Toggle SGML Header (+)


Section 1: 10-Q (UMBF Q1 2018 10Q)

umbf-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

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

For the quarterly period ended March 31, 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 number001-38481

 

UMB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Missouri

 

43-0903811

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

1010 Grand Boulevard, Kansas City, Missouri

 

64106

(Address of principal executive offices)

 

(Zip Code)

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

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non- accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

 

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

 

 

 


 

UMB FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I – FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

3

CONSOLIDATED BALANCE SHEETS

3

CONSOLIDATED STATEMENTS OF INCOME

4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

6

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

7

CONSOLIDATED STATEMENTS OF CASH FLOWS

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9

ITEM 2.

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

38

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

52

ITEM 4.

CONTROLS AND PROCEDURES

57

 

 

 

PART II - OTHER INFORMATION

58

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

58

ITEM 1A.

RISK FACTORS

58

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

58

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

58

ITEM 4.

MINE SAFETY DISCLOSURES

58

ITEM 5.

OTHER INFORMATION

58

ITEM 6.

EXHIBITS

59

SIGNATURES

60

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Loans

 

$

11,458,794

 

 

$

11,280,513

 

Allowance for loan losses

 

 

(100,302

)

 

 

(100,604

)

Net loans

 

 

11,358,492

 

 

 

11,179,909

 

Loans held for sale

 

 

4,586

 

 

 

1,460

 

Securities:

 

 

 

 

 

 

 

 

Available for sale

 

 

6,139,346

 

 

 

6,258,577

 

Held to maturity (fair value of $1,157,627 and $1,207,447, respectively)

 

 

1,246,466

 

 

 

1,261,014

 

Trading securities

 

 

65,389

 

 

 

54,055

 

Other securities

 

 

67,408

 

 

 

65,897

 

Total investment securities

 

 

7,518,609

 

 

 

7,639,543

 

Federal funds sold and securities purchased under agreements to resell

 

 

127,208

 

 

 

191,601

 

Interest-bearing due from banks

 

 

671,163

 

 

 

1,351,760

 

Cash and due from banks

 

 

279,838

 

 

 

392,723

 

Premises and equipment, net

 

 

272,632

 

 

 

275,942

 

Accrued income

 

 

97,632

 

 

 

98,863

 

Goodwill

 

 

180,867

 

 

 

180,867

 

Other intangibles, net

 

 

18,695

 

 

 

20,257

 

Other assets

 

 

458,182

 

 

 

438,658

 

Total assets

 

$

20,987,904

 

 

$

21,771,583

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

6,042,719

 

 

$

6,839,171

 

Interest-bearing demand and savings

 

 

10,188,367

 

 

 

9,903,565

 

Time deposits under $250,000

 

 

553,692

 

 

 

547,990

 

Time deposits of $250,000 or more

 

 

433,487

 

 

 

732,274

 

Total deposits

 

 

17,218,265

 

 

 

18,023,000

 

Federal funds purchased and repurchase agreements

 

 

1,354,615

 

 

 

1,260,704

 

Long-term debt

 

 

78,687

 

 

 

79,281

 

Accrued expenses and taxes

 

 

129,753

 

 

 

191,464

 

Other liabilities

 

 

39,198

 

 

 

35,603

 

Total liabilities

 

 

18,820,518

 

 

 

19,590,052

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

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

 

 

55,057

 

 

 

55,057

 

Capital surplus

 

 

1,046,673

 

 

 

1,046,095

 

Retained earnings

 

 

1,393,485

 

 

 

1,338,110

 

Accumulated other comprehensive loss, net

 

 

(117,391

)

 

 

(45,525

)

Treasury stock, 5,010,494 and 5,161,740 shares, at cost, respectively

 

 

(210,438

)

 

 

(212,206

)

Total shareholders' equity

 

 

2,167,386

 

 

 

2,181,531

 

Total liabilities and shareholders' equity

 

$

20,987,904

 

 

$

21,771,583

 

 

See Notes to Consolidated Financial Statements.

