UNITED STATESUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ Quarterly |
For the quarterly period ended September 30 2017, 2019
ORor
☐ | Transition |
For the transition period from _____________ to _______________.Commission File Number: 1-13661
Commission file number 1-13661
STOCK YARDS BANCORP, INC.YARDSBANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky | 61-1137529 | ||
(State or other jurisdiction of | |||
incorporation or organization) | (I.R.S. Employer Identification No.) |
1040 East Main Street, Louisville, Kentucky | 40206 | |
(Address of principal executive offices) | (Zip Code) |
1040 East Main Street, Louisville, Kentucky 40206
(Address of principal executive offices including zip code)
(502) 582-2571
(Registrant’sRegistrant’s telephone number, including area code)code: (502) 582-2571
Not ApplicableSecurities registered pursuant to Section 12(b) of the Act:
(Former name, former address and former fiscal year, if changed since last report)
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, no par value | SYBT | The NASDAQ Stock Market, LLC |
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”,filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:Act.
Large accelerated filer ☒ |
| Accelerated filer ☐ |
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Non-accelerated filer |
| Smaller reporting company | ☐ | |||
Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)Act).
Yes ☐ Yes ☒ No ☑
The number of shares outstanding of the registrant’sregistrant’s Common Stock, no par value, outstanding as of October 26, 201731, 2019, was 22,670,610.22,597,716.
Stock Yards Bancorp, inc. and subsidiary
IndexTABLE OF CONTENTS
Stock Yards Bancorp, inc. and subsidiary
IndexPART I – FINANCIAL INFORMATION
PART I – FINANCIAL INFORMATION
Glossary of Acronyms and Terms
The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
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FDIC | Federal Deposit Insurance Corporation | |||||||||
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| Available for Sale | FFP | Federal | |||||||
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OAEM | Other Assets Especially Mentioned | |||||||||
Allowance | Allowance for Loan and Lease Losses | FFS | Federal Funds Sold | OCI | Other Comprehensive Income | |||||
AOCI | Accumulated Other Comprehensive Income | FFTR | Federal Funds Target Rate | OREO | Other Real Estate Owned | |||||
ASC | Accounting Standards Codification | FHA | Federal Housing Authority | OTTI | Other than Temporary Impairment | |||||
ASU | Accounting Standards Update | FHLB | Federal Home Loan Bank of Cincinnati | PCI | Purchased Credit Impaired | |||||
AUM | Assets Under Management | FHLMC | Federal Home Loan Mortgage Corporation | Prime | The Wall Street Journal Prime Interest Rate | |||||
Bancorp / the Company | Stock Yards Bancorp, Inc. | FICA | Federal Insurance Contributions Act | Provision | Provision for Loan and Lease Losses | |||||
Bank / SYB&T | Stock Yards Bank & Trust Company | FNMA | Federal National Mortgage Association | PSU | Performance Stock Unit | |||||
BOLI | Bank Owned Life Insurance | FRB | Federal Reserve Bank | ROA | Return on Average Assets | |||||
bps | Basis Point - 1/100th of one percent | FTE | Fully Tax Equivalent | ROE | Return on Average Equity | |||||
C&D | Construction and Development | GAAP | Generally Accepted Accounting Principles in the United States | RSA | Restricted Stock Award | |||||
C&I | Commercial and Industrial | GNMA | Government National Mortgage Association | RSU | Restricted Stock Unit | |||||
CD | Certificate of Deposit | HB | House Bill | SAR | Stock Appreciation Right | |||||
CECL | Current Expected Credit Loss | HELOC | Home Equity Line of Credit | SEC | Securities and Exchange Commission | |||||
| Chief Executive Officer | KBST | King Bancorp Statutory Trust I | SSUAR | Securities Sold Under Agreements to Repurchase | |||||
CFO | Chief Financial Officer | KSB | King Bancorp, Inc. and King Southern Bank | TBOC | THE Bank Oldham County | |||||
COSO | Committee of Sponsoring Organizations | LIBOR | London Interbank Offered Rate | TCE | Tangible Common Equity | |||||
CRA | Community Reinvestment Act | Loans | Loans and Leases | TDR | Troubled Debt | |||||
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| MBS | Mortgage Backed Securities | TPS | Trust Preferred Securities | |||||
EPS | Earnings Per Share | MSA | Metropolitan Statistical Area | VA | U.S. Department of Veterans Affairs | |||||
ETR | Effective Tax Rate | MSRs | Mortgage Servicing Rights | WM&T | Wealth Management and Trust | |||||
EVP | Executive Vice President | NA | Not Applicable | |||||||
FASB | Financial Accounting Standards Board | NIM | Net Interest Margin |
Stock Yards Bancorp, inc. and subsidiary
CONSOLIDATED BALANCE SHEETS |
September 30, 2019 (unaudited) and December 31, 2018 |
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(In thousands, except share data) |
September 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2017 | 2016 | 2019 | 2018 | ||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | 47,700 | $ | 39,709 | $ | 68,107 | $ | 51,892 | ||||||||
Federal funds sold and interest bearing deposits | 81,378 | 8,264 | ||||||||||||||
Federal funds sold and interest bearing due from banks | 68,107 | 147,047 | ||||||||||||||
Cash and cash equivalents | 129,078 | 47,973 | 136,214 | 198,939 | ||||||||||||
Mortgage loans held for sale | 5,459 | 3,213 | 6,329 | 1,675 | ||||||||||||
Securities available-for-sale (amortized cost of $571,953 in 2017 and $571,936 in 2016) | 571,522 | 570,074 | ||||||||||||||
Federal Home Loan Bank stock and other securities | 7,666 | 6,347 | ||||||||||||||
Loans | 2,335,120 | 2,305,375 | ||||||||||||||
Less allowance for loan losses | 24,948 | 24,007 | ||||||||||||||
Net loans | 2,310,172 | 2,281,368 | ||||||||||||||
Securities available for sale | 375,601 | 436,995 | ||||||||||||||
Federal Home Loan Bank stock, at cost | 11,316 | 10,370 | ||||||||||||||
Loans and leases | 2,856,664 | 2,548,171 | ||||||||||||||
Allowance for loan and lease losses | 26,877 | 25,534 | ||||||||||||||
Net loans and leases | 2,829,787 | 2,522,637 | ||||||||||||||
Premises and equipment, net | 41,498 | 42,384 | 62,386 | 44,764 | ||||||||||||
Bank owned life insurance | 31,854 | 31,867 | 32,376 | 32,273 | ||||||||||||
Accrued interest receivable | 8,162 | 6,878 | 8,581 | 8,360 | ||||||||||||
Goodwill | 12,593 | 682 | ||||||||||||||
Core deposit intangible | 2,373 | 1,057 | ||||||||||||||
Other assets | 50,502 | 49,377 | 56,370 | 45,172 | ||||||||||||
Total assets | $ | 3,155,913 | $ | 3,039,481 | $ | 3,533,926 | $ | 3,302,924 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Liabilities | ||||||||||||||||
Deposits: | ||||||||||||||||
Non-interest bearing | $ | 676,824 | $ | 680,156 | $ | 795,793 | $ | 711,023 | ||||||||
Interest bearing | 1,805,142 | 1,840,392 | 2,150,520 | 2,083,333 | ||||||||||||
Total deposits | 2,481,966 | 2,520,548 | 2,946,313 | 2,794,356 | ||||||||||||
Securities sold under agreements to repurchase | 71,863 | 67,595 | 33,172 | 36,094 | ||||||||||||
Federal funds purchased and other short-term borrowings | 161,961 | 47,374 | ||||||||||||||
Federal funds purchased | 9,957 | 10,247 | ||||||||||||||
Federal Home Loan Bank advances | 50,110 | 51,075 | 81,985 | 48,177 | ||||||||||||
Accrued interest payable | 212 | 144 | 712 | 762 | ||||||||||||
Other liabilities | 55,546 | 38,873 | 65,676 | 46,788 | ||||||||||||
Total liabilities | 2,821,658 | 2,725,609 | 3,137,815 | 2,936,424 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Commitments and contingent liabilities (note 15) | — | — | ||||||||||||||
Stockholders’ equity | ||||||||||||||||
Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding | - | - | — | — | ||||||||||||
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 22,669,339 and 22,617,098 shares in 2017 and 2016, respectively | 36,424 | 36,250 | ||||||||||||||
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 22,597,000 and 22,749,000 shares in 2019 and 2018, respectively | 36,184 | 36,689 | ||||||||||||||
Additional paid-in capital | 30,681 | 26,682 | 34,607 | 36,797 | ||||||||||||
Retained earnings | 267,681 | 252,439 | 323,592 | 298,156 | ||||||||||||
Accumulated other comprehensive loss | (531 | ) | (1,499 | ) | ||||||||||||
Total stockholders’ equity | 334,255 | 313,872 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,155,913 | $ | 3,039,481 | ||||||||||||
Accumulated other comprehensive income (loss) | 1,728 | (5,142 | ) | |||||||||||||
Total stockholders’ equity | 396,111 | 366,500 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,533,926 | $ | 3,302,924 |
See accompanying notes to unaudited consolidated financial statements. |
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For three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest income: | ||||||||||||||||
Loans | $ | 25,401 | $ | 23,436 | $ | 73,812 | $ | 67,992 | ||||||||
Federal funds sold and interest bearing deposits | 388 | 95 | 798 | 395 | ||||||||||||
Mortgage loans held for sale | 48 | 66 | 145 | 185 | ||||||||||||
Securities – taxable | 2,003 | 2,047 | 6,173 | 6,325 | ||||||||||||
Securities – tax-exempt | 271 | 298 | 829 | 907 | ||||||||||||
Total interest income | 28,111 | 25,942 | 81,757 | 75,804 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 1,593 | 941 | 4,237 | 2,916 | ||||||||||||
Federal funds purchased and other short-term borrowing | 77 | 19 | 125 | 57 | ||||||||||||
Securities sold under agreements to repurchase | 33 | 38 | 100 | 100 | ||||||||||||
Federal Home Loan Bank advances | 244 | 184 | 715 | 552 | ||||||||||||
Total interest expense | 1,947 | 1,182 | 5,177 | 3,625 | ||||||||||||
Net interest income | 26,164 | 24,760 | 76,580 | 72,179 | ||||||||||||
Provision for loan losses | 150 | 1,250 | 1,650 | 2,500 | ||||||||||||
Net interest income after provision for loan losses | 26,014 | 23,510 | 74,930 | 69,679 | ||||||||||||
Non-interest income: | ||||||||||||||||
Wealth management and trust services | 5,025 | 4,800 | 15,272 | 14,219 | ||||||||||||
Service charges on deposit accounts | 2,522 | 2,544 | 7,368 | 6,952 | ||||||||||||
Bankcard transactions | 1,492 | 1,455 | 4,412 | 4,198 | ||||||||||||
Mortgage banking | 781 | 1,072 | 2,380 | 2,896 | ||||||||||||
Gain on call of securities available for sale | 31 | — | 31 | — | ||||||||||||
Securities brokerage | 551 | 558 | 1,584 | 1,539 | ||||||||||||
Bank owned life insurance | 204 | 216 | 964 | 657 | ||||||||||||
Other | 497 | 713 | 1,564 | 1,757 | ||||||||||||
Total non-interest income | 11,103 | 11,358 | 33,575 | 32,218 | ||||||||||||
Non-interest expenses: | ||||||||||||||||
Salaries and employee benefits | 12,983 | 12,048 | 39,244 | 36,214 | ||||||||||||
Net occupancy | 1,621 | 1,646 | 4,765 | 4,716 | ||||||||||||
Data processing | 1,920 | 1,747 | 5,909 | 5,172 | ||||||||||||
Furniture and equipment | 316 | 277 | 861 | 853 | ||||||||||||
FDIC insurance | 242 | 356 | 716 | 1,035 | ||||||||||||
Amortization of investments in tax credit partnerships | 616 | 1,015 | 1,847 | 3,046 | ||||||||||||
Other | 3,619 | 3,429 | 10,469 | 9,215 | ||||||||||||
Total non-interest expenses | 21,317 | 20,518 | 63,811 | 60,251 | ||||||||||||
Income before income taxes | 15,800 | 14,350 | 44,694 | 41,646 | ||||||||||||
Income tax expense | 4,096 | 3,883 | 11,597 | 11,235 | ||||||||||||
Net income | $ | 11,704 | $ | 10,467 | $ | 33,097 | $ | 30,411 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.52 | $ | 0.47 | $ | 1.47 | $ | 1.36 | ||||||||
Diluted | $ | 0.51 | $ | 0.46 | $ | 1.44 | $ | 1.34 | ||||||||
Average common shares: | ||||||||||||||||
Basic | 22,542 | 22,385 | 22,524 | 22,325 | ||||||||||||
Diluted | 22,964 | 22,803 | 22,984 | 22,711 |
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For the three and nine months ended September 30, |
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September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 11,704 | $ | 10,467 | $ | 33,097 | $ | 30,411 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Unrealized gains (losses) on securities available for sale: | ||||||||||||||||
Unrealized gains (losses) arising during the period, net of tax $29, ($616), $512, and $2,213, respectively | 56 | (1,147 | ) | 950 | 4,110 | |||||||||||
Reclassification adjustment for securities (gains) realized in income (net of tax of $(11), $0, $(11), and $0, respectively) | (20 | ) | — | (20 | ) | — | ||||||||||
Unrealized losses on hedging instruments: | ||||||||||||||||
Unrealized gains (losses) arising during the period, net of tax benefit of $23, $74, $21, ($162), respectively | 43 | 137 | 38 | (301 | ) | |||||||||||
Other comprehensive income (loss), net of tax | 79 | (1,010 | ) | 968 | 3,809 | |||||||||||
Comprehensive income | $ | 11,783 | $ | 9,457 | $ | 34,065 | $ | 34,220 |
Three months ended | Nine months ended | |||||||||||||||
(In thousands, except per share data) | September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Interest income: | ||||||||||||||||
Loans and leases | $ | 35,022 | $ | 30,359 | $ | 99,985 | $ | 86,877 | ||||||||
Federal funds sold and interest bearing due from banks | 566 | 373 | 2,129 | 804 | ||||||||||||
Mortgage loans held for sale | 41 | 42 | 121 | 121 | ||||||||||||
Securities available for sale | ||||||||||||||||
Taxable | 2,239 | 2,055 | 7,353 | 6,298 | ||||||||||||
Tax-exempt | 105 | 192 | 382 | 669 | ||||||||||||
Total interest income | 37,973 | 33,021 | 109,970 | 94,769 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 5,316 | 3,972 | 16,034 | 8,723 | ||||||||||||
Securities sold under agreements to repurchase | 26 | 55 | 79 | 122 | ||||||||||||
Federal funds purchased and other short-term borrowing | 52 | 245 | 176 | 728 | ||||||||||||
Federal Home Loan Bank advances | 509 | 228 | 1,154 | 692 | ||||||||||||
Subordinated debentures | - | — | 26 | — | ||||||||||||
Total interest expense | 5,903 | 4,500 | 17,469 | 10,265 | ||||||||||||
Net interest income | 32,070 | 28,521 | 92,501 | 84,504 | ||||||||||||
Provision for loan and lease losses | 400 | 735 | 1,000 | 2,705 | ||||||||||||
Net interest income after provision | 31,670 | 27,786 | 91,501 | 81,799 | ||||||||||||
Non-interest income: | ||||||||||||||||
Wealth management and trust services | 5,738 | 5,380 | 16,839 | 16,224 | ||||||||||||
Deposit service charges | 1,444 | 1,482 | 4,027 | 4,340 | ||||||||||||
Debit and credit card income | 2,102 | 1,759 | 6,014 | 4,956 | ||||||||||||
Treasury management fees | 1,264 | 1,151 | 3,623 | 3,311 | ||||||||||||
Mortgage banking income | 834 | 712 | 2,112 | 2,034 | ||||||||||||
Net investment product sales commissions and fees | 400 | 444 | 1,120 | 1,245 | ||||||||||||
Bank owned life insurance | 487 | 186 | 849 | 564 | ||||||||||||
Other | 1,035 | 312 | 2,045 | 1,096 | ||||||||||||
Total non-interest income | 13,304 | 11,426 | 36,629 | 33,770 | ||||||||||||
Non-interest expenses: | ||||||||||||||||
Compensation | 12,330 | 11,607 | 36,846 | 34,280 | ||||||||||||
Employee benefits | 2,908 | 2,501 | 8,458 | 7,646 | ||||||||||||
Net occupancy and equipment | 2,199 | 1,914 | 6,033 | 5,543 | ||||||||||||
Technology and communication | 1,841 | 1,595 | 5,462 | 4,910 | ||||||||||||
Debit and credit card processing | 662 | 588 | 1,880 | 1,733 | ||||||||||||
Marketing and business development | 732 | 740 | 2,260 | 2,191 | ||||||||||||
Postage, printing and supplies | 402 | 370 | 1,218 | 1,161 | ||||||||||||
Legal and professional | 524 | 501 | 2,581 | 1,498 | ||||||||||||
FDIC insurance | - | 238 | 486 | 718 | ||||||||||||
Amortization/impairment of investments in tax credit partnerships | 137 | - | 241 | 58 | ||||||||||||
Capital and deposit based taxes | 993 | 738 | 2,864 | 2,452 | ||||||||||||
Other | 1,229 | 989 | 3,731 | 2,754 | ||||||||||||
Total non-interest expenses | 23,957 | 21,781 | 72,060 | 64,944 | ||||||||||||
Income before income tax expense | 21,017 | 17,431 | 56,070 | 50,625 | ||||||||||||
Income tax expense | 3,783 | 3,555 | 6,652 | 9,766 | ||||||||||||
Net income | $ | 17,234 | $ | 13,876 | $ | 49,418 | $ | 40,859 | ||||||||
Net income per share, basic | $ | 0.76 | $ | 0.61 | $ | 2.18 | $ | 1.81 | ||||||||
Net income per share, diluted | $ | 0.76 | $ | 0.60 | $ | 2.16 | $ | 1.78 | ||||||||
Weighted average common shares: | ||||||||||||||||
Basic | 22,550 | 22,636 | 22,633 | 22,613 | ||||||||||||
Diluted | 22,810 | 22,968 | 22,901 | 22,956 |
See accompanying notes to unaudited consolidated financial statements. |
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Common stock | Additional | other | ||||||||||||||||||||||
Number of | paid-in | Retained | comprehensive | |||||||||||||||||||||
shares | Amount | capital | earnings | income (loss) | Total | |||||||||||||||||||
Balance December 31, 2015 | 14,919 | $ | 10,616 | $ | 44,180 | $ | 231,091 | $ | 632 | $ | 286,519 | |||||||||||||
Net income | - | - | - | 30,411 | - | 30,411 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 3,809 | 3,809 | ||||||||||||||||||
Stock compensation expense | - | - | 1,646 | - | - | 1,646 | ||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax | 159 | 527 | 3,404 | (2,903 | ) | - | 1,028 | |||||||||||||||||
3 for 2 stock split | 7,494 | 24,956 | (24,956 | ) | - | - | - | |||||||||||||||||
Cash dividends, $0.53 per share | - | - | - | (11,843 | ) | - | (11,843 | ) | ||||||||||||||||
Shares cancelled | (9 | ) | (31 | ) | (224 | ) | 255 | - | - | |||||||||||||||
Balance September 30, 2016 | 22,563 | $ | 36,068 | $ | 24,050 | $ | 247,011 | $ | 4,441 | $ | 311,570 | |||||||||||||
Balance December 31, 2016 | 22,617 | $ | 36,250 | $ | 26,682 | $ | 252,439 | $ | (1,499 | ) | $ | 313,872 | ||||||||||||
Net income | - | - | - | 33,097 | - | 33,097 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 968 | 968 | ||||||||||||||||||
Stock compensation expense | - | - | 2,012 | - | - | 2,012 | ||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | 59 | 198 | 2,142 | (4,669 | ) | - | (2,329 | ) | ||||||||||||||||
Cash dividends, $0.59 per share | - | - | - | (13,365 | ) | - | (13,365 | ) | ||||||||||||||||
Shares cancelled | (7 | ) | (24 | ) | (155 | ) | 179 | - | - | |||||||||||||||
Balance September 30, 2017 | 22,669 | $ | 36,424 | $ | 30,681 | $ | 267,681 | $ | (531 | ) | $ | 334,255 |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income | $ | 17,234 | $ | 13,876 | $ | 49,418 | $ | 40,859 | ||||||||
Other comprehensive income: | ||||||||||||||||
Change in unrealized gain (loss) on available for sale debt securities | 946 | (2,068 | ) | 9,392 | (8,392 | ) | ||||||||||
Change in fair value of derivatives used in cash flow hedges | (59 | ) | 51 | (589 | ) | 543 | ||||||||||
Total other comprehensive income (loss), before income tax | 887 | (2,017 | ) | 8,803 | (7,849 | ) | ||||||||||
Tax effect | 225 | (425 | ) | 1,933 | (1,649 | ) | ||||||||||
Total other comprehensive income (loss), net of tax | 662 | (1,592 | ) | 6,870 | (6,200 | ) | ||||||||||
Comprehensive income | $ | 17,896 | $ | 12,284 | $ | 56,288 | $ | 34,659 |
See accompanying notes to unaudited consolidated financial statements. |
9+
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) |
Nine months ended September 30, 2019 and 2018 with quarterly subtotals |
Accumulated | ||||||||||||||||||||||||
Common stock | Additional | other | Total | |||||||||||||||||||||
Number of | paid-in | Retained | comprehensive | stockholders' | ||||||||||||||||||||
(In thousands, except per share data) | shares | Amount | capital | earnings | income (loss) | equity | ||||||||||||||||||
Balance, January 1, 2019 | 22,749 | $ | 36,689 | $ | 36,797 | $ | 298,156 | $ | (5,142 | ) | $ | 366,500 | ||||||||||||
Activity for three months ended March 31, 2019: | ||||||||||||||||||||||||
Net income | — | — | — | 15,641 | — | 15,641 | ||||||||||||||||||
Net change in accumulated other comprehensive income | — | — | — | — | 2,629 | 2,629 | ||||||||||||||||||
Stock compensation expense | — | — | 863 | — | — | 863 | ||||||||||||||||||
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations | 74 | 245 | 2,254 | (4,452 | ) | — | (1,953 | ) | ||||||||||||||||
Cash dividends declared, $0.25 per share | — | — | — | (5,686 | ) | — | (5,686 | ) | ||||||||||||||||
Balance, March 31, 2019 | 22,823 | $ | 36,934 | $ | 39,914 | $ | 303,659 | $ | (2,513 | ) | $ | 377,994 | ||||||||||||
Activity for three months ended June 30, 2019: | ||||||||||||||||||||||||
Net income | — | — | — | 16,543 | — | 16,543 | ||||||||||||||||||
Net change in accumulated other comprehensive income | — | — | — | — | 3,579 | 3,579 | ||||||||||||||||||
Stock compensation expense | — | — | 993 | — | — | 993 | ||||||||||||||||||
Common stock repurchased | (107 | ) | (357 | ) | (3,308 | ) | — | — | (3,665 | ) | ||||||||||||||
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations | 5 | 19 | 182 | (363 | ) | — | (162 | ) | ||||||||||||||||
Cash dividends declared, $0.26 per share | — | — | — | (5,917 | ) | — | (5,917 | ) | ||||||||||||||||
Shares cancelled | — | — | (5 | ) | 5 | — | — | |||||||||||||||||
Balance, June 30, 2019 | 22,721 | $ | 36,596 | $ | 37,776 | $ | 313,927 | $ | 1,066 | $ | 389,365 | |||||||||||||
Activity for three months ended September 30, 2019: | ||||||||||||||||||||||||
Net income | — | — | — | 17,234 | — | 17,234 | ||||||||||||||||||
Net change in accumulated other comprehensive income | — | — | — | — | 662 | 662 | ||||||||||||||||||
Stock compensation expense | — | — | 876 | — | — | 876 | ||||||||||||||||||
Common stock repurchased | (152 | ) | (504 | ) | (4,995 | ) | — | — | (5,499 | ) | ||||||||||||||
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations | 29 | 97 | 994 | (1,744 | ) | — | (653 | ) | ||||||||||||||||
Cash dividends declared, $0.26 per share | — | — | — | (5,874 | ) | — | (5,874 | ) | ||||||||||||||||
Shares cancelled | (1 | ) | (5 | ) | (44 | ) | 49 | — | — | |||||||||||||||
Balance, September 30, 2019 | 22,597 | $ | 36,184 | $ | 34,607 | $ | 323,592 | $ | 1,728 | $ | 396,111 |
See accompanying notes to unaudited consolidated financial statements. |
(continued) |
Accumulated | ||||||||||||||||||||||||
Common stock | Additional | other | Total | |||||||||||||||||||||
Number of | paid-in | Retained | comprehensive | stockholders' | ||||||||||||||||||||
(In thousands, except per share data) | shares | Amount | capital | earnings | loss | Total | ||||||||||||||||||
Balance, January 1, 2018 | 22,679 | $ | 36,457 | $ | 31,924 | $ | 267,193 | $ | (1,930 | ) | $ | 333,644 | ||||||||||||
Activity for three months ended March 31, 2018: | ||||||||||||||||||||||||
Reclassification adjustment under | ||||||||||||||||||||||||
Accounting Standards Update 2018-02 | — | — | — | 506 | (506 | ) | — | |||||||||||||||||
Net income | — | — | — | 13,404 | — | 13,404 | ||||||||||||||||||
Net change in accumulated other comprehensive income | — | — | — | — | (3,408 | ) | (3,408 | ) | ||||||||||||||||
Stock compensation expense | — | — | 823 | — | — | 823 | ||||||||||||||||||
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations | 52 | 174 | 205 | (1,914 | ) | — | (1,535 | ) | ||||||||||||||||
Cash dividends declared, $0.23 per share | — | — | — | (5,226 | ) | — | (5,226 | ) | ||||||||||||||||
Shares cancelled | (1 | ) | (4 | ) | (35 | ) | 39 | — | — | |||||||||||||||
Balance, March 31, 2018 | 22,730 | $ | 36,627 | $ | 32,917 | $ | 274,002 | $ | (5,844 | ) | $ | 337,702 | ||||||||||||
Activity for three months ended June 30, 2018: | ||||||||||||||||||||||||
Net income | — | — | — | 13,579 | — | 13,579 | ||||||||||||||||||
Net change in accumulated other comprehensive income | — | — | — | — | (1,200 | ) | (1,200 | ) | ||||||||||||||||
Stock compensation expense | — | — | 1,212 | — | — | 1,212 | ||||||||||||||||||
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations | 17 | 57 | 618 | (1,226 | ) | — | (551 | ) | ||||||||||||||||
Cash dividends declared, $0.23 per share | — | — | — | (5,227 | ) | — | (5,227 | ) | ||||||||||||||||
Shares cancelled | (1 | ) | (4 | ) | (32 | ) | 36 | — | — | |||||||||||||||
Balance, June 30, 2018 | 22,746 | $ | 36,680 | $ | 34,715 | $ | 281,164 | $ | (7,044 | ) | $ | 345,515 | ||||||||||||
Activity for three months ended September 30, 2018: | ||||||||||||||||||||||||
Net income | — | — | — | 13,876 | — | 13,876 | ||||||||||||||||||
Net change in accumulated other comprehensive income | — | — | — | — | (1,592 | ) | (1,592 | ) | ||||||||||||||||
Stock compensation expense | — | — | 888 | — | — | 888 | ||||||||||||||||||
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations | 2 | 5 | 56 | (84 | ) | — | (23 | ) | ||||||||||||||||
Cash dividends declared, $0.25 per share | — | — | — | (5,684 | ) | — | (5,684 | ) | ||||||||||||||||
Shares cancelled | (2 | ) | (7 | ) | (61 | ) | 68 | — | — | |||||||||||||||
Balance, September 30, 2018 | 22,746 | $ | 36,678 | $ | 35,598 | $ | 289,340 | $ | (8,636 | ) | $ | 352,980 |
See accompanying notes to unaudited consolidated financial statements. |
CONSOLIDATED STATEMENTS OF CASHFLOWS (Unaudited) |
For the nine months ended September 30, |
(In thousands) | 2019 | 2018 | ||||||
Operating activities: | ||||||||
Net income | $ | 49,418 | $ | 40,859 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan and lease losses | 1,000 | 2,705 | ||||||
Depreciation, amortization and accretion, net | 2,969 | 3,956 | ||||||
Deferred income tax (benefit) expense | (4,924 | ) | (490 | ) | ||||
Gain on sales of mortgage loans held for sale | (1,251 | ) | (1,182 | ) | ||||
Origination of mortgage loans held for sale | (69,983 | ) | (58,963 | ) | ||||
Proceeds from sale of mortgage loans held for sale | 66,580 | 60,576 | ||||||
Bank owned life insurance income | (849 | ) | (564 | ) | ||||
Loss on the disposal of premises and equipment | 6 | 8 | ||||||
Income on other investments | (142 | ) | - | |||||
Gain on the sale of other real estate owned | (63 | ) | (109 | ) | ||||
Stock compensation expense | 2,732 | 2,923 | ||||||
Excess tax benefits from share-based compensation arrangements | (712 | ) | (527 | ) | ||||
Net change in accrued interest receivable and other assets | (7,296 | ) | 2,554 | |||||
Net change in accrued interest payable and other liabilities | 2,169 | (3,466 | ) | |||||
Net cash provided by operating activities | 39,654 | 48,280 | ||||||
Investing activities: | ||||||||
Purchases of securities available for sale | (442,220 | ) | (599,830 | ) | ||||
Proceeds from sales of securities available for sale | 12,427 | — | ||||||
Proceeds from maturities and paydowns of securities available for sale | 513,906 | 614,926 | ||||||
Purchase of Federal Home Loan Bank stock | — | (2,724 | ) | |||||
Proceeds from redemption of Federal Home Loan Bank stock | 591 | — | ||||||
Proceeds from redemption of Federal Reserve Bank stock | 490 | — | ||||||
Proceeds from redemption of interest bearing due from banks | 1,761 | — | ||||||
Net change in loans | (142,108 | ) | (128,996 | ) | ||||
Purchases of premises and equipment | (4,179 | ) | (4,917 | ) | ||||
Proceeds from sales of premises and equipment | 2,561 | 230 | ||||||
Proceeds from surrender of acquired bank bank owned life insurance | 3,431 | — | ||||||
Proceeds from bank owned life insurance mortality benefit | 909 | — | ||||||
Other investment activities | (2,766 | ) | (2,571 | ) | ||||
Proceeds from sales of other real estate owned | 868 | 2,860 | ||||||
Cash for acquisition, net of cash acquired | (24,684 | ) | — | |||||
Net cash used in investing activities | (79,013 | ) | (121,022 | ) | ||||
Financing activities: | ||||||||
Net change in deposits | 26,342 | 19,743 | ||||||
Net change in securities sold under agreements to repurchase and federal funds purchased | (4,778 | ) | 53,402 | |||||
Proceeds from Federal Home Loan Bank advances | 90,000 | 90,000 | ||||||
Repayments of Federal Home Loan Bank advances | (99,620 | ) | (90,958 | ) | ||||
Repayment of acquired bank holding company line of credit | (2,300 | ) | — | |||||
Redemption of acquired bank subordinated debentures | (3,609 | ) | — | |||||
Repurchase of common stock | (9,164 | ) | — | |||||
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations | (2,768 | ) | (2,109 | ) | ||||
Cash dividends paid | (17,469 | ) | (16,104 | ) | ||||
Net cash provided by (used in) financing activities | (23,366 | ) | 53,974 | |||||
Net change in cash and cash equivalents | (62,725 | ) | (18,768 | ) | ||||
Cash and cash equivalents at beginning of period | 198,939 | 139,248 | ||||||
Cash and cash equivalents at end of period | $ | 136,214 | $ | 120,480 |
(continued) |
CONSOLIDATED STATEMENTS OF CASHFLOWS (continued) (Unaudited) |
|
2017 | 2016 | |||||||
Operating activities: | ||||||||
Net income | $ | 33,097 | $ | 30,411 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,650 | 2,500 | ||||||
Depreciation, amortization and accretion, net | 6,848 | 8,016 | ||||||
Deferred income tax provision | (1,811 | ) | (320 | ) | ||||
Gain on call of securities available for sale | (31 | ) | — | |||||
Gain on sales of mortgage loans held for sale | (1,453 | ) | (1,825 | ) | ||||
Origination of mortgage loans held for sale | (74,857 | ) | (91,195 | ) | ||||
Proceeds from sale of mortgage loans held for sale | 74,064 | 93,861 | ||||||
Bank owned life insurance income | (964 | ) | (657 | ) | ||||
Loss on the disposal of premises and equipment | - | 163 | ||||||
(Gain) on the sale of foreclosed assets | (39 | ) | (382 | ) | ||||
Stock compensation expense | 2,012 | 1,646 | ||||||
Excess tax benefits from share-based compensation arrangements | (1,353 | ) | (963 | ) | ||||
Decrease in accrued interest receivable and other assets | (5,651 | ) | (6,145 | ) | ||||
Increase in accrued interest payable and other liabilities | 18,062 | 14,253 | ||||||
Net cash provided by operating activities | 49,574 | 49,363 | ||||||
Investing activities: | ||||||||
Purchases of securities available for sale | (422,190 | ) | (327,711 | ) | ||||
Proceeds from sale of securities available for sale | - | - | ||||||
Proceeds from maturities of securities available for sale | 420,179 | 355,943 | ||||||
Purchase of Federal Home Loan Bank stock | (1,319 | ) | - | |||||
Net increase in loans | (30,454 | ) | (191,793 | ) | ||||
Purchases of premises and equipment | (1,733 | ) | (5,853 | ) | ||||
Proceeds from mortality benefit of bank owned life insurance | 970 | - | ||||||
Proceeds from sale of foreclosed assets | 2,432 | 1,403 | ||||||
Net cash used in investing activities | (32,115 | ) | (168,011 | ) | ||||
Financing activities: | ||||||||
Net (decrease) increase in deposits | (38,582 | ) | 18,895 | |||||
Net increase in securities sold under agreements to repurchase and federal funds purchased | 118,855 | 56,699 | ||||||
Proceeds from Federal Home Loan Bank advances | 90,000 | 199,000 | ||||||
Repayments of Federal Home Loan Bank advances | (90,965 | ) | (191,102 | ) | ||||
Proceeds (used for) and received from settlement of stock awards | (216 | ) | 1,599 | |||||
Excess tax benefits from share-based compensation arrangements | - | 963 | ||||||
Common stock repurchases | (2,113 | ) | (1,534 | ) | ||||
Cash dividends paid | (13,333 | ) | (11,812 | ) | ||||
Net cash provided by financing activities | 63,646 | 72,708 | ||||||
Net increase (decrease) in cash and cash equivalents | 81,105 | (45,940 | ) | |||||
Cash and cash equivalents at beginning of period | 47,973 | 103,833 | ||||||
Cash and cash equivalents at end of period | $ | 129,078 | $ | 57,893 | ||||
Supplemental cash flow information: | ||||||||
Income tax payments | $ | 11,063 | $ | 9,190 | ||||
Cash paid for interest | 5,109 | 3,636 | ||||||
Supplemental non-cash activity: | ||||||||
Transfers from loans to foreclosed assets | $ | - | $ | 1,522 |
(In thousands) | 2019 | 2018 | ||||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Income tax payments, net of refunds | $ | 9,281 | $ | 5,512 | ||||
Cash paid for interest | 17,519 | 9,816 | ||||||
Supplemental non-cash activity: | ||||||||
Initital recognition of right-of-use lease assets | $ | 16,747 | $ | — | ||||
Initital recognition operating lease liabilities | 18,067 | — | ||||||
Transfers from loans to real estate acquired in settlement of loans | — | 1,715 | ||||||
Liabilities assumed in conjunction with King Bancorp acquisition: | ||||||||
Fair value of assets acquired | $ | 204,613 | $ | — | ||||
Cash paid in acqusition | 28,000 | — | ||||||
Liabilities assumed | $ | 176,613 | $ | — |
See accompanying notes to unaudited consolidated financial statements. |
Stock Yards Bancorp, inc. and subsidiaryNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
| Basis of Presentation and Summary of Significant Accounting Policies |
The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles (US GAAP) for complete financial statements. The consolidated unaudited financial statements
Basis of Stock Yards Bancorp, Inc. (“Bancorp”) and its subsidiary reflect all adjustments (consisting only of adjustments of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods.
Presentation – The unaudited consolidated financial statements include the accounts of Stock Yards Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”). SignificantSYB&T. All significant inter-company transactions and accounts have been eliminated in consolidation. All companies are collectively referred to as “Bancorp” or the “Company.”
The Bank, chartered in 1904, is a Louisville, Kentucky-based, state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio MSAs through 42 full service banking center locations.
As a result of its acquisition of KSB on May 1, 2019, Bancorp became the 100% successor owner of KBST, an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the TPS at the par amount of approximately $4 million on June 17, 2019.
Bancorp is divided into 2 reportable segments: Commercial Banking and WM&T:
Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses through commercial lending, retail lending, deposit services, treasury management services, private banking, online banking, mobile banking, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer.
WM&T provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates.
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31,2019. For further information, refer to the consolidated financial statements and footnotes thereto included in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.
Significant Accounting Policies - In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, valuation of available-for sale securities, other real estate owned and income tax assets, and estimated liabilities and expense.
A description of other significant accounting policies is presented in the notes to Consolidated Financial StatementsBancorp’s Annual Report on Form 10-K for the year ended December 31, 2016 included in Stock Yards Bancorp, Inc.’s Annual Report on Form 10-K. Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.2018.
Interim resultsCritical Accounting Policies - An allowance has been established to provide for probable losses on loans that may not be fully repaid. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries. Loans are typically charged off when management deems them uncollectible and after underlying collateral has been liquidated; however, collection efforts may continue and future recoveries could occur. Periodically, loans are partially charged off to the three and nine-month periods ended September 30, 2017 are not necessarily indicativenet realizable value based upon the evaluation of results for the entire year.related underlying collateral, including Bancorp’s expectation of resolution.
