Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
GENERAL
UMB Financial Corporation (the "Company") was organized in 1967 under Missouri law for the purpose of becoming a bank holding company registered under the Bank Holding Company Act of 1956. The Company owns substantially all of the outstanding stock of 18 commercial banks, a consumer credit bank, a bank real estate corporation, a reinsurance company, a community development corporation and a discount brokerage company.
The Company's 18 commercial banks are engaged in general commercial banking business entirely in domestic markets. The banks, 14 located in Missouri, 2 in Kansas, one in Illinois and one in Colorado, offer a full range of banking services to commercial, retail, government and correspondent bank customers. In addition to standard banking functions, the principal affiliate bank, UMB Bank, n.a., provides international banking services, investment and cash management services, data processing services for correspondent banks and a full range of trust activities for individuals, estates, business corporations, governmental bodies and public authorities. A table setting forth the names and locations of the Company's affiliate banks as well as their total assets, loans, deposits and shareholders' equity as of December 31, 1994, is included on page A-46 of the attached Appendix, and is incorporated herein by reference.
United Missouri Bank, U.S.A. is a consumer credit bank chartered in Delaware. United Missouri Bank, U.S.A. services all incoming credit card requests, performs data entry services on new card requests and evaluates new and existing credit lines.
Other subsidiaries of the Company are UMB Properties, Inc., United Missouri Insurance Company, Scout Brokerage Services, Inc., and UMB Community Development Corporation. UMB Properties, Inc. is a real estate company that leases facilities to certain subsidiaries and acquires and holds land and buildings for anticipated future facilities. United Missouri Insurance Company, an Arizona corporation, is a reinsurance company that reinsures credit life and disability insurance originated by affiliate banks. Scout Brokerage Services, Inc. provides transaction services in a variety of investment securities for the general public. This subsidiary offers brokerage and custodial services to its customers (including affiliate and correspondent banks) through the facilities of National Financial Services Corporation, a wholly-owned subsidiary of Fidelity Brokerage Services, Inc. UMB Community Development Corporation provides low-cost mortgage loans to low- to moderate-income families for acquiring or rehabing owner-occupied housing in Missouri, Kansas, Illinois and Colorado.
On a full-time equivalent basis at December 31, 1994, UMB Financial Corporation and subsidiaries employed 4,006 persons.
COMPETITION
The commercial banking business is highly competitive. Affiliate banks compete with other commercial banks and with other financial institutions, including savings and loan associations, finance companies, money market mutual funds, mortgage banking companies and credit unions. In recent years, competition has also increased from institutions not subject to the same geographical and other regulatory restrictions as domestic banks and bank holding companies.
MONETARY POLICY AND ECONOMIC CONDITIONS
The operations of the Company's affiliate banks are affected by general economic conditions as well as the monetary policy of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") which affects the supply of money available to commercial banks. Monetary policy measures by the Federal
Reserve Board are effected through open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements.
SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHCA") and to regulation by the Federal Reserve Board.
The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may (i) acquire substantially all the assets of any bank, (ii) acquire more than 5% of the voting stock of a bank or bank holding company which is not already majority owned, or (iii) merge or consolidate with another bank holding company.
Under the BHCA, a bank holding company is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in business other than that of banking, managing and controlling banks or performing services for its banking subsidiaries. However, the BHCA authorizes the Federal Reserve Board to permit bank holding companies to engage in activities which are so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Federal Reserve Board from approving an application by a registered bank holding company to acquire shares of a bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted unless the acquisition is specifically authorized by the laws of the state in which the bank to be acquired is located. In 1986, Missouri authorized bank holding companies domiciled in contiguous states to acquire Missouri banks and bank holding companies, provided their home states have similar laws. Colorado and all of the eight states contiguous to Missouri have passed similar legislation.
There are various legal restrictions on the extent to which a bank holding company and certain of its non-bank subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries. The Company and its subsidiaries are also subject to certain restrictions on issuance, underwriting and distribution of securities.
Three of the affiliate banks are national banks and are subject to supervision and examination by the Comptroller of the Currency. United Missouri Bank, U.S.A. is chartered under the state banking laws of Delaware and is subject to supervision and regular examination by the Office of the State Bank Commissioner of Delaware. One of the affiliate banks is chartered under the state banking laws of Illinois and is subject to supervision and regular examination by the Office of the Commissioner of Banks and Trust Companies of Illinois. One of the affiliate banks is chartered under the state banking laws of Colorado and is subject to supervision and regular examination by the Office of the State Bank Commissioner of Colorado. One of the affiliate banks is chartered under the state banking laws of Kansas and is subject to supervision and regular examination by the Kansas Banking Department. The remaining 12 banks are chartered under the state banking laws of Missouri and are subject to supervision and regular examination by the Office of the Commissioner of Finance of Missouri. In addition, the national banks and the one state bank that are members of the Federal Reserve System are subject to examination by that agency. All affiliate banks are members of the Federal Deposit Insurance Corporation, and as such, are subject to examination thereby.
Scout Brokerage Services, Inc. is subject to supervision and regulation by the National Association of Securities Dealers. This subsidiary is also a member of the Securities Investor Protection Corporation.
Information regarding capital adequacy standards of Federal banking regulators is included on pages A-15, A-39 and A-40 of the attached Appendix, and is incorporated herein by reference.
Information regarding dividend restrictions is on page A-15 of the attached Appendix, incorporated herein by reference.
STATISTICAL DISCLOSURE
The information required by Guide 3, "Statistical Disclosure by Bank Holding Companies," has been integrated throughout pages A-25 through A-46 of the attached Appendix under the captions of "Five-Year Financial Summary" and "Financial Review," and such information is incorporated herein by reference.
EXECUTIVE OFFICERS
The following are the executive officers of the Company, each of whom is elected annually, and there are no arrangements or understandings between any of the persons so named and any other person pursuant to which such person was elected as an officer.
ITEM 2.



ITEM 2. PROPERTIES
The Company's headquarters building, the UMB Bank Building, is located at 1010 Grand Avenue in downtown Kansas City, Missouri, and was opened in July 1986. Of the total 250,000 square feet, the offices of the parent company and customer service functions of UMB Bank, n.a. comprise 175,000 square feet. The remaining 75,000 square feet are leased to the Company's principal law firm and principal accounting firm.
The banking facility of UMB Bank, n.a. at 928 Grand Avenue principally houses that bank's operations, data processing and other support functions and is connected to the headquarters building by an enclosed pedestrian walkway.
At December 31, 1994, the Company's affiliate banks operated a total of 18 main banking houses and 98 detached facilities, the majority of which are owned by them or a non-bank subsidiary of the Company and leased to the respective bank.
The Company's affiliate bank in St. Louis leases 40,000 square feet of space in the Equitable Building in the heart of the downtown commercial sector. A full service banking center, operations and administrative offices are housed at this location. The St. Louis affiliate bank provides full service banking at 19 additional offices, which circle the metropolitan area.
Additional information with respect to premises and equipment is presented on page A-14 of the attached Appendix, which is incorporated herein by reference.
In the opinion of the management of the Company, the physical properties of the Company and its subsidiaries are suitable and adequate and are being fully utilized.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company and its subsidiaries had certain lawsuits pending against them at December 31, 1994. In the opinion of management, after consultation with legal counsel, none of these suits will have a significant effect on the financial condition of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders for a vote during the fourth quarter ending December 31, 1994.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock is traded on the NASDAQ National Market System under the symbol "UMBF." As of December 31, 1994, the Company had 2,722 shareholders. Dividend and sale prices of stock information, by quarter, for the past two years is contained on page A-43 of the attached Appendix and is hereby incorporated by reference.
