UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31,June 30, 2019
or
☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 1-13661
STOCK YARDS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky |
| 61-1137529 | |
(State | (I.R.S. Employer Identification No.) |
1040 East Main Street, Louisville, Kentucky |
| 40206 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (502) 582-2571
Securities registered pursuant to Section 12(b) of the Act:
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 every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares outstanding of the registrant’s Common Stock, no par value, outstanding as of
Stock Yards Bancorp, inc. and subsidiary
Stock Yards Bancorp, inc. and subsidiary
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:
Stock Yards Bancorp, inc. and subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Basis of Presentation – The consolidated financial statements include the accounts of Stock Yards Bancorp, Inc. (“Holding Company”), and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”). All significant inter-company transactions and accounts have been eliminated in consolidation. All companies are collectively referred to as “Bancorp” or the “Company.” As a result of its acquisition of King, Bancorp, Inc. on May 1, 2019, Bancorp became the 100% successor owner of King Bancorp Statutory Trust I (“KBST”), an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the trust-preferred securities at the par amount of approximately $3.6 million on June 17, 2019. 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 Metropolitan Statistical Areas (“MSAs”) through As of 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, WM&T, with The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form
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. A description of significant accounting policies is presented in Bancorp’s Annual Report on Form
Critical 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 continue and future recoveries may occur. Periodically, loans are partially charged off to the net realizable value based upon evaluation of related underlying collateral, including Bancorp’s
The allowance methodology is driven by risk ratings, historical losses, and qualitative factors. The level of the
Accounting Standards Updates (“ASUs”) The following ASU was issued prior to In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU As a result of this ASU, Bancorp could experience an increase in 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 Recently Bancorp adopted ASU The adoption of this ASU did not have a meaningful impact on Bancorp's performance metrics, including regulatory capital ratios and return on average assets. 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 note titled “Leases” for additional information on lease activities.
Explanation of fair value adjustments
All of Bancorp’s securities are classified as available for sale. Amortized cost, unrealized gains and losses, and fair value of securities follow:
At
Securities owned by King, totaling $12.4 million, were sold immediately following the acquisition with no gain or loss realized in the income statement.
A summary of securities available for sale by contractual maturity follows:
Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without prepayment penalties. The investment portfolio includes agency mortgage backed securities, which are guaranteed by agencies such as Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), and Government National Mortgage Association (“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.
Securities with a carrying value of
Securities with unrealized losses at
Applicable dates for determining when securities are in an unrealized loss position are
Unrealized losses on Bancorp’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 maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consist of 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.
Federal Home Loan Bank of Cincinnati (“FHLB”) stock is an investment held by Bancorp which is not readily marketable and is carried at cost adjusted for identified impairment. Impairment is evaluated on an annual basis in the fourth quarter. Holdings of FHLB stock are required for access to FHLB advances.
Composition of loans, net of deferred fees and costs, by loan portfolio class follows:
(1) Consists of land acquired for development by the borrower, but for which no development has yet taken place. (2) Total loans are presented inclusive of premiums, discounts, and net loan origination fees and costs.
Loans to directors and their The following table summarizes loans acquired in the King acquisition based upon valuation method:
Purchased-Credit-Impaired (“PCI”) Loans The Bank acquired PCI loans on May 1, 2019 in its King acquisition and during the year ended December 31, 2012 in the TBOC acquisition. PCI loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Management utilized the following PCI criteria for the May 1, 2019 King acquisition: ● Loans assigned a non-accretable mark ● Loans classified as substandard, doubtful or loss ● Loans classified as non-accrual when acquired ● Loans past due 90 days or more when acquired The following table reconciles the contractually required and carrying amounts of all PCI loans:
The following table presents a rollforward of the accretable amount on all PCI loans:
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, substandard, and doubtful, which are defined below:
Internally assigned risk grades of loans by loan portfolio class classification category follows:
The following table presents the activity in the allowance by loan portfolio class:
The considerations by Bancorp in computing its allowance are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:
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.
The following table presents the recorded investment in non-accrual loans:
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 six months periods ended June 30, 2019 and 2018. Detail of outstanding TDRs follows:
As of
The following tables present the balance in the recorded investment in loans and allowance for loans by portfolio loan class and based on impairment evaluation method:
The following tables present loans individually evaluated for impairment by loan portfolio class:
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:
The goodwill balance at June 30, 2019 relates entirely to the Commercial Banking segment of Bancorp. GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Impairment exists when a reporting unit’s carrying value of 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. At December 31, 2018, Bancorp’s Commercial Banking reporting unit had positive equity and Bancorp
The Company recorded Details regarding the King acquisition are discussed in the Acquisitions footnote. Changes in the net carrying amount of
Mortgage servicing rights (“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 Total outstanding principal balances of loans serviced for others were Changes in the net carrying amount of MSRs follows:
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 thousand 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. 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 s state tax benefit associated with this change of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the three and six month periods ended June 30, 2019. Components of income tax expense (benefit) from operations follow:
An analysis of the difference between statutory and effective income tax rates follows:
The composition of the Bank’s deposits follows:
Deposits totaling $125.5 million were acquired on May 1, 2019, associated with the King acquisition.
SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At
Information concerning
Bancorp had outstanding
The following is a summary of the contractual maturities and average effective rates of outstanding advances:
FHLB advances are collateralized by certain commercial and residential real estate mortgage loans under a blanket mortgage collateral pledge agreement and FHLB stock. Bancorp views these advances to be an effective alternative to brokered deposits to fund loan growth. At
The following
Bancorp has a class of preferred stock (no 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. None of this stock has been issued to date.
The following table reflects, for the three months ended
These shares while antidilutive, could however, be dilutive to
Bancorp sponsors an unfunded, non-qualified, defined benefit retirement plan for three key officers (one current and two retired), and has no plans to increase the number of or benefits to participants.
The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.
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. In 2018 shareholders approved an additional 500 thousand shares for issuance under the plan. As of
Stock Options – Bancorp had no stock options outstanding as of
Fair 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:
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.
Restricted stock awards (“RSAs”) – RSAs granted to officers vest over
Grants of performance stock units (“PSUs”) – PSUs vest based upon service and a
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 equals market value of underlying shares on the date of grant.
Bancorp utilized cash of In the
Bancorp has recognized stock-based compensation expense for SARs, RSAs, and PSUs within compensation expense, and RSUs for directors within other non-interest expense, as follows:
36
As of
The following table summarizes SARs activity and related information:
(1)
37
The following table summarizes activity for RSAs granted to officers:
Expected shares to be awarded for PSUs granted to executive officers of Bancorp, the
As of
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. 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 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 38
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. Those guarantees are primarily issued to support customer commercial transactions. Standby letters of credit generally have maturities of
As of
Fair value represents the exchange price that would be received for 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 on the measurement date. There are three levels of inputs that may be used to measure fair values:
Authoritative guidance requires maximization of use of observable inputs and minimization 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.
At
All available for sale 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 observable in the market place and can be derived from or supported by observable data. These measurements are classified as Level 2.
Fair value measurements for 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 counterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during the reporting period. Interest rate swaps are valued using primarily Level 2 inputs.
Mortgage servicing rights, 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.
Carrying values of assets measured at fair value on a recurring basis follows:
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 six months ended
Bancorp had
Discussion of assets measured at fair value on a non-recurring basis follows:
Mortgage Servicing Rights – On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the 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
Impaired loans - Collateral-dependent impaired loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate
Other real estate owned (“OREO”) - Assets acquired through or instead of loan foreclosure are initially recorded at fair 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 less estimated costs to sell. Fair value is commonly based on recent real estate appraisals performed by 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’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 are the carrying values of assets measured at fair value on a non-recurring basis.
For Level 3 assets measured at fair value on a non-recurring basis as of
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’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.
Periodically, Bancorp enters into
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 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.
At
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
The following table details Bancorp’s derivative position designated as a cash flow hedge, and the fair values as of
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% 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 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, 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 Capital Conservation Buffer.
The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios:
Bancorp’s principal activities include commercial banking and 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 investment 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 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’ operations if they were independent entities.
Principally, all of the net assets of Bancorp are involved in the commercial banking segment. Goodwill of
Selected financial information by business segment for the three and six month periods ended
48
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:
(1) Outside of the scope of ASC 606
Revenue sources within the scope of ASC 606 are discussed
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 49
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,
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 the first
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.
Bancorp has operating leases for various branch locations with terms remaining from
Balance sheet, income statement, and cash flow detail regarding operating leases follows:
As of
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As a result of its acquisition of King, Bancorp, Inc. on May 1, 2019, Bancorp became the 100% successor owner of King Bancorp Statutory Trust I (“KBST”), an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the trust-preferred securities at the par amount of approximately $3.6 million on June 17, 2019.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying notes presented in Part 1 Item 1 “Financial Statements.”
Stock Yards Bancorp, Inc. is a financial holding company headquartered in Louisville, Kentucky.
The Bank, chartered in 1904, is a state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio Metropolitan Statistical Areas (“MSAs”) through
This report contains forward-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.
As a result of
Issued but Not Yet Effective Accounting Standards Updates (“ASUs”)
For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
Business Segment Overview
As of
Commercial
WM&T, with
Overview of six months ended June 30, 2019 compared with same period in 2018
Bancorp completed the first
Key factors affecting Bancorp’s results for the
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
● | Card income and |
● | Bancorp’s effective income tax rate declined to |
Net interest income increased $4.4 million, or 7.9%, for the first six months of 2019, as compared with the same period in 2018. Net interest margin increased to 3.85% for the first six months of 2019, compared with 3.84% for the same period of 2018. Increasing average rates earned on interest earning assets, along with the impact of increased volumes of loans and short-term investments contributed to higher interest income for the first six months of 2019, as interest income increased $10.2 million, or 16.6%, over the same period in 2018. Average earning asset growth attributable to the May 1, 2019 King acquisition totaled $56 million for the six-month comparison period. Higher long-term borrowing costs assumed in the King acquisition, along with a shift in deposits from non-interest bearing accounts to interest bearing accounts resulted in an increase in interest expense of $5.8 million. Interest paying liabilities assumed as part of the King acquisition contributed $47.1 million of the total $149.6 million average interest bearing liabilities growth for the six month comparison. The average balance of time deposits increased $144.8 million, or 61.2% in the first six months of 2019, as compared with the same period in 2018, as a result primarily of targeted marketing campaigns initiated in 2018 to support loan growth and add liquidity to the balance sheet. The corresponding cost of time deposits increased from 0.86% for the first six months of 2018 to 1.93% for the same period in 2019.
For the six-month period ended June 30, 2019, Bancorp recorded a $600 thousand provision, compared with $2.0 million for the same period in 2018. The provision represents a charge to earnings necessary to maintain an allowance that, in management’s estimation, is adequate to provide coverage for the inherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors. Reflecting continued strong credit quality metrics, and net recoveries of $282 thousand in the first six months of 2019, the allowance to total loans was 0.96% as of June 30, 2019, compared with 0.96% as of June 30, 2018. In management’s opinion, the allowance remained adequate to cover potential losses within the portfolio.
Total non-interest income for the first six months of 2019 increased $981 thousand, or 4.4%, compared with the same period in 2018. Non-interest income comprised 27.9% of total revenues, defined as net interest income and non-interest income, as compared with 28.5% for the same period in 2018. Bancorp’s WM&T services comprised 47.6% of Bancorp’s non-interest income. Debit and credit card revenue, as a result of increasing transaction volumes and incentives paid by the credit card processor, increased $715 thousand, or 22.4% in the first six months of 2019, as compared with the same period in 2018. Treasury management fees, a steadily growing source of revenue for Bancorp, increased $199 thousand, or 9.2%, in the first half of 2019, as compared with the first half of 2018. These items offset declines of $275 thousand, and $81 thousand, for deposit service charges and investment product sales commissions and fees, respectively, for the first six months of 2019, as compared with 2018.
Total non-interest expense in the first six months of 2019 increased $4.9 million, or 11.4%, compared with the same period in 2018. Increases in compensation, technology and communication, legal and professional fees, and other expenses drove the increase. Costs associated with the King acquisition recognized during 2019 totaled $1.3 million approximately, or $0.05 net income per diluted share, and were spread primarily between compensation and legal and professional fees. Bancorp's efficiency ratio, reflecting the one-time transaction costs associated with the King acquisition recognized in the first six months of 2019 was 57.36%, as compared with 54.98% in the same period in 2018.
Bancorp recorded income tax expense of $2.9 million for the first six months of 2019, compared to $6.2 million for the same period in 2018. The effective rate for the corresponding six month periods was 8.2% and 18.7%, respectively. The decrease in the effective tax rate from 2018 to 2019 related primarily to Kentucky state tax law changes as discussed below:
● | In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a |
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 corresponding 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 marketplace.
Net interest income increased $2.3 million, or 8.6%, for the first threesix months of 2019, as compared with the same period in 2018. Net interest margin increased to 3.89% for the first three months of 2019, compared with 3.79% for the same period of 2018. Increasing average rates earned on interest earning assets, along with the impact of increased volumes of loans and short-term investments contributed to higher interest income for the first quarter of 2019, as interest income increased $5.3 million, or 17.8%, over the same period in 2018. Higher funding costs on deposits and borrowings, coupled with growth in interest bearing demand deposits and time deposits, resulted in an increase in interest expense of $2.9 million, or 120.6%, year over year. The average balance of time deposits increased $118.9 million, or 50.7% in the first quarter of 2019, as compared with the same period in 2018, as a result of targeted marketing campaigns initiated in 2018 to support loan growth and add liquidity to the balance sheet. The corresponding cost of time deposits increased from 0.77% for the first three months of 2018 to 1.83% for the same period in 2019, as Bancorp aggressively promoted certificate of deposits.
For the three-month period ended March 31, 2019, Bancorp recorded a $600 thousand provision for loan and lease losses (“provision”), compared with $735 thousand for the same period in 2018. The provision represents a charge to earnings necessary to maintain an allowance that, in management’s evaluation, is adequate to provide coverage for the inherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors. Reflecting a moderate increase in classified loans and net recoveries of $330 thousand in the first quarter of 2019, the allowance to total loans was 1.05% as of March 31, 2019, compared with 0.96% as of March 31, 2018. In management’s opinion, the allowance remained adequate to cover potential losses within the portfolio.