Critical Accounting Policies
The allowance for loan lossesmethodology is management’s estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Loan losses are charged against the allowance when management believes uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management has identified the accounting policy related to the allowance and provision for loan losses as critical to the understanding of Bancorp’s results of operations and discussed this conclusion with the Audit Committee of the Board of Directors. Since application of this policy requires significant management assumptions and estimates, it could result in materially different amounts to be reported if conditions or underlying circumstances were to change. The provision for loan losses reflects an allowance methodology driven by risk ratings, historical losses, specific loan loss allocations, and qualitative factors. Assumptions include manyThe level of the September 30, 2019 allowance reflected a number of factors, such as changes in borrowers’ financial conditionincluding credit quality metrics which can change quickly or historical loss ratios related to certain loan portfolios which may or may not be indicativewere generally consistent with prior periods, and expansion of future losses. In the first quarter of 2017, Bancorp extended the historical look-back period usedfrom 32 to capture Bancorp’s historical loss ratios from 2436 quarters to 28 quarters.in March of 2019. This extensionexpansion of the historical period was applied to all classes and segments of the portfolio. The expansionExpansion of the look-back period for the historical loss rates used in the quantitative allocation caused management to review of the overall methodology for the qualitative factors to ensure Bancorp waswe were appropriately capturing the risk not addressed in the quantitative historical loss rates used in the quantitative allocation, resulting in the same expansion of the look-back period for the qualitative factors.rate. Management believes the extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. ToBased on the extentlook-back period extension, the allowance level increased approximately $2.0 million for 2019. Key indicators of loan quality continued to trend at levels consistent with prior periods, however management recognizes that management’s assumptions prove incorrect, results from operations could be materially affected by a higher or lower provision for loan losses. The accounting policy relateddue to the cyclical nature of local economies, these trends will likely normalize over the long term. Additional information regarding Bancorp’s methodology for evaluating the adequacy of the allowance can be read in Bancorp’s Annual Report on Form 10-K.
Accounting Standards Updates–Generally, if an issued-but-not-yet-effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.
The following ASU was issued prior to September 30, 2019 and is considered relevant to Bancorp’s financial statements.
In June 2016, FASB issued ASU 2016-13,CECL. This ASU significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. The guidance is effective for loan losses is applicableannual and interim reporting periods beginning after December 15, 2019. Bancorp expects to recognize a one-time cumulative-effect adjustment to the commercial bankingallowance. Interagency guidance issued in December 2018 allows for a three year phase-in of the cumulative-effect adjustment for regulatory capital reporting.
As a result of this ASU, Bancorp expects to increase its allowance. Bancorp has formed a committee to oversee its transition to the CECL methodology. Bancorp has devoted internal resources and purchased a third party software solution to analyze, compute and report upon the CECL disclosure requirements. In addition, Bancorp has analyzed loan-level data and is determining its CECL loan segmentation and initial segment calculation methodologies. Bancorp continues to analyze forecast scenarios and stress test the volatility of Bancorp.the model. The Company expects to quantify the approximate January 1, 2020 impact and any associated risks related toof this policy on Bancorp’s business operations are discussedASU upon its consolidated financial statements in the “Allowancefiling of its 2019 Annual Report on Form 10-K.
Recently Adopted Accounting Standards - Bancorp adopted ASU 2016-02,Leases and related amendments using an alternative transition method, effective January 1, 2019 and upon adoption recorded $17 million in right-of-use lease assets and $18 million of operating lease liabilities on its balance sheet. Prior periods have not been restated. The right-of-use lease asset and operating lease liability are recorded in premises and equipment and other liabilities on the consolidated balance sheet. Bancorp elected all applicable practical expedients, including the option to expense short-term leases, which are defined as leases with a term of one year or less. Bancorp also elected not to separate lease components from non-lease components.
The adoption of this ASU did not have a meaningful impact on Bancorp's performance metrics, including regulatory capital ratios and ROA. Additionally, Bancorp does not believe that the adoption of this ASU by its clients will have a significant impact on Bancorp's ability to underwrite credit when client financial statements are presented inclusive of the requirements of this ASU. See the Footnote titled “Leases” for Loan Losses” section below.additional information on lease activities.
(2) | Acquisition of King Bancorp, Inc. and its wholly-owned subsidiary King Southern Bank |
On May 1, 2019, Bancorp completed its acquisition of KSB, for $28 million in cash. The acquisition expands the Company’s market area into nearby Nelson County, Kentucky, while growing its customer base in Louisville, Kentucky.
Stock Yards
The following table provides a summary of the assets acquired and liabilities assumed as recorded by KSB, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, recast adjustments to those previously reported preliminary fair values, and the fair values of those assets and liabilities as recorded by the Bancorp. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary resultant fair values shown in the following table continue to be evaluated by management and may be subject to further recast adjustments.
Acquisition of King Bancorp, Inc. |
Summary of Assets Aquired and Liabilities Assumed |
May 1, 2019 | ||||||||||||||||||
As Recorded | Fair Value | Recast | As Recorded | |||||||||||||||
(In thousands) | by King | Adjustments (1) | Adjustments (1) | by Bancorp | ||||||||||||||
Assets aquired: | ||||||||||||||||||
Cash and due from banks | $ | 3,316 | $ | — | $ | — | $ | 3,316 | ||||||||||
Interest bearing due from banks | 1,761 | — | — | 1,761 | ||||||||||||||
Available for sale securities | 12,404 | 23 | a | — | 12,427 | |||||||||||||
Loans | 165,744 | (1,597 | ) | b | (118 | ) | b | 164,029 | ||||||||||
Allowance for loan and lease losses | (1,812 | ) | 1,812 | b | — | — | ||||||||||||
Loans, net | 163,932 | 215 | (118 | ) | 164,029 | |||||||||||||
Federal Home Loan Bank stock, at cost | 1,517 | — | — | 1,517 | ||||||||||||||
Federal Reserve Bank stock, at cost | 490 | — | — | 490 | ||||||||||||||
Premises and equipment, net | 4,358 | (1,328 | ) | c | 351 | c | 3,381 | |||||||||||
Core deposit intangible | — | 1,519 | d | — | 1,519 | |||||||||||||
Bank owned life insurance | 3,431 | — | — | 3,431 | ||||||||||||||
Other real estate owned | 325 | (325 | ) | e | — | — | ||||||||||||
Other assets and accrued interest receivable | 867 | (36 | ) | f | — | 831 | ||||||||||||
Total assets acquired | $ | 192,401 | $ | 68 | $ | 233 | $ | 192,702 | ||||||||||
Liabilities assumed: | ||||||||||||||||||
Deposits | ||||||||||||||||||
Non-interest bearing | $ | 24,939 | $ | — | $ | — | $ | 24,939 | ||||||||||
Interest bearing | 100,839 | (252 | ) | g | — | 100,587 | ||||||||||||
Total deposits | 125,778 | (252 | ) | — | 125,526 | |||||||||||||
Federal funds purchased | 1,566 | — | — | 1,566 | ||||||||||||||
Federal Home Loan Bank advances | 43,718 | (419 | ) | h | — | 43,299 | ||||||||||||
Subordinated Note | 3,609 | — | — | 3,609 | ||||||||||||||
Holding Company line of credit | 2,300 | — | — | 2,300 | ||||||||||||||
Other liabilities and accrued interest payable | 313 | — | — | 313 | ||||||||||||||
Total liabilities assumed | 177,284 | (671 | ) | — | 176,613 | |||||||||||||
Net assets acquired | $ | 15,117 | $ | 739 | $ | 233 | $ | 16,089 | ||||||||||
Cash consideration paid | (28,000 | ) | ||||||||||||||||
Goodwill | $ | 11,911 |
(1) - Bancorp’s acquisition of KSB closed on May 1, 2019. The fair value adjustments reported are preliminary estimates based on information obtained subsequent to May 1, 2019 and through September 30, 2019. Management is continuing to evaluate each of its estimates and may provide additional recast adjustments in future periods based on this continuing evaluation. To the extent that additional recast adjustments are posted in future periods, the resultant fair values and the amount of goodwill recorded by Bancorp inc. and subsidiary will change.
Explanation of preliminary fair value adjustments:
a. | Reflects the fair value adjustment based on Bancorp’s evaluation of the acquired investment portfolio. |
b. | Reflects the fair value adjustment based on Bancorp’s evaluation of the acquired loan portfolio and to eliminate KSB’s recorded allowance. |
c. | Reflects the fair value adjustment based on Bancorp’s evaluation of the premises and equipment acquired. |
d. | Reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition. |
e. | Reflects the fair value adjustment based upon Bancorp’s evaluation of the foreclosed real estate acquired. |
f. | Reflects the write-off of a miscellaneous other asset. |
g. | Reflects the fair value adjustment based on the Company’s evaluation of the assumed time deposits. |
h. | Reflects the fair value adjustment based upon Bancorp’s evaluation of the assumed FHLB advances. |
Bancorp’s allowance calculation includes allocationsGoodwill of approximately $12 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, is expected to loan portfolio segments at be recorded in the KSB acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to Bancorp’s Commercial Banking segment and is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the KSB acquisition will change.
Based upon the proximity to existing branch locations, Bancorp closed three acquired full service branch locations in the third quarter of 2019, while retaining the associated customer relationships. The sale of two of these locations was consummated prior to September 30, 20172019 with a recast to Goodwill posted. The remaining building is considered held for qualitative factors including, among other factors, local economic and business conditions in eachsale as of our primary markets, quality and experience of lending staff and management, exceptionsSeptember 30, 2019.
Prior year pro-forma financial statements are not presented due to lending policies, levels of and trends in past due loans and loan classifications, concentrations of credit such as collateral type, trends in portfolio growth, changes in value of underlying collateral for collateral-dependent loans, effect of other external factors such as the national economic and business trends, quality and depthimmateriality of the loan review function,transaction. Revenue (defined as net interest income and management’s judgement of current trendsnon-interest income) attributed to KSB totaled $1.5 million and potential risks. Bancorp utilizes$2.6 million for the sum of all allowance amounts derived as described above as the appropriate level of allowance for loanthree and lease losses. Changes in criteria used in this evaluation or availability of new information could cause the allowance to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan losses based on their judgments and estimates.nine months ended September 30, 2019.
| Securities Available for Sale |
The amortizedAll of Bancorp’s securities are classified as AFS. Amortized cost, unrealized gains and losses, and fair value of securities available-for-sale follow:
(in thousands) | Amortized | Unrealized |
| |||||||||||||
September 30, 2017 | cost | Gains | Losses | Fair value | ||||||||||||
Government sponsored enterprise obligations | $ | 372,596 | $ | 846 | $ | 778 | $ | 372,664 | ||||||||
Mortgage-backed securities - government agencies | 147,604 | 697 | 1,581 | 146,720 | ||||||||||||
Obligations of states and political subdivisions | 51,100 | 611 | 89 | 51,622 | ||||||||||||
Corporate equity securities | 653 | - | 137 | 516 | ||||||||||||
Total securities available for sale | $ | 571,953 | $ | 2,154 | $ | 2,585 | $ | 571,522 | ||||||||
December 31, 2016 | ||||||||||||||||
U.S. Treasury and other U.S. Government obligations | $ | 74,997 | $ | 1 | $ | - | $ | 74,998 | ||||||||
Government sponsored enterprise obligations | 268,784 | 800 | 1,494 | 268,090 | ||||||||||||
Mortgage-backed securities - government agencies | 170,344 | 735 | 2,236 | 168,843 | ||||||||||||
Obligations of states and political subdivisions | 57,158 | 682 | 396 | 57,444 | ||||||||||||
Corporate equity securities | 653 | 46 | - | 699 | ||||||||||||
Total securities available for sale | $ | 571,936 | $ | 2,264 | $ | 4,126 | $ | 570,074 |
(In thousands) | Amortized | Unrealized | Fair | |||||||||||||
September 30, 2019 | cost | Gains | Losses | value | ||||||||||||
Government sponsored enterprise obligations | $ | 212,315 | $ | 2,239 | $ | (189 | ) | $ | 214,365 | |||||||
Mortgage backed securities - government agencies | 142,518 | 1,233 | (749 | ) | 143,002 | |||||||||||
Obligations of states and political subdivisions | 18,123 | 113 | (2 | ) | 18,234 | |||||||||||
Total securities available for sale | $ | 372,956 | $ | 3,585 | $ | (940 | ) | $ | 375,601 | |||||||
December 31, 2018 | ||||||||||||||||
Government sponsored enterprise obligations | $ | 264,234 | $ | 156 | $ | (3,351 | ) | $ | 261,039 | |||||||
Mortgage backed securities - government agencies | 149,748 | 282 | (3,753 | ) | 146,277 | |||||||||||
Obligations of states and political subdivisions | 29,760 | 107 | (188 | ) | 29,679 | |||||||||||
Total securities available for sale | $ | 443,742 | $ | 545 | $ | (7,292 | ) | $ | 436,995 |
Corporate equityAt September 30, 2019 and December 31, 2018, there were no holdings of debt securities consist of common stockany one issuer, other than the U.S. government and its agencies, in a publicly-traded business development company.an amount greater than 10% of stockholders’ equity.
There were no0 gains or losses on sales or calls of securities classified as held to maturity as of September 30, 2017 or December 31, 2016.
Stock Yards Bancorp, inc.for the three-month and subsidiary
Bancorp sold no securities during the three or nine month periods ending September 30, 20162019 and 2018. Securities acquired from KSB, totaling $12 million, were sold immediately following the acquisition with 0 gain or 2017. One security was called prior to maturityloss realized in the third quarter of 2017 resulting in the receipt of a pre-payment penalty. The penalty income was classified as a realized gain on the call of available for sale securities.statement.
A summary of the available-for-sale investment securities AFS by contractual maturity groupings as of September 30, 2017 is shown below.follows:
(in thousands) |
|
| ||||||
Securities available-for-sale | Amortized cost | Fair value | ||||||
Due within 1 year | $ | 216,651 | $ | 216,696 | ||||
Due after 1 but within 5 years | 74,383 | 74,529 | ||||||
Due after 5 but within 10 years | 14,085 | 14,031 | ||||||
Due after 10 years | 118,577 | 119,030 | ||||||
Mortgage-backed securities - government agencies | 147,604 | 146,720 | ||||||
Corporate equity securities | 653 | 516 | ||||||
Total securities available-for-sale | $ | 571,953 | $ | 571,522 |
(In thousands) | Amortized cost | Fair value | ||||||
Due within 1 year | $ | 99,584 | $ | 99,577 | ||||
Due after 1 year but within 5 years | 33,234 | 33,288 | ||||||
Due after 5 years but within 10 years | 6,174 | 6,245 | ||||||
Due after 10 years | 91,446 | 93,489 | ||||||
Mortgage backed securities - government agencies | 142,518 | 143,002 | ||||||
Total securities available for sale | $ | 372,956 | $ | 375,601 |
Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations. In addition to equity securities, theobligations with or without prepayment penalties. The investment portfolio includes agency mortgage-backed securities,MBSs, which are guaranteed by agencies such as the FHLMC, FNMA, and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.
Bancorp pledges portions of its investment securities portfolio to secure public fund deposits, cash balances of certain wealth management and trust accounts, and securities sold under agreements to repurchase. TheSecurities with a carrying value of these$295 million and $355 million were pledged securities was approximately $329.7 million at September 30, 2017 2019 and $380.4 million at December 31, 2016.2018, to secure accounts of commercial depositors in cash management accounts, public deposits, and uninsured cash balances for WM&T accounts.
Stock Yards Bancorp, inc. and subsidiary
Securities with unrealized losses at September 30, 2017 2019 and December 31, 2016, not recognized2018, aggregated by investment category and length of time securities have been in the statements of income are asa continuous unrealized loss position follows:
(in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
September 30, 2017 | value | losses | value | losses | value | losses | ||||||||||||||||||
Government sponsored enterprise obligations | $ | 190,462 | $ | 135 | $ | 70,176 | $ | 643 | $ | 260,638 | $ | 778 | ||||||||||||
Mortgage-backed securities - government agencies | 13,227 | 117 | 65,781 | 1,464 | 79,008 | 1,581 | ||||||||||||||||||
Obligations of states and political subdivisions | 9,307 | 13 | 6,287 | 76 | 15,594 | 89 | ||||||||||||||||||
Corporate equity securities | 516 | 137 | - | - | 516 | 137 | ||||||||||||||||||
Total temporarily impaired securities | $ | 213,512 | $ | 402 | $ | 142,244 | $ | 2,183 | $ | 355,756 | $ | 2,585 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Government sponsored enterprise obligations | $ | 154,951 | $ | 1,344 | $ | 3,485 | $ | 150 | $ | 158,436 | $ | 1,494 | ||||||||||||
Mortgage-backed securities - government agencies | 115,374 | 1,873 | 9,914 | 363 | 125,288 | 2,236 | ||||||||||||||||||
Obligations of states and political subdivisions | 29,893 | 380 | 1,478 | 16 | 31,371 | 396 | ||||||||||||||||||
Total temporarily impaired securities | $ | 300,218 | $ | 3,597 | $ | 14,877 | $ | 529 | $ | 315,095 | $ | 4,126 |
(In thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
September 30, 2019 | value | losses | value | losses | value | losses | ||||||||||||||||||
Government sponsored enterprise obligations | $ | 10,347 | $ | (48 | ) | $ | 51,559 | $ | (141 | ) | $ | 61,906 | $ | (189 | ) | |||||||||
Mortgage-backed securities - government agencies | 28,937 | (247 | ) | 40,290 | (502 | ) | 69,227 | (749 | ) | |||||||||||||||
Obligations of states and political subdivisions | 4,276 | (2 | ) | 135 | - | 4,411 | (2 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 43,560 | $ | (297 | ) | $ | 91,984 | $ | (643 | ) | $ | 135,544 | $ | (940 | ) | |||||||||
December 31, 2018 | ||||||||||||||||||||||||
Government sponsored enterprise obligations | $ | 96,740 | $ | (38 | ) | $ | 149,320 | $ | (3,313 | ) | $ | 246,060 | $ | (3,351 | ) | |||||||||
Mortgage-backed securities - government agencies | 3,108 | (5 | ) | 120,848 | (3,748 | ) | 123,956 | (3,753 | ) | |||||||||||||||
Obligations of states and political subdivisions | 814 | (1 | ) | 17,639 | (187 | ) | 18,453 | (188 | ) | |||||||||||||||
Total temporarily impaired securities | $ | 100,662 | $ | (44 | ) | $ | 287,807 | $ | (7,248 | ) | $ | 388,469 | $ | (7,292 | ) |
Applicable dates for determining when securities are in an unrealized loss position are September 30, 2017 2019 and December 31, 2016. 2018. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past twelve months, but is not in the “investments with an unrealized loss of less“Less than 12 months” category above.
Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in value below amortized cost is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.
Unrealized losses on Bancorp’sBancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is due to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach their maturity date and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consist of 52 and 117 separate investment positions as of September 30, 2019 and December 31, 2018. Because management does not intend to sell the investments,securities, and it is not likely that Bancorp will be required to sell the investments before recovery of their amortized cost, bases, which may be at maturity, Bancorp does not consider these securities to be other-than-temporarily impaired at September 30, 2017.2019.
FHLB stock and other securities are investmentsrepresents an investment held by Bancorp which are is not readily marketable and areis carried at cost. This category includes Federal Home Loan Bankcost adjusted for identified impairment. Impairment is evaluated on an annual basis in the fourth quarter. No impairment has been recorded in the past and not future impairment is expected. Holdings of Cincinnati (FHLB)FHLB stock which isare required for access to FHLB borrowing.advances.
Stock Yards Bancorp, inc. and subsidiary
| Loans and leases |
CompositionComposition of loans, net of deferred fees and costs, by primary loan portfolio class follows:
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Commercial and industrial | $ | 750,728 | $ | 736,841 | ||||
Construction and development, excluding undeveloped land | 174,310 | 192,348 | ||||||
Undeveloped land | 20,989 | 21,496 | ||||||
Real estate mortgage: | ||||||||
Commercial investment | 576,810 | 538,886 | ||||||
Owner occupied commercial | 397,804 | 408,292 | ||||||
1-4 family residential | 261,707 | 249,498 | ||||||
Home equity - first lien | 51,925 | 55,325 | ||||||
Home equity - junior lien | 63,416 | 67,519 | ||||||
Subtotal: Real estate mortgage | 1,351,662 | 1,319,520 | ||||||
Consumer | 37,431 | 35,170 | ||||||
Total loans | $ | 2,335,120 | $ | 2,305,375 |
Stock Yards Bancorp, inc. and subsidiary
The following table presents the balance of the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of September 30, 2017 and December 31, 2016.
(in thousands) | Type of loan | |||||||||||||||||||||||
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
September 30, 2017 | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Loans | $ | 750,728 | $ | 174,310 | $ | 20,989 | $ | 1,351,662 | $ | 37,431 | $ | 2,335,120 | ||||||||||||
Loans collectively evaluated for impairment | $ | 748,591 | $ | 173,573 | $ | 20,515 | $ | 1,348,774 | $ | 37,375 | $ | 2,328,828 | ||||||||||||
Loans individually evaluated for impairment | $ | 2,137 | $ | 737 | $ | 474 | $ | 2,403 | $ | 56 | $ | 5,807 | ||||||||||||
Loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | 485 | $ | - | $ | 485 |
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
industrial | land | land | mortgage | Consumer | Total | |||||||||||||||||||
Allowance for loan losses | ||||||||||||||||||||||||
At December 31, 2016 | $ | 10,483 | $ | 1,923 | $ | 684 | $ | 10,573 | $ | 344 | $ | 24,007 | ||||||||||||
Provision (credit) | 1,518 | 9 | (85 | ) | 54 | 154 | 1,650 | |||||||||||||||||
Charge-offs | (770 | ) | - | - | (45 | ) | (418 | ) | (1,233 | ) | ||||||||||||||
Recoveries | 128 | - | - | 98 | 298 | 524 | ||||||||||||||||||
At September 30, 2017 | $ | 11,359 | $ | 1,932 | $ | 599 | $ | 10,680 | $ | 378 | $ | 24,948 | ||||||||||||
Allowance for loans collectively evaluated for impairment | $ | 10,705 | $ | 1,932 | $ | 599 | $ | 10,668 | $ | 322 | $ | 24,226 | ||||||||||||
Allowance for loans individually evaluated for impairment | $ | 654 | $ | - | $ | - | $ | 12 | $ | 56 | $ | 722 | ||||||||||||
Allowance for loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
Stock Yards Bancorp, inc. and subsidiary
(in thousands) | Type of loan | |||||||||||||||||||||||
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
December 31, 2016 | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Loans | $ | 736,841 | $ | 192,348 | $ | 21,496 | $ | 1,319,520 | $ | 35,170 | $ | 2,305,375 | ||||||||||||
Loans collectively evaluated for impairment | $ | 734,139 | $ | 191,810 | $ | 21,022 | $ | 1,316,400 | $ | 35,111 | $ | 2,298,482 | ||||||||||||
Loans individually evaluated for impairment | $ | 2,682 | $ | 538 | $ | 474 | $ | 2,516 | $ | 59 | $ | 6,269 | ||||||||||||
Loans acquired with deteriorated credit quality | $ | 20 | $ | - | $ | - | $ | 604 | $ | - | $ | 624 |
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
industrial | land | land | mortgage | Consumer | Total | |||||||||||||||||||
Allowance for loan losses | ||||||||||||||||||||||||
At December 31, 2015 | $ | 8,645 | $ | 1,760 | $ | 814 | $ | 10,875 | $ | 347 | $ | 22,441 | ||||||||||||
Provision (credit) | 2,775 | 275 | (130 | ) | (68 | ) | 148 | 3,000 | ||||||||||||||||
Charge-offs | (1,216 | ) | (133 | ) | - | (576 | ) | (568 | ) | (2,493 | ) | |||||||||||||
Recoveries | 279 | 21 | - | 342 | 417 | 1,059 | ||||||||||||||||||
At December 31, 2016 | $ | 10,483 | $ | 1,923 | $ | 684 | $ | 10,573 | $ | 344 | $ | 24,007 | ||||||||||||
Allowance for loans collectively evaluated for impairment | $ | 9,276 | $ | 1,923 | $ | 683 | $ | 10,573 | $ | 285 | $ | 22,740 | ||||||||||||
Allowance for loans individually evaluated for impairment | $ | 1,207 | $ | - | $ | 1 | $ | - | $ | 59 | $ | 1,267 | ||||||||||||
Allowance for loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
The considerations by Bancorp in computing its allowance for loan losses are determined based on various risk characteristics of each loan segment. Relevant risk characteristics are as follows:
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Commercial and industrial | $ | 876,127 | $ | 833,524 | ||||
Construction and development, excluding undeveloped land(1) | 248,296 | 225,050 | ||||||
Undeveloped land | 35,169 | 30,092 | ||||||
Real estate mortgage: | ||||||||
Commercial investment | 727,531 | 588,610 | ||||||
Owner occupied commercial | 470,678 | 426,373 | ||||||
1-4 family residential | 331,747 | 276,017 | ||||||
Home equity - first lien | 51,015 | 49,500 | ||||||
Home equity - junior lien | 72,533 | 70,947 | ||||||
Subtotal: Real estate mortgage | 1,653,504 | 1,411,447 | ||||||
Consumer | 43,568 | 48,058 | ||||||
Total loans(2) | $ | 2,856,664 | $ | 2,548,171 |
|
|
|
|
Stock Yards Bancorp, inc. and subsidiary
|
| |||
(2) Total loans are presented inclusive of |
|
|
|
|
Bancorp hasLoans to directors and their related interests, including loans that were acquiredto companies for which there was, at acquisition, evidencedirectors are principal owners and executive officers totaled $45 million and $53 million, as of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amount of those loans is included in the balance sheet amounts of loans at September 30, 2017 2019 and December 31, 2016. Changes in the fair value adjustment for acquired impaired loans are shown in the following table:2018.
(in thousands) | Accretable discount | Non- accretable discount | ||||||
Balance at December 31, 2015 | $ | 3 | $ | 189 | ||||
Accretion | (3 | ) | (41 | ) | ||||
Reclassifications from (to) non-accretable discount | - | - | ||||||
Disposals | - | - | ||||||
Balance at December 31, 2016 | $ | - | $ | 148 | ||||
Accretion | - | - | ||||||
Reclassifications from (to) non-accretable discount | - | - | ||||||
Disposals | - | - | ||||||
Balance at September 30, 2017 | $ | - | $ | 148 |
Stock Yards Bancorp, inc. and subsidiary
The following tables present loans individually evaluated for impairment as of September 30, 2017 and December 31, 2016.
Unpaid | Average | |||||||||||||||
(in thousands) | Recorded | principal | Related | recorded | ||||||||||||
September 30, 2017 | investment | balance | allowance | investment | ||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||
Commercial and industrial | $ | 350 | $ | 540 | $ | - | $ | 228 | ||||||||
Construction and development, excluding undeveloped land | 737 | 907 | - | 533 | ||||||||||||
Undeveloped land | 474 | 506 | - | 413 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | 55 | 55 | - | 124 | ||||||||||||
Owner occupied commercial | 1,470 | 1,908 | - | 1,264 | ||||||||||||
1-4 family residential | 785 | 785 | - | 759 | ||||||||||||
Home equity - first lien | - | - | - | - | ||||||||||||
Home equity - junior lien | 81 | 81 | - | 224 | ||||||||||||
Subtotal: Real estate mortgage | 2,391 | 2,829 | - | 2,371 | ||||||||||||
Consumer | - | 17 | - | - | ||||||||||||
Subtotal | $ | 3,952 | $ | 4,799 | $ | - | $ | 3,545 | ||||||||
Loans with an allowance recorded: | ||||||||||||||||
Commercial and industrial | $ | 1,787 | $ | 2,321 | $ | 654 | $ | 2,343 | ||||||||
Construction and development, excluding undeveloped land | - | - | - | - | ||||||||||||
Undeveloped land | - | - | - | 60 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | - | - | - | - | ||||||||||||
Owner occupied commercial | - | - | - | - | ||||||||||||
1-4 family residential | 12 | 12 | 12 | 3 | ||||||||||||
Home equity - first lien | - | - | - | - | ||||||||||||
Home equity - junior lien | - | - | - | - | ||||||||||||
Subtotal: Real estate mortgage | 12 | 12 | 12 | 3 | ||||||||||||
Consumer | 56 | 56 | 56 | 58 | ||||||||||||
Subtotal | $ | 1,855 | $ | 2,389 | $ | 722 | $ | 2,464 | ||||||||
Total: | ||||||||||||||||
Commercial and industrial | $ | 2,137 | $ | 2,861 | $ | 654 | $ | 2,571 | ||||||||
Construction and development, excluding undeveloped land | 737 | 907 | - | 533 | ||||||||||||
Undeveloped land | 474 | 506 | - | 473 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | 55 | 55 | - | 124 | ||||||||||||
Owner occupied commercial | 1,470 | 1,908 | - | 1,264 | ||||||||||||
1-4 family residential | 797 | 797 | 12 | 762 | ||||||||||||
Home equity - first lien | - | - | - | - | ||||||||||||
Home equity - junior lien | 81 | 81 | - | 224 | ||||||||||||
Subtotal: Real estate mortgage | 2,403 | 2,841 | 12 | 2,374 | ||||||||||||
Consumer | 56 | 73 | 56 | 58 | ||||||||||||
Total | $ | 5,807 | $ | 7,188 | $ | 722 | $ | 6,009 |
Stock Yards Bancorp, inc. and subsidiary
Unpaid | Average | |||||||||||||||
(in thousands) | Recorded | principal | Related | recorded | ||||||||||||
December 31, 2016 | investment | balance | allowance | investment | ||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||
Commercial and industrial | $ | 322 | $ | 465 | $ | - | $ | 1,947 | ||||||||
Construction and development, excluding undeveloped land | 538 | 708 | - | 108 | ||||||||||||
Undeveloped land | 233 | 265 | - | 76 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | 107 | 107 | - | 193 | ||||||||||||
Owner occupied commercial | 1,042 | 1,479 | - | 1,356 | ||||||||||||
1-4 family residential | 895 | 896 | - | 962 | ||||||||||||
Home equity - first lien | - | - | - | 3 | ||||||||||||
Home equity - junior lien | 472 | 472 | - | 333 | ||||||||||||
Subtotal: Real estate mortgage | 2,516 | 2,954 | - | 2,847 | ||||||||||||
Consumer | - | - | - | 18 | ||||||||||||
Subtotal | $ | 3,609 | $ | 4,392 | $ | - | $ | 4,996 | ||||||||
Loans with an allowance recorded: | ||||||||||||||||
Commercial and industrial | $ | 2,360 | $ | 2,835 | $ | 1,207 | $ | 1,619 | ||||||||
Construction and development, excluding undeveloped land | - | - | - | 182 | ||||||||||||
Undeveloped land | 241 | 241 | 1 | 149 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | - | - | - | - | ||||||||||||
Owner occupied commercial | - | - | - | 554 | ||||||||||||
1-4 family residential | - | - | - | - | ||||||||||||
Home equity - first lien | - | - | - | - | ||||||||||||
Home equity - junior lien | - | - | - | - | ||||||||||||
Subtotal: Real estate mortgage | - | - | - | 554 | ||||||||||||
Consumer | 59 | 59 | 59 | 63 | ||||||||||||
Subtotal | $ | 2,660 | $ | 3,135 | $ | 1,267 | $ | 2,567 | ||||||||
Total: | ||||||||||||||||
Commercial and industrial | $ | 2,682 | $ | 3,300 | $ | 1,207 | $ | 3,566 | ||||||||
Construction and development, excluding undeveloped land | 538 | 708 | - | 290 | ||||||||||||
Undeveloped land | 474 | 506 | 1 | 225 | ||||||||||||
Real estate mortgage | - | - | - | - | ||||||||||||
Commercial investment | 107 | 107 | - | 193 | ||||||||||||
Owner occupied commercial | 1,042 | 1,479 | - | 1,910 | ||||||||||||
1-4 family residential | 895 | 896 | - | 962 | ||||||||||||
Home equity - first lien | - | - | - | 3 | ||||||||||||
Home equity - junior lien | 472 | 472 | - | 333 | ||||||||||||
Subtotal: Real estate mortgage | 2,516 | 2,954 | - | 3,401 | ||||||||||||
Consumer | 59 | 59 | 59 | 81 | ||||||||||||
Total | $ | 6,269 | $ | 7,527 | $ | 1,267 | $ | 7,563 |
Differences between recorded investment amounts and unpaid principal balance amounts are due to partial charge-offs and interest paid on non-accrual loans which have occurred over the life of loans. Unpaid principal balance is reduced by these items to arrive at the recorded investment in the loan.
Stock Yards Bancorp, inc. and subsidiary
Impaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (TDRs), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over 90 days past due and still accruing interest. Bancorp had loans totaling $261 thousand past due more than 90 days and still accruing interest at September 30, 2017, compared with $438 thousand at December 31, 2016.
The following table presentssummarizes loans acquired in the recorded investment in non-accrual loansCompany’s May 1, 2019 KSB acquisition, recasted as of September 30, 2017 and December 31, 2016.2019.
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Commercial and industrial | $ | 1,256 | $ | 1,767 | ||||
Construction and development, excluding undeveloped land | 737 | 538 | ||||||
Undeveloped land | 474 | 474 | ||||||
Real estate mortgage | ||||||||
Commercial investment | 55 | 107 | ||||||
Owner occupied commercial | 1,470 | 1,042 | ||||||
1-4 family residential | 785 | 984 | ||||||
Home equity - first lien | - | - | ||||||
Home equity - junior lien | 81 | 383 | ||||||
Subtotal: Real estate mortgage | 2,391 | 2,516 | ||||||
Consumer | - | - | ||||||
Total | $ | 4,858 | $ | 5,295 |
May 1, 2019 | ||||||||||||||||
Contractual | Non-accretable | Accretable | Acquisition-day | |||||||||||||
(In thousands) | receivable | amount | amount | fair value | ||||||||||||
Commercial and industrial | $ | 8,249 | $ | — | $ | (23 | ) | $ | 8,226 | |||||||
Construction and development | 10,764 | — | 43 | 10,807 | ||||||||||||
Raw Land | 7,974 | — | 43 | 8,017 | ||||||||||||
Real estate mortgage: | ||||||||||||||||
Commercial real estate | 84,219 | — | (456 | ) | 83,763 | |||||||||||
1-4 family residential | 50,556 | — | 322 | 50,878 | ||||||||||||
Home equity - first lien | 196 | — | 3 | 199 | ||||||||||||
Home equity - junior lien | 679 | — | 5 | 684 | ||||||||||||
Subtotal: Real estate mortgage | 135,650 | — | (126 | ) | 135,524 | |||||||||||
Consumer | 1,528 | — | (73 | ) | 1,455 | |||||||||||
Total loans ASC 310-20 | 164,165 | — | (136 | ) | 164,029 | |||||||||||
Commercial and industrial | ||||||||||||||||
Construction and development | — | — | — | — | ||||||||||||
Raw Land | — | — | — | — | ||||||||||||
Real estate mortgage: | ||||||||||||||||
Commercial real estate | 1,351 | (1,351 | ) | — | — | |||||||||||
1-4 family residential | 228 | (228 | ) | — | — | |||||||||||
Home equity - first lien | — | — | — | — | ||||||||||||
Home equity - junior lien | — | — | — | — | ||||||||||||
Subtotal: Real estate mortgage | 1,579 | (1,579 | ) | — | — | |||||||||||
Consumer | — | — | — | — | ||||||||||||
Total loans ASC 310 purchased- credit-impaired loans | 1,579 | (1,579 | ) | — | — | |||||||||||
Total loans | $ | 165,744 | $ | (1,579 | ) | $ | (136 | ) | $ | 164,029 |
In the course of working with borrowers, Bancorp may elect to restructure contractual terms of certain loans. Troubled debt restructurings (TDRs) occur when, for economic or legal reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider.
Purchased Credit Impaired Loans
At September The Bank acquired PCI loans on May 1, 2019 related to the KSB acquisition and also during 2013 associated with the TBOC acquisition. PCI loans are accounted for under ASC 310-30, 2017 Bancorp had $949 thousandLoans and Debt Securities Acquired with Deteriorated Credit Quality. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets.
Management utilized the following criteria in determining which loans were classified as TDRs, all of which were accruing interest consistent with their modified terms. One residential real estate loan with a recorded investment of $12 thousand was modified and classified as a TDR in the three-month period ended September 30, 2017. Interest due and unpaid was capitalized into the principal balance resulting in the TDR classification. A specific reserve was establishedPCI loans for the entire recorded investment of this loan. One additional loan, a commercial loan with a recorded investment of $35 thousand at September 30, 2017, was modified and classified as a TDR previously in the nine-month period ended September 30, 2017. The pre and post-modification balance for this loan was $39 thousand. The monthly payment amount of this loan was modified to enable the borrower to fulfill the loan agreement. A specific reserve was established for the entire recorded investment of this loan.its KSB acquisition:
Stock Yards Bancorp, inc. and subsidiary
Loans for which management assigned a non-accretable mark
● Loans classified by management as substandard, doubtful or loss
At September 30, 2016 Bancorp had $999 thousand of accruing loans● Loans classified as TDR. Bancorp did not modifynon-accrual when acquired
● Loans past due 90 days or classify any additional loans as TDR during the three or nine month periods ended September 30, 2016.more when acquired
No loans classifiedThe following table reconciles the contractually required and reported as TDRs within the twelve months prior to September 30, 2017 defaulted during the three or nine-month periods ended September 30, 2017. Likewise, no loans classified and reported as troubled debt restructured within the twelve months prior to September 30, 2016 defaulted during the three-month or nine-month periods ended September 30, 2016. Loans accounted for as TDRs include modifications from original terms such as those due to bankruptcy proceedings, certain modificationscarrying amounts of amortization periods or extended suspension of principal payments due to customer financial difficulties. Loans accounted for as TDRs are individually evaluated for impairment and, at September 30, 2017, had a total allowance allocation of $142 thousand, compared with $207 thousand at December 31, 2016.all PCI loans:
At September 30, 2017 and December 31, 2016, Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDRs.
At September 30, 2017 formal foreclosure proceedings were in process on two loans with a total recorded investment of $75 thousand.