Information concerning restrictions on the ability of Registrant to pay dividends and Registrant's subsidiaries to transfer funds to Registrant is contained on page A-15 of the attached Appendix and is hereby incorporated by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
See the "Five-Year Financial Summary" on page A-25 of the attached Appendix, which is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See the "Financial Review" on pages A-26 through A-46 of the attached Appendix, which is incorporated herein by reference.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data appearing on the indicated pages of the attached Appendix are incorporated herein by reference:
Consolidated Financial Statements -- pages A-2 through A-23.
Summary of Operating Results by Quarter -- page A-43.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is included in the Company's 1995 Proxy Statement under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" and is hereby incorporated by reference.
Information regarding executive officers is included in Part I of this Form 10-K under the caption "Executive Officers."
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
This information is included in the Company's 1995 Proxy Statement under the captions "Executive Compensation", "Report of the Officers Salary and Stock Option Committee on Executive Compensation," "Director Compensation", "Salary Committee Interlocks and Insider Participation," and "Performance Graph" and is hereby incorporated by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
This information in included in the Company's 1995 Proxy Statement under the caption "Principal Shareholders" and is hereby incorporated by reference.
SECURITY OWNERSHIP OF MANAGEMENT
This information is included in the Company's 1995 Proxy Statement under the caption "Stock Beneficially Owned by Directors and Nominees and Executive Officers" and is hereby incorporated by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included in the Company's 1995 Proxy Statement under the caption "Certain Transactions" and is hereby incorporated by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Set forth below are the consolidated financial statements of the Company appearing on the indicated pages of the attached Appendix, which are hereby incorporated by reference.
Condensed financial statements for parent company only may be found on page A-23. All other schedules have been omitted because the required information is presented in the financial statements or in the notes thereto, the amounts involved are not significant or the required subject matter is not applicable.
REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the fourth quarter of 1994.
EXHIBITS
The following Exhibit Index lists the Exhibits to Form 10-K.
-------- * Exhibit has heretofore been filed with the Securities and Exchange Commission and is incorporated herein as an exhibit by reference.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
UMB FINANCIAL CORPORATION
/s/ R. Crosby Kemper _____________________________________ R. Crosby Kemper, Chairman of the Board and Chief Executive Officer
/s/ Timothy M. Connealy _____________________________________ Timothy M. Connealy, Senior Vice President and Treasurer (Principal Accounting and Financial Officer)
Date: March 24, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES ON THE DATE INDICATED.
UMB FINANCIAL CORPORATION
AND SUPPLEMENTARY DATA
A-1
UMB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
See Notes to Financial Statements, pages A-6 to A-23.
A-2
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
See Notes to Financial Statements, pages A-6 to A-23.
A-3
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
-------- Note: Certain noncash transactions regarding the adoption of SFAS No. 115 and common stock issued for acquisitions are disclosed in the accompanying financial statements and notes to financial statements.
See Notes to Financial Statements, pages A-6 to A-23.
A-4
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
See Notes to Financial Statements, pages A-6 to A-23.
A-5
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES
The accounting policies of UMB Financial Corporation and its subsidiaries conform to generally accepted accounting principles applicable to the banking industry. Following is a summary of the more significant accounting policies to assist the reader in understanding the financial presentation.
CONSOLIDATION -- All subsidiaries are included in the financial statements. Intercompany accounts and transactions have been eliminated where significant.
ACQUISITIONS -- Banks acquired and recorded under the purchase method are recorded at the fair value of the net assets acquired at the acquisition date, and results of operations are included from that date. Excess of purchase price over the value of net assets acquired is recorded as premiums on purchased banks. Premiums on purchases prior to 1982 are being amortized ratably over 40 years. Premiums on purchases in 1982 and after are being amortized ratably over 15 years. Core deposit intangible assets are being amortized ratably over 10 years.
LOANS -- Interest on discount loans is recorded on a method that approximates income at a level rate of return on the principal amount outstanding over the term of the loan. Interest on all other loans is recognized based on the rate times the principal amount outstanding. Interest accrual is discontinued when, in the opinion of management, the likelihood of collection becomes doubtful.
Affiliate banks enter into lease financing transactions that are generally recorded under the financing method of accounting. Income is recognized on a basis that results in an approximately level rate of return over the life of the lease.
Annual bankcard fees are recognized on a straight-line basis over the period that cardholders may use the card.
The adequacy of the allowance for loan losses is based on management's continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured and determination of the existence and realizable value of the collateral and guarantees securing such loans. The actual losses, notwithstanding such considerations, however, could differ significantly from the amounts estimated by management.
SECURITIES AVAILABLE FOR SALE -- Effective December 31, 1992, the company classified certain debt securities as securities available for sale. These securities are considered part of the company's asset/liability management program that may be sold in response to changes in interest rates, prepayments, or capital or liquidity needs.
Debt securities available for sale include principally U.S. Treasury and agency securities and certain mortgage-backed securities. Until December 31, 1993, securities available for sale were carried at the lower of aggregate amortized cost or market value.
Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, equity securities and debt securities available for sale are measured at fair value. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of shareholders' equity until realized. Realized gains and losses on sales are computed by the specific identification method at the time of disposition and are shown separately as a component of noninterest income.
A-6
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Prior to the adoption of SFAS No. 115, marketable equity securities, owned primarily by the parent company, were carried at the lower of aggregate cost or market value.
INVESTMENT SECURITIES -- Investment securities are carried at amortized historical cost based on management's intention, and the Company's ability, to hold them to maturity. The Company classifies securities of state and political subdivisions and a portion of its mortgage-backed securities portfolio as investment securities. Certain significant unforeseeable changes in circumstances may cause a change in the intent to hold these securities to maturity. For example, such changes may include a deterioration in the issuer's creditworthiness that is expected to continue or a change in tax law that eliminates the tax-exempt status of interest on the security.
TRADING SECURITIES -- Trading securities, generally acquired for subsequent sale to customers, are carried at market value. Market adjustments, fees and gains or losses on the sale of trading securities are considered to be a normal part of operations and are included in trading and investment banking income. Interest income on trading securities is included in income from earning assets.
TAXES -- The Company recognizes certain income and expenses in different time periods for financial reporting and income tax purposes. The provision for deferred income taxes is based on the liability method and represents the change in the deferred income tax accounts during the year, including the effect of enacted tax rate changes.
PER SHARE DATA -- Earnings per share are computed based on the weighted average number of shares of common stock outstanding during each period. All per share presentations have been restated to give effect to the 10% stock dividend paid July 1, 1994, to the shareholders of record June 14, 1994. The dilutive effect of shares issuable under stock options granted by the Company is immaterial.
RECLASSIFICATIONS -- Certain reclassifications were made to the 1993 and 1992 financial statements to conform to the current year presentation.
INDUSTRY SEGMENT REPORTING -- The Company operates principally in a single business segment offering general commercial banking services.
ACCOUNTING CHANGES
EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS -- The Financial Accounting Standards Board issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This Statement, effective for fiscal years beginning after December 15, 1993, establishes accounting standards for employers who provide certain benefits to former or inactive employees after employment but before retirement. The Company does not provide any such postemployment benefits and, consequently, adoption of this Statement did not affect its financial position or results of operations.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -- The Financial Accounting Standards Board issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement, which becomes effective for fiscal years beginning after December 15, 1994, will require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. In October 1994, SFAS No. 118 was issued as an amendment to SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. The impact of the Statements on the Company has not yet been fully determined; the effects are not expected to be significant to the consolidated financial statements.