3


 

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans

 

$

126,134

 

 

$

106,560

 

Securities:

 

 

 

 

 

 

 

 

Taxable interest

 

 

19,780

 

 

 

19,190

 

Tax-exempt interest

 

 

18,703

 

 

 

17,183

 

Total securities income

 

 

38,483

 

 

 

36,373

 

Federal funds and resell agreements

 

 

1,038

 

 

 

919

 

Interest-bearing due from banks

 

 

1,580

 

 

 

551

 

Trading securities

 

 

430

 

 

 

287

 

Total interest income

 

 

167,665

 

 

 

144,690

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

13,835

 

 

 

5,966

 

Federal funds and repurchase agreements

 

 

4,732

 

 

 

3,469

 

Other

 

 

1,176

 

 

 

940

 

Total interest expense

 

 

19,743

 

 

 

10,375

 

Net interest income

 

 

147,922

 

 

 

134,315

 

Provision for loan losses

 

 

10,000

 

 

 

9,000

 

Net interest income after provision for loan losses

 

 

137,922

 

 

 

125,315

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Trust and securities processing

 

 

44,002

 

 

 

42,541

 

Trading and investment banking

 

 

4,101

 

 

 

7,542

 

Service charges on deposit accounts

 

 

21,905

 

 

 

22,075

 

Insurance fees and commissions

 

 

301

 

 

 

646

 

Brokerage fees

 

 

6,353

 

 

 

5,377

 

Bankcard fees

 

 

18,123

 

 

 

17,752

 

Gain on sales of securities available for sale, net

 

 

139

 

 

 

468

 

Other

 

 

10,601

 

 

 

6,516

 

Total noninterest income

 

 

105,525

 

 

 

102,917

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

107,968

 

 

 

103,652

 

Occupancy, net

 

 

10,953

 

 

 

10,968

 

Equipment

 

 

18,826

 

 

 

17,482

 

Supplies and services

 

 

3,760

 

 

 

4,094

 

Marketing and business development

 

 

5,034

 

 

 

4,141

 

Processing fees

 

 

11,161

 

 

 

9,199

 

Legal and consulting

 

 

3,844

 

 

 

5,050

 

Bankcard

 

 

4,626

 

 

 

4,903

 

Amortization of other intangible assets

 

 

1,562

 

 

 

2,046

 

Regulatory fees

 

 

2,905

 

 

 

3,833

 

Other

 

 

5,237

 

 

 

8,442

 

Total noninterest expense

 

 

175,876

 

 

 

173,810

 

Income before income taxes

 

 

67,571

 

 

 

54,422

 

Income tax expense

 

 

10,038

 

 

 

12,446

 

Income from continuing operations

 

 

57,533

 

 

 

41,976

 

Discontinued Operations

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations before income taxes

 

 

(917

)

 

 

2,907

 

Income tax (benefit) expense

 

 

(170

)

 

 

702

 

(Loss) income from discontinued operations

 

 

(747

)

 

 

2,205

 

NET INCOME

 

$

56,786

 

 

$

44,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4


 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.16

 

 

$

0.85

 

(Loss) income from discontinued operations

 

 

(0.01

)

 

 

0.05

 

Net income – basic

 

 

1.15

 

 

 

0.90

 

Diluted:

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

1.15

 

 

 

0.84

 

(Loss) income from discontinued operations

 

 

(0.01

)

 

 

0.05

 

Net income - diluted

 

 

1.14

 

 

 

0.89

 

Dividends

 

 

0.290

 

 

 

0.255

 

Weighted average shares outstanding - basic

 

 

49,420,606

 

 

 

49,109,872

 

Weighted average shares outstanding - diluted

 

 

49,917,454

 

 

 

49,829,508

 

 

See Notes to Consolidated Financial Statements.

5


 

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, dollars in thousands)

 

 

 

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.