In thousands | September 30, 2019 | December 31, 2018 | ||||||
Contractually-required principal | $ | 1,575 | $ | 432 | ||||
Non-accretable amount | (1,575 | ) | — | |||||
Accretable amount | - | (68 | ) | |||||
Carrying value of loans | $ | - | $ | 364 |
The following table presents aginga rollforward of the recorded investment in loans as of September 30, 2017 and December 31, 2016.accretable amount on all PCI loans:
Recorded | ||||||||||||||||||||||||||||
(in thousands) | 90 or more | investment | ||||||||||||||||||||||||||
days past | > 90 days | |||||||||||||||||||||||||||
30-59 days | 60-89 days | due (includes | Total | Total | and | |||||||||||||||||||||||
September 30, 2017 | Current | past due | past due | non-accrual) | past due | loans | accruing | |||||||||||||||||||||
Commercial and industrial | $ | 747,316 | $ | 2,149 | $ | 7 | $ | 1,256 | $ | 3,412 | $ | 750,728 | $ | - | ||||||||||||||
Construction and development, excluding undeveloped land | 173,573 | - | - | 737 | 737 | 174,310 | - | |||||||||||||||||||||
Undeveloped land | 20,515 | - | - | 474 | 474 | 20,989 | - | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | 574,088 | 2,667 | - | 55 | 2,722 | 576,810 | - | |||||||||||||||||||||
Owner occupied commercial | 395,924 | 47 | 363 | 1,470 | 1,880 | 397,804 | - | |||||||||||||||||||||
1-4 family residential | 259,729 | 330 | 602 | 1,046 | 1,978 | 261,707 | 261 | |||||||||||||||||||||
Home equity - first lien | 51,836 | 89 | - | - | 89 | 51,925 | - | |||||||||||||||||||||
Home equity - junior lien | 62,892 | 165 | 278 | 81 | 524 | 63,416 | - | |||||||||||||||||||||
Subtotal: Real estate mortgage | 1,344,469 | 3,298 | 1,243 | 2,652 | 7,193 | 1,351,662 | 261 | |||||||||||||||||||||
Consumer | 37,196 | 226 | 9 | - | 235 | 37,431 | - | |||||||||||||||||||||
Total | $ | 2,323,069 | $ | 5,673 | $ | 1,259 | $ | 5,119 | $ | 12,051 | $ | 2,335,120 | $ | 261 | ||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 734,682 | $ | 84 | $ | 290 | $ | 1,785 | $ | 2,159 | $ | 736,841 | $ | 18 | ||||||||||||||
Construction and development, excluding undeveloped land | 191,810 | - | - | 538 | 538 | 192,348 | - | |||||||||||||||||||||
Undeveloped land | 21,022 | - | - | 474 | 474 | 21,496 | - | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | 537,998 | 631 | 64 | 193 | 888 | 538,886 | 86 | |||||||||||||||||||||
Owner occupied commercial | 406,726 | 342 | - | 1,224 | 1,566 | 408,292 | 182 | |||||||||||||||||||||
1-4 family residential | 246,730 | 1,174 | 576 | 1,018 | 2,768 | 249,498 | 34 | |||||||||||||||||||||
Home equity - first lien | 55,027 | 231 | 21 | 46 | 298 | 55,325 | 46 | |||||||||||||||||||||
Home equity - junior lien | 66,911 | 99 | 126 | 383 | 608 | 67,519 | 72 | |||||||||||||||||||||
Subtotal: Real estate mortgage | 1,313,392 | 2,477 | 787 | 2,864 | 6,128 | 1,319,520 | 420 | |||||||||||||||||||||
Consumer | 34,965 | 28 | 105 | 72 | 205 | 35,170 | - | |||||||||||||||||||||
Total | $ | 2,295,871 | $ | 2,589 | $ | 1,182 | $ | 5,733 | $ | 9,504 | $ | 2,305,375 | $ | 438 |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Balance, beginning of period | $ | (62 | ) | $ | (95 | ) | $ | (68 | ) | $ | (106 | ) | ||||
Transfers between non-accretable and accretable | — | — | — | — | ||||||||||||
Net accretion into interest income on loans, including loan fees | 62 | 10 | 68 | 21 | ||||||||||||
Balance, end of period | $ | - | $ | (85 | ) | $ | - | $ | (85 | ) |
Stock Yards Bancorp, inc. and subsidiary
Credit Quality Indicators
Consistent with regulatory guidance, Bancorp categorizes loans into credit risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans included all risk-rated loans other than those classified as other assets especially mentioned,OAEM, substandard, and doubtful, which are defined below:
● |
|
● | Substandard: Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have |
● | Substandard non-performing: Loans classified as substandard non-performing have all the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as |
● | Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. |
Internally assigned risk grades of loans by loan portfolio class classification category follows:
(In thousands) | Substandard | Total | ||||||||||||||||||||||
September 30, 2019 | Pass | OAEM | Substandard | non-performing | Doubtful | loans | ||||||||||||||||||
Commercial and industrial | $ | 838,507 | $ | 13,924 | $ | 23,488 | $ | 208 | $ | — | $ | 876,127 | ||||||||||||
Construction and development, excluding undeveloped land | 248,296 | — | — | — | — | 248,296 | ||||||||||||||||||
Undeveloped land | 35,169 | — | — | — | — | 35,169 | ||||||||||||||||||
Real estate mortgage: | ||||||||||||||||||||||||
Commercial investment | 715,432 | 1,835 | 8,690 | 1,574 | — | 727,531 | ||||||||||||||||||
Owner occupied commercial | 456,106 | 6,825 | 6,338 | 1,409 | — | 470,678 | ||||||||||||||||||
1-4 family residential | 329,678 | 1,690 | 157 | 222 | — | 331,747 | ||||||||||||||||||
Home equity - first lien | 51,015 | — | — | — | — | 51,015 | ||||||||||||||||||
Home equity - junior lien | 72,034 | 213 | 18 | 268 | — | 72,533 | ||||||||||||||||||
Subtotal: Real estate mortgage | 1,624,265 | 10,563 | 15,203 | 3,473 | — | 1,653,504 | ||||||||||||||||||
Consumer | 43,568 | — | — | — | — | 43,568 | ||||||||||||||||||
Total | $ | 2,789,805 | $ | 24,487 | $ | 38,691 | $ | 3,681 | $ | — | $ | 2,856,664 | ||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Commercial and industrial | $ | 803,073 | $ | 11,516 | $ | 18,703 | $ | 232 | $ | — | $ | 833,524 | ||||||||||||
Construction and development, excluding undeveloped land | 220,532 | 4,200 | — | 318 | — | 225,050 | ||||||||||||||||||
Undeveloped land | 29,618 | — | — | 474 | — | 30,092 | ||||||||||||||||||
Real estate mortgage: | ||||||||||||||||||||||||
Commercial investment | 586,543 | 1,815 | 15 | 237 | — | 588,610 | ||||||||||||||||||
Owner occupied commercial | 411,722 | 9,030 | 4,500 | 1,121 | — | 426,373 | ||||||||||||||||||
1-4 family residential | 273,537 | 1,544 | 162 | 774 | — | 276,017 | ||||||||||||||||||
Home equity - first lien | 49,500 | — | — | — | — | 49,500 | ||||||||||||||||||
Home equity - junior lien | 70,437 | 249 | 19 | 242 | — | 70,947 | ||||||||||||||||||
Subtotal: Real estate mortgage | 1,391,739 | 12,638 | 4,696 | 2,374 | — | 1,411,447 | ||||||||||||||||||
Consumer | 48,058 | — | — | — | — | 48,058 | ||||||||||||||||||
Total | $ | 2,493,020 | $ | 28,354 | $ | 23,399 | $ | 3,398 | $ | — | $ | 2,548,171 |
Stock Yards Bancorp, inc. and subsidiary
The following table presents the activity in the allowance by loan portfolio class:
Type of loan | ||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||
and development, | ||||||||||||||||||||||||
Three months ended | Commercial | excluding | ||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
(In thousands) | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Balance, July 1, 2019 | $ | 11,858 | $ | 1,810 | $ | 601 | $ | 12,030 | $ | 117 | $ | 26,416 | ||||||||||||
Provision (credit) | 32 | (108 | ) | 195 | 269 | 12 | 400 | |||||||||||||||||
Charge-offs | (91 | ) | — | — | — | (139 | ) | (230 | ) | |||||||||||||||
Recoveries | 154 | — | — | 46 | 91 | 291 | ||||||||||||||||||
Balance, September 30, 2019 | $ | 11,953 | $ | 1,702 | $ | 796 | $ | 12,345 | $ | 81 | $ | 26,877 |
As of September 30, 2017 and December 31, 2016, the internally assigned risk grades of loans by category were as follows:
Construction | ||||||||||||||||||||||||
and development, | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
(In thousands) | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Balance, July 1, 2018 | $ | 12,118 | $ | 1,938 | $ | 501 | $ | 9,914 | $ | 402 | $ | 24,873 | ||||||||||||
Provision (credit) | (628 | ) | 31 | 81 | 1,211 | 40 | 735 | |||||||||||||||||
Charge-offs | (451 | ) | — | — | (14 | ) | (96 | ) | (561 | ) | ||||||||||||||
Recoveries | 62 | — | — | 51 | 62 | 175 | ||||||||||||||||||
Balance, September 30, 2018 | $ | 11,101 | $ | 1,969 | $ | 582 | $ | 11,162 | $ | 408 | $ | 25,222 |
(in thousands) | Substandard | Total | ||||||||||||||||||||||
September 30, 2017 | Pass | OAEM | Substandard | non-performing | Doubtful | loans | ||||||||||||||||||
Commercial and industrial | $ | 726,194 | $ | 7,464 | $ | 14,197 | $ | 2,873 | $ | - | $ | 750,728 | ||||||||||||
Construction and development, excluding undeveloped land | 174,310 | - | - | - | - | 174,310 | ||||||||||||||||||
Undeveloped land | 20,485 | - | 30 | 474 | - | 20,989 | ||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||
Commercial investment | 575,339 | 761 | 420 | 290 | - | 576,810 | ||||||||||||||||||
Owner occupied commercial | 383,387 | 10,313 | 2,869 | 1,235 | - | 397,804 | ||||||||||||||||||
1-4 family residential | 256,458 | 3,018 | 1,172 | 1,059 | - | 261,707 | ||||||||||||||||||
Home equity - first lien | 51,923 | 2 | - | - | - | 51,925 | ||||||||||||||||||
Home equity - junior lien | 63,029 | 73 | 233 | 81 | - | 63,416 | ||||||||||||||||||
Subtotal: Real estate mortgage | 1,330,136 | 14,167 | 4,694 | 2,665 | - | 1,351,662 | ||||||||||||||||||
Consumer | 37,269 | 102 | 4 | 56 | - | 37,431 | ||||||||||||||||||
Total | $ | 2,288,394 | $ | 21,733 | $ | 18,925 | $ | 6,068 | $ | - | $ | 2,335,120 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Commercial and industrial | $ | 714,025 | $ | 14,266 | $ | 5,850 | $ | 2,700 | $ | - | $ | 736,841 | ||||||||||||
Construction and development, excluding undeveloped land | 191,455 | - | 355 | 538 | - | 192,348 | ||||||||||||||||||
Undeveloped land | 21,022 | - | - | 474 | - | 21,496 | ||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||
Commercial investment | 538,688 | - | 5 | 193 | - | 538,886 | ||||||||||||||||||
Owner occupied commercial | 396,997 | 7,960 | 2,111 | 1,224 | - | 408,292 | ||||||||||||||||||
1-4 family residential | 247,888 | - | 592 | 1,018 | - | 249,498 | ||||||||||||||||||
Home equity - first lien | 55,279 | - | - | 46 | - | 55,325 | ||||||||||||||||||
Home equity - junior lien | 66,710 | - | 426 | 383 | - | 67,519 | ||||||||||||||||||
Subtotal: Real estate mortgage | 1,305,562 | 7,960 | 3,134 | 2,864 | - | 1,319,520 | ||||||||||||||||||
Consumer | 35,039 | - | - | 131 | - | 35,170 | ||||||||||||||||||
Total | $ | 2,267,103 | $ | 22,226 | $ | 9,339 | $ | 6,707 | $ | - | $ | 2,305,375 |
Type of loan | ||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||
and development, | ||||||||||||||||||||||||
Nine months ended | Commercial | excluding | ||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
(In thousands) | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Balance, January 1, 2019 | $ | 11,965 | $ | 1,760 | $ | 752 | $ | 10,681 | $ | 376 | $ | 25,534 | ||||||||||||
Provision (credit) | (178 | ) | (261 | ) | 44 | 1,579 | (184 | ) | 1,000 | |||||||||||||||
Charge-offs | (94 | ) | — | — | (13 | ) | (383 | ) | (490 | ) | ||||||||||||||
Recoveries | 260 | 203 | — | 98 | 272 | 833 | ||||||||||||||||||
Balance, September 30, 2019 | $ | 11,953 | $ | 1,702 | $ | 796 | $ | 12,345 | $ | 81 | $ | 26,877 |
Construction | ||||||||||||||||||||||||
and development, | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
(In thousands) | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Balance, January 1, 2018 | $ | 11,276 | $ | 1,724 | $ | 521 | $ | 11,012 | $ | 352 | $ | 24,885 | ||||||||||||
Provision (credit) | 2,141 | 245 | 61 | 107 | 151 | 2,705 | ||||||||||||||||||
Charge-offs | (2,390 | ) | — | — | (14 | ) | (332 | ) | (2,736 | ) | ||||||||||||||
Recoveries | 74 | — | — | 57 | 237 | 368 | ||||||||||||||||||
Balance, September 30, 2018 | $ | 11,101 | $ | 1,969 | $ | 582 | $ | 11,162 | $ | 408 | $ | 25,222 |
Stock Yards
The considerations by Bancorp inc.in computing its allowance are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:
● | C&I: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from cash flows of the business. A decline in the strength of the business or a weakened economy and decreased consumer and/or business spending may have an effect on the credit quality in this loan category. |
● | C&D, excluding undeveloped land: Loans in this category primarily include owner-occupied and investment C&D loans and commercial development projects. In most cases, C&D loans require only interest to be paid during the construction period. Upon completion or stabilization, C&D loans generally convert to permanent financing in the real estate mortgage segment, requiring principal amortization. Repayment of development loans is derived from sale of lots or units. Credit risk is affected by construction delays, cost overruns, market conditions and availability of permanent financing; to the extent such permanent financing is not being provided by Bancorp. |
● | Undeveloped land: Loans in this category are secured by land acquired for development by the borrower, but for which no development has yet taken place. Credit risk is primarily dependent upon the financial strength of the borrower, but can also be affected by market conditions and time to sell lots at an adequate price in the future. Credit risk is also affected by availability of permanent financing, including to the end user, to the extent such permanent financing is not being provided by Bancorp. |
● | Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential real estate, owner-occupied real estate used for business purposes, and income-producing investment properties. Underlying properties are generally located in Bancorp's primary market areas. |
For owner occupied residential and subsidiaryowner-occupied CRE, repayment is dependent on financial strength of the borrower. For income-producing investment properties, repayment is dependent on financial strength of tenants, and to a lesser extent the borrowers’ financial strength. Cash flows of income producing investment properties may be adversely impacted by a downturn in the economy as reflected by increased vacancy rates, which in turn, will have an effect on credit quality and property values. Overall health of the economy, including unemployment rates and real estate prices, has an effect on credit quality in this overall loan category.
● | Consumer: Loans in this category may be either secured or unsecured and repayment is dependent on credit quality of the individual borrower and, if applicable, adequacy of collateral securing the loan. Therefore, overall health of the economy, including unemployment rates, as well as home and securities prices, will have a significant effect on credit quality in this loan category. |
Impaired loans include non-accrual loans and loans past due 90 days-or-more accruing interest in addition to a nominal amount TDRs, which also continue to accrue interest.
The following table presents the recorded investment in non-accrual and loans past due 90-days-or-more and still accruing interest:
Past Due 90-Days-or-More | ||||||||||||||||
Non-accrual | and Still Accruing Interest | |||||||||||||||
(In thousands) | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | ||||||||||||
Commercial and industrial | $ | 186 | $ | 192 | $ | - | $ | 12 | ||||||||
Construction and development, excluding undeveloped land | — | 318 | — | — | ||||||||||||
Undeveloped land | — | 474 | — | — | ||||||||||||
Real estate mortgage: | ||||||||||||||||
Commercial investment | 741 | 138 | 396 | 99 | ||||||||||||
Owner occupied commercial | 1,409 | 586 | — | 535 | ||||||||||||
1-4 family residential | 137 | 760 | 72 | — | ||||||||||||
Home equity - first lien | — | — | — | — | ||||||||||||
Home equity - junior lien | 249 | 143 | 19 | 99 | ||||||||||||
Subtotal: Real estate mortgage | 2,536 | 1,627 | 487 | 733 | ||||||||||||
Consumer | — | — | — | — | ||||||||||||
Total loans | $ | 2,722 | $ | 2,611 | $ | 487 | $ | 745 |
In the course of working with borrowers, Bancorp may elect to restructure the contractual terms of certain loans. TDRs occur when, for economic, legal, or other reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider. Bancorp did not recognize new TDRs, nor did any TDRs default, in the three and nine months periods ended September 30, 2019 and 2018. Detail of outstanding TDRs included in total non-performing loans follows:
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
(In thousands) | Specific | Additional | Specific | Additional | ||||||||||||||||||||
reserve | commitment | reserve | commitment | |||||||||||||||||||||
TDRs | Balance | allocation | to lend | Balance | allocation | to lend | ||||||||||||||||||
Commercial and industrial | $ | 22 | $ | 22 | $ | — | $ | 28 | $ | 28 | $ | — | ||||||||||||
1-4 family residential | 13 | 13 | — | 14 | 14 | — | ||||||||||||||||||
Total TDRs | $ | 35 | $ | 35 | $ | — | $ | 42 | $ | 42 | $ | — |
As of September 30, 2019 formal foreclosure proceedings were in process on 1-4 family residential mortgage loans with a total recorded investment of $140,000, as compared with $528,000 as of December 31, 2018.
The following tables present the balance in the recorded investment in loans and by portfolio loan class and based on impairment evaluation method:
(In thousands) | Loans | Allowance | ||||||||||||||||||||||||||||||
September 30, 2019 | Loans individually evaluated for impairment | Loans collectively evaluated for impairment | Loans acquired with deteriorated credit quality | Total loans | Loans individually evaluated for impairment | Loans collectively evaluated for impairment | Loans acquired with deteriorated credit quality | Total allowance | ||||||||||||||||||||||||
Commercial and industrial | $ | 208 | $ | 875,919 | $ | — | $ | 876,127 | $ | 22 | $ | 11,931 | $ | — | $ | 11,953 | ||||||||||||||||
Construction and development, excluding undeveloped land | — | 248,296 | — | 248,296 | — | 1,702 | — | 1,702 | ||||||||||||||||||||||||
Undeveloped land | — | 35,169 | — | 35,169 | — | 796 | — | 796 | ||||||||||||||||||||||||
Real estate mortgage | 2,549 | 1,650,955 | — | 1,653,504 | 13 | 12,332 | — | 12,345 | ||||||||||||||||||||||||
Consumer | — | 43,568 | — | 43,568 | — | 81 | — | 81 | ||||||||||||||||||||||||
Total | $ | 2,757 | $ | 2,853,907 | $ | — | $ | 2,856,664 | $ | 35 | $ | 26,842 | $ | — | $ | 26,877 |
(In thousands) | Loans | Allowance | ||||||||||||||||||||||||||||||
December 31, 2018 | Loans individually evaluated for impairment | Loans collectively evaluated for impairment | Loans acquired with deteriorated credit quality | Total loans | Loans individually evaluated for impairment | Loans collectively evaluated for impairment | Loans acquired with deteriorated credit quality | Total allowance | ||||||||||||||||||||||||
Commercial and industrial | $ | 220 | $ | 833,304 | $ | — | $ | 833,524 | $ | 28 | $ | 11,937 | $ | — | $ | 11,965 | ||||||||||||||||
Construction and development, excluding undeveloped land | 318 | 224,732 | — | 225,050 | — | 1,760 | — | 1,760 | ||||||||||||||||||||||||
Undeveloped land | 474 | 29,618 | — | 30,092 | — | 752 | — | 752 | ||||||||||||||||||||||||
Real estate mortgage | 1,641 | 1,409,806 | — | 1,411,447 | 14 | 10,667 | — | 10,681 | ||||||||||||||||||||||||
Consumer | — | 48,058 | — | 48,058 | — | 376 | — | 376 | ||||||||||||||||||||||||
Total | $ | 2,653 | $ | 2,545,518 | $ | — | $ | 2,548,171 | $ | 42 | $ | 25,492 | $ | — | $ | 25,534 |
The following table’s present loans individually evaluated for impairment by loan portfolio class:
As of | Three months ended | Nine months ended | ||||||||||||||||||||||||||
September 30, 2019 | September 30, 2019 | September 30, 2019 | ||||||||||||||||||||||||||
Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
Recorded | principal | Related | recorded | income | recorded | income | ||||||||||||||||||||||
(In thousands) | investment | balance | allowance | investment | recognized | investment | recognized | |||||||||||||||||||||
Impaired loans with no related allowance: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 186 | $ | 176 | $ | — | $ | 136 | $ | — | $ | 164 | $ | — | ||||||||||||||
Construction and development, excluding undeveloped land | — | — | — | — | — | 80 | — | |||||||||||||||||||||
Undeveloped land | — | — | — | — | — | 119 | — | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | 741 | 741 | — | 524 | — | 376 | — | |||||||||||||||||||||
Owner occupied commercial | 1,409 | 1,847 | — | 1,427 | — | 1,226 | — | |||||||||||||||||||||
1-4 family residential | 137 | 137 | — | 426 | — | 614 | — | |||||||||||||||||||||
Home equity - first lien | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity - junior lien | 249 | 249 | — | 359 | — | 329 | — | |||||||||||||||||||||
Subtotal: Real estate mortgage | 2,536 | 2,974 | — | 2,736 | — | 2,545 | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal | $ | 2,722 | $ | 3,150 | $ | — | $ | 2,872 | $ | — | $ | 2,908 | $ | — | ||||||||||||||
Impaired loans with an allowance: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 22 | $ | 22 | $ | 22 | $ | 28 | $ | — | $ | 27 | $ | — | ||||||||||||||
Construction and development, excluding undeveloped land | — | — | — | — | — | — | — | |||||||||||||||||||||
Undeveloped land | — | — | — | — | — | — | — | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | — | — | — | — | — | — | — | |||||||||||||||||||||
Owner occupied commercial | — | — | — | — | — | — | — | |||||||||||||||||||||
1-4 family residential | 13 | 13 | 13 | 14 | — | 14 | — | |||||||||||||||||||||
Home equity - first lien | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity - junior lien | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal: Real estate mortgage | 13 | 13 | 13 | 14 | — | 14 | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal | $ | 35 | $ | 35 | $ | 35 | $ | 42 | $ | — | $ | 41 | $ | — | ||||||||||||||
Total: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 208 | $ | 198 | $ | 22 | $ | 164 | $ | — | $ | 191 | $ | — | ||||||||||||||
Construction and development, excluding undeveloped land | — | — | — | — | — | 80 | — | |||||||||||||||||||||
Undeveloped land | — | — | — | — | — | 119 | — | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | 741 | 741 | — | 524 | — | 376 | — | |||||||||||||||||||||
Owner occupied commercial | 1,409 | 1,847 | — | 1,427 | — | 1,226 | — | |||||||||||||||||||||
1-4 family residential | 150 | 150 | 13 | 440 | — | 628 | — | |||||||||||||||||||||
Home equity - first lien | — | — | — | - | — | - | — | |||||||||||||||||||||
Home equity - junior lien | 249 | 249 | — | 359 | — | 329 | — | |||||||||||||||||||||
Subtotal: Real estate mortgage | 2,549 | 2,987 | 13 | 2,750 | — | 2,559 | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Total impaired loans | $ | 2,757 | $ | 3,185 | $ | 35 | $ | 2,914 | $ | — | $ | 2,949 | $ | — |
As of | Three months ended | Nine months ended | ||||||||||||||||||||||||||
December 31, 2018 | September 30, 2018 | September 30, 2018 | ||||||||||||||||||||||||||
Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
Recorded | principal | Related | recorded | income | recorded | income | ||||||||||||||||||||||
(In thousands) | investment | balance | allowance | investment | recognized | investment | recognized | |||||||||||||||||||||
Impaired loans with no related allowance: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 192 | $ | 707 | $ | — | $ | 119 | $ | — | $ | 398 | $ | — | ||||||||||||||
Construction and development, excluding undeveloped land | 318 | 489 | — | 380 | — | 524 | — | |||||||||||||||||||||
Undeveloped land | 474 | 506 | — | 474 | — | 474 | — | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | 138 | 138 | — | — | — | 13 | — | |||||||||||||||||||||
Owner occupied commercial | 586 | 1,023 | — | 996 | — | 2,190 | — | |||||||||||||||||||||
1-4 family residential | 760 | 760 | — | 1,307 | — | 1,461 | — | |||||||||||||||||||||
Home equity - first lien | — | - | — | - | — | - | — | |||||||||||||||||||||
Home equity - junior lien | 143 | 143 | — | 60 | — | 45 | — | |||||||||||||||||||||
Subtotal: Real estate mortgage | 1,627 | 2,064 | — | 2,363 | — | 3,709 | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | 23 | — | |||||||||||||||||||||
Subtotal | $ | 2,611 | $ | 3,766 | $ | — | $ | 3,336 | $ | — | $ | 5,128 | $ | — | ||||||||||||||
Impaired loans with an allowance: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 28 | $ | 28 | $ | 28 | $ | 1,720 | $ | — | $ | 1,853 | $ | — | ||||||||||||||
Construction and development, excluding undeveloped land | — | — | — | — | — | — | — | |||||||||||||||||||||
Undeveloped land | — | — | — | — | — | 24 | — | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | — | — | — | — | — | — | — | |||||||||||||||||||||
Owner occupied commercial | — | — | — | 937 | — | 897 | — | |||||||||||||||||||||
1-4 family residential | 14 | 14 | 14 | 14 | — | 14 | — | |||||||||||||||||||||
Home equity - first lien | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity - junior lien | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal: Real estate mortgage | 14 | 14 | 14 | 951 | — | 911 | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal | $ | 42 | $ | 42 | $ | 42 | $ | 2,671 | $ | — | $ | 2,788 | $ | — | ||||||||||||||
Total: | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 220 | $ | 735 | $ | 28 | $ | 1,839 | $ | — | $ | 2,251 | $ | — | ||||||||||||||
Construction and development, excluding undeveloped land | 318 | 489 | — | 380 | — | 524 | — | |||||||||||||||||||||
Undeveloped land | 474 | 506 | — | 474 | — | 498 | — | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | 138 | 138 | — | — | — | 13 | — | |||||||||||||||||||||
Owner occupied commercial | 586 | 1,023 | — | 1,933 | — | 3,087 | — | |||||||||||||||||||||
1-4 family residential | 774 | 774 | 14 | 1,321 | — | 1,475 | — | |||||||||||||||||||||
Home equity - first lien | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity - junior lien | 143 | 143 | — | 60 | — | 45 | — | |||||||||||||||||||||
Subtotal: Real estate mortgage | 1,641 | 2,078 | 14 | 3,314 | — | 4,620 | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | 23 | — | |||||||||||||||||||||
Total impaired loans | $ | 2,653 | $ | 3,808 | $ | 42 | $ | 6,007 | $ | — | $ | 7,916 | $ | — |
Differences between recorded investment amounts and unpaid principal balance amounts less related allowance are due to partial charge-offs which have occurred over the lives of certain loans.
The following table presents the aging of the recorded investment in loans by portfolio class:
(In thousands) | 90 or more | |||||||||||||||||||||||
days past due | ||||||||||||||||||||||||
30-59 days | 60-89 days | (includes all | Total | Total | ||||||||||||||||||||
September 30, 2019 | Current | past due | past due | non-accrual) | past due | loans | ||||||||||||||||||
Commercial and industrial | $ | 874,576 | $ | 465 | $ | 900 | $ | 186 | $ | 1,551 | $ | 876,127 | ||||||||||||
Construction and development, excluding undeveloped land | 248,296 | — | — | — | — | 248,296 | ||||||||||||||||||
Undeveloped land | 35,169 | — | — | — | — | 35,169 | ||||||||||||||||||
Real estate mortgage: | ||||||||||||||||||||||||
Commercial investment | 723,028 | 3,352 | 14 | 1,137 | 4,503 | 727,531 | ||||||||||||||||||
Owner occupied commercial | 468,699 | 478 | 92 | 1,409 | 1,979 | 470,678 | ||||||||||||||||||
1-4 family residential | 329,140 | 2,159 | 239 | 209 | 2,607 | 331,747 | ||||||||||||||||||
Home equity - first lien | 50,881 | 134 | — | — | 134 | 51,015 | ||||||||||||||||||
Home equity - junior lien | 72,216 | 49 | — | 268 | 317 | 72,533 | ||||||||||||||||||
Subtotal: Real estate mortgage | 1,643,964 | 6,172 | 345 | 3,023 | 9,540 | 1,653,504 | ||||||||||||||||||
Consumer | 43,522 | 46 | — | — | 46 | 43,568 | ||||||||||||||||||
Total | $ | 2,845,527 | $ | 6,683 | $ | 1,245 | $ | 3,209 | $ | 11,137 | $ | 2,856,664 | ||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Commercial and industrial | $ | 832,923 | $ | 197 | $ | 200 | $ | 204 | $ | 601 | $ | 833,524 | ||||||||||||
Construction and development, excluding undeveloped land | 224,732 | — | — | 318 | 318 | 225,050 | ||||||||||||||||||
Undeveloped land | 29,552 | 66 | — | 474 | 540 | 30,092 | ||||||||||||||||||
Real estate mortgage: | ||||||||||||||||||||||||
Commercial investment | 586,884 | 1,382 | 107 | 237 | 1,726 | 588,610 | ||||||||||||||||||
Owner occupied commercial | 421,143 | 2,732 | 1,377 | 1,121 | 5,230 | 426,373 | ||||||||||||||||||
1-4 family residential | 274,547 | 374 | 336 | 760 | 1,470 | 276,017 | ||||||||||||||||||
Home equity - first lien | 49,321 | 179 | — | — | 179 | 49,500 | ||||||||||||||||||
Home equity - junior lien | 70,467 | 182 | 56 | 242 | 480 | 70,947 | ||||||||||||||||||
Subtotal: Real estate mortgage | 1,402,362 | 4,849 | 1,876 | 2,360 | 9,085 | 1,411,447 | ||||||||||||||||||
Consumer | 48,058 | — | — | — | — | 48,058 | ||||||||||||||||||
Total | $ | 2,537,627 | $ | 5,112 | $ | 2,076 | $ | 3,356 | $ | 10,544 | $ | 2,548,171 |
| Goodwill and Intangible Assets |
US Goodwill, recorded on the acquisition date of an entity, represents $11.9 million related to the May 1, 2019 KSB acquisition and $682,000 related to the 1996 purchase of a bank in southern Indiana. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. During this measurement period, Bancorp may record subsequent recast adjustments to goodwill for provisional amounts recorded at the acquisition date.
GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Evaluations have resulted in no indicationImpairment exists when a reporting unit’s carrying value of impairment.goodwill exceeds its fair value. Bancorp’s annual goodwill impairment test is conducted as of December 31 of each year or more often as situations dictate. The goodwill balance at September 30, 2019 relates entirely to the Commercial Banking segment of Bancorp. At December 31, 2018, Bancorp’s Commercial Banking reporting unit had positive equity and Bancorp currently has goodwillelected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair value. Therefore, Bancorp did not complete the two-step impairment test as of December 31, 2018.
Changes in the amountcarrying value of $682 thousand from the 1996 acquisition of an Indiana bank. This goodwill is assigned to the commercial banking segment of Bancorp.follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Balance at beginning of period | $ | 12,826 | $ | 682 | $ | 682 | $ | 682 | ||||||||
Goodwill acquired | — | — | 12,144 | — | ||||||||||||
Recast adjustments | (233 | ) | — | (233 | ) | — | ||||||||||
Impairment | — | — | — | — | ||||||||||||
Balance at end of period | $ | 12,593 | $ | 682 | $ | 12,593 | $ | 682 |
Bancorp
The Company recorded a gross core deposit intangible totalingassets of $1.5 million and $2.5 million as a resultin association with its May 1, 2019 KSB and 2013 TBOC acquisitions. See the Footnote titled “Acquisition of its 2013 acquisitionKing Bancorp, Inc.” for further details.
Changes in the net carrying amount of THE BANCorp, Inc. This intangible is being amortized over the expected life of the underlying deposits to which the intangible is attributable. At September 30, 2017, the unamortized core deposit intangible was $1.3 million, as compared to $1.4 million at December 31, 2016.intangibles follow:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Balance at beginning of period | $ | 2,461 | $ | 1,139 | $ | 1,056 | $ | 1,225 | ||||||||
Core deposit intangible acquired | — | — | 1,519 | — | ||||||||||||
Amortization | (88 | ) | (41 | ) | (202 | ) | (127 | ) | ||||||||
Balance at end of period | $ | 2,373 | $ | 1,098 | $ | 2,373 | $ | 1,098 |
Mortgage servicing rights (MSRs)
MSRs, a component of other assets, are initially recognized at fair value when mortgage loans are sold with servicing retained. The MSRs are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. MSRs are evaluated quarterly for impairment by comparing carrying value to fair value. Estimated fair values of MSRs at both September 30, 2017 2019 and December 31, 2016 2018 were $2.7$3 million and $4 million.
Changes in the net carrying amount of MSRs follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Balance at beginning of period | $ | 1,168 | $ | 898 | $ | 1,022 | $ | 875 | ||||||||
Additions for mortgage loans sold | 124 | 125 | 338 | 220 | ||||||||||||
Amortization | (40 | ) | (40 | ) | (108 | ) | (112 | ) | ||||||||
Balance at end of period | $ | 1,252 | $ | 983 | $ | 1,252 | $ | 983 |
Total outstanding principal balances of loans serviced for others were $350.1$324 million and $372.2$328 million at September 30, 2017, 2019, and December 31, 2016, respectively.2018.
(6) | Income Taxes |
In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Historically, the franchise tax, a component of non-interest expenses, was assessed at 1.1% of net capital and averaged $2.5 million annually over the prior two year-end periods. The Kentucky corporate income tax will be assessed at 5% of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, during the first quarter of 2019, Bancorp established a Kentucky state deferred tax asset related to existing temporary differences estimated to reverse after the effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of federal impact of $1.3 million, or approximately $0.06 per diluted share for the first quarter 2019. While this is positive in the short-term, Bancorp anticipates an unfavorable impact of approximately $200,000 per year beginning in 2021.
ChangesIn April 2019, the Kentucky legislature passed HB458 allowing banks and their holding companies to be combined together for Kentucky tax return filings. The combined filing will allow Bancorp’s holding company net operating losses to offset against net revenue generated by the Bank and reduce Bancorp’s tax liability. Bancorp recorded a state tax benefit associated with this change of $2.4 million in the net carrying amountsecond quarter of MSRs2019, or approximately $0.11 per diluted share for the nine months ended September 30, 2017 and 2016 are shown in the following table:second quarter of 2019.
For the nine months | ||||||||
ended September 30, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Balance at beginning of period | $ | 921 | $ | 1,018 | ||||
Additions for mortgage loans sold | 143 | 105 | ||||||
Amortization | (222 | ) | (192 | ) | ||||
Balance at end of period | $ | 842 | $ | 931 |
Components of income tax expense (benefit) from operations follow:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Current income tax expense: | ||||||||||||||||
Federal | $ | 4,524 | $ | 3,888 | $ | 11,022 | $ | 9,750 | ||||||||
State | 224 | 196 | 554 | 506 | ||||||||||||
Total current income tax expense | 4,748 | 4,084 | 11,576 | 10,256 | ||||||||||||
Deferred income tax expense (benefit) : | ||||||||||||||||
Federal | (768 | ) | (502 | ) | 21 | (456 | ) | |||||||||
State | (201 | ) | (27 | ) | (4,969 | ) | (34 | ) | ||||||||
Total deferred income tax expense | (969 | ) | (529 | ) | (4,948 | ) | (490 | ) | ||||||||
Change in valuation allowance | 4 | — | 24 | — | ||||||||||||
Total income tax expense | $ | 3,783 | $ | 3,555 | $ | 6,652 | $ | 9,766 |
Stock Yards Bancorp, inc. and subsidiary
|
|
Components of income tax expense from operations were as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Current income tax expense | ||||||||||||||||
Federal | $ | 5,211 | $ | 4,363 | $ | 12,936 | $ | 10,958 | ||||||||
State | 179 | 287 | 472 | 597 | ||||||||||||
Total current income tax expense | 5,390 | 4,650 | 13,408 | 11,555 | ||||||||||||
Deferred income tax (benefit) expense | ||||||||||||||||
Federal | (1,583 | ) | (692 | ) | (2,240 | ) | (302 | ) | ||||||||
State | (44 | ) | (75 | ) | (30 | ) | (18 | ) | ||||||||
Total deferred income tax expense (benefit) | (1,627 | ) | (767 | ) | (2,270 | ) | (320 | ) | ||||||||
Change in valuation allowance | 333 | - | 459 | - | ||||||||||||
Total income tax expense | $ | 4,096 | $ | 3,883 | $ | 11,597 | $ | 11,235 |
An analysis of the difference between statutory and effective income tax rates for the nine months ended September 30, 2017 and 2016 follows:
Three months ended | Nine months ended | |||||||||||||||||||||||
Nine months ended September 30, | September 30, | September 30, | ||||||||||||||||||||||
2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
U.S. federal statutory income tax rate | 35.0 | % | 35.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||
Kentucky state income tax enactments | (0.7 | ) | — | (6.9 | ) | — | ||||||||||||||||||
Excess tax benefits from stock-based compensation arrangements | (1.5 | ) | — | (1.2 | ) | (1.0 | ) | |||||||||||||||||
Increase in cash surrender value of life insurance | (0.8 | ) | (0.7 | ) | (0.9 | ) | (0.6 | ) | ||||||||||||||||
Tax credits | (4.6 | ) | (9.4 | ) | (0.5 | ) | (0.2 | ) | (0.6 | ) | (0.4 | ) | ||||||||||||
Excess tax benefits from share-based compensation arrangements | (3.0 | ) | - | |||||||||||||||||||||
Increase in cash surrender value of life insurance | (1.4 | ) | (0.9 | ) | ||||||||||||||||||||
Tax exempt interest income | (1.1 | ) | (1.3 | ) | (0.3 | ) | (0.4 | ) | (0.3 | ) | (0.5 | ) | ||||||||||||
State income taxes, net of federal benefit | 0.7 | 0.9 | 0.7 | 0.8 | 0.7 | 0.7 | ||||||||||||||||||
Other, net | 0.3 | 2.7 | (0.1 | ) | (0.1 | ) | 0.1 | 0.1 | ||||||||||||||||
Effective income tax rate | 25.9 | % | 27.0 | % | 17.9 | % | 20.4 | % | 11.9 | % | 19.3 | % |
StateCurrently, state income tax expense represents taxes owed into the state of Indiana. State income taxes in Kentucky and Ohio state bank taxes are currently based on capital levels, and are recorded as other non-interest expense.See preceding section regarding 2019 changes in Kentucky tax law.