A-7
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
REPORTING ON DERIVATIVE FINANCIAL INSTRUMENTS -- The Financial Accounting Standards Board issued SFAS No. 119, which requires disclosures concerning derivative financial instruments--futures, forward, swap, and option contracts, and other financial instruments with similar characteristics. This statement requires disclosures of amounts, nature, and terms of derivative financial instruments that do not result in off-balance sheet risk of accounting loss. It requires that a distinction be made between financial instruments held or issued for trading purposes and financial instruments held or issued for purposes other than trading. It also amends SFAS Nos. 105 and 107 requiring distinctions in certain disclosures required by those statements. This statement has been adopted for the year ending December 31, 1994.
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS -- The Financial Accounting Standards Board issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement, effective for fiscal years beginning after December 15, 1992, requires accrual of postretirement benefits (such as health care benefits) during the years an employee provides services. The Company does not provide any such postretirement benefits and, consequently, adoption of this Statement did not affect its financial position or results of operations.
ACCOUNTING FOR INCOME TAXES -- The Financial Accounting Standards Board issued SFAS No. 109, "Accounting For Income Taxes." This Statement superseded SFAS No. 96, by the same title, which the Company had adopted in 1989. SFAS No. 109 reduces the complexity of SFAS No. 96 and changes the criteria for recognition and measurement of deferred tax assets. SFAS No. 109 was adopted by the Company in 1993 and did not have a material effect on the Company's financial position or results of operations.
ACQUISITIONS
On January 23, 1992, the Company acquired Columbine National Bank, Denver, Colorado (renamed UMB Columbine National Bank). The Company paid $9.1 million in cash for all the shares of the bank's holding company, The Village Corporation, as well as the minority holdings of bank stock. The acquisition of this $62 million bank was recorded as a purchase, with $2.0 million recorded as premium on purchased bank. On October 19, 1994, UMB Columbine National Bank was merged into UMB Bank Colorado.
A-8
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
As of June 25, 1993, the Company had consummated the acquisitions of eight Kansas bank holding companies (the "Kansas banks"). During 1994, these Kansas banks were merged to form two banks, UMB National Bank of America and UMB Bank Kansas. The eight companies and their subsidiary banks are presented below:
The cash portion of the purchase prices was obtained principally through the issuance of debt by the Company. On February 24, 1993, the Company issued $10,000,000 in medium-term notes due 2000 at 6.81% and $15,000,000 in medium- term notes due 2003 at 7.30%.
The acquisitions of the Kansas banks have been accounted for by the Company under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations," as amended. Under this method of accounting, the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values, including applicable income tax effects, at the effective dates of the acquisitions. Income of the combined company does not include income of the acquired companies prior to the effective dates of the acquisitions.
A-9
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The following table presents supplementary information regarding the acquisitions of the Kansas banks (in thousands):
The following unaudited pro forma consolidated financial information gives effect to the Kansas banks as if they were all acquired on January 1, 1992. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the combinations been in effect on the dates indicated, or which may result in the future.
A-10
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
ALLOWANCE FOR LOAN LOSSES
The table below provides an analysis of the allowance for loan losses for the three years ended December 31, 1994 (in thousands):
SECURITIES AVAILABLE FOR SALE
The table below provides detailed information for securities available for sale at December 31, 1994, 1993 and 1992 (in thousands):
Investment securities with a market value of $1,190,000 at December 31, 1994, $5,356,000 at December 31, 1993, and $3,139,000 at December 31, 1992, were pledged to secure U.S. Government deposits, other public deposits and certain trust deposits as required by law.
A-11
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The following table presents contractual maturity information for securities available for sale at December 31, 1994. 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.
Securities available for sale with a market value of $1,476,231,000 at December 31, 1994, $1,554,257,000 at December 31, 1993, and $858,175,000 at December 31,1992, were pledged to secure U.S. Government deposits, other public deposits and certain trust deposits as required by law.
During 1994, proceeds from the sales of securities available for sale were $150,570,000 and securities transactions resulted in gross realized gains of $3,719,000 and gross realized losses of $87,000.
The net unrealized holding loss on trading securities at December 31, 1994, was $39,000, and was included in trading and investment banking income.
INVESTMENT SECURITIES
The table below provides detailed information for investment securities at December 31, 1994, 1993 and 1992 (in thousands):
A-12
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The following table presents contractual maturity information for investment securities at December 31, 1994. 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 investment securities during 1994. Proceeds from sales of investment securities and gross realized gains and gross realized losses on such sales for 1993 and 1992 are presented below (in thousands):
COMMON STOCK
The following table summarizes the share transactions for the three years ended December 31, 1994:
A-13
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED LOANS TO MANAGEMENT
Certain Company and principal affiliate bank executive officers and directors, including companies in which those persons are principal holders of equity securities or are general partners, borrow in the normal course of business from affiliate banks of the Company. All such loans have been made on the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons. In addition, all such loans are current as to repayment terms. For the years 1994, 1993 and 1992, an analysis of activity with respect to such aggregate loans to related parties appears below (in thousands):
A-14
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED Long-term debt represents direct, unsecured obligations of the parent company. The senior notes due 2000 and 2003 cannot be redeemed prior to stated maturity. The senior notes due 1996 require annual redemptions of $3,572,000. Optional prepayments without premiums were made on the senior notes due 1996 of $2,678,000 in 1993 and $3,572,000 in 1992. The senior notes due 1999 require annual redemptions of $3,000,000 beginning in 1995. The 7.50% notes that mature in 1997 require annual principal payments of $1,546,000. The senior notes contain financial covenants relating to the issuance of additional debt, payment of dividends, reacquisition of common stock and maintenance of minimum tangible capital. Under the most restrictive covenant, approximately $90,226,000 was available for the payment of dividends at December 31, 1994.
The Company enters into sales of securities with simultaneous agreements to repurchase ("repurchase agreements"). The amounts received under these agreements represent short-term borrowings and are reflected as a separate item in the consolidated balance sheet. The amount outstanding at December 31, 1994, was $661,203,000 (with accrued interest payable of $1,591,000). Of that amount, $140,341,000 represented sales of securities in which the securities were obtained under reverse repurchase agreements ("resell agreements"). The remainder of $520,862,000 represented sales of U.S. Treasury securities obtained from the Company's securities portfolio. The carrying amounts and market values of the securities and the related repurchase liabilities and weighted average interest rates of the repurchase liabilities (grouped by maturity of the repurchase agreements) were as follows (amounts in thousands):
REGULATORY REQUIREMENTS
Payment of dividends by the affiliate banks to the parent company is subject to various regulatory restrictions. For national banks, state banks that are Federal Reserve members and state banks in Colorado, the governing regulatory agency must approve the declaration of any dividends generally in excess of the sum of net income for that year and retained net income for the preceding two years. The state banks in Missouri, Kansas and Illinois are subject to state laws permitting dividends to be declared from retained earnings, provided certain specified capital requirements are met. At December 31, 1994, approximately $38,629,000 of the equity of the affiliate banks was available for distribution as dividends to the parent company without prior regulatory approval or without reducing the capital of the respective affiliate banks below prudent levels.
The Company is required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by the banking regulators. At December 31, 1994, the Company is required to have minimum Tier 1 and Total capital ratios of 4.00% and 8.00%, respectively. The Company's actual ratios at that date were 16.76% and 17.85%, respectively. The Company's leverage ratio at December 31, 1994, was 7.89%.
Certain affiliate banks maintain reserve balances with the Federal Reserve Bank as required by law. During 1994, this amount averaged $125,294,000.
