ) |
Issuance of equity awards |
|
| — |
|
|
| (3,373 | ) |
|
| — |
|
|
| — |
|
|
| 3,802 |
|
|
| 429 |
|
|
| — |
|
|
| (4,140 | ) |
|
| — |
|
|
| — |
|
|
| 4,611 |
|
|
| 471 |
|
Recognition of equity-based compensation |
|
| — |
|
|
| 8,253 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,253 |
|
|
| — |
|
|
| 2,861 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,861 |
|
Sale of treasury stock |
|
| — |
|
|
| 362 |
|
|
| — |
|
|
| — |
|
|
| 474 |
|
|
| 836 |
|
|
| — |
|
|
| 150 |
|
|
| — |
|
|
| — |
|
|
| 117 |
|
|
| 267 |
|
Exercise of stock options |
|
| — |
|
|
| 2,400 |
|
|
| — |
|
|
| — |
|
|
| 7,014 |
|
|
| 9,414 |
|
|
| — |
|
|
| 935 |
|
|
| — |
|
|
| — |
|
|
| 2,905 |
|
|
| 3,840 |
|
Cumulative effect adjustment (1) |
|
| — |
|
|
| 1,338 |
|
|
| (856 | ) |
|
| — |
|
|
| — |
|
|
| 482 |
| ||||||||||||||||||||||||
Balance - September 30, 2016 |
| $ | 55,057 |
|
| $ | 1,028,869 |
|
| $ | 1,112,613 |
|
| $ | 42,512 |
|
| $ | (214,423 | ) |
| $ | 2,024,628 |
| ||||||||||||||||||||||||
Balance - January 1, 2017 |
| $ | 55,057 |
|
| $ | 1,033,419 |
|
| $ | 1,142,887 |
|
| $ | (57,542 | ) |
| $ | (211,437 | ) |
| $ | 1,962,384 |
| ||||||||||||||||||||||||
Total comprehensive income |
|
| — |
|
|
| — |
|
|
| 135,144 |
|
|
| 34,874 |
|
|
| — |
|
|
| 170,018 |
| ||||||||||||||||||||||||
Cash dividends ($0.765 per share) |
|
| — |
|
|
| — |
|
|
| (38,166 | ) |
|
| — |
|
|
| — |
|
|
| (38,166 | ) | ||||||||||||||||||||||||
Balance - March 31, 2017 |
| $ | 55,057 |
|
| $ | 1,033,225 |
|
| $ | 1,174,587 |
|
| $ | (44,159 | ) |
| $ | (207,832 | ) |
| $ | 2,010,878 |
| ||||||||||||||||||||||||
Balance - January 1, 2018 |
| $ | 55,057 |
|
| $ | 1,046,095 |
|
| $ | 1,338,110 |
|
| $ | (45,525 | ) |
| $ | (212,206 | ) |
| $ | 2,181,531 |
| ||||||||||||||||||||||||
Total comprehensive income (loss) |
|
| — |
|
|
| — |
|
|
| 56,786 |
|
|
| (71,866 | ) |
|
| — |
|
|
| (15,080 | ) | ||||||||||||||||||||||||
Reclassification of certain tax effects(1) |
|
| — |
|
|
| — |
|
|
| 12,917 |
|
|
| — |
|
|
| — |
|
|
| 12,917 |
| ||||||||||||||||||||||||
Cash dividends ($0.290 per share) |
|
| — |
|
|
| — |
|
|
| (14,473 | ) |
|
| — |
|
|
| — |
|
|
| (14,473 | ) | ||||||||||||||||||||||||
Purchase of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,369 | ) |
|
| (14,369 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,951 | ) |
|
| (5,951 | ) |
Issuance of equity awards |
|
| — |
|
|
| (3,364 | ) |
|
| — |
|
|
| — |
|
|
| 3,835 |
|
|
| 471 |
|
|
| — |
|
|
| (2,959 | ) |
|
| — |
|
|
| — |
|
|
| 3,454 |
|
|
| 495 |
|
Recognition of equity-based compensation |
|
| — |
|
|
| 9,576 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,576 |
|
|
| — |
|
|
| 2,270 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,270 |
|
Sale of treasury stock |
|
| — |
|
|
| 468 |
|
|
| — |
|
|
| — |
|
|
| 381 |
|
|
| 849 |
|
|
| — |
|
|
| 145 |
|
|
| — |
|
|
| — |
|
|
| 140 |
|
|
| 285 |
|
Exercise of stock options |
|
| — |
|
|
| 1,923 |
|
|
| — |
|
|
| — |
|
|
| 8,857 |
|
|
| 10,780 |
|
|
| — |
|
|
| 1,122 |
|
|
| — |
|
|
| — |
|
|
| 4,125 |
|
|
| 5,247 |
|
Balance - September 30, 2017 |
| $ | 55,057 |
|
| $ | 1,042,022 |
|
| $ | 1,239,865 |
|
| $ | (22,668 | ) |
| $ | (212,733 | ) |
| $ | 2,101,543 |
| ||||||||||||||||||||||||
Cumulative effect adjustments(2) |
|
| — |
|
|
| — |
|
|
| 145 |
|
|
| — |
|
|
| — |
|
|
| 145 |
| ||||||||||||||||||||||||
Balance - March 31, 2018 |
| $ | 55,057 |
|
| $ | 1,046,673 |
|
| $ | 1,393,485 |
|
| $ | (117,391 | ) |
| $ | (210,438 | ) |
| $ | 2,167,386 |
|
(1) | Related to the adoption of ASU No. 2018-02. See Note 3, “New Accounting |
(2) | Related to the adoption of ASU Nos. 2016-01 and 2017-12. See Note 3, “New Accounting |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
|
| For the Nine Months Ended |
|
| For the Three Months Ended |
| ||||||||||
|
| September 30, |
|
| March 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
| ||||
Operating Activities |
|
|
|
|
|
|
|
| ||||||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
| ||||||||
Net income |
| $ | 135,144 |
|
| $ | 115,867 |
|
| $ | 56,786 |
|
| $ | 44,181 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| 35,000 |
|
|
| 25,000 |
|
|
| 10,000 |
|
|
| 9,000 |
|
Net accretion of premiums and discounts from acquisition |
|
| (1,810 | ) |
|
| (1,711 | ) |
|
| (10 | ) |
|
| (838 | ) |
Depreciation and amortization |
|
| 41,538 |
|
|
| 40,949 |
|
|
| 13,371 |
|
|
| 14,375 |
|
Deferred income tax expense |
|
| 1,555 |
|
|
| 911 |
| ||||||||
Net increase in trading securities |
|
| (17,680 | ) |
|
| (30,635 | ) | ||||||||
Deferred income tax benefit |
|
| (7,760 | ) |
|
| (322 | ) | ||||||||
Net increase in trading securities and other earning assets |
|
| (13,628 | ) |
|
| (35,278 | ) | ||||||||
Gains on sales of securities available for sale, net |
|
| (4,138 | ) |
|
| (8,509 | ) |
|
| (139 | ) |
|
| (468 | ) |
Gains on sales of assets |
|
| (484 | ) |
|
| (136 | ) | ||||||||
Losses (gains) on sales of assets |
|
| 142 |
|
|
| (1,020 | ) | ||||||||
Amortization of securities premiums, net of discount accretion |
|
| 36,571 |
|
|
| 43,467 |
|
|
| 11,640 |
|
|
| 12,081 |
|
Originations of loans held for sale |
|
| (53,207 | ) |
|
| (71,726 | ) |
|
| (12,520 | ) |
|
| (10,818 | ) |
Gains on sales of loans held for sale, net |
|
| (1,188 | ) |
|
| (1,281 | ) |
|
| (270 | ) |
|
| (299 | ) |