Total non-interest income for the first three months of 2019 increased $153 thousand, or 1.4%, compared with the same period in 2018. Non-interest income comprised 27.2% of total revenues, defined as net interest income and non-interest income, as compared with 28.5% for the same period in 2018. Bancorp’s WM&T services comprised 49.2% of Bancorp’s non-interest income, despite a slight reduction in revenue in the first three months of 2019 of 1.1%, or $61 thousand. The stock market recovery in the first quarter of 2019 significantly impacted WM&T income for the quarter. Should positive market trends continue, WM&T is expected to deliver low single digit growth in 2019, however, market volatility could affect near-term results. Debit and credit card revenue, as a result of increasing transaction volumes, increased $236 thousand, or 15.6% in the first three months of 2019, as compared with the same period in 2018. Treasury management fees, a steadily growing source of revenue for Bancorp, increased $110 thousand, or 10.5% in the first quarter of 2019, as compared with the first quarter of 2018. These items offset declines of $164 thousand, or 11.6%, and $94 thousand, or 16.3%, for deposit service charges and mortgage banking income, respectively, for the first three months of 2019, as compared with 2018.
Total non-interest expense in the first three months of 2019 increased $1.6 million, or 7.7%, compared with the same period in 2018. Increases in compensation, technology and communication, and other expenses drove the increase. Bancorp's efficiency ratio in the first three months of 2019 was 55.52% compared with 54.89% in the same period in 2018.
Bancorp recorded income tax expense of $1.8 million for the first three months of 2019, compared to $3.1 million for the same period in 2018. The effective rate for the corresponding three month periods was 10.5% and 18.5%, respectively. The decrease in the effective tax rate from 2018 to 2019 related primarily to a Kentucky state tax law change. 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 thousand 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 associated with this change of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the first six months of 2019. |
The ratio of stockholder’s equity to total assets was 11.52%11.24% as of March 31,June 30, 2019, as compared with 11.10% at December 31, 2018, and 10.40% at June 30, 2018. Total equity increased $11.5$22.9 million in the first quartersix months of 2019, as net income of $15.6$32.2 million was offset by dividends declared of $5.7$11.6 million and stock repurchases totaling $5.8 million. Bancorp’s ratio of tangible common equity (“TCE”) to total tangible assets was 11.47%10.85% as of March 31,June 30, 2019, compared with 11.05% at December 31, 2018.2018, and 10.35% at June 30, 2018, with the decline attributable to the KSB acquisition. TCE, a non-Generally(a non-U.S. Generally Accepted Accounting Principle (“GAAP”) measure,measure), is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. It consists of a company’s common equity less any preferred equity, less intangible assets. Tangible common equity is divided by tangible assets, which equals total assets less intangible assets. See the Non-GAAP Financial Measures section for details on reconcilement to GAAP measures.
Results of Operations
Net income of $15.6$16.5 million for the three months ended March 31,June 30, 2019 increased $2.2$3.0 million, or 16.4%21.8%, from $13.4$13.6 million for the comparable 2018 period. Basic net income per share was $0.69$0.73 for the firstsecond quarter of 2019, an increase of 16.9%21.7% from the $0.59$0.60 for the firstsecond quarter of 2018. Net income per share on a diluted basis was $0.68$0.72 for the firstsecond quarter of 2019, an increase of 17.2%22.0% from the $0.58$0.59 for the same period in 2018. See Note 12 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.94%1.93% and 17.09%17.40%, respectively, for the firstsecond quarter of 2019, compared with 1.76%1.74% and 16.15%15.94%, respectively, for the same period in 2018.
Net income of $32.2 million for the six months ended June 30, 2019 increased $5.2 million, or 19.3%, from $27.0 million for the comparable 2018 period. Basic net income per share was $1.42 for the first six months of 2019, an increase of 19.3% from the $1.19 for the same period of 2018. Net income per share on a diluted basis was $1.40 for the first half of 2019, an increase of 19.7% from the $1.17 for the same period in 2018. See Note 12 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.93% and 17.25%, respectively, for the six months ended June 30, 2019, compared with 1.75% and 16.05%, respectively, for the same period in 2018.
Net Interest Income
The following table presentstables present average balance sheets for the three and six month periods ended March 31,June 30, 2019 and 2018 along with the related calculation of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. See the notes following the tables for further explanation.
Three months ended March 31, | Three months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 |
2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Average |
Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | balances | Interest | rate | balances | Interest | rate | ||||||||||||||||||||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 122,189 | $ | 733 | 2.43 | % | $ | 71,186 | $ | 268 | 1.53 | % | $ | 137,130 | $ | 830 | 2.43 | % | $ | 36,985 | $ | 163 | 1.77 | % | ||||||||||||||||||||||||
Mortgage loans held for sale | 1,727 | 37 | 8.69 | 2,098 | 35 | 6.77 | 3,794 | 43 | 4.55 | 2,975 | 44 | 5.93 | ||||||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 409,835 | 2,411 | 2.39 | 373,314 | 2,027 | 2.20 | 410,201 | 2,395 | 2.34 | 358,637 | 1,996 | 2.23 | ||||||||||||||||||||||||||||||||||||
Tax-exempt | 27,784 | 175 | 2.55 | 44,394 | 296 | 2.70 | 25,190 | 162 | 2.58 | 42,732 | 288 | 2.70 | ||||||||||||||||||||||||||||||||||||
FHLB stock | 10,192 | 157 | 6.25 | 7,687 | 111 | 5.86 | 10,590 | 151 | 5.72 | 8,925 | 109 | 4.90 | ||||||||||||||||||||||||||||||||||||
Loans, net of unearned income | 2,528,625 | 31,572 | 5.06 | 2,432,659 | 27,100 | 4.52 | 2,658,036 | 33,442 | 5.05 | 2,523,450 | 29,489 | 4.69 | ||||||||||||||||||||||||||||||||||||
Total earning assets | 3,100,352 | 35,085 | 4.59 | 2,931,338 | 29,837 | 4.13 | 3,244,941 | 37,023 | 4.58 | 2,973,704 | 32,089 | 4.33 | ||||||||||||||||||||||||||||||||||||
Less allowance for loan losses | 26,127 | 25,063 | 27,190 | 24,433 | ||||||||||||||||||||||||||||||||||||||||||||
| 3,074,225 | 2,906,275 | 3,217,751 | 2,949,271 | |||||||||||||||||||||||||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 41,653 | 39,985 | 43,955 | 40,607 | ||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net | 45,340 | 41,891 | 64,238 | 42,000 | ||||||||||||||||||||||||||||||||||||||||||||
Accrued interest receivable and other assets | 110,039 | 102,740 | 110,231 | 100,616 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 3,271,257 | $ | 3,090,891 | $ | 3,436,175 | $ | 3,132,494 | ||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing demand deposits | $ | 861,020 | $ | 1,404 | 0.66 | % | $ | 817,567 | $ | 623 | 0.31 | % | $ | 843,768 | $ | 1,408 | 0.67 | % | $ | 792,193 | $ | 839 | 0.42 | % | ||||||||||||||||||||||||
Savings deposits | 157,053 | 96 | 0.25 | 154,607 | 56 | 0.15 | 169,883 | 109 | 0.26 | 158,561 | 61 | 0.15 | ||||||||||||||||||||||||||||||||||||
Money market deposits | 677,512 | 1,974 | 1.18 | 686,699 | 953 | 0.56 | 689,954 | 2,079 | 1.21 | 657,230 | 1,206 | 0.74 | ||||||||||||||||||||||||||||||||||||
Time deposits | 353,245 | 1,592 | 1.83 | 234,383 | 445 | 0.77 | 409,163 | 2,056 | 2.02 | 238,746 | 568 | 0.95 | ||||||||||||||||||||||||||||||||||||
Total interest bearing deposits | 2,112,768 | 5,652 | 1.07 | 1,846,730 | 2,674 | 0.58 | ||||||||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 37,528 | 25 | 0.27 | 71,276 | 33 | 0.19 | 39,969 | 28 | 0.28 | 61,993 | 33 | 0.21 | ||||||||||||||||||||||||||||||||||||
Federal funds purchased and other short term borrowings | 11,428 | 60 | 2.13 | 26,259 | 90 | 1.39 | 11,774 | 64 | 2.18 | 88,180 | 394 | 1.79 | ||||||||||||||||||||||||||||||||||||
FHLB advances | 47,962 | 221 | 1.87 | 49,247 | 235 | 1.94 | 72,923 | 424 | 2.33 | 48,929 | 229 | 1.88 | ||||||||||||||||||||||||||||||||||||
Subordinated debt | 1,497 | 26 | 6.97 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities | 2,145,748 | 5,372 | 1.02 | 2,040,038 | 2,435 | 0.48 | 2,238,931 | 6,194 | 1.11 | 2,045,832 | 3,330 | 0.65 | ||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities: | �� | |||||||||||||||||||||||||||||||||||||||||||||||
Non-interest bearing demand deposits | 694,871 | 669,929 | 754,592 | 701,642 | ||||||||||||||||||||||||||||||||||||||||||||
Accrued interest payable and other liabilities | 59,568 | 44,354 | 61,382 | 43,383 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 2,900,187 | 2,754,321 | 3,054,905 | 2,790,857 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 371,070 | 336,570 | 381,270 | 341,637 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,271,257 | $ | 3,090,891 | $ | 3,436,175 | $ | 3,132,494 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 29,713 | $ | 27,402 | $ | 30,829 | $ | 28,759 | ||||||||||||||||||||||||||||||||||||||||
Net interest spread | 3.57 | % | 3.65 | % | 3.47 | % | 3.68 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin | 3.89 | % | 3.79 | % | 3.81 | % | 3.88 | % | ||||||||||||||||||||||||||||||||||||||||
Six months ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | ||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 129,701 | $ | 1,563 | 2.43 | % | $ | 53,991 | $ | 431 | 1.61 | % | ||||||||||||
Mortgage loans held for sale | 2,766 | 80 | 5.83 | 2,539 | 79 | 6.27 | ||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Taxable | 410,018 | 4,806 | 2.36 | 365,935 | 4,024 | 2.22 | ||||||||||||||||||
Tax-exempt | 26,480 | 337 | 2.57 | 43,558 | 583 | 2.70 | ||||||||||||||||||
FHLB stock | 10,392 | 308 | 5.98 | 8,310 | 219 | 5.31 | ||||||||||||||||||
Loans, net of unearned income | 2,593,712 | 65,014 | 5.05 | 2,478,305 | 56,590 | 4.60 | ||||||||||||||||||
Total earning assets | 3,173,069 | 72,108 | 4.58 | 2,952,638 | 61,926 | 4.23 | ||||||||||||||||||
Less allowance for loan losses | 26,662 | 24,746 | ||||||||||||||||||||||
| 3,146,407 | 2,927,892 | |||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 42,810 | 40,298 | ||||||||||||||||||||||
Premises and equipment, net | 63,083 | 41,945 | ||||||||||||||||||||||
Accrued interest receivable and other assets | 101,872 | 101,672 | ||||||||||||||||||||||
Total assets | $ | 3,354,172 | $ | 3,111,807 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand deposits | $ | 852,347 | $ | 2,811 | 0.67 | % | $ | 804,810 | $ | 1,462 | 0.37 | % | ||||||||||||
Savings deposits | 163,504 | 205 | 0.25 | 156,594 | 117 | 0.15 | ||||||||||||||||||
Money market deposits | 683,767 | 4,054 | 1.20 | 671,883 | 2,159 | 0.65 | ||||||||||||||||||
Time deposits | 381,358 | 3,648 | 1.93 | 236,577 | 1,013 | 0.86 | ||||||||||||||||||
Total interest bearing deposits | 2,080,976 | 10,718 | 1.04 | 1,869,864 | 4,751 | 0.51 | ||||||||||||||||||
Securities sold under agreements to repurchase | 38,755 | 53 | 0.28 | 66,609 | 67 | 0.20 | ||||||||||||||||||
Federal funds purchased and other short term borrowings | 11,602 | 124 | 2.16 | 57,391 | 483 | 1.70 | ||||||||||||||||||
FHLB advances | 60,512 | 645 | 2.15 | 49,087 | 464 | 1.91 | ||||||||||||||||||
Subordinated debt | 752 | 26 | 6.97 | — | — | — | ||||||||||||||||||
Total interest bearing liabilities | 2,192,597 | 11,566 | 1.06 | 2,042,951 | 5,765 | 0.57 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing demand deposits | 724,896 | 685,873 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 60,481 | 43,866 | ||||||||||||||||||||||
Total liabilities | 2,977,974 | 2,772,690 | ||||||||||||||||||||||
Stockholders’ equity | 376,198 | 339,117 | ||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,354,172 | $ | 3,111,807 | ||||||||||||||||||||
Net interest income | $ | 60,542 | $ | 56,161 | ||||||||||||||||||||
Net interest spread | 3.52 | % | 3.66 | % | ||||||||||||||||||||
Net interest margin | 3.85 | % | 3.84 | % | ||||||||||||||||||||
NotesNotes to the average balance and interest rate tables:
● | Average balances for loans 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. |
● | Interest income on a fully tax equivalent 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 loans has been calculated on a fully tax equivalent basis using a federal income tax rate of 21% for 2019 and 2018. Approximate tax equivalent adjustments to interest income were |
● | Interest income includes loan fees of |
● | Net interest income, the most significant component of the Bank's earnings represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates. |
● | Net interest |
|
|
● | Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is impacted by both interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity. |
Net interest spread and net interest margin were 3.57%3.47% and 3.89%3.81%, respectively, for the firstsecond quarter of 2019, and 3.65%3.68% and 3.79%3.88%, respectively, for the firstsecond quarter of 2018. Net interest margin was challenged in the second quarter of 2019 primarily due to the following:
● | While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, it has become more rate sensitive as deposit balances have migrated from non-interest bearing accounts to interest bearing accounts. |
● | Asset yields were impacted by the downward trending of the overall rate environment, as fixed rate loan pricing and LIBOR based loans were impacted. |
● | The second quarter 2018 margin was elevated by prepayment fees collected, with a much lighter impact experienced in the second quarter of 2019. |
● | The King portfolio mix of earning assets and interest bearing liabilities had a slightly negative impact on margin overall. |
Fully taxable equivalent net interest income of $29.7$30.8 million for the three months ended March 31,June 30, 2019 increased $2.3$2.1 million, or 8.4%7.2%, from $27.4$28.8 million for the same period in 2018. Fully taxable equivalent interest income increased $5.2$4.9 million or 17.6%15.4% for the firstsecond quarter of 2019, as compared with the firstsecond quarter of 2018, due primarily to increased average loan balances stemming from 2018 loan growth fueled by record loan production and the King acquisition, as well as increased rates earned on loans. Wall Street Journal Prime interest rate was 50 to 75 basis points (“bps”) higher infor much of the first quarterhalf of 2019, as compared with 2018, which benefited short-term loan and investment pricing, while new, fixed-rate loans originated during the period benefited from a higher five-year treasury yield curve.pricing. Taxable securities, and federal funds sold and interest bearing due from banks average balances also increased in the first quarterhalf of 2019, as compared with 2018, as a result of Bancorp deploying excess liquidity into short-term investments, which earned higher yields year over year. In total, average earning assets increased $169.0$271.2 million or 5.77%9.1% to $3.1$3.2 billion for the first three months ofmonth period ended June 30, 2019, as compared with the same period in 2018. The2018, with the average rate on earnings assets increased 46increasing 25 bps to 4.59%, as Bancorp benefited4.58%. Earning assets resulting from a generally higher interest rate environment.the King acquisition averaged $119.6 million, and yielded 5.28% for the three months ended June 30, 2019.