A-15
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
EMPLOYEE BENEFITS
The Company has a noncontributory profit sharing plan, which features an employee stock ownership plan. These plans are for the benefit of substantially all officers and employees of the Company and its subsidiaries. Contributions to these plans for the years 1994, 1993 and 1992 were $3,983,000, $3,542,000 and $3,317,000, respectively.
The Company has a qualified 401(k) profit sharing plan that permits participants to make contributions by salary reduction. The Company does not make contributions to this plan.
Substantially all officers and employees are covered by a noncontributory defined benefit pension plan. Under the plan, retirement benefits are based on years of service and the average of the employee's highest 120 consecutive months of compensation. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year.
The pension plan was amended in January 1995 whereby the plan would not accept any new participants. This change was made with consideration given to discontinuing the current plan at a future date. New employees of the Company that are not eligible to participate in the pension plan will receive a partial matching contribution to the qualified 401(k) plan, as amended.
The following items are components of the net periodic pension expense (income) for the three years ended December 31, 1994 (in thousands):
The following table sets forth the pension plan's funded status, using valuation dates of September 30, 1994, 1993 and 1992 (in thousands):
A-16
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
On April 16, 1992, the shareholders of the Company approved the 1992 Incentive Stock Option Plan ("the 1992 Plan"), which provides incentive options to certain key employees for up to 500,000 common shares of the Company. The options are not exercisable for two years from the date of the grant and are thereafter exercisable for such periods as the Board of Directors, or a committee thereof, specify (which may not exceed 10 years), provided that the optionee has remained in the employment of the Company or its subsidiaries. The Board or the committee may accelerate the exercise period for an option upon the optionee's disability, retirement or death. All options expire at the end of the exercise period. The Company makes no recognition in the balance sheet of the options until such options are exercised and no amounts applicable thereto are reflected in net income. Options are granted at not less than 100% of fair market value at date of grant.
Activity in the 1992 Plan for the three years ended December 31, 1994, is summarized in the following table:
All figures have been restated to reflect the 10% stock dividend paid July 1, 1994.
The 1981 Incentive Stock Option Plan ("the 1981 Plan") was adopted by the Company on October 22, 1981, and amended November 27, 1985, and October 10, 1989. No further options may be granted under the 1981 Plan. Provisions of the 1981 Plan regarding option price, term and exercisability are generally the same as that described for the 1992 Plan. Activity in the 1981 Plan for the three years ended December 31, 1994, is summarized in the following table:
All figures have been restated to reflect the 10% stock dividend paid July 1, 1994.
A-17
UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is a 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, and futures contracts. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument 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. For futures contracts, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its futures contracts through credit approvals, limits and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. These conditions generally include, but are not limited to, each customer being current as to repayment terms of existing loans and no deterioration in the customer's financial condition. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The interest rate is generally a variable, or floating, interest rate. If the commitment has a fixed interest rate, the rate is generally not set until such time as credit is extended. For its credit card customers, the Company has the right to change or terminate any terms or conditions of the credit card account at any time. Since a large portion of the commitments and unused credit card lines are never actually drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, real estate, plant and equipment, stock, securities and certificates of deposit.
Commercial letters of credit are issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, as a general rule, drafts will be drawn when the underlying transaction is consummated as intended. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments when deemed necessary. Collateral varies but may include such items as those described for commitments to extend credit.
Futures contracts are contracts for delayed delivery of securities or money market instruments in which the seller agrees to make delivery at a specified future date of a specified instrument at a specified yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. Instruments used in trading activities are carried at market value and gains and losses on futures contracts are settled in cash daily. Any changes in the market value are recognized in trading and investment banking income.
The Company's use of futures contracts is very limited. The Company uses contracts to offset interest rate risk on specific securities held in the trading portfolio. The contract amount of open positions in financial futures contracts at year end 1994 was $36 million. Open futures contract positions averaged $44.5 million
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UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED during the year ended December 31, 1994. Net futures activity resulted in gains of $2.7 million for the year ended December 31, 1994.
The Company also enters into foreign exchange contracts on a limited basis. For operating purposes the Company maintains certain balances in foreign banks. Foreign exchange contracts are purchased on a monthly basis to avoid foreign exchange risk on these foreign balances. The Company will also enter into foreign exchange contracts to facilitate foreign exchange needs of customers. The Company will enter into a contract to buy or sell a foreign currency at a future date only as part of a contract to sell or buy the foreign currency at the same future date to a customer. The Company had no open foreign exchange contracts at December 31, 1994. During 1994 contracts to purchase and to sell foreign currency averaged approximately $1.2 million. The gain or loss on these foreign exchange contracts for 1994 was not significant.
With respect to group concentrations of credit risk, most of the Company's business activity is with customers in the states of Missouri, Kansas, Colorado and Illinois. At December 31, 1994, the Company did not have any significant credit concentrations in any particular industry.
In the normal course of business, the Company and its subsidiaries are named defendants in various lawsuits and counterclaims. In the opinion of management, after consultation with legal counsel, none of these lawsuits will have a materially adverse effect on the financial position or results of operations of the Company.
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UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
INCOME TAXES
Income taxes as set forth below produce effective federal income tax rates of 29.78% in 1994, 30.17% in 1993 and 26.67% in 1992. These percentages are computed by dividing total federal income tax by the sum of such tax and net income. Income taxes include the following components (in thousands):
The reconciliation between the income tax provision and the amount computed by applying the statutory federal tax rate of 35% in 1994 and 1993 and 34% in 1992 to income before income taxes is as follows (in thousands):
Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities. The net deferred tax asset included in the consolidated balance sheet at December 31, 1992, was $2,273,000.
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UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Temporary differences which comprise a significant portion of deferred tax assets and liabilities at December 31, 1994 and 1993, were as follows (in thousands):
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosures about the fair value of all financial instruments, whether or not recognized in the balance sheet. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
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 AVAILABLE FOR SALE AND INVESTMENT SECURITIES -- 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.
TRADING SECURITIES -- Fair values for trading securities (including financial futures), which also are the amounts recognized in the balance sheet, 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.
LOANS -- Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES -- The fair value of demand deposits and savings accounts is the amount payable on demand at December 31, 1994 and 1993. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
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UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
SHORT-TERM DEBT -- The carrying amounts of federal funds purchased, repurchase agreements and other short-term debt are reasonable estimates of their fair values.
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 a loan commitment and a letter of credit is 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 or these instruments or their fair value at year- end are significant to the Company's consolidated financial position.
The estimated fair values of the Company's financial instruments at December 31, 1994, 1993, and 1992 are as follows (in millions):
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1994, 1993 and 1992. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
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UMB FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED PARENT COMPANY FINANCIAL INFORMATION
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INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of UMB Financial Corporation:
We have audited the accompanying consolidated balance sheets of UMB Financial Corporation and subsidiaries as of December 31, 1994, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of UMB Financial Corporation and subsidiaries as of December 31, 1994, 1993 and 1992, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles.
As discussed in the Accounting Policies note to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities effective December 31, 1993, to conform with Statement of Financial Accounting Standards No. 115.
/s/ Deloitte & Touche LLP Kansas City, Missouri January 19, 1995
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UMB FINANCIAL CORPORATION
FIVE-YEAR FINANCIAL SUMMARY
-------- Per share information restated for 10% stock dividend paid July 1, 1994. *Securities include investment securities and securities available for sale. **For purposes of computing these ratios, earnings represent pretax income plus fixed charges. Fixed charges include all interest (except interest on deposits as indicated above), the portion of rental expense deemed representative of an interest factor and amortization of debt expense. ***Excludes SFAS 115 mark-to-market equity adjustment.