Proceeds from sales of loans held for sale |
|
| 55,149 |
|
|
| 61,716 |
|
|
| 9,664 |
|
|
| 14,462 |
|
Equity-based compensation |
|
| 10,047 |
|
|
| 8,682 |
|
|
| 2,765 |
|
|
| 3,332 |
|
Net tax benefit (expense) related to equity compensation plans |
|
| 3,149 |
|
|
| (261 | ) | ||||||||
Net tax benefit related to equity compensation plans |
|
| 1,713 |
|
|
| 1,783 |
| ||||||||
Changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued income |
|
| (4,031 | ) |
|
| (2,889 | ) |
|
| 1,231 |
|
|
| 2,010 |
|
Accrued expenses and taxes |
|
| 21,011 |
|
|
| 4,789 |
|
|
| (61,711 | ) |
|
| (29,980 | ) |
Other assets and liabilities, net |
|
| (12,336 | ) |
|
| (14,466 | ) |
|
| 8,345 |
|
|
| (5,533 | ) |
Net cash provided by operating activities |
|
| 244,290 |
|
|
| 169,767 |
|
|
| 19,619 |
|
|
| 16,668 |
|
Investing Activities |
|
|
|
|
|
|
|
| ||||||||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
| ||||||||
Proceeds from maturities of securities held to maturity |
|
| 64,079 |
|
|
| 29,757 |
|
|
| 21,303 |
|
|
| 16,682 |
|
Proceeds from sales of securities available for sale |
|
| 573,062 |
|
|
| 951,263 |
|
|
| 41,273 |
|
|
| 86,069 |
|
Proceeds from maturities of securities available for sale |
|
| 1,005,585 |
|
|
| 1,300,372 |
|
|
| 328,267 |
|
|
| 405,500 |
|
Purchases of securities held to maturity |
|
| (225,445 | ) |
|
| (373,520 | ) |
|
| (6,756 | ) |
|
| (108,215 | ) |
Purchases of securities available for sale |
|
| (1,107,842 | ) |
|
| (1,689,198 | ) |
|
| (340,795 | ) |
|
| (550,920 | ) |
Net increase in loans |
|
| (481,593 | ) |
|
| (876,784 | ) |
|
| (188,349 | ) |
|
| (222,959 | ) |
Net decrease (increase) in fed funds sold and resell agreements |
|
| 79,891 |
|
|
| (71,264 | ) | ||||||||
Net cash activity from acquisitions and branch sales |
|
| (2,532 | ) |
|
| — |
| ||||||||
Net increase in interest bearing balances due from other financial institutions |
|
| 34,164 |
|
|
| 65,203 |
| ||||||||
Net decrease in fed funds sold and resell agreements |
|
| 64,393 |
|
|
| 127,860 |
| ||||||||
Net cash activity from acquisitions and divestitures |
|
| 2,874 |
|
|
| — |
| ||||||||
Net decrease in interest bearing balances due from other financial institutions |
|
| 6,674 |
|
|
| 22,362 |
| ||||||||
Purchases of premises and equipment |
|
| (24,748 | ) |
|
| (38,950 | ) |
|
| (8,639 | ) |
|
| (4,985 | ) |
Proceeds from sales of premises and equipment |
|
| 1,650 |
|
|
| 2,164 |
|
|
| — |
|
|
| 173 |
|
Increase in COLI/BOLI cash surrender value |
|
| (62,800 | ) |
|
| (7,095 | ) | ||||||||
Net cash used in investing activities |
|
| (146,529 | ) |
|
| (708,052 | ) |
|
| (79,755 | ) |
|
| (228,433 | ) |
Financing Activities |
|
|
|
|
|
|
|
| ||||||||
Net (decrease) increase in demand and savings deposits |
|
| (559,697 | ) |
|
| 460,129 |
| ||||||||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
| ||||||||
Net decrease in demand and savings deposits |
|
| (511,650 | ) |
|
| (610,428 | ) | ||||||||
Net decrease in time deposits |
|
| (11,313 | ) |
|
| (173,783 | ) |
|
| (293,085 | ) |
|
| (65,002 | ) |
Net (decrease) increase in fed funds purchased and repurchase agreements |
|
| (100 | ) |
|
| 203,061 |
| ||||||||
Net decrease in short-term debt |
|
| — |
|
|
| (5,000 | ) | ||||||||
Net increase in fed funds purchased and repurchase agreements |
|
| 93,911 |
|
|
| 533,427 |
| ||||||||
Repayment of long-term debt |
|
| (1,491 | ) |
|
| (11,285 | ) |
|
| (898 | ) |
|
| (938 | ) |
Payment of contingent consideration on acquisitions |
|
| — |
|
|
| (3,031 | ) | ||||||||
Cash dividends paid |
|
| (38,171 | ) |
|
| (36,385 | ) |
|
| (14,531 | ) |
|
| (12,710 | ) |
Proceeds from exercise of stock options and sales of treasury shares |
|
| 11,629 |
|
|
| 10,250 |
|
|
| 5,532 |
|
|
| 4,107 |
|
Purchases of treasury stock |
|
| (14,369 | ) |
|
| (14,189 | ) |
|
| (5,951 | ) |
|
| (4,028 | ) |
Net cash (used in) provided by financing activities |
|
| (613,512 | ) |
|
| 429,767 |
| ||||||||
Net cash used in financing activities |
|
| (726,672 | ) |
|
| (155,572 | ) | ||||||||
Decrease in cash and cash equivalents |
|
| (515,751 | ) |
|
| (108,518 | ) |
|
| (786,808 | ) |
|
| (367,337 | ) |
Cash and cash equivalents at beginning of period |
|
| 1,063,967 |
|
|
| 819,112 |
|
|
| 1,716,262 |
|
|
| 1,063,967 |
|
Cash and cash equivalents at end of period |
| $ | 548,216 |
|
| $ | 710,594 |
|
| $ | 929,454 |
|
| $ | 696,630 |
|
|
|
|
|
|
|
|
|
| ||||||||
Supplemental Disclosures: |
|
|
|
|
|
|
|
| ||||||||
Income taxes paid |
| $ | 5,972 |
|
| $ | 668 |
| ||||||||
Total interest paid |
|
| 19,168 |
|
|
| 10,250 |
|
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2018 (UNAUDITED)
1. Financial Statement Presentation
The Consolidated Financial Statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after elimination of all intercompany transactions. In the opinion of management of the Company, all adjustments relating to items that are of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year ending December 31, 2017.2018. The financial statements should be read in conjunction with “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations” within this Quarterly Report on Form 10-Q (the Form 10-Q) and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 filed with the Securities and Exchange Commission (SEC) on February 23, 201722, 2018 (the Form 10-K).