Bancorp’s results for the first nine months of 2017 reflect implementation of Accounting Standards Update 2016-09, which provides guidance for the recognition of excess tax benefits or deficiencies related to share-based payment awards. Effective for fiscal years beginning after December 15, 2016, ASU 2016-09 changes the way these benefits and deficiencies are recorded. Prior to 2017 they were recorded in additional paid-in capital, and therefore did not affect earnings. Beginning in 2017, these amounts are being recorded as tax expense or benefit in the income statement. For the three and nine month periods ending September 30, 2017 Bancorp recorded benefits of $241 thousand and $1.4 million, respectively, within the provision for income tax expense for such awards.
Stock Yards Bancorp, inc. and subsidiary
US GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’smanagement’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of September 30, 2017 2019 and December 31, 2016, 2018, the gross amount of unrecognized tax benefits was immaterial to the consolidated financial statements of the Company. Federal and state income tax returns are subject to examination for the years after 2012.2015.
| Deposits |
The composition of the Bank’s deposits outstanding at September 30, 2017 (unaudited) and December 31, 2016 is as follows:
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||||||||||
September 30, | December 31, | |||||||||||||||
2017 | 2016 | |||||||||||||||
(in thousands) | ||||||||||||||||
Non-interest bearing demand | $ | 676,824 | $ | 680,156 | ||||||||||||
Non-interest bearing demand deposits | $ | 795,793 | $ | 711,023 | ||||||||||||
Interest bearing deposits: | ||||||||||||||||
Interest bearing demand | 725,368 | 768,139 | 854,175 | 892,867 | ||||||||||||
Savings | 149,596 | 140,030 | 168,067 | 155,007 | ||||||||||||
Money market | 698,198 | 682,421 | 698,318 | 688,744 | ||||||||||||
Time deposits of more than $250,000 | 33,270 | 40,427 | ||||||||||||||
Other time deposits | 198,710 | 209,375 | ||||||||||||||
Time deposits of $250 thousand or more | 69,210 | 55,182 | ||||||||||||||
Other time deposits(1) | 360,750 | 291,533 | ||||||||||||||
Total time deposits | 231,980 | 249,802 | 429,960 | 346,715 | ||||||||||||
Total interest bearing deposits | 1,805,142 | 1,840,392 | 2,150,520 | 2,083,333 | ||||||||||||
Total deposits | $ | 2,481,966 | $ | 2,520,548 | $ | 2,946,313 | $ | 2,794,356 |
(1) | Includes $29.8 million in brokered deposits as of both September30, 2019 and December 31, 2018. |
Maturities of time deposits of more than $250,000, outstanding at September 30, 2017, are summarized as follows:Deposits totaling $125.5 million were acquired on May 1, 2019, associated with the KSB acquisition.
(in thousands) | Amount | |||
3 months or less | $ | 11,463 | ||
Over 3 through 6 months | 3,938 | |||
Over 6 through 12 months | 10,942 | |||
Over 1 through 3 years | 6,410 | |||
Over 3 years | 517 | |||
Total | $ | 33,270 |
Stock Yards Bancorp, inc. and subsidiary
| Securities Sold Under Agreements to Repurchase |
Securities sold under agreements to repurchase, whichSSUAR represent excess funds froma funding source of Bancorp and are primarily used by commercial customers as part of ain conjunction with collateralized corporate cash management service, totaled $71.9 millionaccounts. Such repurchase agreements are considered financing agreements and $67.6 million at mature within one business day from the transaction date. At September 30, 2017 and December 31, 2016, respectively. Bancorp enters into sales of securities under agreement to repurchase at a specified future date. At September 30, 2017, 2019, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities which were owned and controlled by and under the control of Bancorp.
Information concerning SSUAR follows:
(Dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Outstanding balance at end of period | $ | 33,172 | $ | 36,094 | ||||
Weighted average interest rate at end of period | 0.24 | % | 0.24 | % |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Average outstanding balance during the period | $ | 37,705 | $ | 67,381 | $ | 38,402 | $ | 66,869 | ||||||||
Average interest rate during the period | 0.27 | % | 0.32 | % | 0.28 | % | 0.24 | % | ||||||||
Maximum outstanding at any month end during the period | $ | 38,362 | $ | 73,057 | $ | 43,160 | $ | 74,725 |
| Federal Home Loan Bank Advances |
Bancorp had outstanding borrowings 57 separate advances totaling $50.1$82 million and $51.1 million at as of September 30, 2017 and 2019, as compared with 14 separate advances totaling $48 million as of December 31, 2016, respectively, via 14 separate fixed-rate advances.2018. As a result of the KSB acquisition, Bancorp assumed 46 advances totaling $43 million, with maturities ranging from 2019 to 2028. These advances were discounted to fair value as of the acquisition date. See the Footnote titled “Acquisition of King Bancorp, Inc.” for further details. As of September 30, 2017, 2019, for two15 advances totaling $30$50 million, bothall of which are non-callable, interest payments are due monthly, with principal due at maturity. For the remaining advances, totaling $20.1 million, principal and interest payments are due monthly based on an amortization schedule.
The following is a summary of the contractual maturities and average effective rates of outstanding advances:
(In thousands) | September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||
Maturity | Weighted average | Weighted average | ||||||||||||||||||||||||||||||
Year | Advance | Fixed Rate | Advance | Fixed Rate | Advance | Fixed Rate | Advance | Fixed Rate | ||||||||||||||||||||||||
2017 | $ | 30,000 | 1.24 | % | $ | 30,000 | 0.70 | % | ||||||||||||||||||||||||
2019 | $ | 29,926 | 2.09 | % | $ | 30,000 | 2.54 | % | ||||||||||||||||||||||||
2020 | 1,753 | 2.23 | 1,790 | 2.23 | 20,218 | 2.38 | 1,691 | 2.23 | ||||||||||||||||||||||||
2021 | 306 | 2.12 | 359 | 2.12 | 2,481 | 2.49 | 215 | 2.12 | ||||||||||||||||||||||||
2023 | 489 | 1.00 | — | — | ||||||||||||||||||||||||||||
2024 | 2,505 | 2.36 | 2,661 | 2.36 | 2,077 | 2.36 | 2,240 | 2.36 | ||||||||||||||||||||||||
2025 | 5,615 | 2.43 | 6,025 | 2.43 | 3,896 | 2.41 | 4,626 | 2.42 | ||||||||||||||||||||||||
2026 | 8,658 | 1.99 | 8,936 | 1.99 | 8,358 | 1.95 | 8,185 | 1.99 | ||||||||||||||||||||||||
2027 | 8,346 | 1.75 | — | — | ||||||||||||||||||||||||||||
2028 | 1,273 | 1.48 | 1,304 | 1.48 | 6,194 | 2.38 | 1,220 | 1.49 | ||||||||||||||||||||||||
Total | $ | 50,110 | 1.61 | % | $ | 51,075 | 1.30 | % | $ | 81,985 | 2.16 | % | $ | 48,177 | 2.39 | % |
In addition to fixed-rateFHLB advances listed above, at September 30, 2017 Bancorp had a $150 million cash management advance from the FHLB. This advance matured in the first week of October, 2017 and was used to manage Bancorp’s overall cash position. Due to the short term of the advance, it was recorded on the consolidated balance sheet within Federal funds purchased and other short-term borrowings.
Advances from the FHLB are collateralized by certain commercial and residential real estate mortgage loans under a blanket mortgage collateral pledge agreement and FHLB stock. Bancorp at times utilizesviews these borrowingsadvances to matchbe an effective alternative to brokered deposits to fund long-term fixed rate loans.loan growth. At September 30, 2017, 2019, and December 31, 2018, the amount of available credit from the FHLB totaled $367.3$511 million and $537 million. The Company also had $105 million in FFP lines available from correspondent banks at both September 30, 2019, and December 31, 2018.
Stock Yards Bancorp, inc. and subsidiary
| Other Comprehensive Income (Loss) |
The following table illustratestables illustrate activity within the balances of accumulated other comprehensive incomein AOCI by component, and is shown for the nine months ended September 30, 2017 and 2016.component:
Net unrealized | Net unrealized | Minimum | ||||||||||||||
gains on | gains (losses) | pension | ||||||||||||||
securities | on cash | liability | ||||||||||||||
(in thousands) | available-for-sale | flow hedges | adjustment | Total | ||||||||||||
Balance at December 31, 2015 | $ | 965 | $ | (60 | ) | $ | (273 | ) | $ | 632 | ||||||
Net current period other comprehensive gain (loss) | 4,110 | (301 | ) | - | 3,809 | |||||||||||
Balance at September 30, 2016 | $ | 5,075 | $ | (361 | ) | $ | (273 | ) | $ | 4,441 | ||||||
Balance at December 31, 2016 | $ | (1,211 | ) | $ | (16 | ) | $ | (272 | ) | $ | (1,499 | ) | ||||
Net current period other comprehensive income gain | 950 | 38 | - | 988 | ||||||||||||
Amounts reclassified from other comprehensive income | (20 | ) | - | - | (20 | ) | ||||||||||
Net current-period other comprehensive income | 930 | 38 | - | 968 | ||||||||||||
Balance at September 30, 2017 | $ | (281 | ) | $ | 22 | $ | (272 | ) | $ | (531 | ) |
Net unrealized | Net unrealized | Minimum | ||||||||||||||
gains (losses) | gains (losses) | pension | ||||||||||||||
Three months ended September 30, 2019 | on securities | on cash | liability | |||||||||||||
(In thousands) | available for sale | flow hedges | adjustment | Total | ||||||||||||
Balance, beginning of period | $ | 1,291 | $ | (14 | ) | $ | (211 | ) | $ | 1,066 | ||||||
Net current period other comprehensive income (loss) | 719 | (55 | ) | (2 | ) | 662 | ||||||||||
Balance, end of period | $ | 2,010 | $ | (69 | ) | $ | (213 | ) | $ | 1,728 | ||||||
Three months ended September 30, 2018 | ||||||||||||||||
Balance, beginning of period | $ | (7,274 | ) | $ | 623 | $ | (393 | ) | $ | (7,044 | ) | |||||
Net current period other comprehensive income (loss) | (1,632 | ) | 40 | — | (1,592 | ) | ||||||||||
Balance, end of period | $ | (8,906 | ) | $ | 663 | $ | (393 | ) | $ | (8,636 | ) |
Net unrealized | Net unrealized | Minimum | ||||||||||||||
gains (losses) | gains (losses) | pension | ||||||||||||||
Nine months ended September 30, 2019 | on securities | on cash | liability | |||||||||||||
(In thousands) | available for sale | flow hedges | adjustment | Total | ||||||||||||
Balance, beginning of period | $ | (5,330 | ) | $ | 408 | $ | (220 | ) | $ | (5,142 | ) | |||||
Net current period other comprehensive income (loss) | 7,340 | (477 | ) | 7 | 6,870 | |||||||||||
Balance, end of period | $ | 2,010 | $ | (69 | ) | $ | (213 | ) | $ | 1,728 | ||||||
Nine months ended September 30, 2018 | ||||||||||||||||
Balance, beginning of period | $ | (1,781 | ) | $ | 193 | $ | (342 | ) | $ | (1,930 | ) | |||||
Net current period other comprehensive income (loss) | (6,629 | ) | 429 | — | (6,200 | ) | ||||||||||
Reclassification adjustment for adoption of ASU 2018-02 | (496 | ) | 41 | (51 | ) | (506 | ) | |||||||||
Balance, end of period | $ | (8,906 | ) | $ | 663 | $ | (393 | ) | $ | (8,636 | ) |
| Preferred Stock |
Bancorp has a class of preferred stock (no(0 par value; 1,000,000 shares authorized), the relative rights, preferences and other terms of which or any series within the class will be determined by the Board of Directors prior to any issuance. NoneNaN of this stock has been issued to date.
Stock Yards Bancorp, inc. and subsidiary
| Net Income Per Share |
The following table reflects for the three and nine months ended September 30, 2017 and 2016, net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:
Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
(in thousands, except per share data) | September 30, | September 30, | ||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | September 30, | September 30, | |||||||||||||||||||||||||||
(In thousands, except per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||
Net income | $ | 11,704 | $ | 10,467 | $ | 33,097 | $ | 30,411 | $ | 17,234 | $ | 13,876 | $ | 49,418 | $ | 40,859 | ||||||||||||||||
Average basic shares outstanding | 22,542 | 22,385 | 22,524 | 22,325 | ||||||||||||||||||||||||||||
Weighted average shares outstanding - basic | 22,550 | 22,636 | 22,633 | 22,613 | ||||||||||||||||||||||||||||
Dilutive securities | 422 | 418 | 460 | 386 | 260 | 332 | 268 | 343 | ||||||||||||||||||||||||
Average shares outstanding including dilutive securities including dilutive securities | 22,964 | 22,803 | 22,984 | 22,711 | ||||||||||||||||||||||||||||
Weighted average shares outstanding- diluted | 22,810 | 22,968 | 22,901 | 22,956 | ||||||||||||||||||||||||||||
Net income per share, basic | $ | 0.52 | $ | 0.47 | $ | 1.47 | $ | 1.36 | $ | 0.76 | $ | 0.61 | $ | 2.18 | $ | 1.81 | ||||||||||||||||
Net income per share, diluted | $ | 0.51 | $ | 0.46 | $ | 1.44 | $ | 1.34 | 0.76 | 0.60 | 2.16 | 1.78 |
Certain SARs that were excluded from the EPS calculation because their impact was antidilutive follows:
Three months ended | Nine months ended | |||||||||||||||
(In thousands) | September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Antidilutive SARs | 199 | 94 | 199 | 94 |
These shares while antidilutive, could however, be dilutive to EPS in the future.
| Defined Benefit |
Bancorp sponsors an unfunded, non-qualified, defined benefit retirement plan for three3 key officers (two(1 current and one2 retired), and has no plans to increase the number of or benefits to participants. Benefits vest based on 25 years of service. All three officersparticipants are fully vested as of September 2017.vested. Actuarially determined pension costs are expensed and accrued over the service period, and benefits are paid from Bancorp’s assets. Bancorp maintains life insurance policies, for which it is the beneficiary, for the defined benefit plan participants. Income from these policies is utilized to offset costs of benefits. Net periodic benefits costs, which include interestbenefit cost and amortization of net losses, totaled $34 thousand and $33 thousandwas immaterial for the three-month periods ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the net periodic benefit costs totaled $103 thousand and $100 thousand, respectively.all respective periods.
| Stock-Based Compensation |
The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.
Bancorp currently has one stock-based compensation plan. At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. NoIn 2018 shareholders approved an additional 500,000 shares were made available.for issuance under the plan. As of September 30, 2017, 2019, there were 285,133795,000 shares available for future awards.
Stock Options – Bancorp had 0 stock options outstanding as of September 30, 2019 and December 31, 2018.
Options, which have not beenSARs – SARs granted since 2007, had a vesting schedule of 20% per year and as of February 2017; all options have been exercised or expired. Stock appreciation rights (“SARs”) have a vesting schedule of 20% per year. SARsyear and expire ten years after the grant date unless unvested grants are forfeited due to employment termination. SARs granted under the 2005 plan expire as late as 2025.
RestrictedFair values of SARs are estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating such value. This model requires the input of assumptions, changes to which can materially affect the fair value estimate. The following assumptions were used in SAR valuations at the grant date in each year:
2019 | 2018 | |||||||
Dividend yield | 2.54 | % | 2.56 | % | ||||
Expected volatility | 20.39 | % | 20.17 | % | ||||
Risk free interest rate | 2.52 | % | 2.96 | % | ||||
Expected life of SARs (years) | 7.2 | 7.0 |
Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of SARs granted. Expected volatility is the volatility of the underlying shares for the expected term on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the awards. The expected life of SARs is based on past experience of similar-life SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.
RSA Grants– RSAs granted to officers vest over five years. All restricted shares have been granted at a price equal to the market value of common stock at the time of grant. For all grants prior to 2015, grantees wereare entitled to dividend payments during the vesting period. For grants in 2015 and after,forward, forfeitable dividends are deferred until shares are vested.
Stock Yards Bancorp, inc. and subsidiaryRSAs is equal to the market value of the shares on the date of grant.
PSU Grants of performance stock units (“PSUs”)– PSUs vest based upon service and a three-yearthree-year performance period, which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the fairmarket value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Beginning in 2015, grantsGrants require a one year post-vesting holding period. For 2015, 2016period and 2017, the fair value of such grants incorporates a liquidity discount of 4.80%, 4.50% and 5.12%, respectively, related to the holding period.period of 4.1%, 4.3% and 5.1% for 2019,2018, and 2017.
RSU Grants of restricted stock units (“RSUs”)– RSUs are only granted to non-employee directors, are time-based and vest 12 months after grant date. Because grantees are entitled to deferred dividend payments at the end of the vesting period, fair value of the RSUs is equal to the fairequals market value of underlying shares on the date of grant.
Bancorp has recognized stock-based compensation expense, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows:
For three months ended | For nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Stock-based compensation expense before income taxes | $ | 670 | $ | 573 | $ | 2,012 | $ | 1,646 | ||||||||
Less: deferred tax benefit | (235 | ) | (200 | ) | (704 | ) | (576 | ) | ||||||||
Reduction of net income | $ | 435 | $ | 373 | $ | 1,308 | $ | 1,070 |
Bancorp’s net income for the three and nine-month periods ended September 30, 2017 reflected the implementation of ASU 2016-09 which changed the way excess tax benefits and deficiencies related to share-based compensation are recorded. Prior to 2017 these were recorded directly to additional paid-in capital and, thus did not affect earnings. Beginning in 2017 these are recorded as a tax expense or benefit in the income statement. For the three and nine months ended September 30, 2017 these benefits resulted in a $241 thousand and a $1.4 million increase in net income, respectively. This tax benefit is not reflected in the table above.
Bancorp expects to record an additional $679 thousand of stock-based compensation expense in 2017 for equity grants outstanding as of September 30, 2017. As of September 30, 2017, Bancorp has $4.9 million of unrecognized stock-based compensation expense that is expected to be recorded as compensation expense over the next five years as awards vest. Bancorp usedutilized cash of $216 thousand$272,000 during the firstnine months of 20172019 for the purchase of shares upon the vesting of restricted stock units, net of cash received for options exercised.RSUs. This compares towith cash receivedused of $1.6 million$154,000 during the firstnine months of 20162018 for similar activity.the purchase of shares.
In the first quarter of 2019, Bancorp awarded 9,834 RSUs to non-employee directors of Bancorp with a grant date fair value of $330,000.
Stock Yards
Bancorp inc.has recognized stock-based compensation expense for SARs, RSAs, and subsidiaryPSUs within compensation expense, and RSUs for directors within other non-interest expense, as follows:
Three months ended September 30, 2019 | ||||||||||||||||||||
(In thousands) | Stock Appreciation Rights | Restricted Stock Awards | Restricted Stock Units | Performance Stock Units | Total | |||||||||||||||
Expense | $ | 88 | $ | 292 | $ | 82 | $ | 414 | $ | 876 | ||||||||||
Deferred tax benefit | (18 | ) | (65 | ) | (17 | ) | (109 | ) | (209 | ) | ||||||||||
Total net expense | $ | 70 | $ | 227 | $ | 65 | $ | 305 | $ | 667 |
Fair values of Bancorp’s SARs are estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options and SARs. This model requires input of assumptions, changes to which can materially affect the fair value estimate. Fair value of restricted shares is equal to Bancorp’s closing stock price on the date of grant. The following assumptions were used in SAR valuations at the grant date in each year:
Three months ended September 30, 2018 | ||||||||||||||||||||
(In thousands) | Stock Appreciation Rights | Restricted Stock Awards | Restricted Stock Units | Performance Stock Units | Total | |||||||||||||||
Expense | $ | 79 | $ | 280 | $ | 62 | $ | 467 | $ | 888 | ||||||||||
Deferred tax benefit | (16 | ) | (59 | ) | (13 | ) | (103 | ) | (191 | ) | ||||||||||
Total net expense | $ | 63 | $ | 221 | $ | 49 | $ | 364 | $ | 697 |
2017 | 2016 | |||||||
Dividend yield | 2.72 | % | 2.94 | % | ||||
Expected volatility | 19.47 | % | 19.31 | % | ||||
Risk free interest rate | 2.29 | % | 1.70 | % | ||||
Expected life of SARs (in years) | 7.0 | 7.3 |
Nine months ended September 30, 2019 | ||||||||||||||||||||
(In thousands) | Stock Appreciation Rights | Restricted Stock Awards | Restricted Stock Units | Performance Stock Units | Total | |||||||||||||||
Expense | $ | 258 | $ | 891 | $ | 246 | $ | 1,337 | $ | 2,732 | ||||||||||
Deferred tax benefit | (54 | ) | (186 | ) | (52 | ) | (281 | ) | (573 | ) | ||||||||||
Total net expense | $ | 204 | $ | 705 | $ | 194 | $ | 1,056 | $ | 2,159 |
Dividend yield and expected volatility are based on historical information for Bancorp for time periods corresponding to the expected life of options and SARs granted. Expected volatility is the price volatility of the underlying shares for the expected term measured on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the award. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.
Nine months ended September 30, 2018 | ||||||||||||||||||||
(In thousands) | Stock Appreciation Rights | Restricted Stock Awards | Restricted Stock Units | Performance Stock Units | Total | |||||||||||||||
Expense | $ | 229 | $ | 831 | $ | 186 | $ | 1,677 | $ | 2,923 | ||||||||||
Deferred tax benefit | (48 | ) | (175 | ) | (39 | ) | (356 | ) | (618 | ) | ||||||||||
Total net expense | $ | 181 | $ | 656 | $ | 147 | $ | 1,321 | $ | 2,305 |
Stock Yards
As of September 30, 2019, Bancorp inc. and subsidiaryhas $5.8 million of unrecognized stock-based compensation expense estimated to be recorded as follows:
(In thousands) | Stock Appreciation Rights | Restricted Stock Awards | Restricted Stock Units | Performance Stock Units | Total | |||||||||||||||
Remainder of 2019 | $ | 88 | $ | 296 | $ | 83 | $ | 381 | $ | 848 | ||||||||||
2020 | 306 | 1,037 | 2 | 853 | 2,198 | |||||||||||||||
2021 | 248 | 819 | — | 462 | 1,529 | |||||||||||||||
2022 | 193 | 550 | — | — | 743 | |||||||||||||||
2023 | 118 | 304 | — | — | 422 | |||||||||||||||
2024 | 11 | 24 | — | — | 35 | |||||||||||||||
Total estimated expense | $ | 964 | $ | 3,030 | $ | 85 | $ | 1,696 | $ | 5,775 |
A summary of stock option andThe following table summarizes SARs activity and related information for the twelve month period ended December 31, 2016 and the nine month period ended September 30, 2017 follows:information:
Weighted | Weighted | ||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted | Aggregate | Weighted | average | Weighted | Weighted | average | |||||||||||||||||||||||||||||||||||||||||||||
Options | average | intrinsic | average | remaining | average | Aggregate | average | remaining | |||||||||||||||||||||||||||||||||||||||||||
and SARs | Exercise | exercise | value | fair | contractual | Exercise | exercise | intrinsic | fair | contractual | |||||||||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | SARs | price | price | value(1) | value | life (in years) | |||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | price | price | (in thousands) | value | life (in years) | ||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Vested and exercisable | 656 | $ | 14.02 | - | 19.44 | $ | 15.75 | $ | 6,191 | $ | 3.39 | 3.7 | |||||||||||||||||||||||||||||||||||||||
Unvested | 266 | 15.24 | - | 24.55 | 18.66 | 1,733 | 3.29 | 7.7 | |||||||||||||||||||||||||||||||||||||||||||
Total outstanding | 922 | 14.02 | - | 24.55 | 16.59 | 7,924 | 3.36 | 4.8 | |||||||||||||||||||||||||||||||||||||||||||
Outstanding, January 1, 2018 | 704 | $14.02 | - | $40.00 | $ | 19.51 | $ | 12,923 | $ | 3.47 | 5.1 | ||||||||||||||||||||||||||||||||||||||||
Granted | 88 | 25.76 | - | 33.08 | 25.84 | 1,866 | 3.56 | 100 | 35.90 | - | 39.32 | 37.75 | — | 6.07 | |||||||||||||||||||||||||||||||||||||
Exercised | (272 | ) | 14.02 | - | 17.89 | 16.38 | 4,155 | 3.73 | (73 | ) | 14.02 | - | 19.37 | 15.32 | 1,654 | 3.43 | |||||||||||||||||||||||||||||||||||
Forfeited | (3 | ) | 14.02 | - | 15.84 | 15.18 | 60 | 2.94 | — | - | - | — | — | ||||||||||||||||||||||||||||||||||||||
Outstanding, December 31, 2018 | 731 | $14.02 | - | $40.00 | $ | 22.42 | $ | 8,422 | $ | 3.83 | 5.2 | ||||||||||||||||||||||||||||||||||||||||
At December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Vested and exercisable | 475 | 14.02 | - | 24.56 | 15.72 | 14,820 | 3.16 | 4.3 | |||||||||||||||||||||||||||||||||||||||||||
Unvested | 260 | 15.24 | - | 33.08 | 21.53 | 6,623 | 3.43 | 7.8 | |||||||||||||||||||||||||||||||||||||||||||
Total outstanding | 735 | 14.02 | - | 33.08 | 17.78 | 21,443 | 3.26 | 5.5 | |||||||||||||||||||||||||||||||||||||||||||
Outstanding, January 1, 2019 | 731 | $14.02 | - | $40.00 | $ | 22.42 | $ | 8,422 | $ | 3.83 | |||||||||||||||||||||||||||||||||||||||||
Granted | 46 | 40.00 | - | 40.00 | 40.00 | - | 6.34 | 53 | 36.65 | - | 38.18 | 37.01 | 2 | 6.24 | |||||||||||||||||||||||||||||||||||||
Exercised | (47 | ) | 14.02 | - | 17.89 | 15.52 | 1,168 | 3.27 | (125 | ) | 14.02 | - | 22.96 | 16.05 | 2,574 | 3.53 | |||||||||||||||||||||||||||||||||||
Forfeited | - | - | - | - | - | — | - | - | — | — | |||||||||||||||||||||||||||||||||||||||||
Outstanding, September 30, 2019 | 659 | $14.02 | - | $40.00 | $ | 24.80 | $ | 8,146 | $ | 4.08 | 5.4 | ||||||||||||||||||||||||||||||||||||||||
At September 30, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Vested and exercisable | 519 | 14.02 | - | 25.76 | 16.39 | 11,218 | 3.15 | 4.3 | 447 | $14.02 | - | $40.00 | $ | 19.89 | $ | 7,575 | $ | 3.36 | 4.1 | ||||||||||||||||||||||||||||||||
Unvested | 215 | 15.24 | - | 40.00 | 26.45 | 2,567 | 4.17 | 7.9 | 212 | 22.96 | - | 40.00 | 35.15 | 571 | 5.58 | 8.2 | |||||||||||||||||||||||||||||||||||
Total outstanding | 734 | 14.02 | - | 40.00 | 19.17 | $ | 13,785 | 3.45 | 5.3 | ||||||||||||||||||||||||||||||||||||||||||
Outstanding, September 30, 2019 | 659 | $14.02 | - | $40.00 | $ | 24.80 | $ | 8,146 | $ | 4.08 | 5.4 | ||||||||||||||||||||||||||||||||||||||||
Vested year-to-date | 92 | $ | 15.24 | - | 25.76 | $ | 19.34 | $ | 1,723 | $ | 3.18 | ||||||||||||||||||||||||||||||||||||||||
Vested at September 30, 2019 | 80 | $19.37 | - | $40.00 | $ | 27.41 | $ | 780 | $ | 4.55 |
Intrinsic(1) - Intrinsic value for stock options and SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grantprice.46,410 shares had an intrinsic value of zero because the exercise price for those shares exceeded the current market price at September 30, 2017. There are no options outstanding as of September 30, 2017; all have been exercised or have expired.
Stock Yards Bancorp, inc. and subsidiary
The following table summarizes activity for RSAs granted to officers:
Grant date | ||||||||
weighted | ||||||||
(In thousands, except per share data) | RSAs | average cost | ||||||
Unvested at January 1, 2018 | 119 | $ | 27.62 | |||||
Shares awarded | 40 | 35.89 | ||||||
Restrictions lapsed and shares released | (44 | ) | 23.62 | |||||
Shares forfeited | (5 | ) | 31.35 | |||||
Unvested at December 31, 2018 | 110 | $ | 32.09 | |||||
Unvested at January 1, 2019 | 110 | $ | 32.09 | |||||
Shares awarded | 40 | 34.88 | ||||||
Restrictions lapsed and shares released | (40 | ) | 28.72 | |||||
Shares forfeited | (2 | ) | 35.37 | |||||
Unvested at September 30, 2019 | 108 | $ | 34.30 |
A summary of activityShares expected to be awarded for restricted shares of common stockPSUs granted to officers for the periods ending December 31, 2016 and September 30, 2017 is outlined in the following table:
Grant date | ||||||||
weighted- | ||||||||
Number | average cost | |||||||
Unvested at December 31, 2015 | 155,858 | $ | 18.98 | |||||
2016 activity: | ||||||||
Shares awarded | 51,122 | 25.78 | ||||||
Restrictions lapsed and shares released | (49,265 | ) | 17.98 | |||||
Shares forfeited | (12,480 | ) | 20.69 | |||||
Unvested at December 31, 2016 | 145,235 | $ | 21.57 | |||||
2017 activity: | ||||||||
Shares awarded | 28,625 | 44.85 | ||||||
Restrictions lapsed and shares released | (46,220 | ) | 19.76 | |||||
Shares forfeited | (7,154 | ) | 25.03 | |||||
Unvested at September 30, 2017 | 120,486 | $ | 27.59 |
Bancorp awarded PSUs to executive officers of Bancorp, the three-yearthree-year performance period for which began January 1 of the award year. Shares awarded in 2017 under the 2014 grant totaled 50,022. Shares awarded in 2016 under the 2013 grant totaled 55,188.year are as follows:
The following table outlines outstanding PSU grants:
Vesting | Expected | |||||||||||
Grant | period | Fair | shares to | |||||||||
year | in years | value | be awarded | |||||||||
2015 | 3 | $ | 20.02 | 51,910 | ||||||||
2016 | 3 | 22.61 | 58,786 | |||||||||
2017 | 3 | 35.66 | 24,756 |
In the first quarter of 2017, Bancorp awarded 4,680 RSUs to directors of Bancorp with a grant date fair value of $220 thousand. No awards were made in the second or third quarters of 2017.
Vesting | Expected | |||||||||||
Grant | period | Fair | shares to | |||||||||
year | in years | value | be awarded | |||||||||
2017 | 3 | $ | 35.66 | 61,893 | ||||||||
2018 | 3 | 31.54 | 50,352 | |||||||||
2019 | 3 | 32.03 | 43,603 |
|
|
In April 2016 Bancorp declared a 3 for 2 stock split effected as a 50% stock dividend payable in May 2016. Share and per share information has been adjusted for this split.
Stock Yards Bancorp, inc. and subsidiary
| Commitments and Contingent Liabilities |
As of September 30, 2017, 2019 and December 31, 2018, Bancorp had various commitments outstanding that arose in the normal course of business, including standby letterssuch as unused commitments or lines of credit and commitments made to extend credit,lend in the future, which are properly not reflected in the consolidated financial statements. In management’s opinion, at September 30, 2017Total off balance sheet commitments to extend credit of $709.7 million, including standby letters of credit of $17.6 million, represent normal banking transactions. Commitments to extend credit were $628.3 million, including letters of credit of $15.6 million, as of December 31, 2016. follows:
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Commercial and industrial | $ | 384,038 | $ | 309,920 | ||||
Construction and development | 251,984 | 179,364 | ||||||
Home equity | 151,800 | 147,907 | ||||||
Credit cards | 25,606 | 20,003 | ||||||
Overdrafts | 22,083 | 21,751 | ||||||
Letters of credit | 22,827 | 20,891 | ||||||
Other | 43,910 | 33,369 | ||||||
Future loan commitments | 179,843 | 101,399 | ||||||
Total off balance sheet commitments to extend credit | $ | 1,082,091 | $ | 834,604 |
Commitments to extend credit are an agreement to lend to a customer as long as collateral is available as agreed upon and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Commitments to extend credit are mainly comprised of commercial lines of credit, construction and home equity credit lines and credit cards issued to commercial customers. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case by case basis. The amount of collateral obtained if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, securities, equipment, and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments. At September 30, 2017, 2019 and December 31, 2018, Bancorp had accrued $350 thousand$350,000 in other liabilities for its estimate of inherent risks related to unfunded credit commitments.
Standby letters of credit and financial guarantees written are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party. party beneficiary. Those guarantees are primarily issued to supportcustomer commercial transactions. Standby letters of credit generally have maturities of one to two years.
As part of the normal course of business Bancorp entered into an agreement to purchase 29 automatic teller machines (ATMs) over the next three years at a total price of $1.2 million. Management was able to secure favorable pricing by contractually committing to purchase the machines.
Also, as of September 30, 2017, 2019, in the normal course of business, there were pending legal actions and administrative proceedings in which claims for damages are asserted and/asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or losses could be incurred. We record a liability for these matters if an unfavorable outcome is probable and the amountresults of loss can be reasonably estimated, including expected insurance coverage. For proceedings where the reasonable estimateoperations of loss is a range, we record a best estimate of loss within the range. At September 30, 2017 we have recorded a liability of $266 thousand for such matters.Bancorp.
| Assets and Liabilities Measured and Reported at Fair Value |
Bancorp followsFair value represents the provisions of authoritative guidance for fair value measurements. This guidance is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by US GAAP. The guidance also prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in US GAAP.
Authoritative guidance defines fair value as theexchange price that would be received to sellfor an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants aton the measurement date. The guidance also establishes a hierarchy to group assets and liabilities carried at fair value in There are three levels based upon the markets in which the assets and liabilities trade and the source of assumptionsinputs that may be used to determinemeasure fair value. These levels are:values:
● | Level 1: Valuation is based upon quoted (unadjusted) prices for identical instruments traded in active markets. |
Stock Yards Bancorp, inc. and subsidiary
● | Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
● | Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect internal estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include pricing models, discounted cash flows and other similar techniques. |
Authoritative guidance requires maximummaximization of use of observable inputs and minimumminimization of use of unobservable inputs in fair value measurements. Where there exists limited or no observable market data, Bancorp derives its own estimates by generally considering characteristics of the asset/liability, the current economic and competitive environment and other factors. For this reason, results cannot be determined with precision and may not be realized on an actual sale or immediate settlement of the asset or liability.
Bancorp’s investmentBancorp’s AFS securities available-for-saleportfolio and interest rate swaps are recorded at fair value on a recurring basis. Other accounts including mortgage servicing rights, impaired loans and other real estate owned may be recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets.
The portfolio of investment securities available-for-sale is comprised of U.S. Treasury and other U.S. government obligations, debt securities of U.S. government-sponsored corporations (including mortgage-backed securities), obligations of state and political subdivisions and corporate equity securities. U.S. Treasury and publicly traded corporate equity securities are priced using quoted prices of identical securities in an active market. These measurements are classified as Level 1 in the hierarchy above. All otherAFS securities are priced using standard industry models or matrices with various assumptions such as yield curves, volatility, prepayment speeds, default rates, time value, credit rating and market prices for similar instruments. These assumptions are generally observable in the market place and can be derived from or supported by observable data. These measurements are classified as Level 2 in the hierarchy above.2.
Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements generallyfor interest rate swaps are based on benchmark forward yield curves and other relevant observable market data. For purposes of potential valuation adjustments to derivative positions, Bancorp evaluates the credit risk of its counterparties as well as its own credit risk. To date, Bancorp has not realized any losses due to a counterparty’scounterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2017.the reporting period. Interest rate swaps are valued using primarily Level 2 inputs.
MSRs, impaired loans and OREO are recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets.
Stock Yards Bancorp, inc. and subsidiary
Below are the carryingCarrying values of assets measured at fair value on a recurring basis.basis follows:
(in thousands) | Fair value at September 30, 2017 | |||||||||||||||||||||||||||||||
(In thousands) | Fair value at September 30, 2019 | |||||||||||||||||||||||||||||||
Assets | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Investment securities available-for-sale | ||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||
Government sponsored enterprise obligations | $ | 372,664 | $ | - | $ | 372,664 | $ | - | $ | 214,365 | $ | — | $ | 214,365 | $ | — | ||||||||||||||||
Mortgage-backed securities - government agencies | 146,720 | - | 146,720 | - | ||||||||||||||||||||||||||||
Mortgage backed securities - government agencies | 143,002 | — | 143,002 | — | ||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 51,622 | - | 51,622 | - | 18,234 | — | 18,234 | — | ||||||||||||||||||||||||
Corporate equity securities | 516 | 516 | - | - | ||||||||||||||||||||||||||||
Total investment securities available-for-sale | 571,522 | 516 | 571,006 | - | ||||||||||||||||||||||||||||
Total Securities available for sale | 375,601 | — | 375,601 | — | ||||||||||||||||||||||||||||
Interest rate swaps | 182 | - | 182 | - | 3,708 | — | 3,708 | — | ||||||||||||||||||||||||
Total assets | $ | 571,704 | $ | 516 | $ | 571,188 | $ | - | $ | 379,309 | $ | — | $ | 379,309 | $ | — | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 148 | $ | - | $ | 148 | $ | - | $ | 3,802 | $ | — | $ | 3,802 | $ | — |
(In thousands) | Fair value at December 31, 2018 | |||||||||||||||
Assets | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Securities available for sale: | ||||||||||||||||
Government sponsored enterprise obligations | $ | 261,039 | $ | — | $ | 261,039 | $ | — | ||||||||
Mortgage backed securities - government agencies | 146,277 | — | 146,277 | — | ||||||||||||
Obligations of states and political subdivisions | 29,679 | — | 29,679 | — | ||||||||||||
Total Securities available for sale | 436,995 | — | 436,995 | — | ||||||||||||
Interest rate swaps | 1,035 | — | 1,035 | — | ||||||||||||
Total assets | $ | 438,030 | $ | — | $ | 438,030 | $ | — | ||||||||
Liabilities | ||||||||||||||||
Interest rate swaps | $ | 543 | $ | — | $ | 543 | $ | — |
(in thousands) | Fair value at December 31, 2016 | |||||||||||||||
Assets | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Investment securities available-for-sale | ||||||||||||||||
U.S. Treasury and other U.S. government obligations | $ | 74,998 | $ | 74,998 | $ | - | $ | - | ||||||||
Government sponsored enterprise obligations | 268,090 | - | 268,090 | - | ||||||||||||
Mortgage-backed securities - government agencies | 168,843 | - | 168,843 | - | ||||||||||||
Obligations of states and political subdivisions | 57,444 | - | 57,444 | - | ||||||||||||
Corporate equity securities | 699 | 699 | - | - | ||||||||||||
Total investment securities available-for-sale | 570,074 | 75,697 | 494,377 | - | ||||||||||||
Interest rate swaps | 203 | - | 203 | - | ||||||||||||
Total assets | $ | 570,277 | $ | 75,697 | $ | 494,580 | $ | - | ||||||||
Liabilities | ||||||||||||||||
Interest rate swaps | $ | 178 | $ | - | $ | 178 | $ | - |
For the securities portfolio, Bancorp monitors the valuation technique used by pricing agencies to ascertain when transfers between levels have occurred. The nature of other assets and liabilities measured at fair value is such that transfers in and out of any level are expected to be rare. For the three and nine months ended September 30, 2019, there were no transfers between Levels 1,2, or 3.