Interest expense increased due primarily to rising deposit costs, and strategic growth in interest bearing demand deposits and time deposits.deposits, and deposits assumed in the King acquisition. While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, deposit balances migrated from non-interest bearing accounts to interest bearing accounts during the period. Average interest bearing liabilities increased $105.7$193.0 million, or 5.2%9.4%, to $2.1$2.2 billion for the first three months ofmonth period ended June 30, 2019, as compared with the same period in 2018. Average interest bearing liabilities resulting from the King acquisition totaled $93.8 million in the second quarter. Growth in average interest bearing demand deposits and time deposits was partially offset by declines in money market deposits, and securities sold under agreements to repurchase.repurchase (“SSUARs”). The average cost of interest bearing liabilities increased 5446 bps to 1.02%1.11% for the firstsecond quarter of 2019, as compared with the firstsecond quarter of 2018. Bancorp increased rates paid on money market accounts in the first half of 2018 in addition to launching a marketing campaign promoting certificate of deposit accounts. Costs of money market deposit accounts and time deposits increased 6247 bps, and 106107 bps, respectively, in the firstsecond quarter of 2019, as compared with the same period in 2018. The average balance of securities sold under agreements to repurchase (“SSUARs”) decreased $33.7$22.0 million, or 47.3%35.5%, as customers migrated from lower yielding collateralized products to higher yielding non-collateralized deposits.
Fully taxable equivalent net interest income of $60.5 million for the six months ended June 30, 2019 increased $4.4 million, or 7.8%, from $56.2 million for the same period in 2018. Positive effects of increased average balances on loans, resulting primarily from strong second quarter loan growth coupled with loans added in the King acquisition, and increased balances and rates on other earning assets, were partially offset by the negative effect of increasing rates for all funding sources. Interest earning assets and interest bearing liabilities increased $220.4 million, or 7.5%, and $149.6 million, or 7.3%, respectively, for the six month periods ended June 30, 2019 and June 30, 2018. Net interest spread and net interest margin were 3.52% and 3.85%, respectively, for the first six months of 2019 and 3.66% and 3.84%, respectively, for the first six months of 2018.
Going forward, yield curve inversion could pose a significant challenge if loans were to be originated and repriced at a relatively low five-year portion of the treasury yield curve, while deposits and other funding sources priced or re-priced based upon a stagnant or increasing shorterhigher short end of the curve.
The Federal Reserve Bank (“FRB”) reduced the federal funds rate 25 bps in late July, with the prime lending rate experiencing a corresponding 25 bps decrease. Bancorp’s strategy in response to the rate reduction is to reduce deposit rates in order to fully offset the loss in revenue. Future rate decreases could have a negative impact on net interest margin, as additional reductions in deposit rates may not be sufficient to offset the potential loss in revenue.
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 SensitivityBalance Sheet
June 30, 2019
Operating lease right-of-use assets
included in premises and equipment
Operating lease liabilities
included in other liabilities
Weighted average remaining lease term (in years)
Weighted average discount rate
Maturities of lease liabilities:
One year or less
Year 2
Year 3
Year 4
Year 5
Greater than 5 years
Total lease payments
Less imputed interest
Total
(In thousands) | Three months ended | Six months ended | ||||||
Income Statement | June 30, 2019 | June 30, 2019 | ||||||
Components of lease expense: | ||||||||
Operating lease cost | $ | 489 | $ | 997 | ||||
Variable lease cost | 24 | 63 | ||||||
Less sublease income | 13 | 27 | ||||||
Total lease cost | $ | 500 | $ | 1,033 | ||||
(In thousands) | Six months ended | |||||||
Cash flow Statement | June 30, 2019 | |||||||
Supplemental cash flow information: | ||||||||
Operating cash flows from operating leases | $ | 694 | ||||||
As of June 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 and operations for Stock Yards Bancorp, Inc. (“Holding Company”), and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”) for the three and six months ended June 30, 2019 and compares these periods with the same periods of the previous year. All significant inter-company transactions and accounts have been eliminated in consolidation. All companies are collectively referred to as “Bancorp” or the “Company.”
As a result of its acquisition of King, Bancorp, Inc. on May 1, 2019, Bancorp became the 100% successor owner of King Bancorp Statutory Trust I (“KBST”), an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the trust-preferred securities at the par amount of approximately $3.6 million on June 17, 2019.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying notes presented in Part 1 Item 1 “Financial Statements.”
Stock Yards Bancorp, Inc. is a financial holding company headquartered in Louisville, Kentucky.
The Bank, chartered in 1904, is a state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio Metropolitan Statistical Areas (“MSAs”) through 43 full service banking center locations.
This report contains forward-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(“King”)
On May 1, 2019, Bancorp completed its acquisition of King Bancorp Inc., and its wholly-owned subsidiary King Southern Bank (collectively referred to as “King”), 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, King reported approximately $192 million in total assets, approximately $164 million in loans, and approximately $126 million in deposits.
As a result of the completion of the acquisition, Bancorp incurred pre-tax transaction charges totaling $1.3 million for the three and six months ended June 30, 2019. Net income from the King 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 (“ASUs”)
For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
Business Segment Overview
As of June 30, 2019, Bancorp was divided into two reportable segments: Commercial Banking and Wealth Management & Trust (“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, with over $3 billion in assets under management (“AUM”), provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates.
Summary - Three and Six Months Ended June 30, 2019 Compared to the Three and Six Months Ended June 30, 2018
Three months ended June 30, (In thousands, except per share data) | 2019 | 2018 | $ Change | % Change | ||||||||||||
Net income | $ | 16,543 | $ | 13,579 | $ | 2,964 | 21.8 | % | ||||||||
Diluted earnings per share | $ | 0.72 | $ | 0.59 | $ | 0.13 | 22.0 | % | ||||||||
Annualized return on average assets | 1.93 | % | 1.74 | % | 19 bps | 10.9 | % | |||||||||
Annualized return on average equity | 17.40 | % | 15.94 | % | 146 bps | 9.2 | % | |||||||||
Six months ended June 30, (In thousands, except per share data) | 2019 | 2018 | $ Change | % Change | ||||||||||||
Net income | $ | 32,184 | $ | 26,983 | $ | 5,201 | 19.3 | % | ||||||||
Diluted earnings per share | $ | 1.40 | $ | 1.17 | $ | 0.23 | 19.7 | % | ||||||||
Annualized return on average assets | 1.93 | % | 1.75 | % | 18 bps | 10.3 | % | |||||||||
Annualized return on average equity | 17.25 | % | 16.05 | % | 120 bps | 7.5 | % | |||||||||
Overview of six months ended June 30, 2019 compared with same period in 2018
Bancorp completed the first six months of 2019 with record net income of $32.2 million, a 19.3% increase over the comparable period in 2018. The increase is primarily due to higher net interest income driven by year-over-year average loan growth, higher non-interest income led by WM&T and debit and credit card income, and a lower effective income tax rate resulting from Kentucky tax law changes. Diluted earnings per share for the first six months of 2019 were $1.40, compared to $1.17 for the first six months of 2018.
Key factors affecting Bancorp’s results for the six months ended June 30, 2019 included:
| Average loans increased $115.4 million, or 4.7%, year over year as a result of strong loan production and the May 1, 2019 King acquisition, contributing to |
● | Net interest income increased $4.4 million or 7.9% for the six months ended June 30, 2019, due largely to a $8.4 million increase in interest |
● | Net interest margin rose 1 basis point compared with the same period of
|
● | Credit quality metrics remained sound, including net
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
● |
|
| Card income and
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
● | Bancorp’s effective income tax rate declined to
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income increased $4.4 million, or 7.9%, for the first six months of 2019, as compared with the same period in 2018. Net interest margin increased to 3.85% for the first six months of 2019, compared with 3.84% for the same period of 2018. Increasing average rates earned on interest earning assets, along with the impact of increased volumes of loans and short-term investments contributed to higher interest income for the first six months of 2019, as interest income increased $10.2 million, or 16.6%, over the same period in 2018. Average earning asset growth attributable to the May 1, 2019 King acquisition totaled $56 million for the six-month comparison period. Higher long-term borrowing costs assumed in the King acquisition, along with a shift in deposits from non-interest bearing accounts to interest bearing accounts resulted in an increase in interest expense of $5.8 million. Interest paying liabilities assumed as part of the King acquisition contributed $47.1 million of the total $149.6 million average interest bearing liabilities growth for the six month comparison. The average balance of time deposits increased $144.8 million, or 61.2% in the first six months of 2019, as compared with the same period in 2018, as a result primarily of targeted marketing campaigns initiated in 2018 to support loan growth and add liquidity to the balance sheet. The corresponding cost of time deposits increased from 0.86% for the first six months of 2018 to 1.93% for the same period in 2019.
For the six-month period ended June 30, 2019, Bancorp recorded a $600 thousand provision, compared with $2.0 million for the same period in 2018. The provision represents a charge to earnings necessary to maintain an allowance that, in management’s estimation, is adequate to provide coverage for the inherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors. Reflecting continued strong credit quality metrics, and net recoveries of $282 thousand in the first six months of 2019, the allowance to total loans was 0.96% as of June 30, 2019, compared with 0.96% as of June 30, 2018. In management’s opinion, the allowance remained adequate to cover potential losses within the portfolio.
Total non-interest income for the first six months of 2019 increased $981 thousand, or 4.4%, compared with the same period in 2018. Non-interest income comprised 27.9% of total revenues, defined as net interest income and non-interest income, as compared with 28.5% for the same period in 2018. Bancorp’s WM&T services comprised 47.6% of Bancorp’s non-interest income. Debit and credit card revenue, as a result of increasing transaction volumes and incentives paid by the credit card processor, increased $715 thousand, or 22.4% in the first six months of 2019, as compared with the same period in 2018. Treasury management fees, a steadily growing source of revenue for Bancorp, increased $199 thousand, or 9.2%, in the first half of 2019, as compared with the first half of 2018. These items offset declines of $275 thousand, and $81 thousand, for deposit service charges and investment product sales commissions and fees, respectively, for the first six months of 2019, as compared with 2018.
Total non-interest expense in the first six months of 2019 increased $4.9 million, or 11.4%, compared with the same period in 2018. Increases in compensation, technology and communication, legal and professional fees, and other expenses drove the increase. Costs associated with the King acquisition recognized during 2019 totaled $1.3 million approximately, or $0.05 net income per diluted share, and were spread primarily between compensation and legal and professional fees. Bancorp's efficiency ratio, reflecting the one-time transaction costs associated with the King acquisition recognized in the first six months of 2019 was 57.36%, as compared with 54.98% in the same period in 2018.
Bancorp recorded income tax expense of $2.9 million for the first six months of 2019, compared to $6.2 million for the same period in 2018. The effective rate for the corresponding six month periods was 8.2% and 18.7%, respectively. The decrease in the effective tax rate from 2018 to 2019 related primarily to Kentucky state tax law changes as discussed below:
● | 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
|
| 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 associated with this change of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the first six months of 2019. |
The ratio of stockholder’s equity to total assets was 11.24% as of June 30, 2019, as compared with 11.10% at December 31, 2018, and 10.40% at June 30, 2018. Total equity increased $22.9 million in the first six months of 2019, as net income of $32.2 million was offset by dividends declared of $11.6 million and stock repurchases totaling $5.8 million. Bancorp’s ratio of tangible common equity (“TCE”) to total tangible assets was 10.85% as of June 30, 2019, compared with 11.05% at December 31, 2018, and 10.35% at June 30, 2018, with the decline attributable to the KSB acquisition. TCE, (a non-U.S. Generally Accepted Accounting Principle (“GAAP”) measure), is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. See the Non-GAAP Financial Measures section for details on reconcilement to GAAP measures.
Results of Operations
Net income of $16.5 million for the three months ended June 30, 2019 increased $3.0 million, or 21.8%, from $13.6 million for the comparable 2018 period. Basic net income per share was $0.73 for the second quarter of 2019, an increase of 21.7% from the $0.60 for the second quarter of 2018. Net income per share on a diluted basis was $0.72 for the second quarter of 2019, an increase of 22.0% from the $0.59 for the same period in 2018. See Note 12 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.93% and 17.40%, respectively, for the second quarter of 2019, compared with 1.74% and 15.94%, respectively, for the same period in 2018.
Net income of $32.2 million for the six months ended June 30, 2019 increased $5.2 million, or 19.3%, from $27.0 million for the comparable 2018 period. Basic net income per share was $1.42 for the first six months of 2019, an increase of 19.3% from the $1.19 for the same period of 2018. Net income per share on a diluted basis was $1.40 for the first half of 2019, an increase of 19.7% from the $1.17 for the same period in 2018. See Note 12 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.93% and 17.25%, respectively, for the six months ended June 30, 2019, compared with 1.75% and 16.05%, respectively, for the same period in 2018.
Net Interest Income
The following tables present average balance sheets for the three and six month periods ended June 30, 2019 and 2018 along with the related calculation of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. See the notes following the tables for further explanation.