On April 20,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. The Company’s national bank, UMB Bank, National Association (the Bank), has its principal office in Missouri and also has branches in Arizona, Colorado, Illinois, Kansas, Nebraska, Oklahoma, and Texas. The Company also has offices in Pennsylvania, South Dakota, Indiana, Utah, Minnesota, California, and Wisconsin.
Until November 17, 2017, the Company announced the execution of an agreement to sell all of the outstanding stock ofowned Scout Investments, Inc. (Scout), itsan institutional investment management subsidiary,asset-management company that offered domestic and international equity strategies. On November 17, 2017, the Company closed on the sale of Scout to Carillon Tower Advisers, Inc., a Florida corporation, for a purchase price of approximately $172.5 million, in cash, subjectafter giving effect to customary purchase price adjustments at closing, which is expected to occur in the fourth quarter of 2017. See Items 1.01 and 5.02 in the Company’s Current Report on Form 8-K that was filed April 20, 2017.adjustments. In accordance with Accounting Standards Codification (ASC) Topic 205-20, Discontinued Operations, the results of Scout have been presented separately as (Loss) income from discontinued operations in the Company’s Consolidated Statements of Income and Scout’s assets have been presented separately as Discontinued assets – goodwill and other intangibles, net in the Company’s Consolidated Balance Sheets.Income.
2. Summary of Significant Accounting Policies
The Company is a financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices in Missouri, Kansas, Colorado, Illinois, Oklahoma, Texas, Arizona, Nebraska, Pennsylvania, South Dakota, Indiana, Utah, Minnesota, California, and Wisconsin. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation is provided in the Notes to Consolidated Financial Statements in the Form 10-K.
Cash and cash equivalents
Cash and cash equivalents include Cash and due from banks and amounts due from the Federal Reserve Bank.Bank (FRB). 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 BankFRB are interest-bearing for all periods presented and are included in the Interest-bearing due from banks line on the Company’s Consolidated Balance Sheets.
This table provides a summary of cash and cash equivalents as presented on the Consolidated Statements of Cash Flows as of September 30,March 31, 2018 and March 31, 2017 and September 30, 2016 (in thousands):
|
| September 30, |
|
| March 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
| ||||
Due from the Federal Reserve Bank |
| $ | 182,047 |
|
| $ | 356,410 |
| ||||||||
Due from the FRB |
| $ | 649,616 |
|
| $ | 322,959 |
| ||||||||
Cash and due from banks |
|
| 366,169 |
|
|
| 354,184 |
|
|
| 279,838 |
|
|
| 373,671 |
|
Cash and cash equivalents at end of period |
| $ | 548,216 |
|
| $ | 710,594 |
|
| $ | 929,454 |
|
| $ | 696,630 |
|
Also included in the Interest-bearing due from banks, but not considered cash and cash equivalents, are interest-bearing accounts held at other financial institutions, which totaled $39.8$21.5 million and $96.8$51.6 million at September 30,March 31, 2018 and March 31, 2017, and September 30, 2016, respectively.
Per Share Data
Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted quarter-to-date net income per share includes the dilutive effect of 549,819496,848 and 435,029719,637 shares issuable upon the exercise of options granted by the Company and outstanding at September 30,March 31, 2018 and 2017, and 2016, respectively. Diluted year-to-date net income per share includes the dilutive effect of 616,990 and 369,781 shares issuable upon the exercise of stock options granted by the Company and outstanding at September 30, 2017 and 2016, respectively.
Options issued under employee benefits plans to purchase 150,739141,870 and 151,002 shares of common stock were outstanding at September 30,March 31, 2018 and 2017, respectively, but were not included in the computation of quarter-to-date and year-to-date diluted EPSearnings per share because the options were anti-dilutive. Options issued under employee benefits plans to purchase 394,863 shares of common stock were outstanding
Derivatives
The Company records all derivatives on the Consolidated Balance Sheets at September 30, 2016, but were not includedfair value. The accounting for changes in the computationfair value of quarter-to-date diluted EPS becausederivatives depends on the options were anti-dilutive. Options issued under employee benefits plansintended use of the derivative, whether the Company has elected to purchase 628,698 sharesdesignate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Currently, three of common stock were outstanding at September 30, 2016, but werethe Company’s derivatives are designated in qualifying hedging relationships. However, the remainder of the Company’s derivatives are not includeddesignated in qualifying hedging relationships, as the computationderivatives are not used to manage risks within the Company’s assets or liabilities. All changes in fair value of year-to-date diluted EPS because the options were anti-dilutive. Company’s non-designated derivatives are recognized directly in earnings. Changes in fair value of the Company’s fair value hedges are recognized directly in earnings. Changes in fair value of the Company’s cash flow hedges are recognized in accumulated other comprehensive income (AOCI).
3. New Accounting Pronouncements
Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The ASU will replacereplaced most existing revenue recognition guidance in U.S. GAAP when it becomesbecame 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 adoptadopted the amended guidance using the modified retrospective approach on January 1, 2018. The Company is progressing in implementing the amended guidance. The Company has assessed its revenue streams and identified 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). Upon completion of the review of the key contracts, the Company grouped the remaining contracts based on the conclusions reached through the key contract review and evaluated specific contracts that could not be grouped. Based on the evaluation of key contracts performed, the adoption of this accounting pronouncement is not expected to have a significantguidance had no impact on the Company’s Consolidated Financial Statements. The Company continues to evaluate the impact the amended guidance will have on itsStatements, except for additional financial statement disclosures. See Note 9, “Revenue Recognition” for 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 requireswere adopted on January 1, 2018. Upon adoption, the use of theCompany recorded a cumulative effect transition methodadjustment to the Company’s Consolidated Balance Sheets of $132 thousand as an increase to the opening balance 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.total shareholders’ equity.
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. 2016-04were adopted January 1, 2018 in conjunction with itsthe adoption of ASU No. 2014-09. The2014-09, and the adoption of this accounting pronouncement is not expected to have a significanthad no impact on the Company’s Consolidated Financial Statements.
Equity-Based Compensation In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The amendment is part of the FASB’s simplification initiative and is intended to simplify the accounting around share-based payment award transactions. The amendments include changing the recording of excess tax benefits from being recognized as a part of surplus capital to being charged directly to the income statement, changing the classification of excess tax benefits within the statement of cash flows, and allowing companies to account for forfeitures on an actual basis, as well as tax withholding changes. The amendment requires different transition methods for various components of the standard. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted.