Bancorp had no0 financial instruments classified within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis at September 30, 2017 2019 or December 31, 2016.2018.
Stock Yards Bancorp, inc. and subsidiary
MSRs are recordedDiscussion of assets measured at fair value upon capitalization,on a non-recurring basis follows:
MSRs – On at least a quarterly basis, MSRs are amortized to correspond with estimated servicing income, and are periodically assessedevaluated for impairment based onupon the fair value atof the reporting date.MSRs as compared to carrying amount. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At September 30, 2017 2019 and December 31, 2016 2018, there was no0 valuation allowance for MSRs, as the mortgage servicing rights, as fair value exceeded the cost. Accordingly, the MSRs are not included in either table belowthe following tabular disclosure for September 30, 2017 2019 or December 31, 2016. See Note 4 for more information regarding MSRs.2018.
ForImpaired loans – Collateral-dependent impaired loans in the table below, fair value is calculated as carrying value of loans with a specific valuation allowance, less the specific allowance, and the carrying value of collateral dependentgenerally include loans that have been charged downreceived partial charge-downs or specific reserve allocations needed to theirrecord the loan at fair value.value. Fair value is commonly based on recent real estate appraisals or other sources of valuations based upon the underlying collateral. Fair value of impaired loans was primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. Bancorp typically determines the value of real estate collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. For other assets, Bancorp relies on both internal and third party assessments of asset value, based on information provided by the borrower, following methodologies similar to those described for real estate. As of September 30, 2017, 2019, total impaired collateral dependent loans charged down to their fair value and impaired loans with a valuation allowance were $3.2 million,$383,000 and the specific allowance totaled $722 thousand,$35,000, resulting in a fair value of $2.5 million,$348,000, compared with total collateral dependent loans charged down to their fair value and impaired loans with a valuation allowance of $4.2 million,$967,000, and the specific allowance allocation totaling $1.3 million,$42,000, resulting in a fair value of $2.9 million$925,000 at December 31, 2016. 2018. Losses represent charge offs and changes in specific allowances for the periodperiods indicated.
Other real estate owned (“OREO”), which is carriedOREO – Assets acquired through or instead of loan foreclosure are initially recorded at thefair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value is periodically assessed for impairment based on fair value at the reporting date.less estimated costs to sell. Fair value is commonly based on recent real estate appraisals or valuations performed by internal or external parties which use judgments and assumptions that are property-specific and sensitive to changes in the overall economic environment. Appraisals may be further discounted based on management’smanagement’s historical knowledge and/or changes in market conditions from the date of the most recent appraisal. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. For OREO in the following table, below, fair value is the carrying value of only parcels of OREO which have a carrying value equal to appraised value. Losses represent write-downs which occurred during the period indicated. At September 30, 2017 2019 and December 31, 2016, 2018, carrying value of all other real estate ownedOREO was $2.6 million$563,000 and $5.0 million, respectively.$1.0 million.
Stock Yards Bancorp, inc. and subsidiary
Below are the carrying values of assets measured at fair value on a non-recurring basis. Impaired loan amounts reported represent only those impaired loans with specific valuation allowances and collateral dependent impaired loans charged down to their carrying value.
(in thousands) | Fair value at September 30, 2017 | Losses for 9 month | ||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Fair value at September 30, 2019 | Losses recorded: | ||||||||||||||||||||||||||||||||||||||||||
Three months | Nine months | |||||||||||||||||||||||||||||||||||||||||||
period ended | ended | ended | ||||||||||||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | September 30, 2017 | Total | Level 1 | Level 2 | Level 3 | September 30, 2019 | September 30, 2019 | ||||||||||||||||||||||||||||||||||
Impaired loans | $ | 2,530 | $ | - | $ | - | $ | 2,530 | $ | (280 | ) | $ | 348 | $ | — | $ | — | $ | 348 | $ | — | $ | — | |||||||||||||||||||||
Other real estate owned | 2,640 | - | - | 2,640 | (171 | ) | 239 | — | — | 239 | — | — | ||||||||||||||||||||||||||||||||
Total | $ | 5,170 | $ | - | $ | - | $ | 5,170 | $ | (451 | ) |
(in thousands) | Fair value at December 31, 2016 | Losses for 9 month | ||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Fair value at December 31, 2018 | Losses recorded: | ||||||||||||||||||||||||||||||||||||||||||
Three months | Nine months | |||||||||||||||||||||||||||||||||||||||||||
period ended | ended | ended | ||||||||||||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | September 30, 2016 | Total | Level 1 | Level 2 | Level 3 | September 30, 2018 | September 30, 2018 | ||||||||||||||||||||||||||||||||||
Impaired loans | $ | 2,933 | $ | - | $ | - | $ | 2,933 | $ | (1,612 | ) | $ | 925 | $ | — | $ | — | $ | 925 | $ | — | $ | 874 | |||||||||||||||||||||
Other real estate owned | 4,488 | - | - | 4,488 | (62 | ) | 239 | — | — | 239 | — | — | ||||||||||||||||||||||||||||||||
Total | $ | 7,421 | $ | - | $ | - | $ | 7,421 | $ | (1,674 | ) |
For the securities portfolio, Bancorp monitors the valuation technique used by pricing agencies to ascertain when transfers between levels have occurred. The nature of other assets and liabilities measured at fair value is such that transfers in and out of any level are expected to be rare. For the nine months ended September 30, 2017, there were no transfers between Levels 1, 2, or 3. For Level 3 assets measured at fair value on a non-recurring basis, as of September 30, 2017,the significant unobservable inputs used in the fair value measurements are presented below.
September 30, 2019 | |||||||||||
Fair | Valuation | Unobservable | (weighted | ||||||||
(Dollars in thousands) | value | technique | inputs | average) | |||||||
Impaired loans - collateral dependent | $ | 348 | Appraisal | Appraisal discounts | 10.0 | % | |||||
Other real estate owned | 239 | Appraisal | Appraisal discounts | 22.0 |
December 31, 2018 | December 31, 2018 | |||||||||||||||||||||
Significant | Weighted | Fair | Valuation | Unobservable | (weighted | |||||||||||||||||
Fair | Valuation | unobservable | average of | |||||||||||||||||||
(dollars in thousands) | Value | technique | input | input | ||||||||||||||||||
(Dollars in thousands) | value | technique | inputs | average) | ||||||||||||||||||
Impaired loans - collateral dependent | $ | 2,530 | Appraisal | Appraisal discounts | 15.0 | % | $ | 925 | Appraisal | Appraisal discounts | 9.9 | % | ||||||||||
Other real estate owned | 2,640 | Appraisal | Appraisal discounts | 23.4 | 239 | Appraisal | Appraisal discounts | 22.0 |
Stock Yards Bancorp, inc. and subsidiary
| Disclosure of Financial Instruments Not Reported at Fair Value |
US GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. Carrying amounts, estimated fair values, and placement in the fair value hierarchy of Bancorp’sBancorp’s financial instruments are as follows:
(in thousands) | Carrying | |||||||||||||||||||
September 30, 2017 | amount | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and short-term investments | $ | 129,078 | $ | 129,078 | $ | 129,078 | $ | - | $ | - | ||||||||||
Mortgage loans held for sale | 5,459 | 6,005 | - | 6,005 | - | |||||||||||||||
Federal Home Loan Bank stock and other securities | 7,666 | 7,666 | - | 7,666 | - | |||||||||||||||
Loans, net | 2,310,172 | 2,302,466 | - | - | 2,302,466 | |||||||||||||||
Accrued interest receivable | 8,162 | 8,162 | 8,162 | - | - | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 2,481,966 | 2,480,641 | - | - | 2,480,641 | |||||||||||||||
Short-term borrowings | 233,824 | 233,824 | - | 233,824 | - | |||||||||||||||
FHLB advances | 50,110 | 50,070 | - | 50,070 | - | |||||||||||||||
Secured borrowings | 18,351 | 18,210 | ||||||||||||||||||
Accrued interest payable | 212 | 212 | 212 | - | - |
(In thousands) | Carrying | |||||||||||||||||||
September 30, 2019 | amount | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 136,214 | $ | 136,214 | $ | 136,214 | $ | — | $ | — | ||||||||||
Mortgage loans held for sale | 6,329 | 6,464 | — | 6,464 | — | |||||||||||||||
Federal Home Loan Bank stock | 11,316 | 11,316 | — | 11,316 | — | |||||||||||||||
Loans, net | 2,829,787 | 2,841,414 | — | — | 2,841,414 | |||||||||||||||
Accrued interest receivable | 8,581 | 8,581 | 8,581 | — | — | |||||||||||||||
Liabilities | ||||||||||||||||||||
Non-interest bearing deposits | $ | 795,793 | $ | 795,793 | $ | 795,793 | $ | — | $ | — | ||||||||||
Transaction deposits | 1,720,560 | 1,720,560 | — | 1,720,560 | — | |||||||||||||||
Time deposits | 429,960 | 433,232 | — | 433,232 | — | |||||||||||||||
Securities sold under agreement to repurchase | 33,172 | 33,172 | — | 33,172 | — | |||||||||||||||
Federal funds purchased | 9,957 | 9,957 | — | 9,957 | — | |||||||||||||||
FHLB advances | 81,985 | 83,505 | — | 83,505 | — | |||||||||||||||
Accrued interest payable | 712 | 712 | 712 | — | — |
(in thousands) | Carrying | |||||||||||||||||||
December 31, 2016 | amount | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and short-term investments | $ | 47,973 | $ | 47,973 | $ | 47,973 | $ | - | $ | - | ||||||||||
Mortgage loans held for sale | 3,213 | 3,481 | - | 3,481 | - | |||||||||||||||
Federal Home Loan Bank stock and other securities | 6,347 | 6,347 | - | 6,347 | - | |||||||||||||||
Loans, net | 2,281,368 | 2,284,569 | - | - | 2,284,569 | |||||||||||||||
Accrued interest receivable | 6,878 | 6,878 | 6,878 | - | - | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 2,520,548 | 2,519,725 | - | - | 2,519,725 | |||||||||||||||
Short-term borrowings | 114,969 | 114,969 | - | 114,969 | - | |||||||||||||||
FHLB advances | 51,075 | 50,806 | - | 50,806 | - | |||||||||||||||
Secured borrowings | 15,814 | 15,731 | ||||||||||||||||||
Accrued interest payable | 144 | 144 | 144 | - | - |
(In thousands) | Carrying | |||||||||||||||||||
December 31, 2018 | amount | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 198,939 | $ | 198,939 | $ | 198,939 | $ | — | $ | — | ||||||||||
Mortgage loans held for sale | 1,675 | 1,743 | — | 1,743 | — | |||||||||||||||
Federal Home Loan Bank stock | 10,370 | 10,370 | — | 10,370 | — | |||||||||||||||
Loans, net | 2,522,637 | 2,508,587 | — | — | 2,508,587 | |||||||||||||||
Accrued interest receivable | 8,360 | 8,360 | 8,360 | — | — | |||||||||||||||
Liabilities | ||||||||||||||||||||
Non-interest bearing deposits | $ | 711,023 | $ | 711,023 | $ | 711,023 | $ | — | $ | — | ||||||||||
Transaction deposits | 1,736,618 | 1,736,618 | — | 1,736,618 | — | |||||||||||||||
Time deposits | 346,715 | 345,273 | — | 345,273 | — | |||||||||||||||
Securities sold under agreement to repurchase | 36,094 | 36,094 | — | 36,094 | — | |||||||||||||||
Federal funds purchased | 10,247 | 10,247 | — | 10,247 | — | |||||||||||||||
FHLB advances | 48,177 | 47,227 | — | 47,227 | — | |||||||||||||||
Accrued interest payable | 762 | 762 | 762 | — | — |
Stock Yards Bancorp, inc. and subsidiary
Management used the following methods and assumptions to estimate the fair value of each class of financial instrument for which it is practicable to estimate the value.
Cash, short-term investments, accrued interest receivable/payable and short-term borrowings
For these short-term instruments, carrying amount is a reasonable estimate of fair value.
Mortgage loans held for sale
Mortgage loans held for sale are initially recorded at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is determined by market quotes for similar loans based on loan type, term, rate, size and the borrower’s credit score.
Federal Home Loan Bank stock and other securities
For these securities without readily available market values, carrying amount is a reasonable estimate of fair value as it equals the amount due from FHLB or other issuer at upon redemption.
Loans, net
US GAAP prescribes the exit price concept for estimating fair value of loans. Because there is not an active market (exit price) for trading virtually all types of loans in Bancorp’s portfolio, fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities (entrance price).
Deposits
Fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. Fair value of fixed-rate certificates of deposits is estimated by discounting future cash flows using the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank advances
Fair value of FHLB advances is estimated by discounting future cash flows using estimates of current market rate for instruments with similar terms and remaining maturities.
Secured BorrowingsSecured borrowings represent sold participation loans for which Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their share of the loan without permission from Bancorp. US GAAP requires the participated portion of these loans to be recorded as secured borrowings. Secured borrowings are included in other liabilities on the consolidated balance sheets.
Commitments to extend credit and standby letters of credit
Fair values of commitments to extend credit are estimated using fees currently charged to enter into similar agreements and creditworthiness of customers. Fair values of standby letters of credit are based on fees currently charged for similar agreements or estimated cost to terminate them or otherwise settle obligations with counterparties at the reporting date.
Limitations
Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’sBancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect estimates.
Stock Yards Bancorp, inc. and subsidiary
| Derivative Financial Instruments |
Periodically, Bancorp enters into an interest rate swap transactiontransactions with a borrower,borrowers who desiresdesire to hedge their exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the consolidated balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition are expected to have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements for the first nine months of 2017 were offsetting and therefore had no net effect on Bancorp’s earnings or cash flows.
Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposure.exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of nonperformance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, limits, collateral, and monitoring procedures, and does not expect any counterparties to fail their obligations.obligations.
At September 30, 2017 and December 31, 2016, Bancorp had outstanding undesignated interest rate swap contracts as follows:
(dollar amounts in thousands) | Receiving | Paying | ||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Notional amount | $ | 53,214 | $ | 43,986 | $ | 53,214 | $ | 43,986 | ||||||||
Weighted average maturity (years) | 8.9 | 9.9 | 8.9 | 9.9 | ||||||||||||
Fair value | $ | 148 | $ | (178 | ) | $ | (148 | ) | $ | 178 |
(Dollars in thousands) | Receiving | Paying | ||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Notional amount | $ | 83,144 | $ | 55,505 | $ | 83,144 | $ | 55,505 | ||||||||
Weighted average maturity (years) | 7.9 | 8.0 | 7.9 | 8.0 | ||||||||||||
Fair value | $ | 3,708 | $ | 519 | $ | 3,729 | $ | 543 |
In 2015, Bancorp entered into an interest rate swap to hedge cash flows of a $20 million rolling fixed-rate three-month FHLB borrowing. The swap began December 9, 2015 and matures December 6, 2020. In 2016, Bancorp entered into an interest rate swap to hedge cash flows of a $10 million rolling fixed-rate three-monththree-month FHLB borrowing. The swap began December 6, 2016 and ends December 6, 2021. In 2015, Bancorp entered into an interest rate swap to hedge cash flows of a $20 million rolling fixed-rate three-month FHLB borrowing. The swap began December 9, 2015 and matures December 6, 2020. For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities. Interest rate swaps involve exchange of Bancorp’sBancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated, and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income,OCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings.
Stock Yards Bancorp, inc. and subsidiary
The following table details Bancorp’sBancorp’s derivative position designated as a cash flow hedges,hedge, and the fair values as of September 30, 2017 2019 and December 31, 2016.2018.
(dollars in thousands) | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||
Fair value | Fair value | |||||||||||||||||||||||||||||||||
Notional | Notional | Maturity | Receive (variable) | Pay fixed | assets (liabilities) | Notional | Maturity | Receive (variable) | Pay fixed | assets (liabilities) | ||||||||||||||||||||||||
amount | amount | date | index | swap rate | September 30, 2017 | December 31, 2016 | amount | date | index | swap rate | September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
$ | 10,000 | 12/6/2021 | US 3 Month LIBOR | 1.89 | % | $ | 26 | $ | 16 | 10,000 | 12/6/2021 | US 3 Month LIBOR | 1.89 | % | $ | (65 | ) | $ | 193 | |||||||||||||||
20,000 | 12/6/2020 | US 3 Month LIBOR | 1.79 | % | 8 | 9 | 20,000 | 12/6/2020 | US 3 Month LIBOR | 1.79 | % | (8 | ) | 323 | ||||||||||||||||||||
$ | 30,000 | 1.82 | % | $ | 34 | $ | 25 | 30,000 | 1.82 | % | $ | (73 | ) | $ | 516 |
| Regulatory Matters |
Bancorp and the Bank are subject to variouscapital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, prescribed by banking regulations and administered by state and federal banking agencies. The final rules implementingin part, dependent on the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective on January 1, 2015 with full compliance with allindividual risk profiles of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Thefinancial institutions. Failure to meet minimum capital level requirements applicable to bankscan initiate certain mandatory and bank holding companies subject topossibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the rules are:
a total risk-based capital ratio of 8%
a common equity tier 1 capital ratio of 4.5%
a tier 1 risk-based capital ratio of 6%
a tier 1 leverage ratio of 4%
Under these requirements, Bancorpregulatory framework for prompt corrective action, the Holding Company and the Bank must meet minimumspecific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and percentages of Tier 1 capital, common equity Tier 1 capital, and total capital to risk weighted assets, and Tier 1 capital to average assets. Risk weighted assetsclassification are determined by applying certain risk weightings prescribed by regulation to various categories of assets and off-balance sheet commitments. Capital and risk weighted assets may be furtheralso subject to qualitative judgments by the regulators as toregarding components, risk weightingweightings and other factors. Failure to meet capital requirements can result in certain mandatory, and possibly discretionary, corrective actions prescribed by regulation or determined to be necessary by regulators, which could materially affect the unaudited consolidated financial statements.
TheBanking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III rules also establisheddefine “well capitalized” as a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total Risk-Based Capital ratio and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and Bank must hold a capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements. The capital conservation buffer phased in from 2016 to 2019 on the following schedule: a capital conservation buffer of 2.5%, to be phased in over three years through December 31, 2018, above the regulatory minimum risk-based capital ratios. When0.625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875% effective January 1, 2018; and a fully phased in capital conservation buffer of 2.5% on January 1, 2019.
Bancorp continues to exceed the buffer will resultregulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based, Tier I Risk Based Capital and Tier I Leverage Capital. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the following minimum ratios:Capital Conservation Buffer.
a common equity tier 1 risk-based capital ratio of 7.0%,
a tier 1 risk-based capital ratio of 8.5%, and
a total risk-based capital ratio of 10.5%.
The rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. Bancorp opted out of this requirement.
Stock Yards Bancorp, inc. and subsidiary
As of September 30, 2017, Bancorp meets the requirements to be considered well capitalized under the rules, and is not subject to limitations due to the capital conservation buffer.
The following tables set sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios as of September 30, 2017 and December 31, 2016.ratios:
(Dollars in thousands) | Actual | Minimum for adequately capitalized | Minimum for well capitalized | |||||||||||||||||||||
September 30, 2019 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total risk-based capital (1) | ||||||||||||||||||||||||
Consolidated | $ | 407,160 | 12.53 | % | $ | 259,900 | 8.00 | % | 0 | 0 | ||||||||||||||
Bank | 385,910 | 11.91 | 259,300 | 8.00 | $ | 324,125 | 10.00 | % | ||||||||||||||||
Common equity tier 1 risk-based capital | ||||||||||||||||||||||||
Consolidated | 379,933 | 11.69 | 146,194 | 4.50 | 0 | 0 | ||||||||||||||||||
Bank | 358,683 | 11.07 | 145,856 | 4.50 | 210,861 | 6.50 | ||||||||||||||||||
Tier 1 risk-based capital (1) | ||||||||||||||||||||||||
Consolidated | 379,933 | 11.69 | 194,925 | 6.00 | 0 | 0 | ||||||||||||||||||
Bank | 358,683 | 11.07 | 194,475 | 6.00 | 259,300 | 8.00 | ||||||||||||||||||
Leverage (2) | ||||||||||||||||||||||||
Consolidated | 379,933 | 10.90 | 139,437 | 4.00 | 0 | 0 | ||||||||||||||||||
Bank | 358,683 | 10.60 | 135,316 | 4.00 | 169,145 | 5.00 |
(dollars in thousands) | Actual | Minimum for adequately capitalized | Minimum for well capitalized | |||||||||||||||||||||
September 30, 2017 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total risk-based capital (1) | ||||||||||||||||||||||||
Consolidated | $ | 358,610 | 13.64 | % | $ | 210,328 | 8.00 | % | NA | NA | ||||||||||||||
Bank | 346,040 | 13.20 | 209,721 | 8.00 | $ | 262,152 | 10.00 | % | ||||||||||||||||
Common equity tier 1 risk-based capital | ||||||||||||||||||||||||
Consolidated | 333,312 | 12.67 | 118,382 | 4.50 | NA | NA | ||||||||||||||||||
Bank | 320,742 | 12.23 | 118,016 | 4.50 | 157,355 | 6.00 | ||||||||||||||||||
Tier 1 risk-based capital (1) | ||||||||||||||||||||||||
Consolidated | 333,312 | 12.67 | 157,843 | 6.00 | NA | NA | ||||||||||||||||||
Bank | 320,742 | 12.23 | 157,355 | 6.00 | 157,355 | 6.00 | ||||||||||||||||||
Leverage (2) | ||||||||||||||||||||||||
Consolidated | 333,312 | 11.02 | 120,984 | 4.00 | NA | NA | ||||||||||||||||||
Bank | 320,742 | 10.61 | 120,921 | 4.00 | 151,151 | 5.00 |
(dollars in thousands) | Actual | Minimum for adequately capitalized | Minimum for well capitalized | |||||||||||||||||||||
December 31, 2016 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total risk-based capital (1) | ||||||||||||||||||||||||
Consolidated | $ | 338,525 | 13.04 | % | $ | 207,684 | 8.00 | % | NA | NA | ||||||||||||||
Bank | 325,630 | 12.57 | 207,243 | 8.00 | $ | 259,053 | 10.00 | % | ||||||||||||||||
Common equity tier 1 risk-based capital | ||||||||||||||||||||||||
Consolidated | 314,147 | 12.10 | 116,832 | 4.50 | NA | NA | ||||||||||||||||||
Bank | 301,252 | 11.63 | 116,564 | 4.50 | 155,418 | 6.00 | ||||||||||||||||||
Tier 1 risk-based capital (1) | ||||||||||||||||||||||||
Consolidated | 314,147 | 12.10 | 155,775 | 6.00 | NA | NA | ||||||||||||||||||
Bank | 301,252 | 11.63 | 155,418 | 6.00 | 155,418 | 6.00 | ||||||||||||||||||
Leverage (2) | ||||||||||||||||||||||||
Consolidated | 314,147 | 10.54 | 119,221 | 4.00 | NA | NA | ||||||||||||||||||
Bank | 301,252 | 10.11 | 119,190 | 4.00 | 148,987 | 5.00 |
(Dollars in thousands) | Actual | Minimum for adequately capitalized | Minimum for well capitalized | |||||||||||||||||||||
December 31, 2018 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total risk-based capital (1) | ||||||||||||||||||||||||
Consolidated | $ | 396,019 | 13.91 | % | $ | 227,714 | 8.00 | % | 0 | 0 | ||||||||||||||
Bank | 385,637 | 13.56 | 227,462 | 8.00 | $ | 284,327 | 10.00 | % | ||||||||||||||||
Common equity tier 1 risk-based capital | ||||||||||||||||||||||||
Consolidated | 370,135 | 13.00 | 128,089 | 4.50 | 0 | 0 | ||||||||||||||||||
Bank | 359,753 | 12.65 | 127,947 | 4.50 | 184,813 | 6.50 | ||||||||||||||||||
Tier 1 risk-based capital (1) | ||||||||||||||||||||||||
Consolidated | 370,135 | 13.00 | 170,785 | 6.00 | 0 | 0 | ||||||||||||||||||
Bank | 359,753 | 12.65 | 170,596 | 6.00 | 227,462 | 8.00 | ||||||||||||||||||
Leverage (2) | ||||||||||||||||||||||||
Consolidated | 370,135 | 11.33 | 130,698 | 4.00 | 0 | 0 | ||||||||||||||||||
Bank | 359,753 | 11.02 | 130,569 | 4.00 | 163,211 | 5.00 |
| Ratio is computed in relation to risk-weighted assets. |
(2) | Ratio is computed in relation to average assets. |
Stock Yards Bancorp, inc. and subsidiary
| Segments |
Bancorp’sBancorp’s principal activities include commercial banking and wealth management and trust (WM&T).WM&T. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage origination and securities brokerageinvestment products sales activity. WM&T provides financial management services including investment management, trust and estate administration, and retirement plan services.
Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax exempt activity. All tax exempt activity and provision for loan losses have been allocated fully to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’segments’ operations if they were independent entities.
Principally, all of the net assets of Stock Yards Bancorp Inc. are involved in the commercial banking segment. Bancorp has goodwillGoodwill of $12.6 million, of which $682,000 relatedrelates to a bank acquisition in 1996 which and $11.9 million related to the May 2019 KSB acquisition, has been assigned to the commercial banking segment. Assets assigned to WM&T primarily consist of net premises and equipment, net of accumulated depreciation.equipment.
Selected financial information by business segment for the three and nine month periods ended September 30, 2017 and 2016 follows:
Wealth | Wealth | |||||||||||||||||||||||
Commercial | management | Commercial | Management | |||||||||||||||||||||
(in thousands) | banking | and trust | Total | |||||||||||||||||||||
(In thousands) | Banking | and Trust | Total Company | |||||||||||||||||||||
Three months ended September 30, 2017 | ||||||||||||||||||||||||
Three months ended September 30, 2019 | ||||||||||||||||||||||||
Net interest income | $ | 26,089 | $ | 75 | $ | 26,164 | $ | 31,995 | $ | 75 | $ | 32,070 | ||||||||||||
Provision for loan losses | 150 | - | 150 | |||||||||||||||||||||
Provision | 400 | — | 400 | |||||||||||||||||||||
Wealth management and trust services | - | 5,025 | 5,025 | — | 5,738 | 5,738 | ||||||||||||||||||
All other non-interest income | 6,078 | - | 6,078 | 7,566 | — | 7,566 | ||||||||||||||||||
Non-interest expense | 18,491 | 2,826 | 21,317 | |||||||||||||||||||||
Income before income taxes | 13,526 | 2,274 | 15,800 | |||||||||||||||||||||
Non-interest expenses | 20,822 | 3,135 | 23,957 | |||||||||||||||||||||
Income before income tax expense | 18,339 | 2,678 | 21,017 | |||||||||||||||||||||
Income tax expense | 3,284 | 812 | 4,096 | 3,202 | 581 | 3,783 | ||||||||||||||||||
Net income | $ | 10,242 | $ | 1,462 | $ | 11,704 | $ | 15,137 | $ | 2,097 | $ | 17,234 | ||||||||||||
Segment assets | $ | 3,153,886 | $ | 2,027 | $ | 3,155,913 | $ | 3,530,198 | $ | 3,728 | $ | 3,533,926 | ||||||||||||
Three months ended September 30, 2016 | ||||||||||||||||||||||||
Three months ended September 30, 2018 | ||||||||||||||||||||||||
Net interest income | $ | 24,690 | $ | 70 | $ | 24,760 | $ | 28,462 | $ | 59 | $ | 28,521 | ||||||||||||
Provision for loan losses | 1,250 | - | 1,250 | |||||||||||||||||||||
Provision | 735 | — | 735 | |||||||||||||||||||||
Wealth management and trust services | - | 4,800 | 4,800 | — | 5,380 | 5,380 | ||||||||||||||||||
All other non-interest income | 6,558 | - | 6,558 | 6,046 | — | 6,046 | ||||||||||||||||||
Non-interest expense | 17,722 | 2,796 | 20,518 | |||||||||||||||||||||
Income before income taxes | 12,276 | 2,074 | 14,350 | |||||||||||||||||||||
Non-interest expenses | 18,774 | 3,007 | 21,781 | |||||||||||||||||||||
Income before income tax expense | 14,999 | 2,432 | 17,431 | |||||||||||||||||||||
Income tax expense | 3,142 | 741 | 3,883 | 3,027 | 528 | 3,555 | ||||||||||||||||||
Net income | $ | 9,134 | $ | 1,333 | $ | 10,467 | $ | 11,972 | $ | 1,904 | $ | 13,876 | ||||||||||||
Segment assets | $ | 2,936,542 | $ | 2,123 | $ | 2,938,665 | $ | 3,320,838 | $ | 3,959 | $ | 3,324,797 |
Stock Yards Bancorp, inc. and subsidiary
Wealth | ||||||||||||
Commercial | management | |||||||||||
(In thousands) | Banking | and Trust | Total Company | |||||||||
Nine months ended September 30, 2019 | ||||||||||||
Net interest income | $ | 92,266 | $ | 235 | $ | 92,501 | ||||||
Provision | 1,000 | — | 1,000 | |||||||||
Wealth management and trust services | — | 16,839 | 16,839 | |||||||||
All other non-interest income | 19,790 | — | 19,790 | |||||||||
Non-interest expenses | 62,725 | 9,335 | 72,060 | |||||||||
Income before income tax expense | 48,331 | 7,739 | 56,070 | |||||||||
Income tax expense | 4,973 | 1,679 | 6,652 | |||||||||
Net income | $ | 43,358 | $ | 6,060 | $ | 49,418 | ||||||
Segment assets | $ | 3,530,198 | $ | 3,728 | $ | 3,533,926 | ||||||
Nine months ended September 30, 2018 | ||||||||||||
Net interest income | $ | 84,312 | $ | 192 | $ | 84,504 | ||||||
Provision | 2,705 | — | 2,705 | |||||||||
Wealth management and trust services | — | 16,224 | 16,224 | |||||||||
All other non-interest income | 17,546 | — | 17,546 | |||||||||
Non-interest expenses | 55,572 | 9,372 | 64,944 | |||||||||
Income before income tax expense | 43,581 | 7,044 | 50,625 | |||||||||
Income tax expense | 8,237 | 1,529 | 9,766 | |||||||||
Net income | $ | 35,344 | $ | 5,515 | $ | 40,859 | ||||||
Segment assets | $ | 3,320,838 | $ | 3,959 | $ | 3,324,797 |
(21) | Revenue from Contracts with Customers |
All of Bancorp’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The table below presents Bancorp’s sources of non-interest income with items outside the scope of ASC 606 noted as such:
Wealth | ||||||||||||
Commercial | management | |||||||||||
(in thousands) | banking | and trust | Total | |||||||||
Nine months ended September 30, 2017 | ||||||||||||
Net interest income | $ | 76,350 | $ | 230 | $ | 76,580 | ||||||
Provision for loan losses | 1,650 | - | 1,650 | |||||||||
Wealth management and trust services | - | 15,272 | 15,272 | |||||||||
All other non-interest income | 18,303 | - | 18,303 | |||||||||
Non-interest expense | 54,756 | 9,055 | 63,811 | |||||||||
Income before income taxes | 38,247 | 6,447 | 44,694 | |||||||||
Income tax expense | 9,295 | 2,302 | 11,597 | |||||||||
Net income | $ | 28,952 | $ | 4,145 | $ | 33,097 | ||||||
Segment assets | $ | 3,153,886 | $ | 2,027 | $ | 3,155,913 | ||||||
Nine months ended September 30, 2016 | ||||||||||||
Net interest income | $ | 71,985 | $ | 194 | $ | 72,179 | ||||||
Provision for loan losses | 2,500 | - | 2,500 | |||||||||
Wealth management and trust services | - | 14,219 | 14,219 | |||||||||
All other non-interest income | 17,999 | - | 17,999 | |||||||||
Non-interest expense | 51,914 | 8,337 | 60,251 | |||||||||
Income before income taxes | 35,570 | 6,076 | 41,646 | |||||||||
Income tax expense | 9,064 | 2,171 | 11,235 | |||||||||
Net income | $ | 26,506 | $ | 3,905 | $ | 30,411 | ||||||
Segment assets | $ | 2,936,542 | $ | 2,123 | $ | 2,938,665 |
Three months ended September 30, 2019 | Three months ended September 30, 2018 | |||||||||||||||||||||||
(Dollars in thousands) | Commercial | WM&T | Total | Commercial | WM&T | Total | ||||||||||||||||||
Wealth management and trust services | $ | — | $ | 5,738 | $ | 5,738 | $ | — | $ | 5,380 | $ | 5,380 | ||||||||||||
Deposit service charges | 1,444 | — | 1,444 | 1,482 | — | 1,482 | ||||||||||||||||||
Debit and credit card income | 2,102 | — | 2,102 | 1,759 | — | 1,759 | ||||||||||||||||||
Treasury management fees | 1,264 | — | 1,264 | 1,151 | — | 1,151 | ||||||||||||||||||
Mortgage banking income(1) | 834 | — | 834 | 712 | — | 712 | ||||||||||||||||||
Net investment product sales commissions and fees | 400 | — | 400 | 444 | — | 444 | ||||||||||||||||||
Bank owned life insurance(1) | 487 | — | 487 | 186 | — | 186 | ||||||||||||||||||
Other(2) | 1,035 | — | 1,035 | 312 | — | 312 | ||||||||||||||||||
Total non-interest income | $ | 7,566 | $ | 5,738 | $ | 13,304 | $ | 6,046 | $ | 5,380 | $ | 11,426 |
Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | |||||||||||||||||||||||
(Dollars in thousands) | Commercial | WM&T | Total | Commercial | WM&T | Total | ||||||||||||||||||
Wealth management and trust services | $ | — | $ | 16,839 | $ | 16,839 | $ | — | $ | 16,224 | $ | 16,224 | ||||||||||||
Deposit service charges | 4,027 | — | 4,027 | 4,340 | — | 4,340 | ||||||||||||||||||
Debit and credit card income | 6,014 | — | 6,014 | 4,956 | — | 4,956 | ||||||||||||||||||
Treasury management fees | 3,623 | — | 3,623 | 3,311 | — | 3,311 | ||||||||||||||||||
Mortgage banking income(1) | 2,112 | — | 2,112 | 2,034 | — | 2,034 | ||||||||||||||||||
Gain on sale of securities | — | — | — | — | — | — | ||||||||||||||||||
Net investment product sales commissions and fees | 1,120 | — | 1,120 | 1,245 | — | 1,245 | ||||||||||||||||||
Bank owned life insurance(1) | 849 | — | 849 | 564 | — | 564 | ||||||||||||||||||
Other(2) | 2,045 | — | 2,045 | 1,096 | — | 1,096 | ||||||||||||||||||
Total non-interest income | $ | 19,790 | $ | 16,839 | $ | 36,629 | $ | 17,546 | $ | 16,224 | $ | 33,770 |
(1) Outside of the scope of ASC 606. |
(2) Outside of the scope of ASC 606, with the exception of safe deposit fees which were nominal for all periods. |
Revenue sources within the scope of ASC 606 are discussed below:
Bancorp earns fees from its deposit customers for transactions-based, account management, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payments fees, and ACH fees, are recognized at the time the transaction is executed as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided. Overdraft fees are recognized at the point in time that the overdraft occurs. Deposit service charges are withdrawn from customer’s account balances.
Treasury management transaction fees are recognized at the time the transaction is executed as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided. Treasury management fees are withdrawn from customer’s account balances.
WM&T provides customers fiduciary and investment management services as agreed upon in asset management contracts. The contracts require WM&T to provide a series of distinct services for which fees are earned over time. The contracts are cancellable upon demand with fees typically based upon the asset value of investments. Revenue is accrued and recognized monthly based upon month-end asset values and collected from the customer predominately in the following month except for a small percentage of fees collected quarterly. Incentive compensation related to WM&T activities is considered a cost of obtaining the contract. Contracts between WM&T and clients do not permit performance based fees and accordingly, none of the fees earned by WM&T are performance based. Trust fees receivable as of September 30, 2019 were $2.1 million compared with $1.9 million as of December 31, 2018.
Investment products sales commissions and fees represent the Bank’s share of transaction fees and wrap fees resulting from investment services and programs provided through an agent relationship with a third party broker-dealer. Transaction fees are assessed at the time of the transaction. Those fees are collected and recognized on a monthly basis. Trailing fees are based upon market value and are assessed, collected, and recognized on a quarterly basis. Because the Bank acts as an agent in arranging the relationship between the customer and third party provider, and does not control the services rendered, investment product sales commissions and fees are reported net of related costs, including nominal incentive compensation, and trading activity charges of $391,000 and $403,000 for the nine month periods ended September 30, 2019 and 2018.
Debit and credit card revenue primarily consists of debit and credit card interchange income. Interchange income represents fees assessed within the payment card system for acceptance of card based transactions. Interchange fees are assessed as the performance obligation is satisfied, which is at the point in time the card transaction is authorized. Revenue is collected and recognized daily through the payment network settlement process.
Bancorp did not establish any contract assets or liabilities as a result of adopting ASC 606, nor were any recognized during 2019.
Bancorp’s revenue on the consolidated statement of income is categorized by product type, which effectively depicts how the nature, timing, and extent of cash flows are affected by economic factors.
(22) | Leases |
Bancorp has operating leases for various branch locations with terms remaining from three months to 14 years, some of which include options to extend the leases in five year increments. Options reasonably expected to be exercised are included in determination of the right of use asset. Bancorp elected the practical expedient to expense short-term lease expense associated with leases with original terms 12 months or less. Bancorp elected not to separate non-lease components from lease components for its operating leases. The right-of-use lease asset and operating lease liability are recorded in premises and equipment and other liabilities on the consolidated balance sheet.