Three months ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | ||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 137,130 | $ | 830 | 2.43 | % | $ | 36,985 | $ | 163 | 1.77 | % | ||||||||||||
Mortgage loans held for sale | 3,794 | 43 | 4.55 | 2,975 | 44 | 5.93 | ||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Taxable | 410,201 | 2,395 | 2.34 | 358,637 | 1,996 | 2.23 | ||||||||||||||||||
Tax-exempt | 25,190 | 162 | 2.58 | 42,732 | 288 | 2.70 | ||||||||||||||||||
FHLB stock | 10,590 | 151 | 5.72 | 8,925 | 109 | 4.90 | ||||||||||||||||||
Loans, net of unearned income | 2,658,036 | 33,442 | 5.05 | 2,523,450 | 29,489 | 4.69 | ||||||||||||||||||
Total earning assets | 3,244,941 | 37,023 | 4.58 | 2,973,704 | 32,089 | 4.33 | ||||||||||||||||||
Less allowance for loan losses | 27,190 | 24,433 | ||||||||||||||||||||||
| 3,217,751 | 2,949,271 | |||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 43,955 | 40,607 | ||||||||||||||||||||||
Premises and equipment, net | 64,238 | 42,000 | ||||||||||||||||||||||
Accrued interest receivable and other assets | 110,231 | 100,616 | ||||||||||||||||||||||
Total assets | $ | 3,436,175 | $ | 3,132,494 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand deposits | $ | 843,768 | $ | 1,408 | 0.67 | % | $ | 792,193 | $ | 839 | 0.42 | % | ||||||||||||
Savings deposits | 169,883 | 109 | 0.26 | 158,561 | 61 | 0.15 | ||||||||||||||||||
Money market deposits | 689,954 | 2,079 | 1.21 | 657,230 | 1,206 | 0.74 | ||||||||||||||||||
Time deposits | 409,163 | 2,056 | 2.02 | 238,746 | 568 | 0.95 | ||||||||||||||||||
Total interest bearing deposits | 2,112,768 | 5,652 | 1.07 | 1,846,730 | 2,674 | 0.58 | ||||||||||||||||||
Securities sold under agreements to repurchase | 39,969 | 28 | 0.28 | 61,993 | 33 | 0.21 | ||||||||||||||||||
Federal funds purchased and other short term borrowings | 11,774 | 64 | 2.18 | 88,180 | 394 | 1.79 | ||||||||||||||||||
FHLB advances | 72,923 | 424 | 2.33 | 48,929 | 229 | 1.88 | ||||||||||||||||||
Subordinated debt | 1,497 | 26 | 6.97 | — | — | — | ||||||||||||||||||
Total interest bearing liabilities | 2,238,931 | 6,194 | 1.11 | 2,045,832 | 3,330 | 0.65 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing demand deposits | 754,592 | 701,642 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 61,382 | 43,383 | ||||||||||||||||||||||
Total liabilities | 3,054,905 | 2,790,857 | ||||||||||||||||||||||
Stockholders’ equity | 381,270 | 341,637 | ||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,436,175 | $ | 3,132,494 | ||||||||||||||||||||
Net interest income | $ | 30,829 | $ | 28,759 | ||||||||||||||||||||
Net interest spread | 3.47 | % | 3.68 | % | ||||||||||||||||||||
Net interest margin | 3.81 | % | 3.88 | % | ||||||||||||||||||||
Six months ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | ||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 129,701 | $ | 1,563 | 2.43 | % | $ | 53,991 | $ | 431 | 1.61 | % | ||||||||||||
Mortgage loans held for sale | 2,766 | 80 | 5.83 | 2,539 | 79 | 6.27 | ||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Taxable | 410,018 | 4,806 | 2.36 | 365,935 | 4,024 | 2.22 | ||||||||||||||||||
Tax-exempt | 26,480 | 337 | 2.57 | 43,558 | 583 | 2.70 | ||||||||||||||||||
FHLB stock | 10,392 | 308 | 5.98 | 8,310 | 219 | 5.31 | ||||||||||||||||||
Loans, net of unearned income | 2,593,712 | 65,014 | 5.05 | 2,478,305 | 56,590 | 4.60 | ||||||||||||||||||
Total earning assets | 3,173,069 | 72,108 | 4.58 | 2,952,638 | 61,926 | 4.23 | ||||||||||||||||||
Less allowance for loan losses | 26,662 | 24,746 | ||||||||||||||||||||||
| 3,146,407 | 2,927,892 | |||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 42,810 | 40,298 | ||||||||||||||||||||||
Premises and equipment, net | 63,083 | 41,945 | ||||||||||||||||||||||
Accrued interest receivable and other assets | 101,872 | 101,672 | ||||||||||||||||||||||
Total assets | $ | 3,354,172 | $ | 3,111,807 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand deposits | $ | 852,347 | $ | 2,811 | 0.67 | % | $ | 804,810 | $ | 1,462 | 0.37 | % | ||||||||||||
Savings deposits | 163,504 | 205 | 0.25 | 156,594 | 117 | 0.15 | ||||||||||||||||||
Money market deposits | 683,767 | 4,054 | 1.20 | 671,883 | 2,159 | 0.65 | ||||||||||||||||||
Time deposits | 381,358 | 3,648 | 1.93 | 236,577 | 1,013 | 0.86 | ||||||||||||||||||
Total interest bearing deposits | 2,080,976 | 10,718 | 1.04 | 1,869,864 | 4,751 | 0.51 | ||||||||||||||||||
Securities sold under agreements to repurchase | 38,755 | 53 | 0.28 | 66,609 | 67 | 0.20 | ||||||||||||||||||
Federal funds purchased and other short term borrowings | 11,602 | 124 | 2.16 | 57,391 | 483 | 1.70 | ||||||||||||||||||
FHLB advances | 60,512 | 645 | 2.15 | 49,087 | 464 | 1.91 | ||||||||||||||||||
Subordinated debt | 752 | 26 | 6.97 | — | — | — | ||||||||||||||||||
Total interest bearing liabilities | 2,192,597 | 11,566 | 1.06 | 2,042,951 | 5,765 | 0.57 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing demand deposits | 724,896 | 685,873 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 60,481 | 43,866 | ||||||||||||||||||||||
Total liabilities | 2,977,974 | 2,772,690 | ||||||||||||||||||||||
Stockholders’ equity | 376,198 | 339,117 | ||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,354,172 | $ | 3,111,807 | ||||||||||||||||||||
Net interest income | $ | 60,542 | $ | 56,161 | ||||||||||||||||||||
Net interest spread | 3.52 | % | 3.66 | % | ||||||||||||||||||||
Net interest margin | 3.85 | % | 3.84 | % | ||||||||||||||||||||
Notes to the average balance and interest rate tables:
● | Average balances for loans 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 $10.0 million and $17.1 million, respectively, for the three month periods ended June 30, 2019 and 2018, and $10.2 million and $17.6 million, respectively for the six month periods ended June 30, 2019 and 2018. |
● | Interest income on a fully tax equivalent 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 loans has been calculated on a fully tax equivalent basis using a federal income tax rate of 21% for 2019 and 2018. Approximate tax equivalent adjustments to interest income were $55 thousand and $85 thousand, respectively, for the three month periods ended June 30, 2019 and 2018, and $111 thousand and $178 thousand for the respective six month periods ended June 30, 2019 and 2018. |
● | Interest income includes loan fees of $295 thousand and $297 thousand for the three months ended June 30, 2019, and 2018, respectively, and $776 thousand and $514 thousand for the respective six month periods ended June 30, 2019 and 2018. |
● | Net interest income, the most significant component of the Bank's earnings represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates. |
● | Net interest spread is the difference between taxable equivalent rates earned on interest earning assets less the cost of interest bearing liabilities. |
● | Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is impacted by both interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity. |
Net interest spread and net interest margin were 3.47% and 3.81%, respectively, for the second quarter of 2019, and 3.68% and 3.88%, respectively, for the second quarter of 2018. Net interest margin was challenged in the second quarter of 2019 primarily due to the following:
● | While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, it has become more rate sensitive as deposit balances have migrated from non-interest bearing accounts to interest bearing accounts. |
● | Asset yields were impacted by the downward trending of the overall rate environment, as fixed rate loan pricing and LIBOR based loans were impacted. |
● | The second quarter 2018 margin was elevated by prepayment fees collected, with a much lighter impact experienced in the second quarter of 2019. |
● | The King portfolio mix of earning assets and interest bearing liabilities had a slightly negative impact on margin overall. |
Fully taxable equivalent net interest income of $30.8 million for the three months ended June 30, 2019 increased $2.1 million, or 7.2%, from $28.8 million for the same period in 2018. Fully taxable equivalent interest income increased $4.9 million or 15.4% for the second quarter of 2019, as compared with the second quarter of 2018, due primarily to increased average loan balances stemming from loan growth fueled by record loan production and the King acquisition, as well as increased rates earned on loans. Wall Street Journal Prime interest rate was 50 to 75 basis points (“bps”) higher for much of the first half of 2019, as compared with 2018, which benefited short-term loan and investment pricing. Taxable securities, and federal funds sold and interest bearing due from banks average balances also increased in the first half of 2019, as compared with 2018, as a result of Bancorp deploying excess liquidity into short-term investments, which earned higher yields year over year. In total, average earning assets increased $271.2 million or 9.1% to $3.2 billion for the three month period ended June 30, 2019, as compared with the same period in 2018, with the average rate on earnings assets increasing 25 bps to 4.58%. Earning assets resulting from the King acquisition averaged $119.6 million, and yielded 5.28% for the three months ended June 30, 2019.
Interest expense increased due primarily to rising deposit costs, growth in interest bearing demand deposits and time deposits, and deposits assumed in the King acquisition. While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, deposit balances migrated from non-interest bearing accounts to interest bearing accounts during the period. Average interest bearing liabilities increased $193.0 million, or 9.4%, to $2.2 billion for the three month period ended June 30, 2019, as compared with the same period in 2018. Average interest bearing liabilities resulting from the King acquisition totaled $93.8 million in the second quarter. Growth in average interest bearing deposits was partially offset by declines in securities sold under agreements to repurchase (“SSUARs”). The average cost of interest bearing liabilities increased 46 bps to 1.11% for the second quarter of 2019, as compared with the second quarter of 2018. Bancorp increased rates paid on money market accounts in the first half of 2018 in addition to launching a marketing campaign promoting certificate of deposit accounts. Costs of money market deposit accounts and time deposits increased 47 bps, and 107 bps, respectively, in the second quarter of 2019, as compared with the same period in 2018. The average balance of securities sold under agreements to repurchase (“SSUARs”) decreased $22.0 million, or 35.5%, as customers migrated from lower yielding collateralized products to higher yielding non-collateralized deposits.
Fully taxable equivalent net interest income of $60.5 million for the six months ended June 30, 2019 increased $4.4 million, or 7.8%, from $56.2 million for the same period in 2018. Positive effects of increased average balances on loans, resulting primarily from strong second quarter loan growth coupled with loans added in the King acquisition, and increased balances and rates on other earning assets, were partially offset by the negative effect of increasing rates for all funding sources. Interest earning assets and interest bearing liabilities increased $220.4 million, or 7.5%, and $149.6 million, or 7.3%, respectively, for the six month periods ended June 30, 2019 and June 30, 2018. Net interest spread and net interest margin were 3.52% and 3.85%, respectively, for the first six months of 2019 and 3.66% and 3.84%, respectively, for the first six months of 2018.
Going forward, yield curve inversion could pose a significant challenge if loans were to be originated and repriced at a relatively low five-year portion of the treasury yield curve, while deposits and other funding sources priced or re-priced based upon a higher short end of the curve.
The Federal Reserve Bank (“FRB”) reduced the federal funds rate 25 bps in late July, with the prime lending rate experiencing a corresponding 25 bps decrease. Bancorp’s strategy in response to the rate reduction is to reduce deposit rates in order to fully offset the loss in revenue. Future rate decreases could have a negative impact on net interest margin, as additional reductions in deposit rates may not be sufficient to offset the potential loss in revenue.
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.
Balance Sheet
June 30, 2019
Operating lease right-of-use assets
included in premises and equipment
Operating lease liabilities
included in other liabilities
Weighted average remaining lease term (in years)
Weighted average discount rate
Maturities of lease liabilities:
One year or less
Year 2
Year 3
Year 4
Year 5
Greater than 5 years
Total lease payments
Less imputed interest
Total
(In thousands) | Three months ended | Six months ended | ||||||
Income Statement | June 30, 2019 | June 30, 2019 | ||||||
Components of lease expense: | ||||||||
Operating lease cost | $ | 489 | $ | 997 | ||||
Variable lease cost | 24 | 63 | ||||||
Less sublease income | 13 | 27 | ||||||
Total lease cost | $ | 500 | $ | 1,033 | ||||
(In thousands) | Six months ended | |||||||
Cash flow Statement | June 30, 2019 | |||||||
Supplemental cash flow information: | ||||||||
Operating cash flows from operating leases | $ | 694 | ||||||
As of June 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 and operations for Stock Yards Bancorp, Inc. (“Holding Company”), and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”) for the three and six months ended June 30, 2019 and compares these periods with the same periods of the previous year. All significant inter-company transactions and accounts have been eliminated in consolidation. All companies are collectively referred to as “Bancorp” or the “Company.”
As a result of its acquisition of King, Bancorp, Inc. on May 1, 2019, Bancorp became the 100% successor owner of King Bancorp Statutory Trust I (“KBST”), an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the trust-preferred securities at the par amount of approximately $3.6 million on June 17, 2019.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying notes presented in Part 1 Item 1 “Financial Statements.”
Stock Yards Bancorp, Inc. is a financial holding company headquartered in Louisville, Kentucky.
The Bank, chartered in 1904, is a state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio Metropolitan Statistical Areas (“MSAs”) through 43 full service banking center locations.
This report contains forward-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(“King”)
On May 1, 2019, Bancorp completed its acquisition of King Bancorp Inc., and its wholly-owned subsidiary King Southern Bank (collectively referred to as “King”), 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, King reported approximately $192 million in total assets, approximately $164 million in loans, and approximately $126 million in deposits.
As a result of the completion of the acquisition, Bancorp incurred pre-tax transaction charges totaling $1.3 million for the three and six months ended June 30, 2019. Net income from the King 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 (“ASUs”)
For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
Business Segment Overview
As of June 30, 2019, Bancorp was divided into two reportable segments: Commercial Banking and Wealth Management & Trust (“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, with over $3 billion in assets under management (“AUM”), provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates.