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The following financial review presents management's discussion and analysis of UMB Financial Corporation's consolidated financial condition and results of operations. This review highlights the major factors affecting results of operations and any significant changes in financial condition for the three- year period ending December 31, 1994. It should be read in conjunction with the accompanying consolidated financial statements, notes to financial statements and other financial statistics appearing elsewhere in this report.
OVERVIEW
During the year ended December 31, 1994, the Company earned $47.8 million, compared to $41.1 million and $39.4 million in 1993 and 1992, respectively. Earnings for 1994 represent a 16.3% increase over the prior year. On a per share basis, 1994 earnings were $2.49, compared to $2.34 and $2.59, respectively, for the prior two years. Earnings per share for 1994 increased 6.4% from 1993 earnings per share. Per share amounts for prior periods have been restated for a ten percent stock dividend distributed to shareholders on July 1, 1994.
During 1993, the Company completed the acquisition of twelve banks in the state of Kansas (the Acquired Banks). The last of these acquisitions was completed in the second quarter. Each of the acquisitions was accounted for as a purchase, therefore, the results of operations of the Acquired Banks are included in consolidated operating results from the respective date of acquisition. The following discussion and analysis of financial condition and results of operations will attempt to distinguish changes and variances caused by the acquisition of the Acquired Banks from other changes.
As noted above, the acquisitions of the Acquired Banks were accounted for as purchases whereby the purchase price of the acquisitions was allocated to the fair market value of the Acquired Banks with any remaining amount recorded as goodwill. As a result of these acquisitions the Company recorded additional intangible assets of $64.7 million. The amortization expense of these intangible assets along with the amortization of the premium allocated to other assets, primarily investment securities and fixed assets, amounted to $6.3 million and $4.7 million, on an after-tax basis, for the years ended December 31, 1994 and 1993, respectively. On a per share basis this expense totaled $0.33 and $0.27 for 1994 and 1993, respectively.
During 1994, the Company consolidated its Kansas banking operations and merged the Acquired Banks into two bank charters, which are two of the largest banks in the state. The Company also merged its two Colorado banks into the largest state-chartered bank in Colorado. In addition, the Company completed an interstate merger through the merger of its St. Louis bank and its bank in Collinsville, Illinois. Application has been filed to merge our four banking companies in Monett, Joplin, Carthage and Springfield, Missouri, into one entity. The goal of these reorganizations is to increase customer convenience and service and improve consolidated efficiency.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the Company's principal source of earnings, is the amount of interest income generated by earning assets less interest expense paid on interest-bearing liabilities. Table 1 summarizes the changes in net interest income resulting from changes in volume and rates for the past two years. Net interest income on a fully tax-equivalent basis (FTE), average balance sheet amounts, and the corresponding yields and rates for the years 1990 through 1994 are shown on pages A-44 and A-45. Net interest income is presented on a "tax-equivalent" basis to adjust for the tax-exempt status of earnings from certain loans and investments, primarily the obligations of states and local governments.
On a tax-equivalent basis net interest income increased $24.0 million or 14.1%, to $194.3 million, compared to $170.3 million in 1993 and $136.5 in 1992. The contribution of the Acquired Banks to this increase was $3 million as they added $28 million, and $25 million to the tax equivalent net interest income for 1994 and 1993, respectively.
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TABLE 1: TAX-EQUIVALENT RATE-VOLUME ANALYSIS
This analysis attributes changes in net interest income on a tax-equivalent basis either to changes in average balances or to changes in average rates for earning assets and interest-bearing liabilities. The change in interest due jointly to volume and rate has been allocated to volume and rate in proportion to the relationship of the absolute dollar amount of change in each. All information is presented on a tax-equivalent basis and gives effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets.
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Average earning assets were $5.4 billion in 1994, compared to $4.9 billion in 1993 and $3.9 billion in 1992. The Acquired Banks' contribution to consolidated average earning assets was $1.1 billion in 1994 and $743 million in 1993.
Net interest margin measures the Company's ability to generate net interest income. It is defined as net interest income (FTE) as a percent of earning assets. The behavior of the margin depends on the interaction of three factors: 1) net interest spread (defined as the difference between the yield on earning assets and the rate paid on interest-bearing liabilities); 2) yield earned on assets funded by interest-free funding sources (primarily noninterest-bearing demand deposits and equity capital); and 3) percentage of earning assets funded by interest-free funding sources.
TABLE 2: ANALYSIS OF NET INTEREST MARGIN
The Company's net interest margin was 3.61% in 1994, compared to 3.48% in 1993 and 1992. A primary factor in the 1994 increase in net interest margin was a change in asset mix with loans increasing to 40% of average earning assets, compared to 37% in 1993 and 34% in 1992. Average loans increased by $362 million, or 20% in 1994 and $449 million in 1993. The average loans of the Acquired Banks were $456 million in 1994 and $321 million in 1993. The remaining increases resulted from increased marketing efforts to promote this line of business and higher customer demand.
The Company's yield on earning assets was 6.13% in 1994, compared to 5.92% in 1993 and 6.63% in 1992. The 1994 increase resulted from an increase in loan volume and an increase in the rate earned on securities and loans. As interest rates increased during the year, security maturities and short term investments were reinvested at higher rates. In addition 56% of the Company's loan portfolio has floating interest rates, therefore the effect of rate changes is recognized immediately. The decrease in the yield on earning assets for 1993, as compared to 1992, resulted from a general decrease in short-term interest rates.
The Company's cost of funds also increased during the year as a result of rising interest rates. Cost of funds increased 12 basis points to 3.17%, compared to 3.05% in 1993. Cost of funds in 1992 was 3.82%. The increase in cost of funds in 1994 did not keep pace with the increasing yield on earning assets, and as a result, the Company's net interest spread increased to 2.96%, compared to 2.87% in 1993 and 2.81% in 1992. During 1994, noninterest-bearing demand deposits represented 25.2% of funding sources, compared to 24.5% in 1993 and 22.5% in 1992. The Company expects its interest spread and margin to improve in 1995 regardless of additional increases in interest rates.
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TABLE 3: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
This table presents an allocation of the allowance for loan losses by loan categories; however, the breakdown is based on a number of qualitative factors, and the amounts presented are not necessarily indicative of actual future charge-offs in any particular category. The percent of loans in each category to total loans is provided in Table 6.
PROVISION AND ALLOWANCE FOR LOAN LOSS
The allowance for loan losses (ALL) represents management's judgement of the losses inherent in the Company's loan portfolio. The provision for loan losses is the amount necessary to adjust the ALL to the level considered appropriate by management. The adequacy of the ALL is reviewed quarterly considering such items as historical loss trends, a review of individual loans, current and projected economic conditions, loan growth and characteristics and other factors. Bank regulatory agencies require that the adequacy of the ALL be maintained on a bank-by-bank basis for each of the Company's subsidiaries.
The Company's ALL was $32.5 million, $35.6 million and $24.5 million, as of December 31, 1994, 1993 and 1992, respectively. The ALL as a percentage of loans was 1.4% for 1994 and 1.7% for both 1993 and 1992. At December 31, 1994, the ALL exceeded the level of nonperforming loans by $27.2 million. Included in the consolidated ALL was $11.1 million and $11.4 million for 1994 and 1993, respectively, attributable to the Acquired Banks. As shown in Table 3, the ALL has been allocated to various portfolio segments. The Company manages the ALL against the entire loan portfolio and therefore the allocation of the ALL to a particular loan segment may change in the future.