Balance sheet, income statement, and cash flow detail regarding operating leases follows:
(In thousands) | |||||
Balance Sheet | September 30, 2019 | ||||
Operating lease right-of-use assets | $ | 15,741 | included in premises and equipment | ||
Operating lease liabilities | 17,060 | included in other liabilities | |||
Weighted average remaining lease term (yrs) | 11.88 | ||||
Weighted average discount rate | 3.61 | % | |||
Maturities of lease liabilities: | |||||
One year or less | $ | 1,974 | |||
Year 2 | 1,917 | ||||
Year 3 | 1,920 | ||||
Year 4 | 1,968 | ||||
Year 5 | 1,858 | ||||
Greater than 5 years | 11,454 | ||||
Total lease payments | $ | 21,091 | |||
Less imputed interest | 4,031 | ||||
Total | $ | 17,060 |
(In thousands) | Three months ended | Nine months ended | ||||||
Income Statement | September 30, 2019 | September 30, 2019 | ||||||
Components of lease expense: | ||||||||
Operating lease cost | $ | 501 | $ | 1,498 | ||||
Variable lease cost | 38 | 101 | ||||||
Less sublease income | 14 | 41 | ||||||
Total lease cost | $ | 525 | $ | 1,558 |
(In thousands) | Nine months ended | |||||||
Cash flow Statement | September 30, 2019 | |||||||
Supplemental cash flow information: | ||||||||
Operating cash flows from operating leases | $ | 1,051 |
As of September 30, 2019 Bancorp had not entered into any lease agreements that had yet to commence.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This item discusses the results ofand operations for Stock Yards Bancorp, Inc. (“Bancorp” or “Company”), and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”)SYB&T for the three and nine months ended September 30, 20172019 and compares these periods with the same periods of the previous year. Unless otherwise indicated, all referencesAll significant inter-company transactions and accounts have been eliminated in this discussionconsolidation. All companies are collectively referred to as “Bancorp” or the “Company.”
Stock Yards Bancorp, Inc. is a financial holding company headquartered in Louisville, Kentucky.
The Bank, include Bancorp. In addition, the discussion describes changeschartered in 1904, is a state-chartered non-member financial institution that provides services in the financial conditionLouisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio MSAs through 42 full service banking center locations.
As a result of its acquisition of KSB on May 1, 2019, Bancorp became the 100% successor owner of KBST, an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the TPS at the par amount of approximately $4 million on June 17, 2019.
Management’s Discussion and the Bank that have occurred during the first nine monthsAnalysis of 2017 compared with same period in 2016. This discussionFinancial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying notesFootnotes presented in Part 1 Item 1 of this report.“Financial Statements.”
This report contains forward-lookingforward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although Bancorp believes assumptions underlying forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to the following: economic conditions both generally and more specifically in markets in which Bancorp and the Bank operate; competition for Bancorp’s customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of Bancorp’s customers; and other risks detailed in Bancorp’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.
Acquisition of King Bancorp, Inc.and its wholly-owned subsidiary King Southern Bank
On May 1, 2019, Bancorp completed its acquisition of KSB, for $28 million in cash. The acquisition expands the Company’s market area into nearby Nelson County, Kentucky, while expanding the customer base in Louisville, Kentucky. At May 1, 2019, KSB reported approximately $192 million in total assets, approximately $164 million in loans, and approximately $126 million in deposits. As a result of the acquisition, goodwill totaling $12 million was recorded during the second quarter of 2019 with nominal recast adjustments posted during the third quarter.
As a result of the completion of the acquisition, Bancorp incurred pre-tax transaction charges totaling $1.3 million during the second quarter of 2019. Net income from the KSB acquisition is expected to be accretive to Bancorp’s overall operating results on a quarterly basis going forward.
Issued but Not Yet Effective Accounting Standards Updates
For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the Footnote titled “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
Business Segment Overview |
Stock Yards
Bancorp inc.is divided into two reportable segments: Commercial Banking and subsidiaryWM&T:
Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses through commercial lending, retail lending, deposit services, treasury management services, private banking, online banking, mobile banking, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer.
Overview
WM&T provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates. The magnitude of 2017 throughWM&T revenue distinguishes Bancorp from other community banks of similar asset size.
Overview - Three and Nine Months Ended September 30, 2019 Compared to the Same Periods in the Prior Year |
Three months ended September 30, (In thousands, except per share data) | 2019 | 2018 | $ Change | % Change | ||||||||||||
Net income | $ | 17,234 | $ | 13,876 | $ | 3,358 | 24 | % | ||||||||
Diluted earnings per share | $ | 0.76 | $ | 0.60 | $ | 0.16 | 27 | % | ||||||||
Annualized return on average assets | 1.95 | % | 1.75 | % | 20 bps | 11 | % | |||||||||
Annualized return on average equity | 17.41 | % | 15.67 | % | 174 bps | 11 | % |
General highlights for the quarter ended September 30, 2017
Bancorp completed2019 compared to the first nine months of 2017 with net income of $33.1 million, an 8.8% increase over the comparablesame period in 2016. The increase is primarily due to higher net interest income, higher non-interest income, and a reduction in provision for loan losses. These increases were partially offset by higher non-interest expense. Diluted earnings per share for the first nine months of 2017 were $1.44, compared with $1.34 for the first nine months of 2016. Bancorp's performance for the first nine months of 2017 reflected several positive factors, including:2018:
● | NIM improved 7 bps to 3.86% for the three months ended September 30, 2019 compared to the same period in 2018. |
● | The |
● | Net interest income |
● | Consistent with |
● |
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● |
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● |
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● |
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● |
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o | Strong market returns, new business generation, and |
o | Debit and credit card revenue continues to benefit from increasing transaction volumes and incentives paid by card processors. |
o | Other non-interest income benefited from non-recurring swap fees collected, gain on sale of Visa Class B common stock and proceeds received from a life insurance policy. |
● | Non-interest expenses increased $2.2 million, or 10%, for the three months ended September 30, 2019 compared to 2018 based on the following: |
o | Compensation reflects increases for both the KSB acquisition and full time equivalent employee additions. |
o | In addition to the full time equivalent employee additions mentioned above, employee benefits expense also reflects higher health insurance claims experienced and increased 401(k) expense. |
As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. Loan and deposit volumes are influenced by competition, new account acquisition efforts and economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.
● | The ETR decreased from 20.39% for the three months ended September 30, 2018 to 18.00% for the same period in 2019. |
Nine months ended September 30, (In thousands, except per share data) | 2019 | 2018 | $ Change | % Change | ||||||||||||
Net income | $ | 49,418 | $ | 40,859 | $ | 8,559 | 21 | % | ||||||||
Diluted earnings per share | $ | 2.16 | $ | 1.78 | $ | 0.38 | 21 | % | ||||||||
Annualized return on average assets | 1.94 | % | 1.75 | % | 19 bps | 11 | % | |||||||||
Annualized return on average equity | 17.31 | % | 15.92 | % | 139 bps | 9 | % |
Net interest income increased $4.4 million, or 6.1%,General highlights for the first nine months of 2017,ended September 30, 2019 compared withto the same period in 2016. Net interest margin increased to 3.63% for the first nine months of 2017, compared with 3.60% for the same period of 2016.2018:
For the nine-month period ended September 30, 2017, Bancorp recorded a $1.7 million provision for loan losses, compared to $2.5 million for the same period in 2016. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for the inherent losses on outstanding loans.
● | NIM improved 3 bps to 3.85% for the nine months ended September 30, 2019 compared to the same period in 2018. |
● | The FRB lowered the FFTR on two separate occasions by 25 bps twice during with Prime ending the period at 5.00%. |
● | Net interest income increased $8.0 million, or 9%, for the nine months ended September 30, 2019. |
● | Consistent with the lowering of Prime, Bancorp lowered the stated rate of most interest-bearing deposit account types during 2019. |
● | Average loans increased $164 million, or 7%, for the nine months ended September 30, 2019 compared to the same period in 2018. Bancorp benefited from the May 1st KSB acquisition in addition to strong organic loan production and net loan growth. |
● | Average deposits increased $275 million, or 11%, for the nine months ended September 30, 2019 compared to same period in 2018. |
● | Sustained sound credit metrics, including net loan loss recoveries for the first nine months of 2019, lead to reduced provision of $1.0 million compared with $2.7 million for the same period in 2018. |
● | Non-interest income increased $2.9 million, or 8%, for the nine months ended September 30, 2019 compared to 2018 based on the following: |
o | Strong market returns, new business generation, and growth in corporate retirement plans led to higher WM&T income. |
o | Debit and credit card revenue continues to benefit from increasing transaction volumes and incentives paid by card processors. |
o | Other non-interest income benefited from non-recurring swap fees collected, gain on sale of Visa Class B common stock and proceeds received from a life insurance policy. |
● | Non-interest expenses increased $7.1 million, or 11%, for the nine months ended September 30, 2019 compared to 2018 based on the following: |
o | Compensation reflects increases for both the KSB acquisition and full time equivalent employee additions. |
o | In addition to the full time equivalent employee additions mentioned above, employee benefits expense also reflects higher health insurance claims experienced and increased 401(k) expense. |
● | Bancorp's efficiency ratio, calculated on a FTE basis, in the first nine months of 2019 was 55.7% compared with 54.8% in the same period in 2018. |
● | The ETR decreased from 19.29% for the nine months ended September 30, 2018 to 11.86% for the same period in 2019 primarily due to two Kentucky state tax law changes that occurred during the first six months of 2018. |
Total non-interest income in the first nine monthsstockholder’s equity to total assets was 11.21% as of 2017 increased $1.4 million, or 4.2%, compared with the same period in 2016, and comprised 30.0% of total revenues, asSeptember 30, 2019 compared to 31.6% for the same period in 2016. Continuing the trends of 2016, Bancorp’s wealth management11.10% at December 31, 2018 and trust department (WM&T) led the increase with a 7.4%, or $1.110.62% at September 30, 2018. Total equity increased $30 million increase over the same period in 2016.
Total non-interest expense in the first nine months of 2017 increased $3.6 million, or 5.9%, compared with the same period in 2016, primarily due to increases in salaries and employee benefits, as well as expenses related to the Bancorp’s continued growth and improvements in technology infrastructure. Amortization expenses for investments in tax-credit partnerships, which had a significant impact on earnings in 2016, decreased by $1.2 million, or 39.4%, in the first nine months of 20172019, as compared to the same periodnet income of $49 million was offset by dividends declared of $17 million, stock repurchases totaling $9 million, changes in 2016. Bancorp's efficiency ratio in the first nine months of 2017 was 57.6% compared to 57.4% in the same period in 2016. Excluding amortization of the investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 55.9%AOCI and 54.5% for the first nine months of 2017 and 2016, respectively. See the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.
Stock Yards Bancorp, inc. and subsidiaryvarious stock based compensation.
Bancorp’s effective tax rate decreased to 25.9% in 2017 from 27.0% in 2016. In 2017 Bancorp adopted ASU 2016-09 “Compensation – Stock Compensation Improvements to Employee Share-Based Payment Accounting”. The new standard requires excess tax benefits and deficiencies related to share-based payment awards to be reflected in the statement of operations as a component of the provision for income taxes. For the nine months ended September 30, 2017 Bancorp recorded a benefit of $1.4 million for such tax benefits against the provision for income tax expense. Prior to adoption of ASU 2016-09 these tax benefits were recorded directly to additional paid-in capital.
The ratio of shareholder’s equity to total assets was 10.59% as of September 30, 2017 compared with 10.33% at December 31, 2016. Tangible common equity (TCE), a non-GAAP measure,TCE is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. TheBancorp’s ratio of tangible common equityTCE to total tangible assets was 10.54%10.83% as of September 30, 2017,2019, compared with 10.26%11.05% at December 31, 2016.2018, and 10.57% at September 30, 2018, with the decline attributable to the second quarter KSB acquisition. See the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.
In April 2016 Bancorp declared a 3 for 2 stock split effected as a 50% stock dividend payable in May 2016. Share and per share information has been adjusted for this dividend.
The following sections provide more details on Bancorp’s financial condition and results of operation.subjects presented in this overview.
| Results |
Net income of $11.7 million for the three months ended September 30, 2017 increased $1.2 million, or 11.8%, from $10.5 million for the comparable 2016 period. Basic net income per share was $0.52 for the third quarter of 2017, an increase of 10.6% from the $0.47 for the third quarter of 2016. Net income per share on a diluted basis was $0.51 for the third quarter of 2017, as compared to $0.46 for the same period in 2016. See Note 11 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.53% and 14.03%, respectively, for the third quarter of 2017, compared with 1.44% and 13.47%, respectively, for the same period in 2016.
Net income of $33.1 million for the nine months ended September 30, 2017 increased $2.7 million, or 8.8%, from $30.4 million for the comparable 2016 period. Basic net income per share was $1.47 for the first nine months of 2017, an increase of 8.1% from the $1.36 for the period in 2016. Net income per share on a diluted basis was $1.44 for the first nine months of 2017, an increase of 7.5% from the $1.34 for the same period in 2016. See Note 11 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.47% and 13.65%, respectively, for the first nine months of 2017, compared with 1.42% and 13.51%, respectively, for the same period in 2016.
Stock Yards Bancorp, inc. and subsidiary
Net Interest Income
The following table presents average balance sheets forAs is the three and nine month periods ended September 30, 2017 and 2016 alongcase with the related calculation of tax-equivalentmost banks, Bancorp’s primary revenue sources are net interest income netand fee income from various financial services provided to customers. Net interest marginincome is the difference between interest income earned on loans, investment securities and netother interest spread forearning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. New business volume is influenced by economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the related periods. See the notes following the tables for further explanation.marketplace.
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Three months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | ||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Federal funds sold and interest bearing deposits | $ | 120,927 | $ | 388 | 1.27 | % | $ | 72,673 | $ | 95 | 0.52 | % | ||||||||||||
Mortgage loans held for sale | 3,515 | 48 | 5.42 | 5,070 | 66 | 5.18 | ||||||||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | 387,696 | 1,920 | 1.96 | 406,481 | 1,984 | 1.94 | ||||||||||||||||||
Tax-exempt | 51,905 | 388 | 2.97 | 59,981 | 426 | 2.83 | ||||||||||||||||||
FHLB stock and other securities | 7,666 | 83 | 4.30 | 6,347 | 63 | 3.95 | ||||||||||||||||||
Loans, net of unearned income | 2,289,435 | 25,484 | 4.42 | 2,171,772 | 23,511 | 4.31 | ||||||||||||||||||
Total earning assets | 2,861,144 | 28,311 | 3.93 | 2,722,324 | 26,145 | 3.82 | ||||||||||||||||||
Less allowance for loan losses | 25,434 | 23,634 | ||||||||||||||||||||||
2,835,710 | 2,698,690 | |||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 41,550 | 41,682 | ||||||||||||||||||||||
Premises and equipment | 41,395 | 42,665 | ||||||||||||||||||||||
Accrued interest receivable and other assets | 108,433 | 100,109 | ||||||||||||||||||||||
Total assets | $ | 3,027,088 | $ | 2,883,146 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand deposits | $ | 725,822 | $ | 418 | 0.23 | % | $ | 698,874 | $ | 232 | 0.13 | % | ||||||||||||
Savings deposits | 150,332 | 55 | 0.15 | 136,292 | 11 | 0.03 | ||||||||||||||||||
Money market deposits | 691,726 | 741 | 0.43 | 655,912 | 346 | 0.21 | ||||||||||||||||||
Time deposits | 232,773 | 379 | 0.65 | 247,237 | 352 | 0.57 | ||||||||||||||||||
Securities sold under agreements to repurchase | 73,806 | 33 | 0.18 | 68,835 | 38 | 0.22 | ||||||||||||||||||
Federal funds purchased and other short term borrowings | 27,535 | 77 | 1.11 | 23,471 | 19 | 0.32 | ||||||||||||||||||
FHLB advances | 50,221 | 244 | 1.93 | 44,194 | 184 | 1.66 | ||||||||||||||||||
Total interest bearing liabilities | 1,952,215 | 1,947 | 0.40 | 1,874,815 | 1,182 | 0.25 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing demand deposits | 697,815 | 656,689 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 46,194 | 42,597 | ||||||||||||||||||||||
Total liabilities | 2,696,224 | 2,574,101 | ||||||||||||||||||||||
Stockholders’ equity | 330,864 | 309,045 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,027,088 | $ | 2,883,146 | ||||||||||||||||||||
Net interest income | $ | 26,364 | $ | 24,963 | ||||||||||||||||||||
Net interest spread | 3.53 | % | 3.57 | % | ||||||||||||||||||||
Net interest margin | 3.66 | % | 3.65 | % |
Stock Yards Bancorp, inc.Total Company Average Balance Sheets and subsidiaryInterest Rates - Three Month Comparison
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Nine months ended September 30, | Three months ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | balance | Interest | rate | balance | Interest | rate | ||||||||||||||||||||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and interest bearing deposits | $ | 97,543 | $ | 798 | 1.09 | % | $ | 100,653 | $ | 395 | 0.52 | % | ||||||||||||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 98,569 | $ | 566 | 2.28 | % | $ | 73,196 | $ | 373 | 2.02 | % | ||||||||||||||||||||||||||||||||||||
Mortgage loans held for sale | 3,656 | 145 | 5.30 | 4,918 | 185 | 5.02 | 3,887 | 41 | 4.18 | 2,980 | 42 | 5.59 | ||||||||||||||||||||||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 406,476 | 5,944 | 1.96 | 413,508 | 6,135 | 1.98 | 376,186 | 2,113 | 2.23 | 337,707 | 1,922 | 2.26 | ||||||||||||||||||||||||||||||||||||
Tax-exempt | 53,568 | 1,186 | 2.96 | 61,417 | 1,298 | 2.82 | 20,500 | 125 | 2.42 | 34,544 | 230 | 2.64 | ||||||||||||||||||||||||||||||||||||
FHLB stock and other securities | 6,801 | 229 | 4.50 | 6,347 | 190 | 4.00 | ||||||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 11,317 | 126 | 4.42 | 10,370 | 133 | 5.09 | ||||||||||||||||||||||||||||||||||||||||||
Loans, net of unearned income | 2,275,320 | 74,055 | 4.35 | 2,113,744 | 68,238 | 4.31 | 2,791,389 | 35,063 | 4.98 | 2,531,604 | 30,390 | 4.76 | ||||||||||||||||||||||||||||||||||||
Total earning assets | 2,843,364 | 82,357 | 3.87 | 2,700,587 | 76,441 | 3.78 | ||||||||||||||||||||||||||||||||||||||||||
Total interest earning assets | 3,301,848 | 38,034 | 4.57 | 2,990,401 | 33,090 | 4.39 | ||||||||||||||||||||||||||||||||||||||||||
Less allowance for loan losses | 24,891 | 23,057 | 27,168 | 25,124 | ||||||||||||||||||||||||||||||||||||||||||||
2,818,473 | 2,677,530 | 3,274,680 | 2,965,277 | |||||||||||||||||||||||||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 40,547 | 40,097 | 45,343 | 43,599 | ||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment | 41,798 | 41,500 | ||||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net | 64,573 | 43,137 | ||||||||||||||||||||||||||||||||||||||||||||||
Bank Owned Life Insurance | 32,697 | 32,492 | ||||||||||||||||||||||||||||||||||||||||||||||
Accrued interest receivable and other assets | 106,035 | 94,263 | 84,974 | 68,901 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 3,006,853 | $ | 2,853,390 | $ | 3,502,267 | $ | 3,153,406 | ||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing demand deposits | $ | 739,295 | $ | 1,076 | 0.19 | % | $ | 710,417 | $ | 735 | 0.14 | % | $ | 837,796 | $ | 1,207 | 0.57 | % | $ | 776,770 | $ | 1,168 | 0.60 | % | ||||||||||||||||||||||||
Savings deposits | 147,471 | 123 | 0.11 | 134,004 | 35 | 0.03 | 170,300 | 65 | 0.15 | 156,471 | 98 | 0.25 | ||||||||||||||||||||||||||||||||||||
Money market deposits | 693,656 | 1,968 | 0.38 | 652,406 | 1,060 | 0.22 | 687,794 | 1,763 | 1.02 | 642,013 | 1,612 | 1.00 | ||||||||||||||||||||||||||||||||||||
Time deposits | 239,250 | 1,070 | 0.60 | 254,172 | 1,086 | 0.57 | 431,879 | 2,281 | 2.10 | 299,599 | 1,094 | 1.45 | ||||||||||||||||||||||||||||||||||||
Total interest bearing deposits | 2,127,769 | 5,316 | 0.99 | 1,874,853 | 3,972 | 0.84 | ||||||||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 67,556 | 100 | 0.20 | 60,438 | 100 | 0.22 | 37,705 | 26 | 0.27 | 67,381 | 55 | 0.32 | ||||||||||||||||||||||||||||||||||||
Federal funds purchased and other short term borrowings | 20,581 | 125 | 0.81 | 25,021 | 57 | 0.30 | ||||||||||||||||||||||||||||||||||||||||||
FHLB advances | 50,541 | 715 | 1.89 | 43,533 | 552 | 1.69 | ||||||||||||||||||||||||||||||||||||||||||
Federal funds purchased | 10,671 | 52 | 1.93 | 48,906 | 245 | 1.99 | ||||||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 83,386 | 509 | 2.42 | 48,612 | 228 | 1.86 | ||||||||||||||||||||||||||||||||||||||||||
Subordinated debt | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities | 1,958,350 | 5,177 | 0.35 | 1,879,991 | 3,625 | 0.26 | 2,259,531 | 5,903 | 1.04 | 2,039,752 | 4,500 | 0.88 | ||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-interest bearing demand deposits | 680,831 | 637,812 | 784,862 | 715,303 | ||||||||||||||||||||||||||||||||||||||||||||
Accrued interest payable and other liabilities | 43,437 | 34,844 | 65,034 | 46,975 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 2,682,618 | 2,552,647 | 3,109,427 | 2,802,030 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 324,235 | 300,743 | ||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,006,853 | $ | 2,853,390 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 392,840 | 351,376 | ||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,502,267 | $ | 3,153,406 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 77,180 | $ | 72,816 | $ | 32,131 | $ | 28,590 | ||||||||||||||||||||||||||||||||||||||||
Net interest spread | 3.52 | % | 3.52 | % | 3.53 | % | 3.51 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin | 3.63 | % | 3.60 | % | 3.86 | % | 3.79 | % |
Stock Yards Bancorp, inc.Total Company Average Balance Sheets and subsidiaryInterest Rates - Nine Month Comparison
Nine months ended September 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(Dollars in thousands) | balance | Interest | rate | balance | Interest | rate | ||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 119,210 | $ | 2,129 | 2.39 | % | $ | 60,463 | $ | 804 | 1.78 | % | ||||||||||||
Mortgage loans held for sale | 3,144 | 121 | 5.15 | 2,687 | 121 | 6.02 | ||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Taxable | 398,617 | 6,919 | 2.32 | 356,423 | 5,946 | 2.23 | ||||||||||||||||||
Tax-exempt | 24,465 | 462 | 2.52 | 40,520 | 813 | 2.68 | ||||||||||||||||||
Federal Home Loan Bank stock | 10,704 | 434 | 5.42 | 9,004 | 352 | 5.23 | ||||||||||||||||||
Loans, net of unearned income | 2,660,328 | 100,077 | 5.03 | 2,496,267 | 86,980 | 4.66 | ||||||||||||||||||
Total interest earning assets | 3,216,468 | 110,142 | 4.58 | 2,965,364 | 95,016 | 4.28 | ||||||||||||||||||
Less allowance for loan losses | 26,832 | 24,874 | ||||||||||||||||||||||
3,189,636 | 2,940,490 | |||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 43,664 | 41,410 | ||||||||||||||||||||||
Premises and equipment, net | 63,586 | 42,347 | ||||||||||||||||||||||
Bank Owned Life Insurance | 32,690 | 32,303 | ||||||||||||||||||||||
Accrued interest receivable and other assets | 74,504 | 69,275 | ||||||||||||||||||||||
Total assets | $ | 3,404,080 | $ | 3,125,825 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand deposits | $ | 847,443 | $ | 4,019 | 0.63 | % | $ | 795,361 | $ | 2,630 | 0.44 | % | ||||||||||||
Savings deposits | 165,794 | 270 | 0.22 | 156,553 | 214 | 0.18 | ||||||||||||||||||
Money market deposits | 685,124 | 5,816 | 1.13 | 661,817 | 3,772 | 0.76 | ||||||||||||||||||
Time deposits | 398,384 | 5,929 | 1.99 | 257,815 | 2,107 | 1.09 | ||||||||||||||||||
Total interest bearing deposits | 2,096,745 | 16,034 | 1.02 | 1,871,546 | 8,723 | 0.62 | ||||||||||||||||||
Securities sold under agreements to repurchase | 38,402 | 79 | 0.28 | 66,869 | 122 | 0.24 | ||||||||||||||||||
Federal funds purchased | 11,288 | 176 | 2.08 | 54,531 | 728 | 1.78 | ||||||||||||||||||
Federal Home Loan Bank advances | 68,075 | 1,154 | 2.27 | 48,927 | 692 | 1.89 | ||||||||||||||||||
Subordinated debt | 643 | 26 | 5.41 | — | — | — | ||||||||||||||||||
Total interest bearing liabilities | 2,215,153 | 17,469 | 1.05 | 2,041,873 | 10,265 | 0.67 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing demand deposits | 745,105 | 695,791 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 62,079 | 44,913 | ||||||||||||||||||||||
Total liabilities | 3,022,337 | 2,782,577 | ||||||||||||||||||||||
Stockholders’ equity | 381,743 | 343,248 | ||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,404,080 | $ | 3,125,825 | ||||||||||||||||||||
Net interest income | $ | 92,673 | $ | 84,751 | ||||||||||||||||||||
Net interest spread | 3.53 | % | 3.61 | % | ||||||||||||||||||||
Net interest margin | 3.85 | % | 3.82 | % |
Notes to the average balanceTotal Company Average Balance Sheets and interest rate tables:Interest Rates - Supplemental Information
● | Average loan balances include the principal balance of non-accrual loans, as well as all loan premiums, discounts, fees and costs, and exclude participation loans accounted for as secured borrowings.Participation loans averaged $9 million and $16 million for the three month periods ended September 30, 2019 and 2018, and $10 million and $17 million for the nine month periods ended September 30, 2019 and 2018. |
● | Interest income on a FTE basis includes additional amounts of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and tax-exempt loanshas been calculated on a FTE basis using a federal income tax rate of 21% for 2019 and 2018. Approximate tax equivalent adjustments to interest income were $61,000 and $69,000 for the three month periods ended September 30, 2019 and 2018, and $172,000 and $247,000 for the nine month periods ended September 30, 2019 and 2018. |
● | Interest income includes loan fees of $481,000 and $184,000 for the three months ended September 30, 2019, and 2018 and $1.3 million and $722,000 for the nine month periods ended September 30, 2019 and 2018. |
● | Net interest income, the most significant component of the Bank's earnings |
● | Net interest spread is the difference between taxable equivalent rates |
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Fully taxable equivalent
Net Interest Income – Overview
During the third quarter of 2019, the FRB lowered the FFTR 25 bps twice; effective on August 1st and later during the quarter effective September 19th. At September 30, 2019, Prime was 5.00% compared to 5.50% at December 31, 2018 and 5.25% at September 30, 2018. In response to the August FFTR reduction, Bancorp immediately lowered the stated rate of most interest-bearing deposit account types, in addition to lowering all CD offering rates. With regard to the September FFTR reduction, Bancorp immediately lowered stated rates on most personal money market and larger sweep customers in addition to CD offering rates. Bancorp was able to fully offset the loss in revenue, with the first FFTR move not impacting overall NIM. As discussed throughout, future FFTR declines would likely result in margin compression, as additional reductions in deposit rates may not be sufficient to offset the potential loss in revenue.
Beginning in the second quarter of 2019, with the flattening/inverting of the treasury curve, Bancorp began to experience loan pricing pressure. In addition to continued intense loan pricing competition, protracted yield curve inversion is a concern, with recent fixed rate loan production at yields closer to 4.50%, while the overall portfolio yielded 4.98% for the three months ended September 30, 2019.
In the first half of 2018, Bancorp raised stated rates paid on money market accounts in addition to launching a targeted CD marketing campaign within its Louisville market to support loan growth in addition to increasing liquidity. The campaign generated over $100 million in CD growth in 2018. In addition, the deposit portfolio assumed from KSB in the second quarter was and remains concentrated in higher costing time deposits. While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, deposit balances have continued to migrate from non-interest bearing accounts to interest bearing accounts during the period.
In general, net interest income and NIM have been favorably impacted by elevated loan prepayment fees collected in 2019 with a much lighter impact experienced in the prior year. Also, the KSB portfolio mix of $26.4earning assets and interest bearing liabilities added during 2019 has slightly impacted NIM in a negative manner.
Net Interest Income – Three months ended September 30, 2019 compared to September 30, 2018
Net interest spread and NIM increased to 3.53% and 3.86%, for the three months ended September 30, 2019 compared to 3.51% and 3.79% for the same periods in 2018. Net interest income (FTE) of $32.1 million for the three months ended September 30, 20172019 increased $1.4$3.5 million, or 5.6%12%, from $25.0$28.6 million for the same period in 2016. Bancorp recognized positive effects of increased average balances on loans, resulting from loan growth in 2016, and increased rates on all2018 led by earning asset categories following rate increases by the Federal Reserve, were partially offset by the negative effect of increased rates for all funding sources, and increasedgrowth, primarily loans. Total average balances for all funding sources except certificate of deposit accounts. To date in 2017 the Federal Reserve twice raised the target Fed Funds rate with 25 basis point increases in both March and June. Management increased rates paid on retail deposits accounts in conjunction with the March rate hike. Those deposit customers had not seen a rate increase on their accounts in over ten years. The June increase resulted in most of the variable rate loan portfolio breaking through applicable floor rates which will enhance margin going forward. Net interest spread and net interest margin were 3.53% and 3.66%, respectively, for the third quarter of 2017 and 3.57% and 3.65%, respectively, for the third quarter of 2016. Heightened competition on pricing, effects of liquidity and a flattening yield curve contributed to pressure on net interest margin.
Fully taxable equivalent net interest income of $77.2 million for the nine months ended September 30, 2017 increased $4.4 million, or 6.0%, from $72.8 million for the same period in 2016. Positive effects of increased average balances on loans, resulting from loan growth in 2016, and increased rates on other earning assets, were partially offset by the negative effect of increasing rates and average balances for all funding sources except certificates of deposits. Average rates on loans increased period to period while the rates on taxable securities decreased. Net interest spread and net interest margin were 3.52% and 3.63%, respectively, for the first nine months of 2017 and 3.52% and 3.60%, respectively, for the first nine months of 2016.
Stock Yards Bancorp, inc. and subsidiary
Average earning assets increased $138.8$311 million, or 5.1%10%, to $2.9$3.3 billion for the three month period ended September 30, 2017 as compared to the same time period in 2016, reflecting growth in the loan portfolio and to a lesser extent fed funds sold. Average interest bearing liabilities increased $77 million or 4.1% for the third quarter of September 30, 2017 as compared to the third quarter of 2016. A decrease in volume of time deposits partially offset increases in all other interest bearing deposit and borrowing categories. Average earning assets increased $142.8 million or 5.3%, to $2.8 billion for the first nine months of 2017 as compared with 2016, reflecting increases in the loan portfolio, the majority of which was garnered in 2016. Average interest bearing liabilities increased $78.4 million, or 4.1%, to $1.95 billion for the first nine months of 2017,2019, as compared with the same period in 2016. Increases2018, with the average rate earned on earnings assets increasing 18 bps to 4.57%. Average loans increased $260 million, or 10%, for the three months ended September 30, 2019 compared to the same period in 2018, with the KSB acquisition contributing $156 million, or 60% of the total increase. The remaining increase stemmed from strong organic loan production experienced across all markets. Average balances of FFS and interest bearing due from banks and taxable securities increased $64 million in total for the third quarter of 2019, as compared with 2018, as excess liquidity was deployed into short-term investments earning higher period over period yields.
Total interest income (FTE) increased $4.9 million, or 15%, for the third quarter of 2019, as compared with the third quarter of 2018, to $38.0 million. Approximately $4.7 million of the total increase related to the increased interest income on loans (FTE), with changes in volume driving most of the increase.
Total average interest bearing liabilities increased $220 million, or 11%, to $2.3 billion for the three month period ended September 30, 2019, as compared with the same period in 2018, with the average cost increasing 16 bps to 1.04%. Interest bearing liabilities assumed in the volumeKSB acquisition (deposits and FHLB advances) represented $122 million, or 56%, of the total increase. Average interest bearing demand deposits savingsincreased $253 million, or 13%, for the three months ended September 30, 2019 compared to the same period in 2018, with time deposits representing 52% of the increase. KSB assumed interest bearing liabilities represented $86 million of the third quarter 2019 average interest bearing deposit balance and concentrated in the time deposit category.
Total interest expense increased $1.4 million, or 31%, for the three months ended September 30, 2019 compared to 2018 with the vast majority of the increase associated with total interest bearing deposits – predominantly time deposits. The cost of time deposits increased from 1.45% for the three months ended September 30, 2018 to 2.10% for the same period in 2019, while the average balance increased $132 million, or 44%. The change in time deposits was impacted equally by both changes in rates and volume. The average balance of SSUAR decreased $30 million, or 44%, for the three months ended September 30, 2019 as compared to the same period in 2018, as a significant number of commercial customers migrated from lower yielding collateralized products to higher yielding non-collateralized deposits. Average FHLB advances increased $35 million, or 72%, for the three months ended September 30, 2019 compared to 2018 based on advances assumed from the KSB acquisition. These advances were retained by Bancorp based upon favorable rates and terms in the overall execution of the Company’s asset liability management strategy.
Net Interest Income – Nine months ended September 30, 2019 compared to September 30, 2018
Net interest spread and NIM were 3.53% and 3.85%, for the nine months ended September 30, 2019 compared to 3.61% and 3.82% for the same periods in 2018. Net interest income (FTE) of $92.7 million for the nine months ended September 30, 2019 increased $7.9 million, or 9%, from $84.8 million for the same period in 2018, led by growth in average interest earning assets, primarily loans. Total average earning assets increased $251 million, or 8%, to $3.2 billion for the nine month period ended September 30, 2019, as compared with the same period in 2018, with the average rate earned on earnings assets increasing 30 bps to 4.58%. Average loans increased $164 million, or 7%, for the nine months ended September 30, 2019 compared to the same period in 2018, with the KSB acquisition contributing $89 million, or 54% of the total average increase. The remaining increase stemmed from record year to date organic loan production experienced across all markets. Average balances of FFS, interest bearing due from banks and taxable securities increased $101 million in total for the nine month period ended September 30, 2019, as compared with 2018, as excess liquidity was deployed into short-term investments earning higher period over period yields.
Total interest income (FTE) increased $15.1 million, or 16%, for the nine months ended September 30, 2019, as compared with the same period in 2018, to $110.1 million. Approximately $100.1 million of the total increase related to loans (FTE), with changes in rate driving just over half of the increase.
Total average interest bearing liabilities increased $173 million, or 8%, to $2.2 billion for the nine month period ended September 30, 2019, as compared with the same period in 2018, with the average cost increasing 38 bps to 1.05%. Interest bearing liabilities assumed in the KSB acquisition (deposits and FHLB advances) represented $71 million, or 41%, of the total increase. Average interest bearing deposits increased $225 million, or 12%, for the nine months ended September 30, 2019 compared to the same period in 2018, with approximately $50 million attributable to the KSB acquisition and concentrated in the time deposits category.
Total interest expense increased $7.2 million, or 70%, for the nine months ended September 30, 2019 compared to the same period in 2018 and was concentrated within interest bearing deposits. Approximately 75% of the combined time deposits, money market deposit accounts securities sold under agreementsand demand deposits change was attributable to repurchase, andrate with fluctuations as follows:
● | The cost of time deposits increased from 1.09% to 1.99%, while the average balance increased $141 million, or 55% |
● | The cost of money markets increased from 0.76% to 1.13%, while the average balance increased $23 million, or 4% |
● | The cost of demand deposits increased from 0.44% 0.63%, while the average balance increased $52 million, or 7%. |
The average balance of SSUAR decreased $28 million, or 43%, for the nine months ended September 30, 2019 compared to the same period in 2018, as a significant number of commercial customers migrated from lower yielding collateralized products to higher yielding non-collateralized deposits. Average FHLB advances increased $19 million, or 39%, for nine months ended September 30, 2019 compared to 2018 based on advances assumed from the KSB acquisition. These advances were partially offsetretained by decreasesBancorp based upon favorable rates and terms in volumethe overall execution of time deposits, and other short term borrowing products.the Company’s asset liability management strategy. As a result of the KSB acquisition, Bancorp assumed a $4 million subordinated note that was redeemed at par prior to the end of the second quarter of 2019.
Asset/Liability Management and Interest Rate Risk
Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.
Interest Rate Simulation Sensitivity Analysis
Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities and off-balance sheet financial instruments.liabilities. By estimating effects of interest rate increases and decreases,fluctuations, the model can reveal approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results.
The September 30, 20172019 simulation analysis, which shows minimal interest rate sensitivity, indicates that Bancorp is asset sensitive as increases in interest rates of 100 to 200 basis pointsBPs would have a positive effect on net interest income, and decreases of 100 to 200 BPs in interest rates would have a negative effect on net interest income. If rates raise 200 basis points,The mix of assets and liabilities acquired in the KSB transaction slightly increased Bancorp’s exposure to falling rates. The overall increase in net interest income would increase 2.12%. The excess liquidity held in interest bearing deposit accounts and other short-term investments along withthe rising rate scenarios is primarily due to variable rate loans now at or above their floors gives Bancorp significant assets that will reprice as rates move. Those sameand short-term investments repricing more quickly than deposits and short-term borrowings. Asset balances subject to immediate repricing cause an estimated decline in net interest income in a down 100 basis pointand 200 BP rate scenario.scenarios, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates are summarized below.
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Change in Rates | ||||||||||||||||
-200 | -100 | +100 | +200 | |||||||||||||
Basis Points | Basis Points | Basis Points | Basis Points | |||||||||||||
% Change from base net interest income at September 30, 2019 | -8.45 | % | -3.27 | % | 2.56 | % | 5.19 | % |
Approximately 61%60% of Bancorp’sBancorp’s loan portfolio has fixed rates and 39% of its loan portfolio iswith 40% priced at variable rates. With the Prime rate currently at 4.25%, and after the .25% increase in Prime in June of 2017, the majority of Bancorp’s variable rate loans now have interest rates at orare above their floors.
Stock Yards Bancorp, inc.floors and subsidiary
will reprice as rates change.