6


 

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

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

 

 

 

Common

Stock

 

 

Capital

Surplus

 

 

Retained

Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Treasury

Stock

 

 

Total

 

Balance - January 1, 2017

 

$

55,057

 

 

$

1,033,419

 

 

$

1,142,887

 

 

$

(57,542

)

 

$

(211,437

)

 

$

1,962,384

 

Total comprehensive income

 

 

 

 

 

 

 

 

44,181

 

 

 

13,383

 

 

 

 

 

 

57,564

 

Cash dividends ($0.255 per share)

 

 

 

 

 

 

 

 

(12,481

)

 

 

 

 

 

 

 

 

(12,481

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,028

)

 

 

(4,028

)

Issuance of equity awards

 

 

 

 

 

(4,140

)

 

 

 

 

 

 

 

 

4,611

 

 

 

471

 

Recognition of equity-based compensation

 

 

 

 

 

2,861

 

 

 

 

 

 

 

 

 

 

 

 

2,861

 

Sale of treasury stock

 

 

 

 

 

150

 

 

 

 

 

 

 

 

 

117

 

 

 

267

 

Exercise of stock options

 

 

 

 

 

935

 

 

 

 

 

 

 

 

 

2,905

 

 

 

3,840

 

Balance - March 31, 2017

 

$

55,057

 

 

$

1,033,225

 

 

$

1,174,587

 

 

$

(44,159

)

 

$

(207,832

)

 

$

2,010,878

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,951

)

 

 

(5,951

)

Issuance of equity awards

 

 

 

 

 

(2,959

)

 

 

 

 

 

 

 

 

3,454

 

 

 

495

 

Recognition of equity-based compensation

 

 

 

 

 

2,270

 

 

 

 

 

 

 

 

 

 

 

 

2,270

 

Sale of treasury stock

 

 

 

 

 

145

 

 

 

 

 

 

 

 

 

140

 

 

 

285

 

Exercise of stock options

 

 

 

 

 

1,122

 

 

 

 

 

 

 

 

 

4,125

 

 

 

5,247

 

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 Pronouncements”, for further detail.

 

(2)

Related to the adoption of ASU Nos. 2016-01 and 2017-12. See Note 3, “New Accounting Pronouncements”, for further detail.

 

See Notes to Consolidated Financial Statements.

7


 

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

56,786

 

 

$

44,181

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

10,000

 

 

 

9,000

 

Net accretion of premiums and discounts from acquisition

 

 

(10

)

 

 

(838

)

Depreciation and amortization

 

 

13,371

 

 

 

14,375

 

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

 

 

(139

)

 

 

(468

)

Losses (gains) on sales of assets

 

 

142

 

 

 

(1,020

)

Amortization of securities premiums, net of discount accretion

 

 

11,640

 

 

 

12,081

 

Originations of loans held for sale

 

 

(12,520

)

 

 

(10,818

)

Gains on sales of loans held for sale, net

 

 

(270

)

 

 

(299

)

Proceeds from sales of loans held for sale

 

 

9,664

 

 

 

14,462

 

Equity-based compensation

 

 

2,765

 

 

 

3,332

 

Net tax benefit related to equity compensation plans

 

 

1,713

 

 

 

1,783

 

Changes in:

 

 

 

 

 

 

 

 

Accrued income

 

 

1,231

 

 

 

2,010

 

Accrued expenses and taxes

 

 

(61,711

)

 

 

(29,980

)

Other assets and liabilities, net

 

 

8,345

 

 

 

(5,533

)

Net cash provided by operating activities

 

 

19,619

 

 

 

16,668

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities of securities held to maturity

 

 

21,303

 

 

 

16,682

 

Proceeds from sales of securities available for sale

 

 

41,273

 

 

 

86,069

 

Proceeds from maturities of securities available for sale

 

 

328,267

 

 

 

405,500

 

Purchases of securities held to maturity

 

 

(6,756

)

 

 

(108,215

)

Purchases of securities available for sale

 

 

(340,795

)

 

 

(550,920

)

Net increase in loans

 

 

(188,349

)

 

 

(222,959

)

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

 

 

(8,639

)

 

 

(4,985

)

Proceeds from sales of premises and equipment

 

 

 

 

 

173

 

Net cash used in investing activities

 

 

(79,755

)

 

 

(228,433

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net decrease in demand and savings deposits

 

 

(511,650

)

 

 

(610,428

)

Net decrease in time deposits

 

 

(293,085

)

 

 

(65,002

)