In September 2016, the Company early adopted ASU No. 2016-09 with an effective date of January 1, 2016. As part of the adoption of this standard, the Company made an accounting policy election to account for forfeitures on an actual basis and discontinued 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.
Credit Losses In September 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 adoptionadoption. The amendments in this update were adopted on January 1, 2018 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 evaluatingdid not have an impact on the impact that this standard will have on itsCompany’s Consolidated Statements of Cash Flows.Financial Statements.
Derivatives and Hedging In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” The purpose of this updated guidance is to better align financial reporting for hedging activities with the economic objectives of those activities. The amendments in this update are effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The standard requirespermitted, and require the modified retrospective transition approach as of the date of adoption. The Company early adopted ASU 2017-12 with an effective date of January 1, 2018. Upon adoption, the Company recorded a cumulative effect adjustment to the Company’s Consolidated Balance Sheets of $13 thousand as an increase to the opening balance of total shareholders’ equity.
Comprehensive Income In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in AOCI are adjusted, certain tax effects become stranded in AOCI. This amendment allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the Tax Act), and requires certain disclosures about stranded tax effects. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption, including adoption in any interim period, is currently evaluatingpermitted. The Company early adopted ASU 2018-02 using a security-by-security approach with an effective date of January 1, 2018. Upon adoption, the impact that this standard will have on its Consolidated Financial Statements.Company reclassified stranded tax effects totaling $12.9 million from AOCI to retained earnings.
4. Loans and Allowance for Loan Losses
Loan Origination/Risk Management
The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio. Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions. Authority levels are established for the extension of credit to ensure consistency throughout the Company. It is necessary that policies, processes and practices implemented to control the risks of individual credit transactions and portfolio segments are sound and adhered to. The Company maintains an independent loan review department that reviews and validates the risk assessment on a continual basis. Management regularly evaluates the results of the loan reviews. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Commercial loans are made based on the identified cash flows of the borrower and on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers. Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans including an analysis of the borrower’s cash flow, available business capital, and overall credit-worthiness of the borrower.
Asset-based loans are offered primarily in the form of revolving lines of credit to commercial borrowers that do not generally qualify for traditional bank financing. Asset-based loans are underwritten based primarily upon the value of the collateral pledged to secure the loan, rather than on the borrower’s general financial condition. The Company utilizes pre-loan due diligence techniques, monitoring disciplines, and loan management practices common within the asset-based lending industry to underwrite loans to these borrowers.
Factoring loans provide working capital through the purchase and/or financing of accounts receivable to borrowers in the transportation industry and to commercial borrowers that do not generally qualify for traditional bank financing.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires that an appraisal of the collateral be made at origination and on an as-needed basis, in conformity with current market conditions and regulatory requirements. The underwriting standards address both owner and non-owner occupied real estate.
Construction loans are underwritten using feasibility studies, independent appraisal reviews, sensitivity analysis or absorption and lease rates and financial analysis of the developers and property owners. Construction loans are based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans, sales of developed
property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their repayment being sensitive to interest rate changes, governmental regulation of real property, economic conditions, and the availability of long-term financing.
Underwriting standards for residential real estate and home equity loans are based on the borrower’s loan-to-value percentage, collection remedies, and overall credit history.
Consumer loans are underwritten based on the borrower’s repayment ability. The Company monitors delinquencies on all of its consumer loans and leases and periodically reviews the distribution of FICO scores relative to historical periods to monitor credit risk on its credit card loans. The underwriting and review practices combined with the relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Consumer loans and leases that are 90 days past due or more are considered non-performing.
Credit risk is a potential loss resulting from nonpayment of either the primary or secondary exposure. Credit risk is mitigated with formal risk management practices and a thorough initial credit-granting process including consistent underwriting standards and approval process. Control factors or techniques to minimize credit risk include knowing the client, understanding total exposure, analyzing the client and debtor’s financial capacity, and monitoring the client’s activities. Credit risk and portions of the portfolio risk are managed through concentration considerations, average risk ratings, and other aggregate characteristics.
Loan Aging Analysis
This table provides a summary of loan classes and an aging of past due loans at September 30, 2017March 31, 2018 and December 31, 20162017 (in thousands):
|
| September 30, 2017 |
|
| March 31, 2018 |
| ||||||||||||||||||||||||||||||||||||||||||
|
| 30-89 Days Past Due and Accruing |
|
| Greater than 90 Days Past Due and Accruing |