Undesignated derivative instruments, as described in Note 18 to Bancorp’s consolidated financial statementsthe Footnote titled “Disclosure of Financial Instruments Not Reported at Fair Value,” are recognized on the consolidated balance sheet at fair value, with changes in fair value due to changes in prevailing interest rates, recorded in other non-interest income.income as interest rates fluctuate. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above.
Derivatives designated as cash flow hedges as described in Note 18 to Bancorp’s consolidated financial statementsthe Footnote titled “Derivative Financial Instruments,” are recognized on the consolidated balance sheet at fair value, with changes in fair value due to changes in prevailing interest rates, recorded net of tax in other comprehensive income.OCI.
Provision for Loan and Lease Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for inherent losses on outstanding loans. The allowance for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysisreflects results of risk in the loan portfolio. The provision reflects an allowance methodology that is driven by risk ratings, historical losses, specific loan loss allocations, and qualitative factors. The provision represents a charge to earnings necessary to maintain an allowance that, in management’s evaluation, is adequate to provide coverage for the firstinherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors.
Bancorp recorded provision of $400,000 and $1.0 million for the three and nine month periods ended September 30, 2019, as compared with $735,000 and $2.7 million for the same periods in 2018. Continued strong credit metrics and net recoveries of $61,000 and $343,000 for the three and nine months ended September 30, 2019 resulted in an allowance to total loans of 2017,0.94% as of September 30, 2019, compared with 1.00% as of both December 31, 2018 and September 30, 2018. The loans acquired in the resulting allowance level, reflected a numberKSB acquisition were marked to market on the acquisition date and as such did not receive an allowance.
Key indicators of factors, including stableloan quality remained consistent with the prior year with the exception of increased classified balances, defined as OAEM, Substandard, and acceptable credit quality metrics, modestnon-performing loans, which increased $11 million as of September 30, 2019, as compared with December 31, 2018. While classified loan growth duringlevels remained historically low, Substandard loans increased approximately $15 million in 2019 primarily due to the period, and an expansiondowngrade of three commercial relationships.
Consistent with Bancorp’s methodology, the historical look-back period was extended from 2432 to 36 quarters to 28 quarters. This expansionin the first quarter of the look-back period was applied2019 to all classes and segments of the portfolio. TheManagement believes the expansion of the look-back period for the historical loss rates used in the quantitative allocation caused management to review the overall methodology for the qualitative factors to ensure Bancorp was appropriately capturing the risk not addressed in the historical loss rates used in the quantitative allocation, resulting in the same expansion of the look-back period for the qualitative factors. Management believes the extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. Key indicators of loan quality continued to show improvement during 2017, with levels of non-performing loans continuing a five year downward trend. Classified assets, after experiencing a slight elevation the prior quarter stabilized in the third quarter. Bancorp recorded provision for loan losses of $150 thousand and $1.7 million for the first three and nine month periods of 2017, respectively, as compared to $1.3 million and $2.5 million for the same periods in 2016.
Management uses loan grading procedures which result in specific allowance allocations for estimated inherent risk of loss. For all loans graded, but not individually reviewed for allowance purposes, a general allowance allocation is computed using historical data based on actual loss experience. Specific and general allocations plus consideration of qualitative factors represent management’s best estimate of probable losses contained in the loan portfolio, atand captures the evaluation date. Althougheffects of a full economic cycle. Based on the look-back period extension, the allowance level increased approximately $2.0 million during the first quarter of 2019. Additional information regarding Bancorp’s methodology for evaluating the adequacy of the allowance can be read in the Company’s Annual Report on Form 10-K.
Non-performing loans, consisting of TDRs, non-accrual loans, and loans over 90 days past due still accruing, declined to $3.2 million at September 30, 2019 from $3.4 million at December 31, 2018 and $5.0 million at September 30, 2018. Bancorp considers the present asset quality metrics to be exceptional; however, recognizing the cyclical nature of local economies, this trend is expected to normalize over the long-term.
Bancorp’s loan lossesportfolio is compriseddiversified with no significant concentrations of specificcredit. Geographically, most loans are extended to borrowers in the MSAs of Louisville, Indianapolis and general allocations,Cincinnati. The adequacy of the entire allowance is availablemonitored on an ongoing basis and it is the opinion of management that the balance of the allowance at September 30, 2019 is adequate to absorb any credit losses. Based on this detailed analysis of credit risk, management considers the allowance for loan losses adequate to cover probable losses inherent in the loan portfolio at September 30, 2017.as of the financial statement date.
Stock Yards Bancorp, inc. and subsidiary
An analysis of the changes in the allowance for loan losses and selected ratios for the three and nine month periods ended September 30, 2017 and 2016 follows:
(dollars in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Balance at the beginning of the period | $ | 25,115 | $ | 23,141 | $ | 24,007 | $ | 22,441 | ||||||||
Provision for loan losses | 150 | 1,250 | 1,650 | 2,500 | ||||||||||||
Loan charge-offs, net of recoveries | (317 | ) | (22 | ) | (709 | ) | (572 | ) | ||||||||
Balance at the end of the period | $ | 24,948 | $ | 24,369 | $ | 24,948 | $ | 24,369 | ||||||||
Average loans, net of unearned income | $ | 2,289,436 | $ | 2,188,089 | $ | 2,275,320 | $ | 2,124,921 | ||||||||
Provision for loan losses to average loans (1) | 0.01 | % | 0.06 | % | 0.07 | % | 0.12 | % | ||||||||
Net loan charge-offs to average loans (1) | 0.01 | % | 0.00 | % | 0.03 | % | 0.03 | % | ||||||||
Allowance for loan losses to average loans | 1.09 | % | 1.11 | % | 1.09 | % | 1.15 | % | ||||||||
Allowance for loan losses to period-end loans | 1.07 | % | 1.10 | % | 1.07 | % | 1.10 | % | ||||||||
(1) Amounts not annualized |
Three months ended | Nine months ended | |||||||||||||||
(Dollars in thousands) | September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Balance at the beginning of the period | $ | 26,416 | $ | 24,873 | $ | 25,534 | $ | 24,885 | ||||||||
Provision | 400 | 735 | 1,000 | 2,705 | ||||||||||||
Total charge-offs | (230 | ) | (561 | ) | (490 | ) | (2,736 | ) | ||||||||
Total recoveries | 291 | 175 | 833 | 368 | ||||||||||||
Total net loan charge-offs (recoveries) | 61 | (386 | ) | 343 | (2,368 | ) | ||||||||||
Balance at the end of the period | $ | 26,877 | $ | 25,222 | $ | 26,877 | $ | 25,222 | ||||||||
Average loans, net of unearned income | $ | 2,791,389 | $ | 2,531,604 | $ | 2,660,328 | $ | 2,496,267 | ||||||||
Provision to average loans (1) | 0.01 | % | 0.03 | % | 0.04 | % | 0.11 | % | ||||||||
Net loan charge-offs (recoveries) to average loans (1) | 0.00 | % | -0.02 | % | 0.01 | % | -0.09 | % | ||||||||
Allowance to average loans | 0.96 | % | 1.00 | % | 1.01 | % | 1.01 | % | ||||||||
Allowance to total loans | 0.94 | % | 1.00 | % | 0.94 | % | 1.00 | % |
(1) Amounts not annualized |
Loans are charged off when deemed uncollectible and a loss is identified or after underlying collateral has been liquidated; however, collection efforts may continue and future recoveries may occur. Periodically, loans are partially charged off to net realizable value based upon collateral analysis and collection status. One significant C&I loan relationship totaling $1.3 million was charged off to its net realizable value in the first quarter of 2018, which resulted in increased net charge offs for the nine month period ending September 30, 2018.
An analysis of net charge-offs (recoveries) by loan category for the three and nine month periods ended September 30, 2017 and 2016portfolio segment follows:
(in thousands) | Three months | Nine months | ||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
Net loan charge-offs (recoveries) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Commercial and industrial | $ | 280 | $ | 18 | $ | 642 | $ | 375 | ||||||||
Construction and development, excluding undeveloped land | - | (11 | ) | - | (21 | ) | ||||||||||
Undeveloped land | - | - | - | - | ||||||||||||
Real estate mortgage - commercial investment | (16 | ) | (67 | ) | (52 | ) | (226 | ) | ||||||||
Real estate mortgage - owner occupied commercial | - | (9 | ) | - | 305 | |||||||||||
Real estate mortgage - 1-4 family residential | (1 | ) | 64 | (5 | ) | 63 | ||||||||||
Home equity | (5 | ) | (34 | ) | 4 | (34 | ) | |||||||||
Consumer | 59 | 61 | 120 | 110 | ||||||||||||
Total net loan charge-offs (recoveries) | $ | 317 | $ | 22 | $ | 709 | $ | 572 |
Three months ended | Nine months ended | |||||||||||||||
(In thousands) | September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Commercial and industrial | $ | (63 | ) | $ | 389 | $ | (166 | ) | $ | 2,316 | ||||||
Construction and development, excluding undeveloped land | — | — | (203 | ) | — | |||||||||||
Undeveloped land | — | — | — | — | ||||||||||||
Real estate mortgage - commercial investment | (3 | ) | (1 | ) | (4 | ) | (3 | ) | ||||||||
Real estate mortgage - owner occupied commercial | — | 14 | (20 | ) | 14 | |||||||||||
Real estate mortgage - 1-4 family residential | (42 | ) | — | (59 | ) | — | ||||||||||
Home equity | (1 | ) | (50 | ) | (2 | ) | (54 | ) | ||||||||
Consumer | 48 | 34 | 111 | 95 | ||||||||||||
Total net loan charge-offs (recoveries) | $ | (61 | ) | $ | 386 | $ | (343 | ) | $ | 2,368 |
Stock Yards Bancorp, inc.Non-interest Income and subsidiaryNon-interest Expenses
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | 2018 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||||
Non-interest income: | ||||||||||||||||||||||||||||||||
Wealth management and trust services | $ | 5,738 | $ | 5,380 | $ | 358 | 7 | % | $ | 16,839 | $ | 16,224 | $ | 615 | 4 | % | ||||||||||||||||
Deposit service charges | 1,444 | 1,482 | (38 | ) | (3 | ) | 4,027 | 4,340 | (313 | ) | (7 | ) | ||||||||||||||||||||
Debit and credit card income | 2,102 | 1,759 | 343 | 19 | 6,014 | 4,956 | 1,058 | 21 | ||||||||||||||||||||||||
Treasury management fees | 1,264 | 1,151 | 113 | 10 | 3,623 | 3,311 | 312 | 9 | ||||||||||||||||||||||||
Mortgage banking income | 834 | 712 | 122 | 17 | 2,112 | 2,034 | 78 | 4 | ||||||||||||||||||||||||
Net investment product sales commissions and fees | 400 | 444 | (44 | ) | (10 | ) | 1,120 | 1,245 | (125 | ) | (10 | ) | ||||||||||||||||||||
Bank owned life insurance | 487 | 186 | 301 | 162 | 849 | 564 | 285 | 51 | ||||||||||||||||||||||||
Other | 1,035 | 312 | 723 | 232 | 2,045 | 1,096 | 949 | 87 | ||||||||||||||||||||||||
Total non-interest income | $ | 13,304 | $ | 11,426 | $ | 1,878 | 16 | % | $ | 36,629 | $ | 33,770 | $ | 2,859 | 8 | % | ||||||||||||||||
Non-interest expenses: | ||||||||||||||||||||||||||||||||
Compensation | $ | 12,330 | $ | 11,607 | $ | 723 | 6 | % | $ | 36,846 | $ | 34,280 | $ | 2,566 | 7 | % | ||||||||||||||||
Employee benefits | 2,908 | 2,501 | 407 | 16 | 8,458 | 7,646 | 812 | 11 | ||||||||||||||||||||||||
Net occupancy and equipment | 2,199 | 1,914 | 285 | 15 | 6,033 | 5,543 | 490 | 9 | ||||||||||||||||||||||||
Technology and communication | 1,841 | 1,595 | 246 | 15 | 5,462 | 4,910 | 552 | 11 | ||||||||||||||||||||||||
Debit and credit card processing | 662 | 588 | 74 | 13 | 1,880 | 1,733 | 147 | 8 | ||||||||||||||||||||||||
Marketing and business development | 732 | 740 | (8 | ) | (1 | ) | 2,260 | 2,191 | 69 | 3 | ||||||||||||||||||||||
Postage, printing, and supplies | 402 | 370 | 32 | 9 | 1,218 | 1,161 | 57 | 5 | ||||||||||||||||||||||||
Legal and professional | 524 | 501 | 23 | 5 | 2,581 | 1,498 | 1,083 | 72 | ||||||||||||||||||||||||
FDIC insurance | — | 238 | (238 | ) | (100 | ) | 486 | 718 | (232 | ) | (32 | ) | ||||||||||||||||||||
Amortization/impairment of investment in tax credit partnerships | 137 | — | 137 | 100 | 241 | 58 | 183 | 316 | ||||||||||||||||||||||||
Capital and deposit based taxes | 993 | 738 | 255 | 35 | 2,864 | 2,452 | 412 | 17 | ||||||||||||||||||||||||
Other | 1,229 | 989 | 240 | 24 | 3,731 | 2,754 | 977 | 35 | ||||||||||||||||||||||||
Total non-interest expenses | $ | 23,957 | $ | 21,781 | $ | 2,176 | 10 | % | $ | 72,060 | $ | 64,944 | $ | 7,116 | 11 | % |
Non-interest I Income and Expensesncome
The following table sets forth major components of non-interest income and expenses for the three and nine month periods ended September 30, 2017 and 2016.
Three months | Nine months | |||||||||||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||||||||||
(In thousands) | 2017 | 2016 | % Change | 2017 | 2016 | % Change | ||||||||||||||||||
Non-interest income: | ||||||||||||||||||||||||
Wealth management and trust services | $ | 5,025 | $ | 4,800 | 4.7 | % | $ | 15,272 | $ | 14,219 | 7.4 | % | ||||||||||||
Service charges on deposit accounts | 2,522 | 2,544 | (0.9 | ) | 7,368 | 6,952 | 6.0 | |||||||||||||||||
Bankcard transactions | 1,492 | 1,455 | 2.5 | 4,412 | 4,198 | 5.1 | ||||||||||||||||||
Mortgage banking | 781 | 1,072 | (27.1 | ) | 2,380 | 2,896 | (17.8 | ) | ||||||||||||||||
Gain (loss) on calls of securities available for sale | 31 | - | 0.0 | 31 | - | 0.0 | ||||||||||||||||||
Securities brokerage | 551 | 558 | (1.3 | ) | 1,584 | 1,539 | 2.9 | |||||||||||||||||
Bank owned life insurance | 204 | 216 | (5.6 | ) | 964 | 657 | 46.7 | |||||||||||||||||
Other | 497 | 713 | (30.3 | ) | 1,564 | 1,757 | (11.0 | ) | ||||||||||||||||
Total non-interest income | $ | 11,103 | $ | 11,358 | (2.2 | )% | $ | 33,575 | $ | 32,218 | 4.2 | % | ||||||||||||
Non-interest expenses: | ||||||||||||||||||||||||
Salaries and employee benefits | $ | 12,983 | $ | 12,048 | 7.8 | % | $ | 39,244 | $ | 36,214 | 8.4 | % | ||||||||||||
Net occupancy | 1,621 | 1,646 | (1.5 | ) | 4,765 | 4,716 | 1.0 | |||||||||||||||||
Data processing | 1,920 | 1,747 | 9.9 | 5,909 | 5,172 | 14.2 | ||||||||||||||||||
Furniture and equipment | 316 | 277 | 14.1 | 861 | 853 | 0.9 | ||||||||||||||||||
FDIC insurance | 242 | 356 | (32.0 | ) | 716 | 1,035 | (30.8 | ) | ||||||||||||||||
Amortization of investment in tax credit partnerships | 616 | 1,015 | (39.3 | ) | 1,847 | 3,046 | (39.4 | ) | ||||||||||||||||
Other | 3,619 | 3,429 | 5.5 | 10,469 | 9,215 | 13.6 | ||||||||||||||||||
Total non-interest expenses | $ | 21,317 | $ | 20,518 | 3.9 | % | $ | 63,811 | $ | 60,251 | 5.9 | % |
The largest component of non-interest income is wealth management and trust (“WM&T”) revenue. The magnitude of WM&T revenue distinguishes Bancorp from most other community banks of similar asset size. WM&T assets under management (AUM) totaled $2.7 billion at September 30, 2017, a 12.5% increase compared to $2.4 billion at September 30, 2016. AUM are stated at market value and while the 2017 increase was partially the result of a rising stock market during the period, primarily it represents a continuance of the 2016 trend for new clients added. WM&T revenue, which constitutes an average of 45% ofTotal non-interest income increased $225 thousand, or 4.7% and $1.1$1.9 million, or 7.4%16%, and $2.9 million, or 8%, for the three and nine month periods ended September 30, 2017 respectively,2019 compared to the same periods in 2016. Recurring fees, which generally comprise over 98%2018. Non-interest income comprised 29.3% and 28.3% of the WM&T revenue, increased $340 thousand or 7.4%total revenues, defined as net interest income and $1.4 million, or 10.7%,non-interest income, for the respective three and nine month periods ended September 30, 2017, as2019 compared to 28.6% and 28.5% for the same periods in 2016. 2018. WM&T services comprised 43.1% and 46.0% of Bancorp’s total non-interest income for the three and nine month periods ended September 30, 2019 compared to 47.1% and 48.0% for the same periods in 2018. Debit and credit card income comprised 15.8% and 16.4% of Bancorp’s non-interest income for the three and nine month periods ended September 30, 2019 compared to 15.4% and 14.7% for the same periods in 2018.
The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. Trust AUM, stated at market value, totaled $3.12 billion at September 30, 2019, a 5% increase compared with $2.97 billion at September 30, 2018, and a 13% increase from $2.77 billion at December 31, 2018. WM&T revenue increased $358,000, or 7%, and $615,000, or 4% for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018 consistent with increased new business generation, the second consecutive quarter of strong market returns and growth in corporate retirement plans.
Recurring fees earned for managing trust accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Some revenuesRecurring fees, which generally comprise over 97% of the WM&T revenue, increased $263,000, or 5%, and $432,000, or 3% for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. A portion of the WM&T revenue, most notably executor, insurance, and some employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues corresponds with the related administrative activities, and is also based on the market value of AUM. Total non-recurring fees decreased $115 thousandincreased $95,000, or 72%, and $393 thousand$182,000, or 52%, for the three and nine monthsmonth periods ended September 30, 2017,2019, as compared towith the same periods in 2016, primarily due to a decrease in estate fees period to period.2018. Contracts between WM&T and their clients do not permit performance based fees and accordingly, none of the fees earned by WM&T are performance based. Management believes the WM&T department will continue to factor significantly in Bancorp’s financial results and provide strategic diversity to revenue streams.
Stock Yards Bancorp, inc. and subsidiary
The following table provides information regarding AUMDetail of WM&T Service Income by WM&T as of September 30, 2017 and 2016. This table demonstrates that:Account Type:
• Approximately 80% of WM&T’s assets are actively managed.
• Corporate retirement plan accounts consist primarily of participant directed assets.
• The amount of custody and safekeeping accounts is insignificant, and
• The majority of WM&T’s managed assets are in personal trust and investment advisory accounts.
Assets Under Management by Account Type | ||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
Assets | Assets | |||||||||||||||
(in thousands) | Managed | Non- managed (1) | Managed | Non- managed (1) | ||||||||||||
Personal trust accounts | $ | 567,222 | $ | 96,005 | $ | 512,905 | $ | 62,221 | ||||||||
Personal investment retirement accounts | 340,159 | 7,142 | 311,215 | 10,024 | ||||||||||||
Corporate retirement accounts | 56,515 | 382,803 | 53,190 | 335,613 | ||||||||||||
Investment advisory accounts | 995,769 | 20,169 | 867,776 | - | ||||||||||||
Foundation and endowment accounts | 220,722 | - | 224,213 | - | ||||||||||||
Total fiduciary accounts | $ | 2,180,387 | $ | 506,119 | $ | 1,969,299 | $ | 407,858 | ||||||||
Custody and safekeeping accounts | - | 59,490 | - | 35,773 | ||||||||||||
Totals | $ | 2,180,387 | $ | 565,609 | $ | 1,969,299 | $ | 443,631 | ||||||||
Total managed and non-managed assets | $ | 2,745,996 | $ | 2,412,930 |
|
Stock Yards Bancorp, inc. and subsidiary
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Investment advisory | $ | 2,319 | $ | 2,121 | $ | 6,696 | $ | 6,270 | ||||||||
Personal trust | 1,701 | 1,730 | 5,399 | 5,512 | ||||||||||||
Personal individual retirement | 978 | 903 | 2,799 | 2,645 | ||||||||||||
Corporate retirement | 517 | 353 | 1,160 | 1,093 | ||||||||||||
Foundation and endowment | 143 | 134 | 416 | 419 | ||||||||||||
Custody and safekeeping | 32 | 42 | 93 | 128 | ||||||||||||
Brokerage and insurance services | 11 | 12 | 49 | 42 | ||||||||||||
Other | 37 | 85 | 227 | 115 | ||||||||||||
Total WM&T services income | $ | 5,738 | $ | 5,380 | $ | 16,839 | $ | 16,224 |
The table below presents data regarding WM&T managed assets by class of investment for the periods ending September 30, 2017 and 2016. This table demonstrates that:
|
|
No Stock Yards Bank propriety mutual funds exist, and therefore no such investment options are available to WM&T clients.
Managed Assets by Class of Investment | ||||||||
As of September 30, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Interest bearing deposits | $ | 122,787 | $ | 127,570 | ||||
US Treasury and government agency obligations | 42,293 | 50,020 | ||||||
State, county and municipal obligations | 132,431 | 126,394 | ||||||
Money market mutual funds | 8,211 | 13,718 | ||||||
Equity mutual funds | 548,972 | 453,995 | ||||||
Other mutual funds - fixed, balanced, and municipal | 310,779 | 319,240 | ||||||
Other notes and bonds | 120,155 | 88,463 | ||||||
Common and preferred stocks | 795,732 | 688,543 | ||||||
Real estate mortgages | 373 | 392 | ||||||
Real estate | 43,664 | 44,572 | ||||||
Other miscellaneous assets (1) | 54,990 | 56,392 | ||||||
Total managed assets | $ | 2,180,387 | $ | 1,969,299 |
|
Stock Yards Bancorp, inc. and subsidiary
The table below provides information regarding fee income earned by Bancorp’s WM&T department for the three and nine-month periods ended September 30, 2017 and 2016. Itabove demonstrates that WM&T fee revenue is earned most significantly fromconcentrated within investment advisory and personal trust and investment advisory accounts. FeesWM&T fees are based on AUM and tailored for individual accounts and/or relationships. WM&T uses arelationships with fee structure that considers and tailorsstructures customized based on account type of account and other factors.factors with larger relationships paying a lower percentage of AUM in fees. For example, fee structures are in place for investment management, irrevocable trusts, revocable trusts, IRA accounts,individual IRAs, and accounts holding only fixed income securities. There are also fee structures for estate settlements, which are non-recurring, and retirement plan services which typically consist of a one-time conversion fee with recurring AUM fees to follow. All fees are based on the market value of each account and are tiered based on account size. Fees are agreed upon at the time the account is opened and these and any subsequent revisions are communicated invia writing to the customer. Fees earned are not performance based nor are they based on investment strategy or transactions.
Wealth Management and Trust Services Income | ||||||||||||||||
Three months | Nine months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Personal trust accounts | $ | 1,691 | $ | 1,707 | $ | 5,523 | $ | 5,427 | ||||||||
Personal retirement accounts | 832 | 778 | 2,426 | 2,229 | ||||||||||||
Corporate retirement accounts | 373 | 408 | 1,161 | 1,162 | ||||||||||||
Investment advisory accounts | 1,895 | 1,681 | 5,471 | 4,789 | ||||||||||||
Foundation and endowment | 135 | 126 | 400 | 364 | ||||||||||||
Custody and safekeeping | 36 | 27 | 119 | 73 | ||||||||||||
Brokerage and insurance | 9 | 13 | 28 | 35 | ||||||||||||
Other | 54 | 60 | 144 | 140 | ||||||||||||
Total | $ | 5,025 | $ | 4,800 | $ | 15,272 | $ | 14,219 |
Other Non-interest IncomeDeposit service charges decreased $38,000, or 3%, and Non-interest Expense
Service charges on deposit accounts decreased $22 thousand$313,000, or 1% while increasing $416 thousand, or 6.0%7%, for the three and nine month periods of 2017, respectively,ended September 30, 2019, as compared with the same periods in 2016. The decline quarter over quarter was driven by a decline in fees assessed on overdrawn checking accounts. This component of2018. Deposit service charge income is generallyprimarily driven by changes in customers and transaction volume which can fluctuate throughoutfrom period to period. Both the year. Cash management services offered to commercial customers through our treasury management area continues to be a growing source of revenue. Treasury generated gross revenue grew 12% overquarterly and year-to-date decreases are consistent with the nine month period ended September 30, 2017, as compared to the same periodgeneral decline in 2016. Fees chargedfees earned on overdrawn checking accounts declined 4% year over year. Managementaccounts. While management expects this source of revenue to slowlycontinue its slow decline due to anticipated changes in customer behavior, including reduced check volume, and ongoing regulatory restrictions. Service charges were further impacted byrestrictions, the introduction of a new checking account productdecline is anticipated to be less significant than what was experienced in the third quarterfirst part of 2016. The product provides2019.
Debit and credit card income consists of interchange income, ancillary services to customers, while carrying a monthly service charge. The income associated with the new checking account product was approximately $641 thousandfees and incentives received from card processors. Debit and credit card revenue increased $343,000, or 19%, and $1.1 million, or 21%, for the firstthree and nine months of 2017, as compared to $198 thousand for the same period in 2016.
Bankcard transaction revenue increased $37 thousand or 2.5% for the third quarter of 2017, and $214 thousand, or 5.1% for the first nine months of 2017, as comparedmonth periods ended September 30, 2019, as compared with the same periods in 2016. Bankcard transaction revenue primarily represents2018. The increases in both comparisons reflected increased volume resulting from continued growth in the customer bases. Total debit card income the Bank derives from customers’ use of debitincreased $86,000, or 6%, and credit cards. Bancorp began offering credit cards to business customers late in 2015. Revenue on credit cards totaled $276 thousand and $795 thousand$467,000, or 12% for the three and nine month periods of 2017, respectively, compared to $206 thousandended September 30, 2019, while credit card income increased $257,000, or 64%, and $520 thousand$591,000, or 55%, for the same periods in 2016. Bancorp expects volume ofperiods. Third quarter 2019 credit card transactions to increase asincome included a $47,000 non-recurring fee from its card processor for reaching activity incentive thresholds. This was the first such payment received since the Bank launched this product in mid-2015. Second quarter 2019 debit card revenue included a similar non-recurring fee of $174,000. No similar non-recurring debit or credit card incentives were received in 2018. Both debit and credit card volume, which is expanded within the commercialdependent on customer base. Interchange income on debit cards declined $35 thousandbehavior and $66 thousand in the three and nine month periods of 2017, respectively, comparednew accounts, is expected to the same periods in 2016. Bancorp expects future decreases in interchange rates on debit cards as merchants structure their technology and processescontinue to take advantage of lower transactional pricing options, which do not favor Bancorp or the banking industry as a whole.increase.
Stock YardsTreasury management fees primarily consists of fees earned for cash management services provided to commercial customers. This category has been a growing source of revenue for Bancorp inc.including increases in the third quarter of 2019 of $113,000, or 10%, and subsidiary
$312,000, or 9%, for the first nine months of 2019, as compared with the same periods in 2018. Bancorp anticipates this income category will continue to increase based upon continued customer base growth and the expanding suite of services offered.
Mortgage banking revenueincome primarily includes gains on sales of mortgage loans. Bancorp’sBancorp’s mortgage banking department originates residential mortgage loans to be sold in the secondary market.market, primarily to the FNMA. Interest rates on the loans sold to FNMA are locked with the borrower and investor prior to closing the loans, thus Bancorp bears no interest rate risk related to these loans.loans sold. The department offers conventional, VA and FHA financing, for purchases and refinances, as well as programs for first-time home buyers. Changes in interestInterest rates on mortgage loans directly impact the volume of business transacted by the mortgage banking department. Mortgage banking revenue decreased $291 thousandincreased $122,000, or 27.1%17%, and $516 thousand,$78,000, or 17.8%4%, for the respective three and nine month periods ended September 30, 20172019, as compared with the same periods in 2016, primarily due2018. Mortgage transaction volume began to lower transaction volume. In Bancorp’s primary market of Louisville, Kentucky the housing inventory was low, particularlyincrease in the first halfsecond quarter and to a larger extent into the third quarter of 2017, contributing2019, as mortgage rates declined, spurring the increase in refinancing activity. During the third quarter, the ten year treasury rate/ yield curve began a steep decline leading to this decline.the lowest mortgage rates in several years. Bancorp anticipates refinancing activity to remain steady into the fourth quarter, provided mortgage rates continue to remain attractive.
Securities brokerageNet investment product sales commissions and fees decreased $7 thousand or 1.3% while increasing $45 thousand, or 2.9%, for the respective three and nine month periods ended September 30, 2017 as compared with the same periods in 2016. Revenue fluctuations correspondare generated primarily to overall brokerage volume. Brokerage commissions and fees earned consist primarily ofon stock, bond and mutual fund sales, as well as wrap fees on brokerage accounts. Wrap fees are charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management, and are based on a percentage of assets. Bancorp deploys its brokers primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced in the Bank’s WM&T department.
Bank Owned Life Insurance (BOLI) income totaled $204 thousand Net investment product sales commissions and fees decreased $44,000, or 10%, and $125,000, or 10%, for the third quarterthree and $964 thousand for the first nine months of 2017,month periods ended September 30, 2019, as compared to $216 thousand and $657 thousand forwith the same periods in 2016. The year to date increase2018. Overall, brokerage volume has been impacted by advisor turnover and market volatility that has somewhat discouraged investment activity in 2017 over 2016, was primarily due to $348 thousand in death benefit proceeds recorded in the second quarter of 2017. 2019.
BOLI assets represent the cash surrender value forof life insurance policies on certain current and priorkey employees who have provided consent for Bancorp to be the beneficiary of a portion of such policies. BOLI income results from theThe related change in cash surrender value and any death benefits received under the policies.policies are recorded as non-interest income. This income helpsserves to offset the cost of various employee benefits.
Other non-interest BOLI income decreased $216 thousand or 30.3%increased $301,000 and $193 thousand, or 11%,$285,000 for the respective three and nine month periods ended September 30, 20172019, as compared with the same time periods in 2016. The primary driver2018, as a result of the decline was swap feelife insurance proceeds received, offset slightly by lower crediting rates on investments.
Other non-interest income which declined $116 thousand in the third quarterincreased $723,000 and $251 thousand$949,000 for the firstthree and nine months ended September 30, 2019, as compared with the same period in 2018 primarily due to the following non-recurring items:
● | Interest rate swap fees on loans of $374,000 and $483,000 were recognized during the three and nine months ended September 30, 2019 compared to $1,000 and $109,000 for the same periods in 2018. |
● | Approximately $142,000 in life insurance proceeds (outside of the traditional BOLI program) were recognized in the third quarter of 2019. Similarly, $112,000 was recognized in the second quarter of 2018. |
● | Approximately $212,000 was realized during the third quarter of 2019 when Bancorp sold a nominal amount of Visa Class B stock, an illiquid $0 basis investment that was acquired in the TBOC acquisition. |
● | In the first quarter of 2019, Bancorp recognized $126,000 related to banking center re-location incentivization. |
● | In the second quarter of 2019, $130,000 was received related to a historic tax-credit investment tax distribution. |
● | The impact of KSB on non-interest income has been and is expected to continue to be nominal in 2019. |
Non-interest Expenses
Total non-interest expenses increased $2.2 million, or 10%, and $7.1 million, or 11%, for the three and nine month periods ended September 30, 2019 compared to the same periods in 2018. Salaries and employee benefits comprised 63.6% and 62.9% of Bancorp’s non-interest expenses for the three and nine month periods ended September 30, 2019, compared to 64.8% and 64.6% for the same periods in 2018.
Compensation, which includes salaries, incentives, bonuses, and stock based compensation, increased $723,000, or 6%, and $2.6 million, or 7%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2016. These fees are2018. The increase related to an infrequent source of revenue dueoverall increase in full time equivalent employee’s led by the Company’s efforts to add loan production talent to support strategic growth initiatives in addition to the unique natureMay 2019 KSB acquisition. In addition, non-recurring severance and employee retention expense of $487,000 was recorded in the second quarter of 2019 as a result of the transactions. This category contains a variety of other income sources none of which resulted in individually significant variances.KSB acquisition. At September 30, 2019, Bancorp had 622 full time equivalent employees including 25 employees added from the KSB acquisition, as compared with 593 at September 30, 2018.
SalariesEmployee benefits consists of all personnel related expense not included in compensation, with the most significant items being health insurance, payroll taxes, and employeeretirement plan contributions. Employee benefits increased $935 thousand$407,000, or 7.8% for the third quarter of 2017,16%, and $3.0 million,$812,000, or 8.4%11%, for the firstthree and nine months of 2017,month periods ended September 30, 2019, as compared with the same periods in 2016. The increases are largely due to2018. Growth in full time equivalent employees, increased 401(k) matching contributions, higher compensation expenses, reflecting addition of personnel and to a lesser extent,health insurance claims, increased health care costs. The additions to staff were driven by expanding market presence in Cincinnati and Indianapolis, alongFICA expense associated with the need for front line lendinggrowth in compensation and loan support staff across all markets. The Bank’shigher employee health insurance is a self-insured plan and related expenses fluctuate with claims experience. At September 30, 2017, Bancorp had 581 full-time equivalent employees compared with 558 at September 30, 2016.recruiting costs resulted in the increases.
Net occupancy and equipment expense decreased $25 thousandprimarily includes depreciation, rent, property taxes, utilities and maintenance, variances for which were not individually significant. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy increased $285,000, or 1.5%15%, and $490,000, or 9%, for the third quarterthree and increased $49 thousand or 1.0% for the nine monthsmonth periods ended September 30, 2017,2019, as compared with the same periods in 2016. The quarterly decrease was the result of timing of normal maintenance activities. The increase year over year was largely due to increased recurring expenses for multiple bank properties and a decrease in sub-lease rents.
Stock Yards2018. Bancorp inc. and subsidiary
Data processing expense increased $173 thousand or 9.9% inopened one branch location during the third quarter of 20172019 in Mt. Washington, Kentucky and $737 thousand, or 14.2% in the first nine months of 2017, as comparedadded five branch locations associated with the same periodsKSB acquisition during the second quarter. The KSB locations added $175,000 of additional expense for the nine month period ended September 30, 2019. Bancorp closed three of the acquired branch locations in 2016. The increase was primarily a resultLouisville during the third quarter of increases2019 due to their proximity to existing Bancorp branches and two buildings were sold resulting in computer infrastructurepositive adjustments to goodwill.
Technology and maintenance costs. These expensescommunications expense include ongoing computer software amortization, equipment depreciation, and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security, and internal resources.
Furniture Technology expense increased $246,000, or 15%, and equipment expense increased $39 thousand$552,000, or 14.1% in the third quarter of 2017 and $8 thousand or 0.9%11%, for the firstthree and nine months of 2017,month periods ended September 30, 2019, as compared with the same periods in 2016. Costs of capital asset additions flow through2018 due largely to increases in computer infrastructure upgrades and maintenance costs. KSB related one-time non-recurring expenses totaled $104,000 for the statement of income over the lives of the assets in the form of depreciation expense.nine month period ended September 30, 2019.
FDIC insuranceBancorp outsources processing for debit and credit card operations, which generate significant revenue for the Company. These expenses increase as transaction volume increases, offsetting a portion of corresponding revenue growth. Debit and credit card processing expense decreased $114 thousandincreased $74,000, or 32%13%, and $319 thousand,$147,000, or 30.7%8%, for the respective three month and nine month periods of 2017,ended September 30, 2019, as compared with the same periods in 2016.2018, as a result of a growing customer base and increased transaction volume.
Marketing and business development expenses include all costs associated with promoting Bancorp, community support, retaining customers, and acquiring new business. Marketing and business development expenses decreased $8,000, or 1%, in the third quarter of 2019, as compared with the third quarter of 2018 while increasing $69,000, or 3%, for the nine months ended September 30, 2019. The increase for the nine months ended September 30, 2019 compared 2018 was largely due to increased community support expenses, which can fluctuate between periods due to the nature and timing of the expense, assessmentbut is calculated byexpected to trend to historical annual levels over the FDIC on a quarterly basis. During 2016remainder of 2019.
Postage, printing and supplies expenses increased $32,000, or 9%, and $57,000, or 5%, for the FDIC revisedthree and nine month periods ended September 30, 2019, as compared with the assessment criteriasame time periods in 2018, primarily due to more closely alignthe KSB acquisition.
Legal and professional fees increased $23,000, or 5%, and $1.1 million, or 72%, for the three and nine month periods ended September 30, 2019 compared to the same periods in 2018. One-time costs associated with the KSB acquisition totaled nearly $900,000 for the nine months ended September 30, 2019. Additional costs associated with consulting engagements also contributed to the period increases.
No FDIC insurance expense with each financial institution’s risk profile. Bancorp benefited from this change.
Amortization of investments in tax credit partnerships decreased $399 thousandwas recorded for the third quarter of 20172019, as the national FDIC Reserve Ratio reached 1.38%, triggering the FDIC to release credits to small institutions (less than $10 billion in total consolidated assets). This change was announced in 2016 and $1.2 millionit took approximately 3 years for the first nine monthsthreshold to be met and the corresponding credits issued. It is also expected that no FDIC insurance expense will be recorded in the fourth quarter of 2017, as compared with the same periods of 2016. This expense reflects amortization of investments in2019.
Tax credit partnerships which generate federal income tax credits, and vary widely depending upon the timing and magnitude of investments and related amortization. Forfor each of Bancorp’s investments in tax credit partnerships, the tax benefit compared with the amortizationrelated expenses results in a positive effect on net income. SeeAmounts of credits and corresponding expenses can vary widely depending upon timing and magnitude of the Income Taxes section below for details on amortization and income tax impact for these credits.investments.