Summary - Three and Six Months Ended June 30, 2019 Compared to the Three and Six Months Ended June 30, 2018
Three months ended June 30, (In thousands, except per share data) | 2019 | 2018 | $ Change | % Change | ||||||||||||
Net income | $ | 16,543 | $ | 13,579 | $ | 2,964 | 21.8 | % | ||||||||
Diluted earnings per share | $ | 0.72 | $ | 0.59 | $ | 0.13 | 22.0 | % | ||||||||
Annualized return on average assets | 1.93 | % | 1.74 | % | 19 bps | 10.9 | % | |||||||||
Annualized return on average equity | 17.40 | % | 15.94 | % | 146 bps | 9.2 | % | |||||||||
Six months ended June 30, (In thousands, except per share data) | 2019 | 2018 | $ Change | % Change | ||||||||||||
Net income | $ | 32,184 | $ | 26,983 | $ | 5,201 | 19.3 | % | ||||||||
Diluted earnings per share | $ | 1.40 | $ | 1.17 | $ | 0.23 | 19.7 | % | ||||||||
Annualized return on average assets | 1.93 | % | 1.75 | % | 18 bps | 10.3 | % | |||||||||
Annualized return on average equity | 17.25 | % | 16.05 | % | 120 bps | 7.5 | % | |||||||||
Overview of six months ended June 30, 2019 compared with same period in 2018
Bancorp completed the first six months of 2019 with record net income of $32.2 million, a 19.3% increase over the comparable period in 2018. The increase is primarily due to higher net interest income driven by year-over-year average loan growth, higher non-interest income led by WM&T and debit and credit card income, and a lower effective income tax rate resulting from Kentucky tax law changes. Diluted earnings per share for the first six months of 2019 were $1.40, compared to $1.17 for the first six months of 2018.
Key factors affecting Bancorp’s results for the six months ended June 30, 2019 included:
| Average loans |
● | Net interest income increased |
● | Net interest margin rose 1 basis point compared with the same period of 2018 as interest income stemming from asset growth offset increased interest expense resulting from deposit rate increases; |
● | Credit quality metrics remained sound, including net loan loss recoveries for the first |
● | WM&T, buoyed by a strong second quarter market and new business generation, achieved 2.4% revenue growth year over year; |
● | Card income and treasury management fees, bolstered by increased volume and usage, continued to stand out as diversifying non-interest revenue streams; and |
● | Bancorp’s effective income tax rate declined to 8.2% for the six months ended June 30, 2019 based on changes made to Kentucky state tax law during the first and second quarters of 2019. |
Net interest income increased $4.4 million, or 7.9%, for the first six months of 2019, as compared with the same period in 2018. Net interest margin increased to 3.85% for the first six months of 2019, compared with 3.84% for the same period of 2018. Increasing average rates earned on interest earning assets, along with the impact of increased volumes of loans and short-term investments contributed to higher interest income for the first six months of 2019, as interest income increased $10.2 million, or 16.6%, over the same period in 2018. Average earning asset growth attributable to the May 1, 2019 King acquisition totaled $56 million for the six-month comparison period. Higher long-term borrowing costs assumed in the King acquisition, along with a shift in deposits from non-interest bearing accounts to interest bearing accounts resulted in an increase in interest expense of $5.8 million. Interest paying liabilities assumed as part of the King acquisition contributed $47.1 million of the total $149.6 million average interest bearing liabilities growth for the six month comparison. The average balance of time deposits increased $144.8 million, or 61.2% in the first six months of 2019, as compared with the same period in 2018, as a result primarily of targeted marketing campaigns initiated in 2018 to support loan growth and add liquidity to the balance sheet. The corresponding cost of time deposits increased from 0.86% for the first six months of 2018 to 1.93% for the same period in 2019.
For the six-month period ended June 30, 2019, Bancorp recorded a $600 thousand provision, compared with $2.0 million for the same period in 2018. The provision represents a charge to earnings necessary to maintain an allowance that, in management’s estimation, is adequate to provide coverage for the inherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors. Reflecting continued strong credit quality metrics, and net recoveries of $282 thousand in the first six months of 2019, the allowance to total loans was 0.96% as of June 30, 2019, compared with 0.96% as of June 30, 2018. In management’s opinion, the allowance remained adequate to cover potential losses within the portfolio.
Total non-interest income for the first six months of 2019 increased $981 thousand, or 4.4%, compared with the same period in 2018. Non-interest income comprised 27.9% of total revenues, defined as net interest income and non-interest income, as compared with 28.5% for the same period in 2018. Bancorp’s WM&T services comprised 47.6% of Bancorp’s non-interest income. Debit and credit card revenue, as a result of increasing transaction volumes and incentives paid by the credit card processor, increased $715 thousand, or 22.4% in the first six months of 2019, as compared with the same period in 2018. Treasury management fees, a steadily growing source of revenue for Bancorp, increased $199 thousand, or 9.2%, in the first half of 2019, as compared with the first half of 2018. These items offset declines of $275 thousand, and $81 thousand, for deposit service charges and investment product sales commissions and fees, respectively, for the first six months of 2019, as compared with 2018.
Total non-interest expense in the first six months of 2019 increased $4.9 million, or 11.4%, compared with the same period in 2018. Increases in compensation, technology and communication, legal and professional fees, and other expenses drove the increase. Costs associated with the King acquisition recognized during 2019 totaled $1.3 million approximately, or $0.05 net income per diluted share, and were spread primarily between compensation and legal and professional fees. Bancorp's efficiency ratio, reflecting the one-time transaction costs associated with the King acquisition recognized in the first six months of 2019 was 57.36%, as compared with 54.98% in the same period in 2018.
Bancorp recorded income tax expense of $2.9 million for the first six months of 2019, compared to $6.2 million for the same period in 2018. The effective rate for the corresponding six month periods was 8.2% and 18.7%, respectively. The decrease in the effective tax rate from 2018 to 2019 related primarily to Kentucky state tax law changes as discussed below:
● | 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 |
● | 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 associated with this change of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the first six months of 2019. |
The ratio of stockholder’s equity to total assets was 11.24% as of June 30, 2019, as compared with 11.10% at December 31, 2018, and 10.40% at June 30, 2018. Total equity increased $22.9 million in the first six months of 2019, as net income of $32.2 million was offset by dividends declared of $11.6 million and stock repurchases totaling $5.8 million. Bancorp’s ratio of tangible common equity (“TCE”) to total tangible assets was 10.85% as of June 30, 2019, compared with 11.05% at December 31, 2018, and 10.35% at June 30, 2018, with the decline attributable to the KSB acquisition. TCE, (a non-U.S. Generally Accepted Accounting Principle (“GAAP”) measure), is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. See the Non-GAAP Financial Measures section for details on reconcilement to GAAP measures.
Results of Operations
Net income of $16.5 million for the three months ended June 30, 2019 increased $3.0 million, or 21.8%, from $13.6 million for the comparable 2018 period. Basic net income per share was $0.73 for the second quarter of 2019, an increase of 21.7% from the $0.60 for the second quarter of 2018. Net income per share on a diluted basis was $0.72 for the second quarter of 2019, an increase of 22.0% from the $0.59 for the same period in 2018. See Note 12 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.93% and 17.40%, respectively, for the second quarter of 2019, compared with 1.74% and 15.94%, respectively, for the same period in 2018.
Net income of $32.2 million for the six months ended June 30, 2019 increased $5.2 million, or 19.3%, from $27.0 million for the comparable 2018 period. Basic net income per share was $1.42 for the first six months of 2019, an increase of 19.3% from the $1.19 for the same period of 2018. Net income per share on a diluted basis was $1.40 for the first half of 2019, an increase of 19.7% from the $1.17 for the same period in 2018. See Note 12 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.93% and 17.25%, respectively, for the six months ended June 30, 2019, compared with 1.75% and 16.05%, respectively, for the same period in 2018.
Net Interest Income
The following tables present average balance sheets for the three and six month periods ended June 30, 2019 and 2018 along with the related calculation of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. See the notes following the tables for further explanation.
Three months ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | ||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 137,130 | $ | 830 | 2.43 | % | $ | 36,985 | $ | 163 | 1.77 | % | ||||||||||||
Mortgage loans held for sale | 3,794 | 43 | 4.55 | 2,975 | 44 | 5.93 | ||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Taxable | 410,201 | 2,395 | 2.34 | 358,637 | 1,996 | 2.23 | ||||||||||||||||||
Tax-exempt | 25,190 | 162 | 2.58 | 42,732 | 288 | 2.70 | ||||||||||||||||||
FHLB stock | 10,590 | 151 | 5.72 | 8,925 | 109 | 4.90 | ||||||||||||||||||
Loans, net of unearned income | 2,658,036 | 33,442 | 5.05 | 2,523,450 | 29,489 | 4.69 | ||||||||||||||||||
Total earning assets | 3,244,941 | 37,023 | 4.58 | 2,973,704 | 32,089 | 4.33 | ||||||||||||||||||
Less allowance for loan losses | 27,190 | 24,433 | ||||||||||||||||||||||
| 3,217,751 | 2,949,271 | |||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 43,955 | 40,607 | ||||||||||||||||||||||
Premises and equipment, net | 64,238 | 42,000 | ||||||||||||||||||||||
Accrued interest receivable and other assets | 110,231 | 100,616 | ||||||||||||||||||||||
Total assets | $ | 3,436,175 | $ | 3,132,494 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand deposits | $ | 843,768 | $ | 1,408 | 0.67 | % | $ | 792,193 | $ | 839 | 0.42 | % | ||||||||||||
Savings deposits | 169,883 | 109 | 0.26 | 158,561 | 61 | 0.15 | ||||||||||||||||||
Money market deposits | 689,954 | 2,079 | 1.21 | 657,230 | 1,206 | 0.74 | ||||||||||||||||||
Time deposits | 409,163 | 2,056 | 2.02 | 238,746 | 568 | 0.95 | ||||||||||||||||||
Total interest bearing deposits | 2,112,768 | 5,652 | 1.07 | 1,846,730 | 2,674 | 0.58 | ||||||||||||||||||
Securities sold under agreements to repurchase | 39,969 | 28 | 0.28 | 61,993 | 33 | 0.21 | ||||||||||||||||||
Federal funds purchased and other short term borrowings | 11,774 | 64 | 2.18 | 88,180 | 394 | 1.79 | ||||||||||||||||||
FHLB advances | 72,923 | 424 | 2.33 | 48,929 | 229 | 1.88 | ||||||||||||||||||
Subordinated debt | 1,497 | 26 | 6.97 | — | — | — | ||||||||||||||||||
Total interest bearing liabilities | 2,238,931 | 6,194 | 1.11 | 2,045,832 | 3,330 | 0.65 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing demand deposits | 754,592 | 701,642 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 61,382 | 43,383 | ||||||||||||||||||||||
Total liabilities | 3,054,905 | 2,790,857 | ||||||||||||||||||||||
Stockholders’ equity | 381,270 | 341,637 | ||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,436,175 | $ | 3,132,494 | ||||||||||||||||||||
Net interest income | $ | 30,829 | $ | 28,759 | ||||||||||||||||||||
Net interest spread | 3.47 | % | 3.68 | % | ||||||||||||||||||||
Net interest margin | 3.81 | % | 3.88 | % | ||||||||||||||||||||
Six months ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | ||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 129,701 | $ | 1,563 | 2.43 | % | $ | 53,991 | $ | 431 | 1.61 | % | ||||||||||||
Mortgage loans held for sale | 2,766 | 80 | 5.83 | 2,539 | 79 | 6.27 | ||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||
Taxable | 410,018 | 4,806 | 2.36 | 365,935 | 4,024 | 2.22 | ||||||||||||||||||
Tax-exempt | 26,480 | 337 | 2.57 | 43,558 | 583 | 2.70 | ||||||||||||||||||
FHLB stock | 10,392 | 308 | 5.98 | 8,310 | 219 | 5.31 | ||||||||||||||||||
Loans, net of unearned income | 2,593,712 | 65,014 | 5.05 | 2,478,305 | 56,590 | 4.60 | ||||||||||||||||||
Total earning assets | 3,173,069 | 72,108 | 4.58 | 2,952,638 | 61,926 | 4.23 | ||||||||||||||||||
Less allowance for loan losses | 26,662 | 24,746 | ||||||||||||||||||||||
| 3,146,407 | 2,927,892 | |||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 42,810 | 40,298 | ||||||||||||||||||||||
Premises and equipment, net | 63,083 | 41,945 | ||||||||||||||||||||||
Accrued interest receivable and other assets | 101,872 | 101,672 | ||||||||||||||||||||||
Total assets | $ | 3,354,172 | $ | 3,111,807 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand deposits | $ | 852,347 | $ | 2,811 | 0.67 | % | $ | 804,810 | $ | 1,462 | 0.37 | % | ||||||||||||
Savings deposits | 163,504 | 205 | 0.25 | 156,594 | 117 | 0.15 | ||||||||||||||||||
Money market deposits | 683,767 | 4,054 | 1.20 | 671,883 | 2,159 | 0.65 | ||||||||||||||||||
Time deposits | 381,358 | 3,648 | 1.93 | 236,577 | 1,013 | 0.86 | ||||||||||||||||||
Total interest bearing deposits | 2,080,976 | 10,718 | 1.04 | 1,869,864 | 4,751 | 0.51 | ||||||||||||||||||
Securities sold under agreements to repurchase | 38,755 | 53 | 0.28 | 66,609 | 67 | 0.20 | ||||||||||||||||||
Federal funds purchased and other short term borrowings | 11,602 | 124 | 2.16 | 57,391 | 483 | 1.70 | ||||||||||||||||||
FHLB advances | 60,512 | 645 | 2.15 | 49,087 | 464 | 1.91 | ||||||||||||||||||
Subordinated debt | 752 | 26 | 6.97 | — | — | — | ||||||||||||||||||
Total interest bearing liabilities | 2,192,597 | 11,566 | 1.06 | 2,042,951 | 5,765 | 0.57 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing demand deposits | 724,896 | 685,873 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 60,481 | 43,866 | ||||||||||||||||||||||
Total liabilities | 2,977,974 | 2,772,690 | ||||||||||||||||||||||
Stockholders’ equity | 376,198 | 339,117 | ||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,354,172 | $ | 3,111,807 | ||||||||||||||||||||
Net interest income | $ | 60,542 | $ | 56,161 | ||||||||||||||||||||
Net interest spread | 3.52 | % | 3.66 | % | ||||||||||||||||||||
Net interest margin | 3.85 | % | 3.84 | % | ||||||||||||||||||||
Notes to the average balance and interest rate tables:
| Average balances for loans 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 $10.0 million and $17.1 million, respectively, for the three month periods ended June 30, 2019 and |
● | Interest income on a fully tax equivalent 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 loans has been calculated on a fully tax equivalent basis using a federal income tax rate of 21% for 2019 and 2018. Approximate tax equivalent adjustments to interest income were $55 thousand and $85 thousand, respectively, for the three month periods ended June 30, 2019 and 2018, and $111 thousand and $178 thousand for the respective six month periods ended June 30, 2019 and 2018. |
● | Interest income includes loan fees of $295 thousand and $297 thousand for the three months ended June 30, 2019, and 2018, respectively, and $776 thousand and $514 thousand for the respective six month periods ended June 30, 2019 and 2018. |
● | Net interest income, the most significant component of the Bank's earnings represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits |
● | Net interest spread is the difference between taxable equivalent rates earned on interest earning assets less the cost of interest bearing liabilities. |
● | Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is impacted by both interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity. |
Net interest spread and net interest margin were 3.47% and 3.81%, respectively, for the second quarter of 2019, and 3.68% and 3.88%, respectively, for the second quarter of 2018. Net interest margin was challenged in the second quarter of 2019 primarily due to the following:
● | While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, it has become more rate sensitive as deposit balances have migrated from non-interest bearing accounts to interest bearing accounts. |
● | Asset yields were impacted by the downward trending of the overall rate environment, as fixed rate loan pricing and LIBOR based loans were impacted. |
● | The second quarter 2018 margin was elevated by prepayment fees collected, with |
● | The King portfolio mix of earning assets and interest bearing |
Fully taxable equivalent net interest income of $30.8 million for the three months ended June 30, 2019 increased $2.1 million, or 7.2%, from $28.8 million for the same period in 2018. Fully taxable equivalent interest income increased $4.9 million or 15.4% for the second quarter of 2019, as compared with the second quarter of 2018, due primarily to increased average loan balances stemming from loan growth fueled by record loan production and the King acquisition, as well as increased rates earned on loans. Wall Street Journal Prime interest rate was 50 to 75 basis points (“bps”) higher for much of the first half of 2019, as compared with 2018, which benefited short-term loan and investment pricing. Taxable securities, and federal funds sold and interest bearing due from banks average balances also increased in the first half of 2019, as compared with 2018, as a result of Bancorp deploying excess liquidity into short-term investments, which earned higher yields year over year. In total, average earning assets increased $271.2 million or 9.1% to $3.2 billion for the three month period ended June 30, 2019, as compared with the same period in 2018, with the average rate on earnings assets increasing 25 bps to 4.58%. Earning assets resulting from the King acquisition averaged $119.6 million, and yielded 5.28% for the three months ended June 30, 2019.