Net increase in fed funds purchased and repurchase agreements

 

 

93,911

 

 

 

533,427

 

Repayment of long-term debt

 

 

(898

)

 

 

(938

)

Cash dividends paid

 

 

(14,531

)

 

 

(12,710

)

Proceeds from exercise of stock options and sales of treasury shares

 

 

5,532

 

 

 

4,107

 

Purchases of treasury stock

 

 

(5,951

)

 

 

(4,028

)

Net cash used in financing activities

 

 

(726,672

)

 

 

(155,572

)

Decrease in cash and cash equivalents

 

 

(786,808

)

 

 

(367,337

)

Cash and cash equivalents at beginning of period

 

 

1,716,262

 

 

 

1,063,967

 

Cash and cash equivalents at end of period

 

$

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.

8


 

UMB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 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, 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, 2017 filed with the Securities and Exchange Commission (SEC) on February 22, 2018 (the Form 10-K).

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 owned Scout Investments, Inc. (Scout), an institutional 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, after giving effect to customary purchase price 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.

2.  Summary of Significant Accounting Policies

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 (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 FRB 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 March 31, 2018 and March 31, 2017 (in thousands):

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Due from the FRB

 

$

649,616

 

 

$

322,959

 

Cash and due from banks

 

 

279,838

 

 

 

373,671

 

Cash and cash equivalents at end of period

 

$

929,454

 

 

$

696,630

 

9


 

 

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 $21.5 million and $51.6 million at March 31, 2018 and March 31, 2017, 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 net income per share includes the dilutive effect of 496,848 and 719,637 shares issuable upon the exercise of options granted by the Company and outstanding at March 31, 2018 and 2017, respectively.

Options issued under employee benefits plans to purchase 141,870 and 151,002 shares of common stock were outstanding at March 31, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

Derivatives  

The Company records all derivatives on the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate 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 the Company’s derivatives are designated in qualifying hedging relationships. However, the remainder of the Company’s derivatives are not designated in qualifying hedging relationships, as the derivatives are not used to manage risks within the Company’s assets or liabilities. All changes in fair value of the 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 replaced most existing revenue recognition guidance in U.S. GAAP when it became 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 adopted the amended guidance using the modified retrospective approach on January 1, 2018.  The adoption of this guidance had no impact on the Company’s Consolidated Financial Statements, 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 were adopted on January 1, 2018. Upon adoption, the Company recorded a cumulative effect adjustment to the Company’s Consolidated Balance Sheets of $132 thousand as an increase to the opening balance of 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

10


 

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 were adopted January 1, 2018 in conjunction with the adoption of ASU 2014-09, and the adoption had no impact on the Company’s Consolidated Financial Statements.

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 adoption. The amendments in this update were adopted on January 1, 2018 and did not have an impact on the Company’s Consolidated 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, 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 permitted.  The Company early adopted ASU 2018-02 using a security-by-security approach with an effective date of January 1, 2018. Upon adoption, the Company reclassified stranded tax effects totaling $12.9 million from AOCI to retained earnings. 

11


 

 

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.  

12


 

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 March 31, 2018 and December 31, 2017 (in thousands):

 

 

 

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

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

7,988

 

 

$

1,508

 

 

$

44,253

 

 

$

53,749

 

 

$

4,415,694

 

 

$

4,469,443

 

Asset-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

345,980

 

 

 

345,980

 

Factoring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

234,148

 

 

 

234,148

 

Commercial – credit card

 

 

640

 

 

 

54

 

 

 

 

 

 

694

 

 

 

192,042

 

 

 

192,736

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate – construction

 

 

195

 

 

 

 

 

 

 

 

 

195

 

 

 

789,650

 

 

 

789,845

 

Real estate – commercial

 

 

2,294

 

 

 

1,908

 

 

 

18,816

 

 

 

23,018

 

 

 

3,687,450

 

 

 

3,710,468

 

Real estate – residential

 

 

32

 

 

 

 

 

 

686

 

 

 

718

 

 

 

649,630

 

 

 

650,348

 

Real estate – HELOC

 

 

87

 

 

 

 

 

 

3,434