The provision for loan losses was $2.6 million in 1994, $3.3 million in 1993 and $3.0 million in 1992. Net charge-offs in 1994 were $5.7 million, compared to $4.3 million in 1993 and $5.0 million in 1992. The overall quality of the Company's loan portfolio has allowed management to record a loss provision that was less than the amount of net charge-offs during each of the last three years. Based on a current assessment of the risk in the loan portfolio, and absent any unforeseen deterioration in the loan portfolio, management does not anticipate a material increase in the loss provision for 1995.
As noted in Table 4, over one half of the Company's net charge-offs were related to bankcard loans, which, compared to the remainder of the portfolio, earn an increased yield to reflect higher anticipated losses. The level of net losses and past due loans in the Company's bankcard portfolio as a percentage of total is well below industry averages. At December 31, 1994, past due loans totaled 2.22% of this portfolio. Excluding net losses related to bankcard loans, 81% of the remaining net losses of the Company in 1994 was attributable to the charge-off of one commercial loan.
NONINTEREST INCOME
Management has stressed growth of noninterest income to enhance the Company's profitability since fee-based services are non-credit related, provide steady income and are not affected by fluctuations in interest rates. These activities are also relatively low-risk and do not impact the Company's regulatory capital needs.
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Fee-based services that have been emphasized include trust and securities processing, securities trading, cash management and merchant processing. Fee income (exclusive of net security gains) as a percent of adjusted operating revenues has increased from 38.4% in 1989 to 41.8% in 1994. Adjusted operating revenues is defined as tax-equivalent net interest income plus noninterest income, excluding net security gains.
Noninterest income, exclusive of net securities gains, was $139.8 million in 1994, compared to $130.5 million in 1993 and $108.2 million in 1992. The contribution of the Acquired Banks to the above noninterest income was $13.3 million in 1994 and $9.0 million in 1993.
Trust fees continue to be the largest component of noninterest income as they totaled $35.0 million in 1994, $32.0 million in 1993 and $27.3 million in 1992. Trust fees related to the Acquired Banks were $4.6 million in 1994 and $2.5 million in 1993. The Company has long been identified as a leader in the trust area and management will continue to market and grow this recognized strength of the Company. The aggregate value of managed trust assets at December 31, 1994 was $8.1 billion, compared to $8.7 billion and $7.5 billion at December 31, 1993 and 1992, respectively.
TABLE 4: ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
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Income from the Company's custodial trust business, principally from the mutual fund industry, declined 6.6% in 1994 to $12.5 million, compared to $13.3 million in 1993 and $13.7 million in 1992. The decrease in 1994 fee income was the result of negotiated price adjustments and a decrease in activity reflective of the decreased performance of the mutual fund industry. A large customer of the Company was sold in 1994, which will cause a loss of custodial processing business. This potential loss of business is not expected to significantly affect the Company due to previous pricing concessions, new business opportunities and expected reductions in variable costs. Total trust assets under custody were $189.8 billion at December 31, 1994, compared to $187.1 billion at year end 1993 and $150.6 billion at year end 1992.
Service charge income on deposit accounts increased to $32.9 million in 1994, compared to $30.2 million in 1993 and $24.1 million in 1992. The Acquired Banks contributed service charge income of $4.7 million in 1994 and $3.2 million in 1993. The remaining increases for 1994 and 1993 resulted primarily from higher transaction volumes. Increased interest rates applied to compensating balances caused a comparative decrease in fees received. Other service charge income was $15.6 million in 1994, compared to $14.1 million in 1993 and $9.7 million in 1992. The increase in 1994 income was primarily the result of the addition of the Acquired Banks for a full year. The 1993 increase was affected by both the acquisition and a 45% increase in fees related to cash management services.
Bankcard fees increased by 22% to $27.4 million in 1994, compared to $22.4 million in 1993 and $18.3 million in 1992. The increase in fee income for both 1994 and 1993 was the result of a higher volume of credit card transactions processed for merchants.
Trading and investment banking income decreased by 27% in 1994 to $9.9 million, compared to $13.6 million in 1993 and $12.5 million in 1992. The sharp 1994 decrease was consistent with industry experience for the year as transaction volumes decreased significantly, particularly sales of higher margin mortgage-backed securities. An increased volume of sales of mortgaged- backed securities and tax-exempt securities accounted for the increase in income in 1993 as compared to 1992.
Other fee income increased to $6.5 million in 1994 from $4.7 million in 1993 and $2.5 million in 1992. The increase for both 1994 and 1993 was primarily attributable to the acquisition of the Acquired Banks. Net security gains totaled $3.6 million in 1994, $1.6 million in 1993 and $5.3 million in 1992. During the first quarter of 1994 the Company repositioned a portion of its available for sale portfolio which resulted in over 80% of net security gains for the year. A similar repositioning of the portfolio in 1992 resulted in 80% of that year's net security gains.
TABLE 5: ANALYSIS OF NONINTEREST EXPENSE
A-31
NONINTEREST EXPENSE
Noninterest expense increased by $26.6 million in 1994 to $257.6 million from $231.0 million in 1993 and $184.9 million in 1992. As shown in Table 5, 46% of the increase in 1994 and 63% of the increase in 1993 resulted from the acquisition of the Acquired Banks. The impact of the acquisitions on 1994 noninterest expense is even greater than indicated above, as a number of backroom and operating functions of the Acquired Banks have been consolidated or merged with the Company's lead bank. These consolidation efforts will continue in order to increase the efficiency of the Company.
Personnel costs are the largest component of noninterest expense and totaled $120.1 million in 1994, $106.3 million in 1993 and $87.9 million in 1992. The addition of the Acquired Banks added $17.7 million and $13.1 million to these cost in 1994 and 1993, respectively. The remaining increase resulted from merit pay increases, additional staffing, higher health insurance costs and increased contributions to employee benefit plans.
Occupancy costs increased only marginally in 1994 after a $2.6 million increase in 1993. The 1993 increase was primarily the result of the Acquired Banks. Equipment expense also increased slightly in 1994, compared to a 29.0% increase in 1993. Approximately 60% of the 1993 increase was due to the Acquired Banks. The remaining increase resulted from depreciation on new data processing, check imaging and bond trading system equipment. Supplies and services expense increased by $1.7 million in 1994 and $3.0 million in 1993. These increases resulted primarily from inclusion of the Acquired Banks.
Bankcard processing expense increased to $22.7 million in 1994 compared to $18.7 million in 1993 and $16.0 million in 1992. These increases were primarily due to a higher volume of merchant processing transactions. Expenses in 1994 also include cost associated with a planned conversion of the bankcard processing system, scheduled for first quarter of 1995.
Marketing and business development expense increased by $2.0 million in 1994 and by $3.0 million in 1993. During both 1994 and 1993 the Company continued a campaign to promote new loan business. The 1993 increase exceeds the 1994 increase as a result of the Acquired Banks.
The increases in both FDIC and regulatory fees and amortization of intangibles of purchased banks for 1994 and 1993 were due primarily to the acquisition of the Acquired Banks.
Other noninterest expense totaled $24.9 million in 1994, $23.7 million in 1993 and $17.3 million in 1992. The increase in 1994 was due solely to the Acquired Banks while the 1993 increase also included higher fees paid for various processing services.
INCOME TAXES
The Company income tax expense for 1994 was $22.6 million, compared to $20.1 million in 1993 and $15.7 million in 1992. The effective tax rate for each year was 32.08%, 32.87% and 28.57%, respectively. For 1993 and 1994, the federal statutory tax rate was 35%, compared to 34% in 1992. The primary differences between the Company effective tax rate and statutory rate for all three years relates principally to non-taxable interest income and an increase in nondeductible goodwill amortization in 1994 and 1993.