Interest expense increased due primarily to rising deposit costs, growth in interest bearing demand deposits and time deposits, and deposits assumed in the King acquisition. While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, deposit balances migrated from non-interest bearing accounts to interest bearing accounts during the period. Average interest bearing liabilities increased $193.0 million, or 9.4%, to $2.2 billion for the three month period ended June 30, 2019, as compared with the same period in 2018. Average interest bearing liabilities resulting from the King acquisition totaled $93.8 million in the second quarter. Growth in average interest bearing deposits was partially offset by declines in securities sold under agreements to repurchase (“SSUARs”). The average cost of interest bearing liabilities increased 46 bps to 1.11% for the second quarter of 2019, as compared with the second quarter of 2018. Bancorp increased rates paid on money market accounts in the first half of 2018 in addition to launching a marketing campaign promoting certificate of deposit accounts. Costs of money market deposit accounts and time deposits increased 47 bps, and 107 bps, respectively, in the second quarter of 2019, as compared with the same period in 2018. The average balance of securities sold under agreements to repurchase (“SSUARs”) decreased $22.0 million, or 35.5%, as customers migrated from lower yielding collateralized products to higher yielding non-collateralized deposits.
Fully taxable equivalent net interest income of $60.5 million for the six months ended June 30, 2019 increased $4.4 million, or 7.8%, from $56.2 million for the same period in 2018. Positive effects of increased average balances on loans, resulting primarily from strong second quarter loan growth coupled with loans added in the King acquisition, and increased balances and rates on other earning assets, were partially offset by the negative effect of increasing rates for all funding sources. Interest earning assets and interest bearing liabilities increased $220.4 million, or 7.5%, and $149.6 million, or 7.3%, respectively, for the six month periods ended June 30, 2019 and June 30, 2018. Net interest spread and net interest margin were 3.52% and 3.85%, respectively, for the first six months of 2019 and 3.66% and 3.84%, respectively, for the first six months of 2018.
Going forward, yield curve inversion could pose a significant challenge if loans were to be originated and repriced at a relatively low five-year portion of the treasury yield curve, while deposits and other funding sources priced or re-priced based upon a higher short end of the curve.
The Federal Reserve Bank (“FRB”) reduced the federal funds rate 25 bps in late July, with the prime lending rate experiencing a corresponding 25 bps decrease. Bancorp’s strategy in response to the rate reduction is to reduce deposit rates in order to fully offset the loss in revenue. Future rate decreases could have a negative impact on net interest margin, as additional reductions in deposit rates may not be sufficient to offset the potential loss in revenue.
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. By estimating effects of interest rate fluctuations, the model can 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 June 30, 2019 simulation analysis, which shows minimal interest rate sensitivity, indicates that increases in interest rates of 100 to 200 basis points would have a positive effect on net interest income, and decreases of 100 to 200 basis points in interest rates would have a negative effect on net interest income. The mix of assets and liabilities acquired in the King transaction slightly increased Bancorp’s exposure to falling rates. The overall minimal increase in net interest income in the rising rate scenarios is primarily due to variable rate loans and 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 down 100 and 200 basis point rate scenarios, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates are summarized below.
Change in Rates | ||||||||||||||||
| -200 | -100 | +100 | +200 | |||||||||||||
Basis Points | Basis Points | Basis Points | Basis Points | |||||||||||||
% Change from base net interest income at June 30, 2019 | -10.14 | % | -1.37 | % | 3.01 | % | 6.03 | % | ||||||||
Approximately 60% of Bancorp’s loan portfolio has fixed rates with 40% priced at variable rates. Bancorp’s variable rate loans are above their floors and will reprice as rates change.
Undesignated derivative instruments described in Note 17 to Bancorp’s consolidated financial statements are recognized on the consolidated balance sheet at fair value, with changes in fair value recorded in other non-interest 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 described in Note 18 to Bancorp’s consolidated financial statements 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.
Provision for Loan and Lease Losses
The provision reflects results of an allowance methodology that is driven by risk ratings, historical losses, specific loan loss allocations, and qualitative factors. Bancorp recorded provision of $0 and $600 thousand for the three and six month periods ended June 30, 2019, respectively, as compared with $1.2 million and $2.0 million for the same periods in 2018. The provision represents a charge to earnings necessary to maintain an allowance that, in management’s evaluation, is adequate to provide coverage for the inherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors. Continued strong credit metrics and net recoveries of $282 thousand for the first six months of 2019 resulted in an allowance to total loans of 0.96% as of June 30, 2019, compared with 0.96% as of June 30, 2018. In management’s opinion, the allowance remained adequate to cover potential losses within the portfolio.
Key indicators of loan quality remained consistent with the prior year with the exception of increased classified balances, defined as other assets especially mentioned (“OAEM”), substandard, and non-performing loans, which increased $23.4 million during the first half of 2019, as compared with December 31, 2018. The increase was concentrated in OAEM loans, as two commercial relationships, which were well-secured, moved from the Watch category into OAEM. Consistent with Bancorp’s methodology, the historical look-back period was extended from 32 to 36 quarters in the first quarter of 2019 to all classes and segments of the portfolio. Management believes the expansion of the look-back period more accurately represents the current level of risk in the loan portfolio, and captures the effects of a full economic cycle. Based on the look-back period extension, the allowance level increased approximately $2.0 million for 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, increased to $3.9 million at June 30, 2019 from $3.4 million at December 31, 2018, while decreasing $3.5 million from $7.4 million at June 30, 2018. Bancorp considers the present asset quality metrics to be exceptional; however, recognizing the cyclical nature of the lending business, this trend is expected to normalize over the long term.
Bancorp’s loan portfolio is diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in the metropolitan areas of Louisville, Indianapolis and Cincinnati. The adequacy of the allowance is monitored on an ongoing basis and it is the opinion of management that the balance of the allowance at June 30, 2019 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.
An analysis of the changes in the allowance and selected ratios follows:
(Dollars in thousands) | Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Balance at the beginning of the period | $ | 26,464 | $ | 24,203 | $ | 25,534 | $ | 24,885 | ||||||||
Provision | — | 1,235 | 600 | 1,970 | ||||||||||||
Total charge-offs | 161 | 647 | 260 | 2,175 | ||||||||||||
Total recoveries | (113 | ) | (82 | ) | (542 | ) | (193 | ) | ||||||||
Total net loan charge-offs (recoveries) | 48 | 565 | (282 | ) | 1,982 | |||||||||||
Balance at the end of the period | $ | 26,416 | $ | 24,873 | $ | 26,416 | $ | 24,873 | ||||||||
Average loans, net of unearned income | $ | 2,658,036 | $ | 2,523,450 | $ | 2,593,712 | $ | 2,478,305 | ||||||||
Provision to average loans (1) | 0.00 | % | 0.05 | % | 0.02 | % | 0.08 | % | ||||||||
Net loan charge-offs (recoveries) to average loans (1) | 0.00 | % | 0.02 | % | (0.01 | )% | 0.08 | % | ||||||||
Allowance to average loans | 0.99 | % | 0.99 | % | 1.02 | % | 1.00 | % | ||||||||
Allowance to total loans | 0.96 | % | 0.96 | % | 0.96 | % | 0.96 | % | ||||||||
(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 commercial and industrial 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 six month period ending June 30, 2018. The increase in the allowance in the second quarter of 2019 as compared with the same period in 2018 was mainly due to qualitative considerations and net recoveries of $282 thousand.
An analysis of net charge-offs (recoveries) by loan portfolio segment follows:
Three months | Six months | |||||||||||||||
(In thousands) | ended June 30, | ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Commercial and industrial | $ | (4 | ) | $ | 528 | $ | (103 | ) | $ | 1,927 | ||||||
Construction and development, excluding undeveloped land | — | — | (203 | ) | — | |||||||||||
Undeveloped land | — | — | — | — | ||||||||||||
Real estate mortgage - commercial investment | (1 | ) | — | (1 | ) | (2 | ) | |||||||||
Real estate mortgage - owner occupied commercial | — | — | (20 | ) | — | |||||||||||
Real estate mortgage - 1-4 family residential | (17 | ) | — | (17 | ) | — | ||||||||||
Home equity | (1 | ) | (2 | ) | (1 | ) | (4 | ) | ||||||||
Consumer | 71 | 39 | 63 | 61 | ||||||||||||
Total net loan charge-offs (recoveries) | $ | 48 | $ | 565 | $ | (282 | ) | $ | 1,982 | |||||||
Non-interest Income and Non-interest Expenses
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | 2018 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||||
Non-interest income: | ||||||||||||||||||||||||||||||||
Wealth management and trust services | $ | 5,662 | $ | 5,344 | $ | 318 | 6.0 | % | $ | 11,101 | $ | 10,844 | $ | 257 | 2.4 | % | ||||||||||||||||
Deposit service charges | 1,336 | 1,447 | (111 | ) | (7.7 | ) | 2,583 | 2,858 | (275 | ) | (9.6 | ) | ||||||||||||||||||||
Debit and credit card income | 2,168 | 1,689 | 479 | 28.4 | 3,912 | 3,197 | 715 | 22.4 | ||||||||||||||||||||||||
Treasury management fees | 1,202 | 1,113 | 89 | 8.0 | 2,359 | 2,160 | 199 | 9.2 | ||||||||||||||||||||||||
Mortgage banking income | 796 | 746 | 50 | 6.7 | 1,278 | 1,322 | (44 | ) | (3.3 | ) | ||||||||||||||||||||||
Net investment product sales commissions and fees | 364 | 397 | (33 | ) | (8.3 | ) | 720 | 801 | (81 | ) | (10.1 | ) | ||||||||||||||||||||
Bank owned life insurance | 184 | 191 | (7 | ) | (3.7 | ) | 362 | 378 | (16 | ) | (4.2 | ) | ||||||||||||||||||||
Other | 551 | 508 | 43 | 8.5 | 1,010 | 784 | 226 | 28.8 | ||||||||||||||||||||||||
Total non-interest income | $ | 12,263 | $ | 11,435 | $ | 828 | 7.2 | % | $ | 23,325 | $ | 22,344 | $ | 981 | 4.4 | % | ||||||||||||||||
Non-interest expenses: | ||||||||||||||||||||||||||||||||
Compensation | $ | 12,715 | $ | 11,703 | $ | 1,012 | 8.6 | % | $ | 24,516 | $ | 22,673 | $ | 1,843 | 8.1 | % | ||||||||||||||||
Employee benefits | 2,908 | 2,512 | 396 | 15.8 | 5,550 | 5,145 | 405 | 7.9 | ||||||||||||||||||||||||
Net occupancy and equipment | 1,976 | 1,811 | 165 | 9.1 | 3,834 | 3,629 | 205 | 5.6 | ||||||||||||||||||||||||
Technology and communication | 1,848 | 1,685 | 163 | 9.7 | 3,621 | 3,315 | 306 | 9.2 | ||||||||||||||||||||||||
Debit and credit card processing | 631 | 579 | 52 | 9.0 | 1,218 | 1,145 | 73 | 6.4 | ||||||||||||||||||||||||
Marketing and business development | 903 | 805 | 98 | 12.2 | 1,528 | 1,451 | 77 | 5.3 | ||||||||||||||||||||||||
Postage, printing, and supplies | 410 | 400 | 10 | 2.5 | 816 | 791 | 25 | 3.2 | ||||||||||||||||||||||||
Legal and professional | 1,523 | 504 | 1,019 | 202.2 | 2,057 | 997 | 1,060 | 106.3 | ||||||||||||||||||||||||
FDIC insurance | 248 | 238 | 10 | 4.2 | 486 | 480 | 6 | 1.3 | ||||||||||||||||||||||||
Amortization/impairment of investment in tax credit partnerships | 52 | 58 | (6 | ) | (10.3 | ) | 104 | 58 | 46 | 79.3 | ||||||||||||||||||||||
Capital and deposit based taxes | 967 | 862 | 105 | 12.2 | 1,871 | 1,714 | 157 | 9.2 | ||||||||||||||||||||||||
Other | 1,283 | 979 | 304 | 31.1 | 2,502 | 1,765 | 737 | 41.8 | ||||||||||||||||||||||||
Total non-interest expenses | $ | 25,464 | $ | 22,136 | $ | 3,328 | 15.0 | % | $ | 48,103 | $ | 43,163 | $ | 4,940 | 11.4 | % | ||||||||||||||||
Non-interest income – WM&T
The largest component of non-interest income is WM&T revenue. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. Trust assets under management totaled $3.07 billion at June 30, 2019, a 7.6% increase compared with $2.85 billion at June 30, 2018, and a 11.0% increase from $2.76 billion at December 31, 2018. AUM are stated at market value. WM&T revenue, which represents approximately 46.2% of non-interest income, increased $318 thousand, or 6.0%, and $257 thousand, or 2.4%, respectively, for the three and six month periods ended June 30, 2019, as compared with the same periods in 2018 consistent with increased new business generation and strong market performance for the quarter.
Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise over 97% of the WM&T revenue, increased $225 thousand, or 4.3% and $142 thousand or 1.3%, respectively, for the three and six month periods ended June 30, 2019, as compared with the same periods in 2018. Some revenues of the WM&T department, 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 increased $93 thousand or 103.3% and $115 thousand or 59.5% for the respective three and six month periods ended June 30, 2019, as compared with the same time periods of 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.
Trust Assets Under Management by Account Type | ||||||||||||||||
June 30, 2019 | June 30, 2018 | |||||||||||||||
(In thousands) | Managed | Non- managed (1) | Managed | Non- managed (1) | ||||||||||||
Investment advisory accounts | $ | 1,263,348 | $ | 20,251 | $ | 1,118,499 | $ | 18,121 | ||||||||
Personal trust accounts | 562,655 | 89,794 | 561,701 | 80,723 | ||||||||||||
Personal individual retirement acounts | 394,429 | 2,632 | 360,046 | 1,802 | ||||||||||||
Corporate retirement accounts | 48,073 | 397,708 | 49,548 | 394,067 | ||||||||||||
Foundation and endowment accounts | 216,789 | 1,247 | 196,268 | - | ||||||||||||
Total accounts | $ | 2,485,294 | $ | 511,632 | $ | 2,286,062 | $ | 494,713 | ||||||||
Custody and safekeeping accounts | — | 71,402 | — | 70,875 | ||||||||||||
| $ | 2,485,294 | $ | 583,034 | $ | 2,286,062 | $ | 565,588 | |||||||||
Total managed and non-managed assets | $ | 3,068,328 | $ | 2,851,650 | ||||||||||||
(1) Non-managed assets represent those for which WM&T does not have investment discretion. |
The table above provides information regarding AUM by WM&T. This table demonstrates that as of June 30, 2019:
• Approximately 81% of AUM 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 managed assets are in investment advisory, personal trust, and agency accounts.
June 30, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Interest bearing deposits | $ | 129,561 | $ | 95,387 | ||||
US Treasury and government agency obligations | 56,083 | 47,574 | ||||||
State, county and municipal obligations | 134,268 | 140,372 | ||||||
Money market mutual funds | 4,461 | 7,670 | ||||||
Equity mutual funds | 603,308 | 580,199 | ||||||
Other mutual funds - fixed, balanced, and municipal | 307,068 | 302,400 | ||||||
Other notes and bonds | 175,014 | 142,123 | ||||||
Common and preferred stocks | 949,410 | 844,004 | ||||||
Real estate mortgages | 342 | 361 | ||||||
Real estate | 50,001 | 51,124 | ||||||
Other miscellaneous assets (1) | 75,778 | 74,848 | ||||||
Total managed assets | $ | 2,485,294 | $ | 2,286,062 | ||||
(1) Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment trusts,and |
The table above presents data regarding WM&T managed assets by class of investment. Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations. This table demonstrates that as of June 30, 2019:
• | The composition of |
• | WM&T has no proprietary mutual funds. |
Fiduciary and Related Trust Services Income | ||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Investment advisory accounts | $ | 2,246 | $ | 2,070 | $ | 4,377 | $ | 4,149 | ||||||||
Personal trust accounts | 1,894 | 1,864 | 3,698 | 3,782 | ||||||||||||
Personal individual retirement accounts | 931 | 869 | 1,821 | 1,742 | ||||||||||||
Corporate retirement accounts | 316 | 361 | 643 | 740 | ||||||||||||
Foundation and endowment accounts | 140 | 134 | 273 | 285 | ||||||||||||
Custody and safekeeping accounts | 30 | 30 | 61 | 86 | ||||||||||||
Brokerage and insurance services | 13 | 7 | 38 | 30 | ||||||||||||
Other | 92 | 9 | 190 | 30 | ||||||||||||
Total WM&T services | $ | 5,662 | $ | 5,344 | $ | 11,101 | $ | 10,844 | ||||||||
The table above provides information regarding fee income earned by Bancorp’s WM&T department. It demonstrates that WM&T fee revenue is earned most significantly from personal trust and investment advisory accounts. Fees are based on AUM and tailored for individual accounts and/or relationships. WM&T uses a fee structure that is tailored based on account type and other factors. For example, fee structures are in place for investment management, irrevocable trusts, revocable trusts, individual retirement accounts (“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, with larger relationships paying a lower percentage of AUM in fees. Fees are agreed upon at the time the account is opened and these and any subsequent revisions are communicated in writing to the customer. Fees earned are not performance based nor are they based on investment strategy or transactions.
Additional sources of non-interest income
Deposit service charges decreased $111 thousand, or 7.7%, and $275 thousand, or 9.6%, respectively, for the three and six month periods ended June 30, 2019, as compared with the same periods in 2018. Service charge income is driven by transaction volume, which can fluctuate from period to period. Both the quarterly and year-to-date decreases are consistent with the decline in fees earned on overdrawn checking accounts. While management expects this source of revenue to slowly decline due to anticipated changes in customer behavior, including reduced check volume, and ongoing regulatory restrictions, the decline is anticipated to be less significant than what was experienced in the first half of 2019.
Debit and credit card revenue increased $479 thousand, or 28.4%, and $715 thousand, or 22.4%, for the respective three and six month periods ended June 30, 2019, as compared with the same periods in 2018. The increases in both the three and six month comparisons reflected increased volume resulting from continued growth in the customer base. Volume, which is dependent on customer behavior and new accounts, is expected to continue to increase. Credit card interchange income increased $184 thousand, or 52.17%, and debit card interchange and ancillary fees increased $295 thousand or 22.0%, in the second quarter of 2019, as compared with the same period in 2018. Second quarter 2019 debit card revenue included a non-recurring fee of $176 thousand from its card processor for reaching activity incentive thresholds. For the first six months of 2019, credit card interchange income increased $328 thousand, or 48.8%, and debit card interchange and ancillary fees increased $387 thousand or 15.3%, as compared with the same period in 2018.
Treasury 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 including increases in the second quarter of 2019 of $89 thousand or 8.0%, and $199 thousand, or 9.2%, for the first six months of 2019, as compared with the same periods in 2018. Bancorp continues to expect growth in this income category in 2019 based upon an expanding customer base, as more existing customers take advantage of these services.
Mortgage banking income primarily includes gains on sales of mortgage loans. Bancorp’s mortgage banking department originates residential mortgage loans to be sold in the secondary market, primarily to the Federal National Mortgage Association (“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 loans sold. The department offers conventional, Veterans Administration (“VA”) and Federal Housing Authority (“FHA”) financing, for purchases and refinances, as well as programs for first-time home buyers. Interest rates on mortgage loans directly impact the volume of business transacted by the mortgage banking department. Mortgage banking revenue increased $50 thousand, or 6.7%, while decreasing $44 thousand, or 3.3%, for the respective three and six month periods ended June 30, 2019, as compared with the same periods in 2018. Transaction volume increased in the second quarter of 2019, as declining mortgage rates resulted in increased refinancing activity. Bancorp anticipates refinancing activity to continue to increase into the third quarter provided mortgage rates continue to decline.
Net investment product sales commissions and fees decreased $33 thousand, or 8.3%, and $81 thousand, or 10.1%, respectively, for the quarterly and six month periods ended June 30, 2019, as compared with the same periods in 2018. The decreases correspond primarily to overall brokerage volume, as market volatility has somewhat discouraged investment activity in 2019. Brokerage commissions and fees earned consist primarily of stock, bond and mutual fund sales, as well as wrap fees on 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”) assets represent the cash surrender value of life insurance policies on certain key employees who have provided consent for Bancorp to be the beneficiary of a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. Income related to BOLI decreased $7 thousand, or 3.7%, and $16 thousand, or 4.2%, respectively, for the three and six month periods ended June 30, 2019 as compared with the same time periods in 2018, as a result of lower crediting rates on investments.
Other non-interest income increased $43 thousand, or 8.5%, for the second quarter of 2019, as compared with the same period in 2018, and $226 thousand, or 28.8%, for the first six months of 2019, as compared with the same period in 2018. In the first quarter of 2019 Bancorp recognized income of $126 thousand related to incentive received to relocate a banking center location and recorded income of $130 thousand in the second quarter of 2019 related to a historic tax-credit investment tax distribution. The impact of King on non-interest income has been and is expected to continue to be nominal in 2019.
Non-interest expenses
Compensation, which includes salaries, incentives, bonuses, and stock based compensation, increased $1.0 million, or 8.6%, and $1.8 million, or 8.1%, respectively, for the quarterly and six-month periods ended June 30, 2019, as compared with the same periods in 2018. Non-recurring severance and employee retention expenses resulting from the King acquisition totaled $437 thousand for the three and six month periods ended June 30, 2019. Personnel additions related to Bancorp’s growth, including the King acquisition drove the remainder of the increase. At June 30, 2019, Bancorp had 615 full-time equivalent employees including 28 employees added from the King acquisition, as compared with 581 at June 30, 2018.
Employee benefits consists of all personnel related expense not included in compensation, with the most significant items being health insurance, payroll taxes, and retirement plan contributions. Employee benefits increased $396 thousand, or 15.8%, and $405 thousand, or 7.9%, respectively for the three and six month periods ended June 30, 2019, as compared with the same periods in 2018. Increased 401K match contributions, higher health insurance claims paid by the Company, and higher employee recruiting costs resulted in the increases. King acquisition related one-time employee benefit expenses totaled $57 thousand for the three and six month periods ended June 30, 2019.
Net occupancy and equipment expense increased $165 thousand, or 9.1%, and $205 thousand, or 5.6%, respectively, for the three and six month periods ended June 30, 2019, as compared with the same periods in 2018. Bancorp added five branch locations in the King acquisition, which impacted this category beginning in May 2019, adding $80 thousand of additional expense for the three and six month periods ended June 30, 2019. Bancorp expect to divest of three acquired branch locations in Louisville during the third quarter of 2019 due to their proximity to existing Bancorp branches. This category primarily includes rent, depreciation, 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.
Technology and communications expense increased $163 thousand, or 9.7%, and $306, or 9.2%, respectively, for the three and six month periods ended June 30, 2019, as compared with the same periods in 2018 due largely to increases in computer infrastructure upgrades and maintenance costs. These expenses 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. King related one-time technology and communication expenses totaled $104 thousand for the three and six month periods ended June 30, 2019.
Bancorp 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 increased $52 thousand, or 9.0%, and $73 thousand, or 6.4%, for the three month and six month periods ended June 30, 2019, respectively, as compared with the same periods in 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 investment, retaining customers, and acquiring new business. Marketing and business development expenses increased $98 thousand, or 12.2%, in the second quarter of 2019, as compared with the second quarter of 2018. Marketing and business development expenses increased $77 thousand, or 5.3%, for the six months ended June 30, 2019. The 2019 increases were largely due to increased community support expenses, which can fluctuate between periods due to the nature and timing of the expense, but is expected to trend to historical annual levels over the remainder of 2019.
Postage, printing and supplies expenses increased $10 thousand, or 2.5%, and $25 thousand, or 3.2%, in the respective three and six month periods ended June 30, 2019, as compared with the same time periods in 2018, primarily due to the King acquisition.
Legal and professional fees increased $1.0 million to $1.5 million for the second quarter of 2019 from $504 thousand in the second quarter of 2018. Legal and professional fees increased $1.1 million to $2.1 million for the first half of 2019 from $997 thousand for the first six months of 2018. One-time costs associated with the King acquisition totaled nearly $900 thousand for the three and six month periods ended June 30, 2019. Additional costs associated with consulting engagements also contributed to the period increases.
FDIC insurance expense was flat quarter over quarter and year over year. The assessment is calculated by the FDIC, and any fluctuation in expense is directly related to changes in Bancorp’s balance sheet.
Amortization/impairment of investments in tax credit partnerships was flat in the second quarter of 2019 as compared with the second quarter of 2018, while increasing slightly year-to-date as compared with the same time period in 2018. Bancorp did not record any expense in the first quarter of 2018. Tax credit partnerships generate federal income tax credits, and for each of Bancorp’s investments in tax credit partnerships, the tax benefit compared with related expenses results in a positive effect on net income. Amounts of credits and corresponding expenses can vary widely depending upon timing and magnitude of the investments. See the Income Taxes section below for details on amortization and income tax impact for these credits.
Other non-interest expenses increased $304 thousand, or 31.1%, and $737 thousand, or 41.8%, respectively, for the three and six month periods ended June 30, 2019, as compared with the same periods in 2018. The quarterly and year-to-date increases were primarily attributed to the following:
| Quarterly |
o | Director compensation increased $88 thousand. |
o | Rewards expense tied to Bancorp’s growing credit card program increased $87 thousand. |
o | Core deposit intangible amortization increased $30 thousand as a result of the King acquisition |
| Year-to-date |
o | Director compensation increased $221 thousand. |
o | Rewards expense tied to Bancorp’s growing credit card program increased $140 thousand. |
o | Expense related to bad debt collection increased $80 thousand. |
o | Fraud related losses increased $76 thousand |
o | Gain on sales of |
o | Core deposit intangible amortization increased $28 thousand as a result of the King acquisition. |
Income Taxes
Bancorp recorded income tax expense of $1.0 million and $2.9 million, respectively, for the three and six month periods ended June 30, 2019, compared with $3.2 million and $6.2 million for the same periods in 2018. The effective rate for the corresponding three and six month periods in 2019 were 5.9% and 8.2%, respectively, and 18.9% and 18.7%, respectively, for 2018 The decrease in the effective tax rate from 2018 to 2019 related primarily to two Kentucky state tax law changes.
In March 2019, Kentucky State legislation was enacted requiring financial institutions to transition from a bank franchise tax to the Kentucky corporate income tax beginning in 2021. In April 2019, an additional Kentucky tax law change was enacted allowing banks and their holding companies to be combined together for Kentucky tax return filings also 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 significant tax benefits associated with these changes in the first and second quarters of 2019. During the first six months of 2019, Bancorp recognized a state deferred tax asset and corresponding state income tax benefit of $3.8 million, or approximately $0.16 per diluted share. See the income taxes footnote for more detail.
Commitments
As detailed in the Commitments footnote, 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.