|
| Non- Accrual Loans |
|
| Total Past Due |
|
| Current |
|
| Total Loans |
|
| 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 |
| $ | 15,092 |
|
| $ | 59 |
|
| $ | 39,107 |
|
| $ | 54,258 |
|
| $ | 4,367,307 |
|
| $ | 4,421,565 |
|
| $ | 7,988 |
|
| $ | 1,508 |
|
| $ | 44,253 |
|
| $ | 53,749 |
|
| $ | 4,415,694 |
|
| $ | 4,469,443 |
|
Asset-based |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 310,030 |
|
|
| 310,030 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 345,980 |
|
|
| 345,980 |
|
Factoring |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 195,882 |
|
|
| 195,882 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 234,148 |
|
|
| 234,148 |
|
Commercial – credit card |
|
| 325 |
|
|
| 98 |
|
|
| — |
|
|
| 423 |
|
|
| 174,359 |
|
|
| 174,782 |
|
|
| 640 |
|
|
| 54 |
|
|
| — |
|
|
| 694 |
|
|
| 192,042 |
|
|
| 192,736 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate – construction |
|
| 547 |
|
|
| 4 |
|
|
| 93 |
|
|
| 644 |
|
|
| 809,416 |
|
|
| 810,060 |
|
|
| 195 |
|
|
| — |
|
|
| — |
|
|
| 195 |
|
|
| 789,650 |
|
|
| 789,845 |
|
Real estate – commercial |
|
| 4,522 |
|
|
| — |
|
|
| 10,769 |
|
|
| 15,291 |
|
|
| 3,345,936 |
|
|
| 3,361,227 |
|
|
| 2,294 |
|
|
| 1,908 |
|
|
| 18,816 |
|
|
| 23,018 |
|
|
| 3,687,450 |
|
|
| 3,710,468 |
|
Real estate – residential |
|
| 943 |
|
|
| 157 |
|
|
| 745 |
|
|
| 1,845 |
|
|
| 612,751 |
|
|
| 614,596 |
|
|
| 32 |
|
|
| — |
|
|
| 686 |
|
|
| 718 |
|
|
| 649,630 |
|
|
| 650,348 |
|
Real estate – HELOC |
|
| 397 |
|
|
| — |
|
|
| 3,138 |
|
|
| 3,535 |
|
|
| 658,456 |
|
|
| 661,991 |
|
|
| 87 |
|
|
| — |
|
|
| 3,434 |
|
|
| 3,521 |
|
|
| 610,216 |
|
|
| 613,737 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer – credit card |
|
| 1,913 |
|
|
| 1,721 |
|
|
| 357 |
|
|
| 3,991 |
|
|
| 239,744 |
|
|
| 243,735 |
|
|
| 1,914 |
|
|
| 2,138 |
|
|
| 393 |
|
|
| 4,445 |
|
|
| 225,169 |
|
|
| 229,614 |
|
Consumer – other |
|
| 613 |
|
|
| 49 |
|
|
| 22 |
|
|
| 684 |
|
|
| 178,031 |
|
|
| 178,715 |
|
|
| 266 |
|
|
| 42 |
|
|
| 22 |
|
|
| 330 |
|
|
| 198,994 |
|
|
| 199,324 |
|
Leases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24,445 |
|
|
| 24,445 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23,151 |
|
|
| 23,151 |
|
Total loans |
| $ | 24,352 |
|
| $ | 2,088 |
|
| $ | 54,231 |
|
| $ | 80,671 |
|
| $ | 10,916,357 |
|
| $ | 10,997,028 |
|
| $ | 13,416 |
|
| $ | 5,650 |
|
| $ | 67,604 |
|
| $ | 86,670 |
|
| $ | 11,372,124 |
|
| $ | 11,458,794 |
|
|
| December 31, 2016 |
|
| December 31, 2017 |
| ||||||||||||||||||||||||||||||||||||||||||||||
|
| 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 |
|
| 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 |
| $ | 3,285 |
|
| $ | 49 |
|
| $ | 35,777 |
|
| $ | 39,111 |
|
| $ | — |
|
| $ | 4,371,695 |
|
| $ | 4,410,806 |
|
| $ | 11,216 |
|
| $ | 672 |
|
| $ | 38,644 |
|
| $ | 50,532 |
|
| $ | 4,502,508 |
|
| $ | 4,553,040 |
|
Asset-based |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 225,878 |
|
|
| 225,878 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 336,614 |
|
|
| 336,614 |
|
Factoring |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 139,902 |
|
|
| 139,902 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 221,672 |
|
|
| 221,672 |
|
Commercial – credit card |
|
| 612 |
|
|
| 10 |
|
|
| 8 |
|
|
| 630 |
|
|
| — |
|
|
| 146,105 |
|
|
| 146,735 |
|
|
| 387 |
|
|
| 79 |
|
|
| — |
|
|
| 466 |
|
|
| 171,825 |
|
|
| 172,291 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate – construction |
|
| 3 |
|
|
| — |
|
|
| 181 |
|
|
| 184 |
|
|
| — |
|
|
| 741,620 |
|
|
| 741,804 |
|
|
| 6,666 |
|
|
| 243 |
|
|
| 93 |
|
|
| 7,002 |
|
|
| 710,847 |
|
|
| 717,849 |
|
Real estate – commercial |
|
| 1,303 |
|
|
| 1,004 |
|
|
| 16,423 |
|
|
| 18,730 |
|
|
| — |
|
|
| 3,147,192 |
|
|
| 3,165,922 |
|
|
| 832 |
|
|
| — |
|
|
| 16,115 |
|
|
| 16,947 |
|
|
| 3,546,683 |
|
|
| 3,563,630 |
|
Real estate – residential |
|
| 1,034 |
|
|
| 6 |
|
|
| 1,344 |
|
|
| 2,384 |
|
|
| — |
|
|
| 545,966 |
|
|
| 548,350 |
|
|
| 791 |
|
|
| — |
|
|
| 929 |
|
|
| 1,720 |
|
|
| 636,871 |
|
|
| 638,591 |
|
Real estate – HELOC |
|
| 588 |
|
|
| — |
|
|
| 4,736 |
|
|
| 5,324 |
|
|
| — |
|
|
| 706,470 |
|
|
| 711,794 |
|
|
| 1,254 |
|
|
| — |
|
|
| 3,013 |
|
|
| 4,267 |
|
|
| 644,112 |
|
|
| 648,379 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer – credit card |
|
| 2,228 |
|
|
| 2,115 |
|
|
| 475 |
|
|
| 4,818 |
|
|
| — |
|
|
| 265,280 |
|
|
| 270,098 |
|
|
| 2,155 |
|
|
| 2,057 |
|
|
| 312 |
|
|
| 4,524 |
|
|
| 248,173 |
|
|
| 252,697 |
|
Consumer – other |
|
| 1,061 |
|
|
| 181 |
|
|
| 11,315 |
|
|
| 12,557 |
|
|
| 800 |
|
|
| 126,205 |
|
|
| 139,562 |
|
|
| 835 |
|
|
| 40 |
|
|
| 36 |
|
|
| 911 |
|
|
| 150,872 |
|
|
| 151,783 |
|
Leases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39,532 |
|
|
| 39,532 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23,967 |
|
|
| 23,967 |
|
Total loans |
| $ | 10,114 |
|
| $ | 3,365 |
|
| $ | 70,259 |
|
| $ | 83,738 |
|
| $ | 800 |
|
| $ | 10,455,845 |
|
| $ | 10,540,383 |
|
| $ | 24,136 |
|
| $ | 3,091 |
|
| $ | 59,142 |
|
| $ | 86,369 |
|
| $ | 11,194,144 |
|
| $ | 11,280,513 |
|
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. The PCI loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt Securities Purchased with Deteriorated Credit Quality. All of the PCI loans 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 $55.1$9.7 million and $61.7$14.5 million in the secondary market without recourse during the ninethree months ended September 30,March 31, 2018 and March 31, 2017, and September 30, 2016, respectively.
The Company has ceased the recognition of interest on loans with a carrying value of $54.2$67.6 million and $70.3$59.1 million at September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. Restructured loans totaled $49.2$20.7 million and $52.5$41.0 million at September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. Loans 90 days past due and still accruing interest amounted to $2.1$5.7 million and $3.4$3.1 million at September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. There was an insignificant amount of interest recognized on impaired loans during 20172018 and 2016.2017.
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 ratings 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 rating 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.