FINANCIAL CONDITION
LOANS
For the year ended December 31, 1994, the Company's average loans were $2.1 billion, compared to $1.8 billion in 1993 and $1.3 billion in 1992. This represents a 20% increase in average loans for 1994 over 1993 and a 34% increase for 1993 over 1992. Year end loan totals were $2.3 billion, $2.2 billion and $1.5 billion for 1994, 1993 and 1992, respectively. Average loans of the Acquired Banks were $456 million in 1994 and $321 million in 1993. Year end loans for the Acquired Banks were $434 million in 1994 and $489 million
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in 1993. Exclusive of the impact of the Acquired Banks, year end 1994 loans increased 10% over the level at year end 1993. This increase was the result of increased customer demand, fueled by an improved economy, and continued emphasis on business development efforts.
Table 6 presents an analysis of loans by type which shows there has been no significant increases in any specific loan category for year end 1994, except consumer loans. The majority of the growth in this loan segment has been the result of increases in indirect loans from automobile dealers at two of the Company's affiliates. Credit reviews of these portfolios indicate no excessive risk has been taken to achieve this growth.
At December 31, 1994, commercial real estate loans comprised 12.4% of total loans, compared to 12.9% at year end 1993. The largest component of this segment is loans secured by commercial property which totaled $218.9 million and $211.3 million at year end 1994 and 1993, respectively. The geographic mix of these loans is well diversified to the markets served by the Company's affiliate banks. Approximately 46% of this segment is secured by commercial property in the metropolitan Kansas City area. The Company's commercial real estate loans generally do not exceed a maximum loan to value ratio of 80% and for the most part the properties are owner-occupied. The Company keeps regular contact with these customers in order to monitor changes in the financial condition of the customer and the market. Generally these borrowers have an established relationship with the Company that includes credit and noncredit products.
TABLE 6: ANALYSIS OF LOANS BY TYPE
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LOAN QUALITY
The quality of the loan portfolio has always been an underlying strength of the Company. A measure of the effectiveness of credit risk management is the percentage of the loan portfolio that is classified as nonperforming. Nonperforming loans include nonaccrual loans and restructured loans. The Company's nonperforming loans totaled $5.3 million at December 31, 1994, representing only 0.2% of the loan portfolio, compared to $7.2 million and 0.3% one year earlier. The Company's nonperforming loans have not exceeded 0.5% of total loans in any of the last five years.
Nonperforming assets include foreclosed real estate with the nonaccrual and restructured loans. The Company's nonperforming asset ratio (nonperforming assets divided by loans plus foreclosed real estate) was 0.5% at December 31, 1994 and 0.7% at December 31, 1993.
Key factors of the Company's loan quality program are a sound credit policy combined with periodic and independent credit reviews. All affiliate banks operate under written loan policies. Credit decisions continue to be based on the borrower's cash flow position and the value of underlying collateral, as well as other relevant factors. Each bank is responsible for evaluating its loans by using a ranking system. In addition, the Company has an internal loan review staff that operates independent of the affiliate banks. This review team performs periodic examinations of each bank's loans for credit quality, documentation and loan administration.
Another means of ensuring loan quality is diversification. By keeping its loan portfolio diversified, the Company has avoided problems associated with undue concentrations of loans within particular industries. Commercial real estate loans comprise 12.4% of total loans, with a history of no significant losses. The Company has no significant exposure to highly leveraged transactions and has no foreign credits in its loan portfolio.
A loan is generally placed on nonaccrual status when payments are past due 90 days or more and 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. At year end 1994, $215,000 of interest due was not recorded as earned, compared to $210,000 for the prior year.
Certain loans are restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial condition of the respective borrowers. Management estimates that approximately $30,000 of additional interest would have been earned in 1994 if the terms of these loans were similar to other comparable loans. In certain instances, the Company continues to accrue interest on loans past due 90 days or more. Though the loan payments are delinquent, collection of interest and principal is expected to resume and sufficient collateral is believed to exist to protect the Company from significant loss. Consequently, management considers the ultimate collection of these loans to be reasonable and has recorded $54,000 of interest due as earned for 1994. The comparative figure for 1993 was $214,000.
In addition to the loans discussed above, management has identified through its loan ranking system $920,000 of potential problem loans. Though the loan payments are current, the borrowers' abilities to comply with the stated terms are questioned. Each of these loans is subject to ongoing management review, including current classification.
Other real estate that has been acquired through foreclosures has a carrying value of $5.4 million, which approximates market value. The largest portion of this is a property located in Kansas City. The remaining other real estate parcels are primarily located in Kansas.
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TABLE 7: LOAN QUALITY
-------- * Includes in-substance foreclosures.
SECURITIES
Effective for year end 1993, the Company adopted Financial Accounting Standards Board Statement 115, "Accounting for Certain Investments in Debt and Equity Securities."
At December 31, 1994, the Company had total securities of $2.7 billion, compared to $3.0 billion at year end 1993. Securities, which include available for sale and held to maturity securities, represented 48.4% of total earning assets at year end 1994, compared to 53.6% for 1993. The percentage breakdown of securities by classification for year end 1994 and 1993 was as follows: available for sale, 86% and 91%, respectively, and held to maturity, 14% and 9%, respectively.
The percentage increase in securities held to maturity was due to the purchase of high quality mortgage backed securities during the first quarter of 1994. The Company has the positive ability and intent to hold these securities until maturity. The remaining items in this classification are securities of state and political subdivisions.
The average life of the Company's securities portfolio was approximately 17 months at December 31, 1994, compared to 24 months at year end 1993. Included in Table 8 and on Table 9 is an analysis of the cost, fair value and average yield of the Company's securities available for sale and securities held to maturity.
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TABLE 8: SECURITIES AVAILABLE FOR SALE
OTHER EARNING ASSETS
Federal funds transactions essentially are overnight loans between financial institutions. The net sold position at year end 1994 was $149.6 million, compared to $49.8 million for year end 1993. During 1994, the Company was a net purchaser of federal funds and this funding source averaged $60.1 million. During 1993, the Company was a net seller of federal funds, which averaged $36.3 million.
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The Investment Banking Division of the Company's principal affiliate bank buys and sells federal funds as agent for nonaffiliated banks. Due to the agency arrangement, these transactions do not appear on the balance sheet and averaged $568.6 million in 1994 and $776.8 million in 1993.
The Investment Banking Division also maintains an active securities trading inventory. The average holdings in the securities trading inventory in 1994 were $56.5 million, compared to $58.1 million in 1993, and were recorded at market value.
TABLE 10: MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
DEPOSITS AND BORROWED FUNDS
Interest-bearing liabilities averaged $4.3 billion in 1994, compared to $3.9 billion in 1993. The increase was primarily the result of the acquisition of the Acquired Banks which had average interest-bearing liabilities of $880 million and $594 million for 1994 and 1993, respectively. Interest-bearing liabilities were $4.4 billion at both year end 1994 and 1993.
Interest-bearing deposits averaged $3.6 billion in 1994, compared to $3.3 billion in 1993. Year end totals were $3.6 billion for 1994 and $3.7 billion for 1993. Interest-bearing demand and savings deposits, the largest portion of the Company's deposit base, represented 47.1% of total average deposits in 1994, compared to 45.9% for 1993. Time deposits have decreased as a percentage of total deposits in each of the last four years. Interest rate uncertainties have caused some customers to avoid investing in products with longer-term maturities.
Average noninterest-bearing demand deposits represented 28.8% of total average deposits for 1994, compared to 27.9% for 1993. This change resulted from increased balances from custody processing, corporate and trust customers.