Other non-interest expenses increased $190 thousand$240,000, or 5.5% and $1.3 million or 13.6% in24%, for the respective three and nine month periods endingmonths ended September 30, 2017,2019, as compared with the same periods in 2016. The quarterly increase was largelyto 2018 primarily due to recording a $266 thousand liability related to an estimated loss from certain administrative proceedings arising in the course of our business. The increase for the year to date 2017 period was largely due to a combination of numerous items, the largest of which are detailed below:following:
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Other non-interest expenses increased $977,000, or 35%, for the nine months ended September 30, 2019, as compared to 2018 primarily due to the following:
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Stock Yards Bancorp, inc. and subsidiary
Income Taxes
Bancorp recorded income tax expense of $4.1$3.8 million and $11.6$6.7 million for the three and nine month periods ended September 30, 2017, respectively, as2019, compared with $3.9$3.6 million and $11.2$9.8 million for the same periods in 2016.2018. The effective rateETR for both the corresponding three and nine months ended September 30, 2017, was 25.9%month periods in 2017 as compared to 27.1%2019 were 18.0% and 27.0%11.9% and 20.4% and 19.3% for the three and nine months ended September 30, 2016, respectively. Refersame periods in 2018. The decline in the ETR from 2018 to Footnote 52019 related primarily to the consolidated financial statements for a reconciliation of the statutory and effective incomefollowing two Kentucky state tax rates.
Bancorp invests in certain partnerships with customers that yield federal income tax credits, and these tax credits reduce the effective tax rate. The level of this activity for the first nine months of 2017 was less than that of the comparable period in 2016 as is reflected in the comparable effect on effective tax rates for those periods. Taken as a whole, the tax benefit of these investments exceeds amortization expense associated with them, resulting in a positive impact on net income.
The effective tax rate in 2017 was largely reduced by the result of the adoption of ASU 2016-09 “Compensation – Stock Compensation Improvements to Employee Share-Based Payment Accounting”. The new standard requires excess tax benefits and deficiencies related to share-based payment awards to be reflected in the statement of operations as a component of the provision for income taxes. For the three and nine months ended September 30, 2017 Bancorp recorded a benefit of $241 thousand and $1.4 million, respectively for such excess benefits against the provision for income tax expense. Prior to adoption of ASU 2016-09 these tax benefits were recorded directly to additional paid-in capital. Tax benefits recorded to capital for the three and nine months ended September 30, 2016 were $443 thousand and $963 thousand, respectively.
Commitments
Bancorp uses a variety of financial instruments in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. A discussion of Bancorp’s commitments is included in Note 15.
Other commitments discussed in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2016, have not materially changed since that report was filed, relative to qualitative and quantitative disclosures of fixed and determinable contractual obligations.law changes:
| In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Historically, the franchise tax, a component of non-interest expenses, was assessed at 1.1% of net capital and averaged $2.5 million annually over the prior two year-end periods. The Kentucky corporate income tax will be assessed at 5% of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, during the first quarter of 2019, Bancorp recorded a state tax benefit, net of federal impact of $1.3 million in the first quarter of 2019, or approximately $0.06 per diluted share for the first nine months of 2019. While this is favorable in the short-term, Bancorp anticipates an unfavorable impact of approximately $200,000 per year beginning in 2021. |
● | In April 2019, the Kentucky Legislature passed HB458 allowing banks and their holding companies to be combined together for Kentucky tax return filings beginning in 2021. The combined filing will allow Bancorp’s Holding Company net operating losses to offset against net revenue generated by the Bank and reduce Bancorp’s tax liability. Bancorp recorded a state tax benefit, net of federal impact of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the first nine months of 2019. |
Financial Condition – September 30, 2019 Compared to December 31, 2018 |
Balance Sheet
Total assets increased $116.4$231 million, or 3.8%7%, to $3.2$3.5 billion at September 30, 2017 as compared to $3.02019, from $3.3 billion at December 31, 2016. Loans increased $29.72018. In the first nine months of 2019, increases in loans, premises and equipment, and other assets were offset by decreases in cash and cash equivalents, and AFS securities. Bancorp acquired total assets of approximately $192 million on May 1, 2019 in connection with the KSB acquisition and recognized goodwill of approximately $12 million.
Cash and cash equivalents decreased $63 million, or 1.3%32%, periodas excess liquidity was used to period, with increases primarily in commercialfund loan growth and industrial loans, commercial real estate, and to a lesser degree, 1-4 family residential loans. The most significant decrease was seen in commercial construction and development loans, primarily the result of significant loan principal repayments where maturing loans were not replaced with permanent financing. Securities available-for-sale increased by $1.4KSB acquisition. AFS securities decreased $61 million, or 14%, during the first nine months of 2017. The majority2019, as maturing security cash flows were not reinvested but held in the form of this increaseshort-term liquidity. This decline was offset by $9 million of market value improvement in the portfolio, shifting to a $3 million net unrealized gain position at September 30, 2019 from a $6 million unrealized loss position at December 31, 2018.
Premises and equipment increased $18 million, or 39%, primarily the result of short-term investments made at quarter end largely offset by maturities duringestablishing a right of use lease asset upon adopting ASU 2016-02, Leases in the first quarter of 2019 and the addition of KSB branches.
Gross loans increased $308 million, or 12%, including $152 million in loans acquired from KSB. Strong loan production in the second and third quarters of 2019 contributed to non-acquisition, or legacy, loan growth of $156 million, or 6%, for the nine months of 2017. Included in securities available-for-sale are short-term U.S. government sponsored entities. These securities, which totaled $150 million atended September 30, 2017 and $1002019.
Total liabilities increased $201 million, ator 7%, to $3.1 billion as of September 30, 2019, from $2.9 billion as of December 31, 2016, normally have a maturity2018. Bancorp assumed $177 million in liabilities in connection with the KSB acquisition as of less than oneMay 1, 2019.
For the nine month and are purchased at quarter-end as part of a tax minimization strategy. The remaining variance was attributable to reduction in unrealized losses on the securities portfolio to $431 thousand atperiod ending September 30, 20172019, non-interest bearing demand deposits increased $85 million, or 12%, while interest bearing deposits increased $67 million, or 3%. SSUAR decreased $3 million, or 8%, as comparedcustomers continued to unrealized lossesmigrate to higher-yielding, non-collateralized deposits. FHLB advances increased $34 million, or 70%, as Bancorp retained the fixed rate long term advances assumed from KSB. These advances were retained by Bancorp based upon favorable rates and terms in the overall execution of $1.9the Company’s asset liability management strategy. Other liabilities increased $19 million, at December 31, 2016. Funds from maturing available-for-sale investments were held as cash, or invested short term,40%, largely due to fund future loan growth.the adoption of ASU 2016-02, Leases, in the first quarter of 2019.
Stock Yards Bancorp, inc. and subsidiaryTrust Assets Under Management
Total liabilities increased $96.0 million,Trust AUM (not included on balance sheet) grew from $2.77 billion at December 31, 20162018 to $3.12 billion at September 30, 2017,2019.
Trust Assets Under Managementby Account Type
September 30, 2019 | December 31, 2018 | |||||||||||||||
(In thousands) | Managed | Non-managed (1) | Managed | Non-managed (1) | ||||||||||||
Investment advisory | $ | 1,258,074 | $ | 19,582 | $ | 1,077,904 | $ | 34,214 | ||||||||
Personal trust | 582,783 | 89,391 | 532,254 | 80,167 | ||||||||||||
Personal individual retirement | 409,791 | 2,714 | 344,900 | 2,363 | ||||||||||||
Corporate retirement | 43,625 | 402,457 | 47,884 | 390,619 | ||||||||||||
Foundation and endowment | 224,572 | 1,236 | 187,492 | 1,020 | ||||||||||||
Total accounts | $ | 2,518,845 | $ | 515,380 | $ | 2,190,434 | $ | 508,383 | ||||||||
Custody and safekeeping | — | 81,348 | — | 66,058 | ||||||||||||
$ | 2,518,845 | $ | 596,728 | $ | 2,190,434 | $ | 574,441 | |||||||||
Total managed and non-managed assets | $ | 3,115,573 | $ | 2,764,875 |
(1) Non-managed assets represent those for which WM&T does not have investment discretion. |
As of September 30, 2019, approximately 81% of AUM were actively managed. The majority of managed assets are in investment advisory, personal trust and agency accounts. Corporate retirement plan accounts primarily consist of participant directed asset and the amount of custody and safekeeping accounts are insignificant.
Managed Trust Assets Under Managementby Class of Investment
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Interest bearing deposits | $ | 113,658 | $ | 139,779 | ||||
US Treasury and government agency obligations | 48,720 | 53,513 | ||||||
State, county and municipal obligations | 138,087 | 128,057 | ||||||
Money market mutual funds | 5,755 | 8,627 | ||||||
Equity mutual funds | 609,282 | 485,961 | ||||||
Other mutual funds - fixed, balanced, and municipal | 326,375 | 290,352 | ||||||
Other notes and bonds | 180,799 | 155,701 | ||||||
Common and preferred stocks | 969,157 | 801,690 | ||||||
Real estate mortgages | 328 | 352 | ||||||
Real estate | 49,954 | 49,840 | ||||||
Other miscellaneous assets (1) | 76,730 | 76,562 | ||||||
Total managed assets | $ | 2,518,845 | $ | 2,190,434 |
(1) Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment trusts, and oil and gas rights. |
Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations, and consist of approximately 63% in equities and 37% in fixed income securities. This composition is relatively consistent from $2.7 billion to $2.8 billion, respectively. Federal funds purchased and other short-term borrowing increased $114.6 million, period to period primarily the resultand WM&T has no proprietary mutual funds.
Loan Portfolio Composition
ElementsComposition of Loan Portfolioloans, net of deferred fees and costs, by primary loan portfolio class follows:
The following table sets forth the major classifications of the loan portfolio.
(in thousands) | ||||||||||||||||
Loans by Type | September 30, 2017 | December 31, 2016 | ||||||||||||||
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||||||||||
Commercial and industrial | $ | 750,728 | $ | 736,841 | $ | 876,127 | $ | 833,524 | ||||||||
Construction and development, excluding undeveloped land | 174,310 | 192,348 | ||||||||||||||
Undeveloped land (1) | 20,989 | 21,496 | ||||||||||||||
Construction and development, excluding undeveloped land(1) | 248,296 | 225,050 | ||||||||||||||
Undeveloped land | 35,169 | 30,092 | ||||||||||||||
Real estate mortgage: | ||||||||||||||||
Commercial investment | 576,810 | 538,886 | 727,531 | 588,610 | ||||||||||||
Owner occupied commercial | 397,804 | 408,292 | 470,678 | 426,373 | ||||||||||||
1-4 family residential | 261,707 | 249,498 | 331,747 | 276,017 | ||||||||||||
Home equity - first lien | 51,925 | 55,325 | 51,015 | 49,500 | ||||||||||||
Home equity - junior lien | 63,416 | 67,519 | 72,533 | 70,947 | ||||||||||||
Subtotal: real estate mortgage | 1,351,662 | 1,319,520 | ||||||||||||||
Subtotal: Real estate mortgage | 1,653,504 | 1,411,447 | ||||||||||||||
Consumer | 37,431 | 35,170 | 43,568 | 48,058 | ||||||||||||
Total loans | $ | 2,335,120 | $ | 2,305,375 | $ | 2,856,664 | $ | 2,548,171 |
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(2) Total loans are presented inclusive of premiums, discounts, and net loan origination fees and costs. |
Stock Yards Bancorp, inc. and subsidiary
Loan portfolio growth built further on the momentum experienced in the second quarter of 2017, driven by solid loan production that continued to exceed the average pace recorded over the last three years. While all of the Company's markets participated in this growth, Indianapolis, through excellent leadership and a growing lending team, led the way. Still, the conversion of loan production into portfolio growth continued to track below the exceedingly strong rate that characterized 2016 due to several factors, including principal repayments primarily related to commercial construction projects and borrowers who sold collateral or their business. Also, management believes that business owners remain more cautious about the longer-term direction of the economy, awaiting greater clarity on possible tax reform. Considering its loan pipeline, management anticipates continued momentum in net loan growth in the fourth quarter of 2017, although net loan growth could be challenging if loan payoffs persist at high levels.
Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain sold participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership share of the loan without permission from Bancorp. US GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the commercialC&I, C&D and industrial and real estateCRE mortgage loan totals above, andportfolio segments with a corresponding liability is recorded in other liabilities. At September 30, 20172019 and December 31, 2016,2018, the total participated portionsportion of loans of this nature were $18.3$9 million and $15.8 million, respectively.$11 million.
Allowance for loan lossesLoan and Lease Losses
An allowance for loan losses has been established to provide for probable losses on loans that may not be fully repaid. The allowance for loan losses is increased by provisions charged to expense and decreased by charge-offs, net of recoveries, if any.recoveries. Loans are typically charged off when management deems them uncollectible and after underlying collateral has been liquidated; however, collection efforts may continue and future recoveries maycould occur. Periodically, loans are partially charged off to the net realizable value based upon the evaluation of related underlying collateral, including Bancorp’s bias forexpectation of resolution.
The allowance methodology is driven by risk ratings, historical losses, and qualitative factors. The provision forlevel of the first nine months of 2017, and the resultingSeptember 30, 2019 allowance level, reflected a number of factors, including a slight elevationcredit quality metrics which were generally consistent with those experienced in classified loansthe preceding 12 months, and an expansion of the historical look-back period from 2432 quarters to 2836 quarters. This expansion of the look-backhistorical period was applied to all classes and segments of the portfolio. The expansionExpansion of the look-back period for the historical loss rates used in the quantitative allocation caused management to review of the overall methodology for the qualitative factors to ensure Bancorp waswe were appropriately capturing the risk not addressed in the quantitative historical loss rates used in the quantitative allocation.rate. Management believes the extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. Key indicators of loan quality continued to show improvement during 2017,trend at levels consistent with levelsprior periods, however management recognizes that due to the cyclical nature of non-performing loans continuing a five year downward trend. During its review of qualitative factors inlocal economies, these trends will likely normalize over the first nine months of 2017, Bancorp noted a potential exposure for one pool of classified loans. Due to this potential exposure, Bancorp increased its qualitative allocation for the allowance for the nine month period.
long term. Additional information regarding Bancorp’sBancorp’s methodology for evaluating the adequacy of the allowance for loan loss can be read in the Company’s annual 10K.Bancorp’s Annual Report on Form 10-K.
As of The allowance increased $1.3 million from December 31, 2018 to $27 million at September 30, 2017 the allowance for loan loss was $24.9 million, a $900 thousand increase over the December 31, 2016 balance of $24.0 million. For the comparative periods, the allowance as a percent of average loans was 1.09% and 1.11%, respectively.2019. The allowance as a percent of period endtotal loans declined to 0.94% at September 30, 2019 from 1.00% at December 31, 2018, primarily due to the KSB acquisition. The loans acquired in the KSB acquisition were marked to market on the acquisition date and as such did not receive an allowance. The allowance balance is reflective of each period end, was 1.07%continued strong credit metrics and 1.04%, respectively.net recoveries of $343,000 for the first nine months of 2019. As of September 30, 2019, and December 31, 2018, the allowance remained adequate to cover potential losses in the loan portfolio, in management’s opinion.
Stock Yards Bancorp, inc. and subsidiary
Non-performing Loans and Assets
Information summarizing non-performing assets, including non-accrual loans follows:
(dollars in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Non-accrual loans (1) | $ | 4,858 | $ | 5,295 | ||||
Troubled debt restructuring | 949 | 974 | ||||||
Loans past due 90 days or more and still accruing | 261 | 438 | ||||||
Non-performing loans | 6,068 | 6,707 | ||||||
Foreclosed real estate | 2,640 | 5,033 | ||||||
Non-performing assets | $ | 8,708 | $ | 11,740 | ||||
Non-performing loans as a percentage of total loans | 0.26 | % | 0.29 | % | ||||
Non-performing assets as a percentage of total assets | 0.28 | % | 0.39 | % |
(Dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Non-accrual loans | $ | 2,722 | $ | 2,611 | ||||
Troubled debt restructurings | 35 | 42 | ||||||
Loans past due 90 days or more and still accruing | 487 | 745 | ||||||
Total non-performing loans | 3,244 | 3,398 | ||||||
Other real estate owned | 563 | 1,018 | ||||||
Total non-performing assets | $ | 3,807 | $ | 4,416 | ||||
Non-performing loans to total loans | 0.11 | % | 0.13 | % | ||||
Non-performing assets to total assets | 0.11 | % | 0.13 | % |
Non-performing
In total, non-performing assets as of September 30, 20172019 were comprised of 33 non-accrual22 loans, ranging in amount from $1$1,000 to $907 thousand, five$500,000, two accruing TDRs, and foreclosed real estate held for sale. Foreclosed real estate held at September 30, 20172019 included properties of three former lending relationships, with a combined value of $2.6 million. At September 30, 2017 there were two properties, with1-4 family residential property and a combined recorded investment of $75 thousand, in the process of foreclosure.CRE property.
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The following table sets forth the major classifications of non-accrual loans:
Non-accrual loans by type | ||||||||
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Commercial and industrial | $ | 1,256 | $ | 1,767 | ||||
Construction and development, excluding undeveloped land | 737 | 538 | ||||||
Undeveloped land | 474 | 474 | ||||||
Real estate mortgage | ||||||||
Real estate mortgage - commercial investment | 55 | 107 | ||||||
Real estate mortgage - owner occupied commercial | 1,470 | 1,042 | ||||||
Real estate mortgage - 1-4 family residential | 785 | 984 | ||||||
Home equity | 81 | 383 | ||||||
Subtotal: Real estate mortgage | 2,391 | 2,516 | ||||||
Home equity and consumer loans | - | - | ||||||
Total loans | $ | 4,858 | $ | 5,295 |
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Commercial and industrial | $ | 186 | $ | 192 | ||||
Construction and development, excluding undeveloped land | — | 318 | ||||||
Undeveloped land | — | 474 | ||||||
Real estate mortgage | ||||||||
Commercial investment | 741 | 138 | ||||||
Owner occupied commercial | 1,409 | 586 | ||||||
1-4 family residential | 137 | 760 | ||||||
Home equity - first lien | — | — | ||||||
Home equity - junior lien | 249 | 143 | ||||||
Subtotal: Real estate mortgage | 2,536 | 1,627 | ||||||
Consumer | — | — | ||||||
Total non-accrual loans | $ | 2,722 | $ | 2,611 |
Commitments
Bancorp uses a variety of financial instruments in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Other commitments discussed in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018, have not materially changed since that report was filed, relative to qualitative and quantitative disclosures of fixed and determinable contractual obligations.
See the Footnote titled “Commitments and Contingent Liabilities” for additional detail.
Stock Yards Bancorp, inc. and subsidiaryLiquidity
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The role of liquidity management is to ensure funds are available to meet depositors’depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of thosesuch funds. Liquidity is provided by short-term liquid assets that can be converted to cash, investmentAFS securities, available-for-sale, various lines of credit available to Bancorp, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than market rate.
Bancorp’sBancorp’s most liquid assets are comprised of cash and due from banks, available-for-saleAFS marketable investment securities, federal funds soldFFS and interest bearing depositsdue from accounts with banks. Federal funds soldFFS and interest bearing depositsdue from bank accounts totaled $81.4$68 million at September 30, 2017.2019. These investments normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $571.5
AFS securities totaled $376 million at September 30, 2017. The portfolio includes maturities of approximately $216.72019, with $100 million in securities expected to mature over the next twelve months, including $150 million of short-term securities which matured in October 2017.12 months. Combined with federal funds soldFFS and interest bearing deposits,due from bank accounts, these offer substantial resources to meet either new loan demand or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of its investmentthe securities portfolio to secure public fund deposits, cash balances of certain wealth management and trustWM&T accounts, and securities sold under agreements to repurchase.SSUAR. At September 30, 2017,2019, total investment securities pledged for these purposes comprised 58%79% of the available-for-sale investmentAFS securities portfolio, leaving $241.8approximately $80 million of unpledged securities, including $150 million which matured the first week of October..AFS securities.
Bancorp defines corehas a significant base of non-maturity customer deposits, defined as demand, savings, and money market deposit accounts and certificates of deposittime deposits less than or equal to $250,000. $250,000 (excluding brokered deposits). At September 30, 2017,2019, such deposits totaled $2.4$2.8 billion and represented 99%97% of Bancorp’s total deposits, as compared to $2.5with $2.7 billion, or 98%97% of total deposits at December 31, 2016.2018. Because these deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they do not put heavysignificant pressure on liquidity. However, many of Bancorp’s customers’ deposit balances are historically high.Bancorp began adding liquidity to the balance sheet in 2018 through targeted CD marketing campaigns. The campaigns generated over $100 million in CD growth in 2018.
As of September 30, 20172019 and December 31, 2018, Bancorp had no brokered deposits. This compares to $498 thousand, or 0.02% of total deposits, in brokered deposits at December 31, 2016.of $30 million.
Included in the total deposit balances at September 30, 20172019 is $122.4$140 million of public funds deposits generally comprised of accounts from local government agencies and public school districts in Bancorp’s markets.the markets Bancorp operates within. As a result of property tax collections in the latter part of each year, these accounts provide seasonal excess balances that originate with tax payments and decline leading into the subsequent tax season. While this excess liquidity is maintained in low-yielding short-term investments and consequently negatively impacts NIM, it has a positive impact on net interest income.
Other sources of funds available to meet daily needs include the sales of SSUAR and FHLB advances. As a member of the FHLB, of Cincinnati, Bancorp has access to credit products offered by the FHLB. Bancorp views these borrowings as a low cost alternative to other timebrokered deposits. At September 30, 2017,2019 and December 31, 2018, available credit from the FHLB totaled $367.3$511 million and $537 million. Additionally, Bancorp had unsecured available federal funds purchasedFFP lines with correspondent banks totaling $105 million at both September 30, 2017.2019, and December 31, 2018.
At September 30, 2017 Bancorp had a $150 million cash management advance from the FHLB. This advance matured in the first week of October, 2017 and was used to manage Bancorp’s overall cash position. Due to the short term of the advance, it was recorded on the consolidated balance sheet within Federal funds purchased and other short-term borrowings.
Stock Yards Bancorp, inc. and subsidiary
Bancorp’s principal source of cash is dividends paid to it as sole shareholder ofreceived from the Bank. The Bank paid the Holding Company an $18.5 million dividend during the third quarter of 2019 to support the share repurchase program. Also, during the second quarter of 2019, the Bank paid the Holding Company a $28 million dividend to consummate the KSB acquisition. At September 30, 2017,2019, the Bank maycould pay up to $70.3$42 million in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.
Capital Resources |
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At September 30, 2017,2019, stockholders’ equity totaled $334.3$396 million, an increase of $20.4$30 million, or 8%, since December 31, 2016. 2018. See the Consolidated Statement of Changes in Stockholders’ Equity for further detail of the changes in equity since the end of 2015.2018. One component of equity is accumulated other comprehensive incomeAOCI which, for Bancorp, consists of net unrealized gains or losses on AFS securities available-for-sale and hedging instruments, as well as a minimum pension liability, each net of income taxes. Accumulated other comprehensive lossAOCI was $531 thousand$2 million at September 30, 20172019 compared with a loss of $1.5$5 million on December 31, 2016.2018. The $968 thousand positive differencefluctuation in OCI is primarily a reflection of the effectreflective of the changing interest rate environment during 2019 and corresponding impact upon the first nine monthsvaluation of 2017 as short term rates increased slightly, while long term rates decreased, which decreased Bancorp’s unrealized loss onAFS securities available for sale.
As of September 30, 2017, Bancorp meets all requirements to be considered well capitalized under regulatory risk-based capital rules, and is not subject to limitations due to the capital conservation buffer. See Footnote 19 to the consolidated financials for more information regarding Bancorp’s and the Bank’s risk-based capital amounts and ratios as of September 30, 2017 and December 31, 2016.
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In addition to capital ratios defined by banking regulators, Bancorp considers various ratios when evaluating capital adequacy and overhead, including tangible common equity to tangible assets, tangible common equity per share, and adjusted efficiency ratio, all of which are non-GAAP measures.
Bancorp believes the tangible common equity ratios are important because of their widespread use by investors as means to evaluate capital adequacy, as they reflect the level of capital available to withstand unexpected market conditions. Because US GAAP does not include capital ratio measures, there are no US GAAP financial measures comparable to these ratios.portfolio.
Stock Yards Bancorp, inc.The following table sets forth Bancorp’s and subsidiarythe Bank’s risk based capital ratios:
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Total risk-based capital(1) | ||||||||
Consolidated | 12.53 | % | 13.91 | % | ||||
Bank | 11.91 | 13.56 | ||||||
Common equity tier 1 risk-based capital(1) | ||||||||
Consolidated | 11.69 | 13.00 | ||||||
Bank | 11.07 | 12.65 | ||||||
Tier 1 risk-based capital(1) | ||||||||
Consolidated | 11.69 | 13.00 | ||||||
Bank | 11.07 | 12.65 | ||||||
Leverage(2) | ||||||||
Consolidated | 10.90 | 11.33 | ||||||
Bank | 10.60 | 11.02 |
(1) Under banking agencies’ risk-based capital guidelines, assets and credit-equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. Weighted values are added together, resulting inBancorp's total risk-weighted assets. These ratios are computed in relation to average assets.
(2) Ratio is computed in relation to average assets.
Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Holding Company and the Bank must meet specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.
Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 6.5% common equity tier 1 risk-based capital ratio, an 8.0% tier 1 risk-based capital ratio, a 10.0% total risk-based capital ratio and a 5.0% leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and Bank must hold a capital conservation buffer composed of common equity tier 1 risk-based capital above their minimum risk-based capital requirements. The capital conservation buffer phased in from 2016 to 2019 on the following schedule: 0.625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875% effective January 1, 2018; and a fully phased in capital conservation buffer of 2.5% on January 1, 2019.
Bancorp continues to exceed the regulatory requirements for total risk-based capital, common equity tier I risk-based capital, tier I risk-based capital and leverage capital. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.
Non-GAAP Financial Measures |
The following table reconcilesprovides a reconciliation of total stockholders’ equity in accordance with GAAP to tangible stockholders’ equity, a non-GAAP disclosure. Bancorp’s calculation provides the tangible book value per share, a non-GAAP measure, in addition to those defined by banking regulators, because of tangible common equityits widespread use by investors as a means to amounts reported under US GAAP.evaluate capital adequacy.
(in thousands, except per share data) | September 30, 2017 | December 31, 2016 | ||||||
Total equity | $ | 334,255 | $ | 313,872 | ||||
Less core deposit intangible | (1,269 | ) | (1,405 | ) | ||||
Less goodwill | (682 | ) | (682 | ) | ||||
Tangible common equity | $ | 332,304 | $ | 311,785 | ||||
Total assets | $ | 3,155,913 | $ | 3,039,481 | ||||
Less core deposit intangible | (1,269 | ) | (1,405 | ) | ||||
Less goodwill | (682 | ) | (682 | ) | ||||
Total tangible assets | $ | 3,153,962 | $ | 3,037,394 | ||||
Total shareholders' equity to total assets | 10.59 | % | 10.33 | % | ||||
Tangible common equity ratio | 10.54 | 10.26 | ||||||
Number of outstanding shares | 22,669 | 22,617 | ||||||
Book value per share | $ | 14.75 | $ | 13.88 | ||||
Tangible common equity per share | 14.66 | 13.79 |
In addition to the efficiency ratio normally presented, Bancorp considers an adjusted efficiency ratio. Bancorp believes excluding amortization of investments in tax credit partnerships from non-interest expense in this ratio is important because it provides a meaningful comparison to both prior periods, since amortization expense can fluctuate widely between periods depending upon timing of tax credits, and to other companies who do not invest in these partnerships.
(In thousands, except per share data) | September 30, 2019 | December 31, 2018 | ||||||
Total stockholders' equity - GAAP | $ | 396,111 | $ | 366,500 | ||||
Less: Goodwill | (12,593 | ) | (682 | ) | ||||
Less: Core deposit intangible | (2,373 | ) | (1,057 | ) | ||||
Tangible common equity - Non-GAAP | $ | 381,145 | $ | 364,761 | ||||
Total assets - GAAP | $ | 3,533,926 | $ | 3,302,924 | ||||
Less: Goodwill | (12,593 | ) | (682 | ) | ||||
Less: Core deposit intangible | (2,373 | ) | (1,057 | ) | ||||
Tangible assets - Non-GAAP | $ | 3,518,960 | $ | 3,301,185 | ||||
Total stockholders' equity to total assets - GAAP | 11.21 | % | 11.10 | % | ||||
Tangible common equity to tangible assets - Non-GAAP | 10.83 | % | 11.05 | % | ||||
Total shares outstanding | 22,597 | 22,749 | ||||||
Book value per share - GAAP | $ | 17.53 | $ | 16.11 | ||||
Tangible common equity per share - Non-GAAP | 16.87 | 16.03 |
Stock Yards Bancorp, inc. and subsidiary
The following table reconciles Bancorp’s calculation of adjusted efficiency ratios to the ratio reported under US GAAP.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(amounts in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Non-interest expense | $ | 21,317 | $ | 20,518 | $ | 63,811 | $ | 60,251 | ||||||||
Net interest income (tax-equivalent) | 26,363 | 24,963 | 77,179 | 72,816 | ||||||||||||
Non-interest income | 11,103 | 11,358 | 33,575 | 32,218 | ||||||||||||
Total revenue | $ | 37,466 | $ | 36,321 | $ | 110,754 | $ | 105,034 | ||||||||
Efficiency ratio | 56.9 | % | 56.5 | % | 57.6 | % | 57.4 | % |
(amounts in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Non-interest expense | $ | 21,317 | $ | 20,518 | $ | 63,811 | $ | 60,251 | ||||||||
Less: amortization of investments in tax credit partnerships | (616 | ) | (1,015 | ) | (1,847 | ) | (3,046 | ) | ||||||||
Adjusted non-interest expense | 20,701 | 19,503 | 61,964 | 57,205 | ||||||||||||
Net interest income (tax-equivalent) | 26,363 | 24,963 | 77,179 | 72,816 | ||||||||||||
Non-interest income | 11,103 | 11,358 | 33,575 | 32,218 | ||||||||||||
Total revenue | $ | 37,466 | $ | 36,321 | $ | 110,754 | $ | 105,034 | ||||||||
Adjusted efficiency ratio | 55.3 | % | 53.7 | % | 55.9 | % | 54.5 | % |
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In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for use in accounting for revenue arising from contracts with customers, and supersedes most current revenue recognition guidance. The ASU was originally effective for fiscal years and interim periods beginning after December 15, 2016. In August 2015, FASB issued ASU 2015-14 which delayed the effective date. The effective date will be annual reporting periods beginning after December 15, 2017, and the interim periods within that year. Bancorp has reviewed existing contractual arrangements and believes the majority of revenue earned is excluded from the scope of the pronouncement and the impact of adoption if any would be minimal. Bancorp continues to evaluate and develop processes and controls for procedural and disclosure requirements of the standard.
The FASB also issued a series of other ASUs, which update ASU 2014-09. The effective dates for ASU 2014-09 have been updated by ASU 2015-14, Deferral of the Effective Date. For public business entities, certain employee benefit plans, and certain not-for-profit entities, ASU 2014-09 is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Earlier application is permitted only as of annual and interim periods in fiscal years beginning after December 15, 2016. Bancorp is including these ASUs in its evaluation and implementation efforts relative to ASU 2014-09.
• ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
• ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
Stock Yards Bancorp, inc. and subsidiary
• ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
• ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value with changes in fair value recognized in net income. The ASU is effective for fiscal years and interim periods beginning after December 15, 2017. Because Bancorp does not have significant investments in equity securities, the adoption of ASU 2016-01 is not expected to have a significant impact on Bancorp’s operations or financial statements.
In February 2016, FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendment should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. Bancorp has evaluated existing lease commitments and does not expect adoption to significantly impact Bancorp’s financial condition or results of operations.
In June 2016, FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This standard will likely have a significant impact on the way Bancorp recognizes credit impairment on loans. Under current US GAAP, credit impairment losses are determined using an incurred-loss model, which recognizes credit losses only when it is probable that all contractual cash flows will not be collected. The initial recognition of loss under CECL differs from current US GAAP because recognition of credit losses will not be based on any triggering event. This should generally result in credit impairment being recognized earlier and immediately after the financial asset is originated or purchased. Bancorp continues to evaluate existing accounting processes, internal controls, and technology capabilities to determine what additional changes will be needed to address the new requirements. These processes and controls require significant judgment, collection and analysis of additional data, and use of estimates. Technology and other resources have been upgraded or modified to capture additional data to support the accounting and disclosure requirements. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2019.
In August 2016, FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s amendments add or clarify guidance on eight cash flow issues. The guidance in the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. Bancorp does not anticipate that adoption of the ASU will have a significant impact on the consolidated financial statements of the Company.
Stock Yards Bancorp, inc. and subsidiary
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize at the transaction date the income tax consequences of inter-company asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities may early adopt the ASU, but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year that includes that interim period. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. For all other entities, the ASU is effective for annual periods in fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019. Entities may early adopt the ASU and apply it to transactions that have not been reported in financial statements that have been issued or made available for issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update), which incorporates into the FASB Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The SEC staff had previously announced that registrants should include the disclosures starting with their December 2017 financial statements. Bancorp is evaluating the potential impact of implementation of this standard on the consolidated financial statements of the Company.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The changes are effective for public business entities that are SEC filers, for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the guidance in Subtopic 610-20 on accounting for derecognition of a nonfinancial asset. The ASU also defines in-substance nonfinancial assets and includes guidance on partial sales of nonfinancial assets. An entity is required to apply the amendments in this ASU at the same time that it applies ASU 2014-09. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
Stock Yards Bancorp, inc. and subsidiary
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires companies to present the service cost component of net benefit cost in the same line items in which they report compensation cost. Companies will present all other components of net benefit cost outside operating income, if this subtotal is presented. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting which clarifies what constitutes a modification of a share-based payment award. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260),Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815); I. Accounting for Certain Financial Instruments with Down Round Features. II. Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interests with a Scope Exception, which makes limited changes to as to classifying certain financial instruments as either liabilities or equity. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018.Early adoption is permitted, including adoption in an interim period. Because Bancorp does not have financial instruments with a down round feature, the implementation of ASU 2017-11 is not expected to have a significant impact on the consolidated financial statements of the Company.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815); Targeted Improvements for Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements under ASC 815. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption of this standard is permitted upon its issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
Item 3.Quantitative and Qualitative Disclosures about Market RiskRisk.
Information required by this item is included in Part I Item 2, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations.”
Stock Yards Bancorp, inc. and subsidiary
Item 4.Controls and ProceduresProcedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by Stock Yards Bancorp, maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it filesInc.’s management, with the Securitiesparticipation of its CEO and Exchange Commission (SEC), and to record, process, summarize and disclose this information within the time periods specified in the rulesCFO, of the SEC.
Based on their evaluation of Bancorp’s disclosure controls and procedures, the Chief Executive and Chief Financial Officers have concluded that, becauseeffectiveness of the material weakness described in Management’s Report on Internal Control Over Financial Reporting in our Annual Report on Form 10-K for the year ended December 31, 2016, Bancorp’sCompany’s disclosure controls and procedures (as defined in RulesRule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective as of September 30, 2017. However, based on a number of factors, we believe. Based upon that evaluation, the consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial positionCompany’s CEO and results of operation and cash flows for the periods presented in conformity with US GAAP.
Changes in Internal Control over Financial Reporting
With regard to the material weakness, our remediation efforts began during the first quarter of 2017. We continue to strengthen how certain controls are designed, performed and documented. We have increased staffing in the internal loan review department, and engaged a third party to assist with loan review. We must now demonstrate the effectiveness ofCFO concluded that these changes with an appropriate amount of consistency and for a sufficient period of time to conclude that the control is functioning properly. Other than these changes, based on the evaluation of Bancorp’s disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Chief Executive and Chief Financial Officers, there were no significant changes during the quarter ended September 30, 2017 in Bancorp’sCompany’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, Bancorp’sthe Company’s internal control over financial reporting.
In the ordinary course of operations, Bancorp and the Bank are defendants in various legal proceedings. There is no proceeding pending or, to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Bancorp or the Bank.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended September 30, 2017.2019.
Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plan | Maximum number of shares that may yet be purchased under the plan | Total number of shares purchased(1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Average price paid per share | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||||||||||||||||||||||
July 1 - July 31 | - | $ | - | - | - | 1,505 | $ | 37.52 | — | $ | — | |||||||||||||||||||||||||
August 1 - August 31 | 2,280 | $ | 35.62 | - | - | 122,155 | 36.39 | 119,814 | 36.39 | |||||||||||||||||||||||||||
Sep 1 - Sep 30 | 2,306 | $ | 37.52 | - | - | |||||||||||||||||||||||||||||||
September 1 - September 30 | 45,131 | 36.53 | 31,652 | 35.99 | ||||||||||||||||||||||||||||||||
Total | 4,586 | $ | 36.58 | - | - | 168,791 | $ | 36.44 | 151,466 | $ | 36.31 | 741,196 |
(1) | Activity includes 17,325 shares of stock withheld to pay taxes due upon exercise of SARs andvesting of RSUs and PSUs. |
(1) Activity representsEffective May 22, 2019, Bancorp’s Board of Directors approved a share repurchase program authorizing the repurchase of 1,000,000 shares, or approximately 4% of stock withheldthe Company’s total common shares outstanding. Stock repurchases are expected to pay taxes due upon exercisebe made from time to time on the open market or in privately negotiated transactions, subject to applicable securities law. The plan, which will expire in two years unless otherwise extended or completed at an earlier date, does not obligate the Company to repurchase any specific dollar amount or number of stock appreciation rights.shares prior to the plan’s expiration. As of September 30, 2019, Bancorp had 741,196 shares that could be repurchased under its current share repurchase program.
There were no equity securities of the registrant sold without registration during the quarter covered by this report.
Stock Yards Bancorp, inc. and subsidiary
The following exhibits are filed or furnished as a part of this report:
Exhibit
Number | Description of exhibit |
31.1 | |
31.2 | |
32 | |
101 | The following |
| inline XBRL: (i) the Consolidated Balance Sheets, |
| (ii) the Consolidated Statements of Income, |
| (iii) the Consolidated Statements of Comprehensive Income, |
| (iv) the Consolidated |
| (v) the Consolidated Statements of Cash Flows, |
| and (vi) the Notes to Consolidated Financial |
104 | The cover page from Stock Yards Bancorp Inc.’s Form 10-Q Report for the quarterly period ended September 30, 2019, formatted in inline XBRL and contained in Exhibit 101. |
Stock Yards Bancorp, inc. and subsidiarySignatures
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STOCK YARDS BANCORP, (Registrant) | |
Date: November | By: /s/
|
Date: November |
Treasurer and Chief Financial Officer (Principal Financial Officer) |
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