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. This table provides an analysis of the credit risk profile of each loan class excluded from ASC 310-30, Loans and Debt Securities Purchased with Deteriorated Credit Quality, at Credit Exposure Credit Risk Profile by Risk Rating
Credit Exposure Credit Risk Profile Based on Payment Activity
Allowance for Loan Losses The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s judgment of inherent probable losses within the Company’s loan portfolio as of the balance sheet date. The allowance is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Accordingly, the methodology is based on historical loss trends. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for probable loan losses reflects loan quality trends, including the levels of, and trends related to, non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and estimated losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available at the time, the adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and changes in the regulatory environment. The Company’s allowance for loan losses consists of specific valuation allowances and general valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, general economic conditions and other qualitative risk factors both internal and external to the Company. The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of impaired loans. Loans are classified based on an internal risk grading process that evaluates the obligor’s ability to repay, the underlying collateral, if any, and the economic environment and industry in which the 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 rating of the loan and economic conditions affecting the borrower’s industry. General valuation allowances are calculated based on the historical loss experience of specific types of loans including an evaluation of the time span and volume of the actual charge-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated based on actual charge-off experience. A valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio, time span to charge-off, and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similarly risk-graded groups of commercial loans, commercial real estate loans, commercial credit card, home equity loans, consumer real estate loans and consumer and other loans. The Company also considers a loan migration analysis for criticized loans. This analysis includes an assessment of the probability that a loan will move to a loss position based on its risk rating. The consumer credit card pool is evaluated based on delinquencies and credit scores. In addition, a portion of the allowance is determined by a review of qualitative factors by management. Generally, the unsecured portion of a commercial or commercial real estate loan is charged off when, after analyzing the borrower’s financial condition, it is determined that the borrower is incapable of servicing the debt, little or no prospect for near term improvement exists, and no realistic and significant strengthening action is pending. For collateral dependent commercial or commercial real estate loans, an analysis is completed regarding the Company’s collateral position to determine if the amounts due from the borrower are in excess of the calculated current fair value of the collateral. Specific allocations of the allowance for loan losses are made for any collateral deficiency. If a collateral deficiency is ultimately deemed to be uncollectible, the amount is charged off. Revolving commercial loans (such as commercial credit cards) which are past due 90 cumulative days are classified as a loss and charged off. Generally, a consumer loan, or a portion thereof, is charged off in accordance with regulatory guidelines which provide that such loans be charged off when the Company becomes aware of the loss, such as from a triggering event that may include, but is not limited to, new information about a borrower’s intent and ability to repay the loan, bankruptcy, fraud, or death. However, the charge-off timeframe should not exceed the specified delinquency time frames, which state that closed-end retail loans (such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (such as home equity lines of credit and consumer credit cards) that become past due 180 cumulative days are classified as a loss and charged off. ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS This table provides a rollforward of the allowance for loan losses by portfolio segment for the three
This table provides a rollforward of the allowance for loan losses by portfolio segment for the three
This table provides an analysis of impaired loans by class at
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 For the three month period ended Securities Available for Sale This table provides detailed information about securities available for sale at
The following table presents contractual maturity information for securities available for sale at
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 Securities available for sale with a 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
The unrealized losses in the Company’s investments in U.S. 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
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 Trading Securities The net unrealized losses on trading securities at The table below provides detailed information for
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 6. Goodwill and Other Intangibles Changes in the carrying amount of goodwill for the periods ended
The following table lists the finite-lived intangible assets that continue to be subject to amortization as of
The following table has the aggregate amortization expense recognized in each period (in thousands):
The following table lists estimated amortization expense of intangible assets in future periods (in thousands):
7. Securities Sold Under Agreements to Repurchase The Company utilizes repurchase agreements to facilitate the needs of customers and to facilitate secured short-term funding needs. Repurchase agreements are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with the Company’s safekeeping agents. The table below presents the remaining contractual maturities of repurchase agreements outstanding at
8. Business Segment Reporting The Company has strategically aligned its operations into the following The following summaries provide information about the activities of each segment:
Institutional Banking is a combination of banking services, fund services, and asset management services provided to Personal Banking combines consumer services and asset management provided to personal clients. This segment combines the Company’s consumer bank with the individual investment and wealth management solutions. The range of services offered to UMB clients extends from a basic checking account to estate planning and trust services. Products and services include the Company’s bank branches, call center, internet banking and ATM
Business Segment Information Business Segment financial results were as follows for the three months ended March 31, 2018 and March 31, 2017 (in thousands):
9. Revenue Recognition As of January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers – Accounting Standards Codification Topic 606 (ASC 606) and all subsequent ASUs that modified ASC 606. The Company has elected to apply the ASU and all related ASUs using the modified retrospective approach. The implementation of the guidance had no material impact on the measurement or recognition of revenue of either current or prior periods. The following is a description of the principal activities from which the Company generates revenue that are within the scope of ASC 606: Trust and securities processing - Trust and securities processing income consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and wealth management services, and mutual fund and alternative asset servicing. The performance obligations related to this revenue include items such as performing full bond trustee service administration, investment advisory services, custody and record-keeping services, and fund administrative and accounting services. These fees are part of long-term contractual agreements and the performance obligations are satisfied upon completion of service and fees are generally a fixed flat monthly rate or based on a percentage of the account’s market value per the contract with the customer. These fees are primarily recorded within the Company’s Institutional and Personal Banking segments. Trading and investment banking - Trading and investment banking income consists of income earned related to the Company’s trading securities portfolio, including futures hedging, dividends, bond underwriting, and other securities incomes. The vast majority of this revenue is recognized in accordance with ASC 320, Debt and Equity Securities, and is out of the scope of ASC 606. A portion of trading and investment banking represents fees earned for management fees, commissions, and underwriting of corporate bond issuances. The performance obligations related to these fees include reviewing the credit worthiness of the customer, ensuring appropriate regulatory approval and participating in due diligence. The fees are fixed per the bond prospectus and the performance obligations are satisfied upon registration approval of the bonds by the applicable regulatory agencies. Revenue is recognized at the point in time upon completion of service and when approval is granted by the regulators. Service charges on deposits - Service charges on deposit accounts represent monthly analysis fees recognized for the services related to customer deposit accounts, including account maintenance and depository transactions processing fees. Commercial Banking and Institutional Banking depository accounts charge fees in accordance with the customer’s pricing schedule while Personal Banking account holders are generally charged a flat service fee per month. Deposit service charges for the Healthcare Services segment are priced according to either standard pricing schedules with individual account holders or according to service agreements between the Company and employer groups or third party administrators. The Company satisfies the performance obligation related to providing depository accounts monthly as transactions are processed and deposit service charge revenue is recorded monthly. These fees are recognized within all Business Segments. Insurance fees and commissions – Insurance fees and commissions includes all insurance-related fees earned, including commissions for individual life, variable life, group life, health, group health, fixed annuity, and variable annuity insurance contracts. The performance obligations related to these revenues primarily represent the placement of insurance policies with the insurance company partners. The fees are based on the contracts with insurance company partners and the performance obligations are satisfied when the terms of the policy have been agreed to and the insurance policy becomes effective. Brokerage fees – Brokerage fees represent income earned related to providing brokerage transaction services, including commissions on equity and commodity trades, and fees for investment management, advisory and administration. The performance obligations related to transaction services are executing the specified trade and are priced according to the customer’s fee schedule. Such income is recognized at a point in time as the trade occurs and the performance obligation is fulfilled. The performance obligations related to investment management, advisory and administration include allocating customer assets across a wide range of mutual funds and other investments, on-going account monitoring and re-balancing of the portfolio. These performance obligations are satisfied over time and the related revenue is calculated monthly based on the assets under management of each customer. All material performance obligations are satisfied as of the end of each accounting period. Bankcard fees – Bankcard fees primarily represent income earned from interchange revenue from MasterCard and Visa for the Company’s processing of debit, credit, HSA, and flexible spending account transactions. Additionally, the Company earns income and incentives related to various referrals of customers to card programs. The performance obligation for interchange revenue is the processing of each transaction through the Company’s access to the banking system. This performance obligation is completed for each individual transaction and income is recognized per transaction in accordance with interchange rates established by MasterCard and Visa. The performance obligations for various referral and incentive programs include either referring customers to certain card products or issuing exclusively branded cards for certain customer segments. The pricing of these incentive and referral programs are in accordance with the agreement with the individual card partner.