Repurchase agreements averaged $498.4 million in 1994, compared to $515.9 million in 1993. Repurchase agreements are transactions involving investment funds that are exchanged for securities to repurchase the same or similar issues at an agreed-upon price and date. The Investment Banking Division buys and sells repurchase agreements as principal for nonaffiliated banks. These agreements are reflected on the balance sheet as both an asset ("resell agreement") and a corresponding liability ("repurchase agreement"), since such funds are purchased and then sold to approved dealer banks and primary dealers. The amount of repurchase agreements handled in this manner was $244.7 million at December 31, 1994, compared to $263.2 million one year earlier.
At year-end 1994, the Company had repurchase agreements of $416.5 million for its own funding needs, compared to $335.7 million at December 31, 1993.
The Company's other short-term borrowings consist primarily of U.S. Treasury demand notes. These demand notes represent treasury tax deposits remitted to the Federal Reserve Bank other than daily. The rate paid on these funds is 0.25% below the weekly average federal funds rate.
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The Company's long-term borrowings consist of four senior note issues and some installment notes. The Company's ratio of long-term debt to total capital, a measure of debt capacity, was 8.31% at December 31, 1994, which compares very favorably with its peer group. The Company borrowed $25.0 million in 1993 under a medium-term note program to fund the cash portions of the Kansas bank acquisitions. Of the total, $10.0 million of notes were issued with a seven- year maturity at 6.81% and $15.0 million of notes were issued with a 10-year maturity at 7.30%.
TABLE 11: ANALYSIS OF AVERAGE DEPOSITS
TABLE 12: SHORT-TERM DEBT
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CAPITAL
The Company places a significant emphasis on the maintenance of strong capital which helps safeguard our customers' funds, promotes investor confidence, provides access to funding sources under favorable terms, and enhances the ability to capitalize on business growth and acquisition opportunities. Capital is managed for each subsidiary based upon their respective risks and growth opportunities, as well as regulatory requirements.
At December 31, 1994, shareholders' equity was $557.3 million, compared to $586.6 million one year earlier. This 5.0% decrease was the result of recording an unrealized loss on securities available for sale of $35.2 million, compared to an unrealized gain on these securities of $14.3 million at year end 1993. Excluding the effect of the mark to market adjustment on securities available for sale, shareholders' equity at December 31, 1994, increased by 3.5% from the previous year. Also contributing to the decrease in shareholders' equity for 1994 was the purchase of 396,984 shares of Company stock for treasury purposes. During the year, management had the opportunity to repurchase shares of the Company's stock at a price which, in management's opinion, would enhance overall shareholder value. Depending on availability, price and cash flow requirements, management will continue to consider treasury stock purchases from time to time.
In April, 1994, in order to reduce regulatory expenses, shareholders approved a reduction in the par value of the Company's common stock from $12.50 per share to $1.00 per share.
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. A financial institution's total capital is required to equal 8% of risk-weighted assets. At least half of that 8% must consist of Tier 1 core capital, and the remainder may be Tier 2 supplementary capital. 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. Due to the Company's high level of core capital and substantial portion of earning assets invested in riskless government securities, the Tier 1 capital ratio of 16.76% and Total capital ratio of 17.85% substantially exceed the regulatory minimums.
DIVIDENDS
The Company's dividend payout ratio was 30.52% in 1994, compared to 31.20% in 1993 and 28.19% in 1992. On July 1, 1994, the Company distributed a 10% stock dividend to shareholders. All per share data has been restated to give effect to this stock dividend for all periods presented.
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TABLE 13: RISK-BASED CAPITAL
The table below computes risk-based capital in accordance with current regulatory guidelines. These guidelines as of December 31, 1994, excluded net unrealized gains or losses on securities available for sale from the computation of regulatory capital and the related risk-based capital ratios.
-------- *Qualifying amounts.
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ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
Due to the nature of the Company's business, some degree of interest rate risk is inherent and appropriate. Management's objective in this area is to limit the level of earnings exposure arising from interest rate movements. This analysis is related to liquidity due to the impact of maturing assets and liabilities. Many of the Company's financial instruments reprice prior to maturity.
Interest rate sensitivity is measured by "gaps", which is the difference between interest earning assets and interest-bearing liabilities which reprice or mature within a specific time interval. A positive gap indicates that interest earning assets exceed interest-bearing liabilities within a given interval. A positive gap position results in increased net interest income when rates increase and the opposite when rates decline.
Management attempts to structure the balance sheet to provide for the repricing of approximately equal amounts of assets and liabilities within specific time intervals. Table 15 is a static gap analysis which presents the Company's assets and liabilities based on their repricing or maturity characteristics. This analysis shows that for the 180 day interval beginning January 1, 1995, the Company is in a negative gap position as liabilities maturing or repricing during this time exceed assets. At the one-year period the Company has a positive cumulative gap as the ratio of earning assets to paying liabilities is 1.12%, compared to 1.02% at December 31, 1993.
In management's opinion the static gap report tends to overstate the interest rate risk of the Company due to certain factors which are not measured on a static or snapshot analysis. A static gap analysis assumes that all liabilities reprice based on their contractual term. However, the effect of rate increases on core retail deposits, approximately 53% of total deposits, tends to lag the change in market rates. This lag generally lessens the negative impact of rising interest rates when the Company has more liabilities repricing than assets. In addition, a static analysis ignores the impact of changes in the mix and volume of interest-bearing assets and liabilities. During 1994, the Company's loans increased as a percentage of total earning assets and noninterest-bearing demand deposit accounts represented a larger component of total funding sources.
The Company will continue to manage its interest rate risk using static gap analysis along with other tools which help measure the impact of various interest rate scenarios. The Company does not use off-balance-sheet hedges or swaps to manage this risk.
TABLE 14: RATE SENSITIVITY AND MATURITY OF LOANS
The following table presents the rate sensitivity of certain loans maturing after 1995, compared with the total loan portfolio as of December 31, 1994. Of the $1,205,622,000 of loans due after 1995, $702,841,000 are to individuals for the purchase of residential dwellings and other consumer goods. The remaining $502,781,000 is for all other purposes and reflects maturities of $376,170,000 in 1996 through 1999 and $126,611,000 after 1999.
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TABLE 15: INTEREST RATE SENSITIVITY ANALYSIS
-------- * Includes securities available for sale based on scheduled maturity dates.
LIQUIDITY
Liquidity represents the Company's ability to meet financial commitments through the maturity and sale of existing assets or availability of additional funds. The primary source of liquidity for the Company is regularly scheduled maturities of assets along with$2.3 billion of high-quality securities available for sale. The liquidity of the Company and its affiliate banks is also enhanced by its activity in the federal funds market and by its core deposits.
The parent company's cash requirements consist primarily of dividends to shareholders, debt service and treasury stock purchases. Management fees and dividends received from subsidiary banks traditionally have been sufficient to satisfy these requirements and are expected to be in the future.
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TABLE 16: SUMMARY OF OPERATING RESULTS BY QUARTER (UNAUDITED)
-------- Per share information restated for the 10% stock dividend paid July 1, 1994.
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UMB FINANCIAL CORPORATION
FIVE-YEAR AVERAGE BALANCE SHEETS/YIELDS AND RATES
-------- (1) Interest income and yields are stated on a fully tax-equivalent (FTE) basis, using a rate of 34% for 1990 through 1992 and 35% for 1993 and 1994. The tax-equivalent interest income and yields give effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets. Rates earned/paid may not compute to the rates shown due to presentation in millions. (2) Loan fees and income from loans on nonaccrual status are included in loan income.
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UMB FINANCIAL CORPORATION
SELECTED FINANCIAL DATA OF AFFILIATE BANKS
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