These performance obligations are completed as the referrals are made or over a period of time when the Company is exclusively issuing branded cards. For the three months ended March 31, 2018 and March 31, 2017, the Company also has approximately $8.1 million and $6.8 million of expense, respectively, recorded within the Bankcard fees line on the Company’s Consolidated Income Statements related to rebates and rewards programs that are outside of the scope of ASC 606. All material performance obligations are satisfied as of the end of each accounting period. Gains on sales of securities available for sale, net – In the regular course of business, the Company recognizes gains on the sale of available for sale securities. These gains are recognized in accordance with ASC 320, Debt and Equity Securities, and are outside of the scope of ASC 606. Other income – The Company recognizes other miscellaneous income through a variety of other revenue streams, the most material of which include letter of credit fees, certain loan origination fees, gains on the sale of assets, gains and losses on equity-method investments, derivative income, and bank-owned and company-owned life insurance income. These revenue streams are outside of the scope of ASC 606 and are recognized in accordance with the applicable U.S. GAAP. The remainder of Other income is primarily earned through transactions with personal banking customers, including wire transfer service charges, stop payment charges, and fees for items like money orders and cashier’s checks. The performance obligations of these types of fees are satisfied as transactions are completed and revenue is recognized upon transaction execution according to established fee schedules with the customers. The Company had no material contract assets, contract liabilities, or remaining performance obligations as of March 31, 2018. Total receivables from revenue recognized under the scope of ASC 606 were $53.3 million and $53.5 million as of March 31, 2018 and December 31, 2017, respectively. These receivables are included as part of the Other assets line on the Company’s Consolidated Balance Sheets. The following table depicts the disaggregation of revenue according to revenue stream and Business Segment for the three months ended March 31, 2018 and March 31, 2017 (in thousands):
10. Commitments, Contingencies and Guarantees In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, forward foreign exchange contracts and spot foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contractual or notional amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. Many of the commitments expire without being drawn upon; therefore, the total amount of these commitments does not necessarily represent the future cash requirements of the Company. The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table summarizes the Company’s off-balance sheet financial
Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Fair Values of Derivative Instruments on the Consolidated Balance Sheets The table below presents the fair value of the Company’s derivative financial instruments as of 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. This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of
Fair Value Hedges of Interest Rate Risk The Company is exposed to changes in the fair value of certain of its 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. 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 Non-designated Hedges The remainder of the Company’s derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of Effect of Derivative Instruments on the Consolidated Statements of Income This table provides a summary of the amount of gain or loss recognized in
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
Credit-risk-related Contingent Features The Company has agreements with certain of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of
The following table presents information about the Company’s assets measured at fair value on a recurring basis as of Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets measured at fair value on a recurring basis as of
Valuation methods for instruments measured at fair value on a recurring basis The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a recurring basis: Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. Securities Available for Sale Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Prices are provided by third-party pricing services and are based on observable market inputs. On an annual basis, the Company compares a sample of these prices to other independent sources for the same securities. Additionally, throughout the year, if securities are sold, comparisons are made between the pricing services prices and the market prices at which the securities were sold. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing services. Based on this research, the pricing services may affirm or revise their quoted price. No significant adjustments have been made to the prices provided by the pricing services. The pricing services also provide documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate. Company-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies. Bank-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies. Derivatives Fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Deferred Compensation Fair values are based on quoted market 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
Valuation methods for instruments measured at fair value on a The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a non-recurring basis:
Impaired loans While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans to reflect write-downs that are based on the external appraised value of the underlying collateral. The external appraisals are generally based on recent sales of comparable properties which are then adjusted for the unique characteristics of the property being valued. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists within the Company’s property management group and the Company’s credit department. The valuation of the impaired loans is reviewed on a quarterly basis. Because many of these inputs are not observable, the measurements are classified as Level 3. Other real estate owned Other real estate owned consists of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, recreational and marine vehicles. Other real estate owned is recorded as held for sale initially at the lower of the loan balance or fair value of the collateral. The initial valuation of the foreclosed property is obtained through an appraisal process similar to the process described in the impaired loans paragraph above. Subsequent to foreclosure, valuations are reviewed quarterly and updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods and those measurements are classified as Level 3. Goodwill Valuation of goodwill to determine impairment is performed annually, or more frequently if there is an event or circumstance that would indicate impairment may have occurred. The process involves calculations to determine the fair value of each reporting unit on a stand-alone basis. A combination of formulas using current market multiples, based on recent sales of financial institutions within the Company’s geographic marketplace, is used to estimate the fair value of each reporting unit. That fair value is compared to the carrying amount of the reporting unit, including its recorded goodwill. Impairment is considered to have occurred if the fair value of the reporting unit is lower than the carrying amount of the reporting unit. The fair value of the Company’s common stock relative to its computed book value per share is also considered as part of the overall evaluation. These measurements are classified as Level 3. Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value of the Company’s financial instruments at
Cash and short-term investments The carrying amounts of cash and due from banks, federal funds sold and resell agreements are reasonable estimates of their fair values. Securities held to maturity Fair value of held-to-maturity securities are estimated by discounting the future cash flows using current market rates. Other securities Amount consists of FRB and FHLB stock held by the Company, PCM equity-method investments, and other miscellaneous investments. The carrying amount of the FRB and FHLB stock equals its fair value because the shares can only be redeemed by the FRB and FHLB at their carrying amount. The fair value of PCM marketable equity-method investments are based on quoted market prices used to estimate the value of the underlying investment. For non-marketable equity-method investments, the Company’s proportionate share of the income or loss is recognized on a one-quarter lag based on the valuation of the underlying investment(s). Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans Demand and savings deposits The fair value of demand deposits and savings accounts 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.
On This table summarizes the components of (loss) income from discontinued operations, net of taxes, for the three
The components of net cash provided by operating activities of discontinued operations included in the Consolidated Statements of Cash Flows are as follows (in thousands):
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations highlights the material changes in the results of operations and changes in financial condition of the Company for the three-month 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 This 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; 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; 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 the Company’s ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or facilities, including its capacity to withstand cyber-attacks; the adequacy of the Company’s corporate governance, risk-management framework, compliance programs, or internal controls, including its ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk; the efficacy of the Company’s methods or models in assessing business strategies or opportunities or in valuing, measuring, monitoring, or managing positions or risk; the Company’s ability to keep pace with changes in technology that affect the Company or its customers, counterparties, or competitors; mergers, 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 and retain qualified employees; natural or man-made disasters, calamities, or conflicts, including terrorist events; or other assumptions, risks, or uncertainties described in the Notes to Consolidated Financial Statements (Item 1) and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2) in this Form 10-Q, in the Risk Factors (Item 1A) in the Form 10-K, or 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 makes in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K. Overview The Company focuses on the following four core strategic objectives. Management believes these The first strategic objective is expense increased The second strategic objective is 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. Noninterest income increased The fourth strategic objective is Earnings Summary The following is a summary regarding the Company’s earnings for the
Net interest income for the three-month period ended The provision for loan losses Noninterest income increased by Noninterest expense increased by 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. Net interest income for the 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 AVERAGE 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
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 ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands) ANALYSIS OF CHANGES IN NET INTEREST INCOME
ANALYSIS OF NET INTEREST MARGIN
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 recorded
Table 3 presents a summary of the Company’s ALL for the Table 3 ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)
Noninterest Income A key objective of the Company is the growth of noninterest income to The SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)
Noninterest income Trust and securities processing consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and investment management services, and servicing of mutual fund assets. The increase in these fees for the Trading and investment banking fees for the Brokerage fees for the
During the Other noninterest income for the SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)
Noninterest expense increased by Salaries and employee benefits increased by Equipment expense increased Processing fees expense increased
Income Tax Expense
For the Table 6
increased interchange. Noninterest expense Table 7
For the related to investments for regulatory requirements, cyber security, and the ongoing modernization of the Company’s core systems. Table 8 Personal Banking Operating Results (unaudited, dollars in thousands)
For the three months ended March 31, 2018, Personal Banking income from continuing operations increased $3.6 million, or 523.0 percent, compared to the same period last year. Table 9 Healthcare Services Operating Results (unaudited, dollars in thousands)
For the three months ended March 31, 2018, Healthcare Services income from continuing operations increased $0.3 million, or 6.7 percent, compared to the same period last year. Net interest income increased $2.0 million, or 27.8 percent, compared to the same period last year, due to an increase in number of accounts and deposits, coupled with increased funds transfer pricing credit on deposits. Noninterest income declined $0.7 million, or 7.5 percent, as compared to Total assets of the Company decreased by Total assets of the Company increased Table SELECTED FINANCIAL INFORMATION (unaudited, dollars in thousands)
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 and generate additional noninterest income for the Company. Actual loan balances totaled 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, AFS, and The Company’s AFS securities portfolio comprised months at 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 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 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 Deposits and Borrowed Funds Deposits decreased 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 strengths given its competitive product mix. Long-term debt totaled Federal funds purchased and securities sold under Capital and Liquidity The Company places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. 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 The Company’s Board of Directors authorized, at its April 24, 2018, 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 meeting. During the At the Company’s quarterly board meeting, the Board of Directors declared a 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 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 the ratio of tier 1 core capital to total average assets, less goodwill and intangibles. The Company's capital position as of Table
The Company's per share data is summarized in the table below.
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 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 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 Form 10-K. ITEM 3. QUANTITATIVE AND Risk Management Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices, or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The following discussion of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading because the instruments held for trading represent such a small portion of the Company’s portfolio that the interest rate risk associated with them is immaterial. Interest Rate Risk In the banking industry, a major risk exposure is changing interest rates. To minimize the effect of interest rate changes to net interest income and exposure levels to economic losses, the Company manages its exposure to changes in interest rates through asset and liability management within guidelines established by its Asset Liability Committee (ALCO) and approved by the Board. The ALCO is responsible for approving and ensuring compliance with asset/liability management policies, including interest rate exposure. The Company’s primary method for measuring and analyzing consolidated interest rate risk is the Net Interest Income Simulation 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 Overall, the Company manages 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 Table MARKET RISK (unaudited)
The Company is positioned relatively neutral 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 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 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 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 rating 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 A primary indicator of credit quality and risk management is the level of nonperforming loans. Nonperforming loans include both nonaccrual loans and restructured loans on nonaccrual. The Company’s nonperforming loans The Company had 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 LOAN QUALITY (unaudited, dollars in thousands)
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 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 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 The Company’s cash requirements consist primarily of dividends to shareholders, debt service, operating expenses, and treasury stock purchases. Management fees and dividends received from bank and non-bank subsidiaries traditionally have been sufficient to satisfy these requirements and are expected to be sufficient in the future. The Bank is subject to various rules regarding payment of dividends to the Company. For the most part, the Bank can pay dividends at least equal to its current year’s earnings without seeking prior regulatory approval. The Company also uses cash to inject capital into its bank and non-bank subsidiaries to maintain adequate capital as well as fund strategic initiatives. To enhance general working capital needs, the Company has a revolving line of credit with Wells Fargo Bank, N.A., which allows the Company to borrow up to The Company is a member bank of the FHLB. The Company owns $10.0 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. Additionally, the Company has access to borrow up to Operational Risk Operational risk generally refers to the risk of loss resulting from the Company’s operations, including those operations performed for the Company by third parties. This would include but is not limited to the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees or others, errors relating to transaction processing, breaches of the internal control system and compliance requirements, and unplanned interruptions in service. This risk of loss also includes the potential legal or regulatory actions that could arise as a result of an operational deficiency, or as a result of noncompliance with applicable regulatory standards. The Company must comply with a number of legal and regulatory requirements, including those under the Sarbanes-Oxley Act of 2002, as amended. The Company operates in many markets and relies on the ability of its employees and systems to properly process a high number of transactions. In the event of a breakdown in internal control systems, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation. In order to address this risk, management maintains a system of internal controls with the objective of providing proper transaction authorization and execution, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other data. The Company maintains systems of internal controls that provide management with timely and accurate information about the Company’s operations. These systems have been designed to manage operational risk at appropriate levels given the Company’s financial strength, the environment in which it operates, and considering factors such as competition and regulation. The Company has also established procedures that are designed to ensure that policies relating to conduct, ethics and business practices are followed on a uniform basis. In certain cases, the Company has experienced losses from operational risk. Such losses have included the effects of operational errors that the Company has discovered and included as expense in the statement of income. While there can be no assurance that the Company will not suffer such losses in the future, management continually monitors and works to improve its internal controls, systems and corporate-wide processes and procedures. ITEM 4. CONTROLS AND PROCEDURES The Sarbanes-Oxley Act of 2002, as amended, requires the Chief Executive Officer and the Chief Financial Officer to make certain certifications with respect to this Disclosure Controls and Procedures The Company’s management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, Internal Control Over Financial Reporting There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the three months ended In the normal course of business, the Company and its subsidiaries are named defendants in various legal proceedings. In the opinion of management, after consultation with legal counsel, none of these lawsuits are expected to have a materially adverse effect on the financial position, results of operations, or cash flows of the Company. There were no material changes to the risk factors as previously disclosed in response to Item 1A to Part 1 of the Company’s Form 10-K. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The table below sets forth the information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three months ended ISSUER PURCHASE OF EQUITY SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. MINE SAFETY DISCLOSURES Not applicable.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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