Financial Condition
Balance Sheet
Total assets increased $160.9 million to $3.5 billion as of June 30, 2019, from $3.3 million at December 31, 2018. Bancorp acquired assets totaling approximately $192 million on May 1, 2019 in connection with the King acquisition. In the first six months of 2019 increases in loans, premises and equipment, and other assets were offset by decreases in cash and cash equivalents, and available for sale securities. Gross loans increased $215.7 million, or 8.5%, including $160.5 million in loans acquired from King. Strong loan production in the second quarter and first six months of 2019 contributed to non-acquisition, or legacy, loan growth of $51.6 million or 2.0% for the six months ended June 30, 2019. Cash and cash equivalents decreased $82.9 million or 41.7%, as excess liquidity was used to fund loan growth and the King acquisition. Securities available for sale decreased $13.4 million, or 3.1%, over the first six months of 2019, as maturing security cash flows were not reinvested but held in the form of short-term liquidity. This decline was offset somewhat by market value improvement in the portfolio with net unrealized gains at June 30, 2019 of $1.7 million as compared with net unrealized losses of $6.7 million at December 31, 2018. Premises and equipment increased $20.3 million or 45.4%, primarily the result establishing a right of use lease asset upon adopting ASU 2016-02, Leases in the first quarter of 2019 and the addition of five King branches. Other assets increased $17.3 million or 36.8% as of June 30, 2019, as compared with December 31, 2018 due primarily to the recognition of $12.1 million in goodwill related to the King acquisition.
Total liabilities increased $138.0 million or 4.7% to $3.1 billion as of June 30, 2019, from $2.9 billion as of December 31, 2018. Liabilities assumed in the King acquisition totaled $176.6 million. Total deposits increased $89.1 million, or 3.2%, as $125.5 million in deposits assumed from the King transaction offset expected seasonal decreases in Bancorp’s non-interest bearing deposits, and interest bearing demand deposit accounts. For the six month period ending June 30, 2019, non-interest bearing demand deposits increased $66.6 million, or 9.4%, while interest bearing deposits increased $22.5 million, or 1.1%. Securities sold under agreements to repurchase (“SSUAR”) decreased $2.3 million, or 6.3%, due to normal cyclical activity, and the continuation of customers migrating to higher-yielding, non-collateralized deposits. Federal funds purchased increased $1.8 million, or 17.2%, period to period, as Bancorp uses short-term lines of credit to manage its overall liquidity position. Federal Home Loan Bank (“FHLB”) advances increased $36.1 million, or 74.9%, as Bancorp retained the fixed rate long term advances that were held at King in connection with overall balance sheet funding. Other liabilities increased $13.1 million, or 28.0%, largely due to the adoption of ASU 2016-02, Leases, in the first quarter of 2019.
Loan Portfolio Composition
Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:
(In thousands) | June 30, 2019 | December 31, 2018 | ||||||
Commercial and industrial | $ | 860,085 | $ | 833,524 | ||||
Construction and development, excluding undeveloped land(1) | 222,632 | 225,050 | ||||||
Undeveloped land | 35,169 | 30,092 | ||||||
Real estate mortgage: | ||||||||
Commercial investment | 696,421 | 588,610 | ||||||
Owner occupied commercial | 452,719 | 426,373 | ||||||
1-4 family residential | 338,957 | 276,017 | ||||||
Home equity - first lien | 46,012 | 49,500 | ||||||
Home equity - junior lien | 67,948 | 70,947 | ||||||
Subtotal: Real estate mortgage | 1,602,057 | 1,411,447 | ||||||
Consumer | 43,937 | 48,058 | ||||||
Total loans(2) | $ | 2,763,880 | $ | 2,548,171 | ||||
(In thousands) | March 31, 2019 | December 31, 2018 | ||||||
Commercial and industrial | $ | 827,747 | $ | 833,524 | ||||
Construction and development, excluding undeveloped land (1) | 216,115 | 225,050 | ||||||
Undeveloped land | 28,433 | 30,092 | ||||||
Real estate mortgage | ||||||||
Commercial investment | 586,648 | 588,610 | ||||||
Owner occupied commercial | 428,163 | 426,373 | ||||||
1-4 family residential | 277,847 | 276,017 | ||||||
Home equity - first lien | 48,656 | 49,500 | ||||||
Home equity - junior lien | 66,837 | 70,947 | ||||||
Subtotal: Real estate mortgage | 1,408,151 | 1,411,447 | ||||||
Consumer | 45,263 | 48,058 | ||||||
Total loans | $ | 2,525,709 | $ | 2,548,171 | ||||
(1) | Consists of land acquired for development by the borrower, but for which no development has yet taken place. |
(2) |
|
Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain 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. GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the commercial and industrial and real estate mortgage loan portfolio segments with a corresponding liability recorded in other liabilities. At June 30, 2019 and Lease Losses
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 continue and future recoveries may occur. Periodically, loans are partially charged off to the net realizable value based upon evaluation of related underlying collateral, including Bancorp’s proclivity for resolution.
The allowance methodology is driven by risk ratings, historical losses, and qualitative factors. The level of the March 31, 2019 allowance reflected a number of factors, including credit quality metrics which were generally consistent with prior periods, and expansion of the historical look-back period from 32 quarters to 36 quarters. This expansion of the historical period was applied to all classes and segments of the portfolio. Expansion of the look-back period for historical loss rates used in the quantitative allocation caused review of the overall methodology for qualitative factors to ensure we were appropriately capturing risk not addressed in the quantitative historical loss rate. Management believes 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 trend at levels consistent with prior periods, however management recognizes that due to the cyclical nature of the lending business, 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 10K.
As of March 31, 2019 the allowance was $26.5 million, a $930 thousand increase from the December 31, 2018 balance of $25.5 million. For the comparative periods, the allowance as a percent of average loans was 1.05% and 1.01%, respectively. The allowance as a percent of period end loans, as of each period end, 1.05% and 1.00%, respectively. The increase in the first quarter of 2019 reflects a moderate increase in classified balances and net recoveries of $330 thousand. As of March 31, 2018, the total participated portions of loans of this nature were $9.9 million and $10.5 million, respectively.
Allowance for Loan and Lease Losses
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 continue and future recoveries may occur. Periodically, loans are partially charged off to the net realizable value based upon evaluation of related underlying collateral, including Bancorp’s proclivity for resolution.
The allowance methodology is driven by risk ratings, historical losses, and qualitative factors. The level of the June 30, 2019 allowance reflected a number of factors, including credit quality metrics which were generally consistent with those experienced in the preceding 12 months, and expansion of the historical look-back period from 32 quarters to 36 quarters. This expansion of the historical period was applied to all classes and segments of the portfolio. Expansion of the look-back period for historical loss rates used in the quantitative allocation caused review of the overall methodology for qualitative factors to ensure we were appropriately capturing risk not addressed in the quantitative historical loss rate. Management believes 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 trend at levels consistent with prior periods, however management recognizes that due to the cyclical nature of the lending business, 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.
As of June 30, 2019 the allowance was $26.4 million, a $882 thousand increase from the December 31, 2018 balance of $25.5 million. For the comparative periods, the allowance as a percent of year-to-date average loans was 1.02% and 1.01%, respectively. The allowance as a percent of period end loans, as of each period end, 0.96% and 1.00%, respectively. The allowance balance is reflective of continued strong credit metrics and net recoveries of $282 thousand for the first six months of 2019. As of June 30, 2019, and December 31, 2018, the allowance remained adequate to cover potential losses in the loan portfolio, in management’s opinion.
Non-performing Loans and Assets
Information summarizing non-performing assets, including non-accrual loans follows:
(Dollars in thousands) | March 31, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | ||||||||||||
Non-accrual loans (1) | $ | 3,273 | $ | 2,611 | ||||||||||||
Troubled debt restructuring | 39 | 42 | ||||||||||||||
Non-accrual loans(1) | $ | 3,030 | $ | 2,611 | ||||||||||||
Troubled debt restructurings | 37 | 42 | ||||||||||||||
Loans past due 90 days or more and still accruing | 454 | 745 | 861 | 745 | ||||||||||||
Total non-performing loans | 3,766 | 3,398 | 3,928 | 3,398 | ||||||||||||
Other real estate owned | 878 | 1,018 | 563 | 1,018 | ||||||||||||
Total non-performing assets | $ | 4,644 | $ | 4,416 | $ | 4,491 | $ | 4,416 | ||||||||
Non-performing loans as a percentage of total loans | 0.15 | % | 0.13 | % | 0.14 | % | 0.13 | % | ||||||||
Non-performing assets as a percentage of total assets | 0.14 | % | 0.13 | % | 0.13 | % | 0.13 | % | ||||||||
(1) No TDRs previously accruing were movedtransferred to non-accrual during the three and six month periods ending March 31,June 30, 2019. No TDRs were on non-accrual as of March 31,June 30, 2019 or December 31, 2018.
In total, non-performing assets as of March 31,June 30, 2019 were comprised of 2926 loans, ranging in amount from $1 thousand to $667$528 thousand, two accruing TDRs, and foreclosed real estate held for sale. Foreclosed real estate held at March 31,June 30, 2019 included a 1-4 family residential property and twoa commercial real estate properties.property.
The following table sets forth the major classifications of non-accrual loans:
(In thousands) | March 31, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | ||||||||||||
Commercial and industrial | $ | 193 | $ | 192 | $ | 96 | $ | 192 | ||||||||
Construction and development, excluding undeveloped land | - | 318 | — | 318 | ||||||||||||
Undeveloped land | - | 474 | — | 474 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | 317 | 138 | 305 | 138 | ||||||||||||
Owner occupied commercial | 1,466 | 586 | 1,444 | 586 | ||||||||||||
1-4 family residential | 843 | 760 | 715 | 760 | ||||||||||||
Home equity - first lien | - | - | — | — | ||||||||||||
Home equity - junior lien | 454 | 143 | 470 | 143 | ||||||||||||
Subtotal: Real estate mortgage | 3,080 | 1,627 | 2,934 | 1,627 | ||||||||||||
Consumer | - | - | — | — | ||||||||||||
Total loans | $ | 3,273 | $ | 2,611 | ||||||||||||
Total non-accrual loans | $ | 3,030 | $ | 2,611 | ||||||||||||
Liquidity
The role of liquidity management is to ensure funds are available to meet 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 supply of thosesuch funds. Liquidity is provided by short-term liquid assets that can be converted to cash, investment 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’s most liquid assets are comprised of cash and due from banks, available for sale marketable investment securities, federal funds sold and interest bearing due from accounts with banks. Federal funds sold and interest bearing due from bank accounts totaled $67.3$64.8 million at March 31,June 30, 2019. These investments normally have overnight maturities and are used for general daily liquidity purposes.
Available for sale securities totaled $507.1$423.6 million, at March 31,June 30, 2019, with $205.4$132.1 million in securities expected to mature over the next 12 months. Combined with federal funds sold and interest bearing 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 the securities portfolio to secure public fund deposits, cash balances of certain WM&T accounts, and securities sold under agreements to repurchase.SSUAR. At March 31,June 30, 2019, total investment securities pledged for these purposes comprised 70%79.4% of the available for sale investment portfolio, leaving approximately $151.5$87.1 million of unpledged securities.
Bancorp has a significant base of non-maturity customer deposits, defined as demand, savings, money market deposit accounts and time deposits less than or equal to $250,000 (excluding brokered deposits). At March 31,June 30, 2019, such deposits totaled $2.7$2.8 billion and represented 97%96.5% of Bancorp’s total deposits, as compared with $2.7 billion, or 97%97.0% of total deposits at December 31, 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. As market conditions continue to improve, these balances may decrease, putting strainplacing pressure on Bancorp’s liquidity position. Bancorp began adding liquidity to the balance sheet in 2018 sheet through targeted certificate of deposit marketing campaigns. The campaigns generated $111over $100 million in certificate of deposit growth in 2018.
As of March 31,June 30, 2019, and December 31, 2018, Bancorp had brokered deposits of $29.8 million.
Included in total deposit balances at March 31,June 30, 2019 is $191.3$157.4 million of public funds deposits generally comprised of accounts from local government agencies and public school districts in 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 nextsubsequent tax season. While this excess liquidity is maintained in low-yielding short-term investments and consequently negatively impacts net interest margin, it has a positive impact on net interest income.
Other sources of funds available to meet daily needs include the sales of securities under agreement to repurchase.SSUAR. 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 brokered deposits. At March 31,June 30, 2019, available credit from the FHLB totaled $523.7$484.0 million, as compared with $537.0 million as of December 31, 2018. Additionally, Bancorp had available federal funds purchased lines with correspondent banks totaling $105.0 million at both March 31,June 30, 2019, and December 31, 2018.
Bancorp’s principal source of cash is dividends paid to it as sole shareholder of the Bank. At March 31,June 30, 2019, the Bank could pay up to $68.4$49.7 million in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank. The Bank will paypaid the Holding Company a $28 million dividend in April, 2019, to consummate the acquisition of King Bancorp, Inc. This willand this did not significantly hamper the Bank’s ability to pay dividends in the future.future dividends.
Capital Resources
At March 31,June 30, 2019, stockholders’ equity totaled $378.0$389.4 million, an increase of $11.5$22.9 million, or 6.2%, since December 31, 2018. See the Consolidated Statement of Changes in Stockholders’ Equity for further detail of changes in equity since the end of 2018. One component of equity is accumulated other comprehensive income (loss) which, for Bancorp, consists of net unrealized gains or losses on securities available for sale and hedging instruments, as well as a minimum pension liability, each net of income taxes. Accumulated other comprehensive lossincome was $2.5$1.1 million at March 31,June 30, 2019 compared with a loss of $5.1 million on December 31, 2018. The $2.6 million increasefluctuation in other comprehensive income is primarily a reflection of the effectreflective of the changing interest rate environment during the first three months of 2019 onand corresponding impact upon the valuation of Bancorp’s portfolio of available for sale securities. securities portfolio.
The following table sets forth Bancorp’s and the Bank’s risk based capital ratios:
March 31, | December 31, | June 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Total risk-based capital (1) | ||||||||||||||||
Total risk-based capital(1) | ||||||||||||||||
Consolidated | 14.04 | % | 13.91 | % | 12.67 | % | 13.91 | % | ||||||||
Bank | 13.74 | 13.56 | 12.45 | 13.56 | ||||||||||||
Common equity tier 1 risk-based capital (1) | ||||||||||||||||
Common equity tier 1 risk-based capital(1) | ||||||||||||||||
Consolidated | 13.11 | 13.00 | 11.82 | 13.00 | ||||||||||||
Bank | 12.82 | 12.65 | 11.60 | 12.65 | ||||||||||||
Tier 1 risk-based capital (1) | ||||||||||||||||
Tier 1 risk-based capital(1) | ||||||||||||||||
Consolidated | 13.11 | 13.00 | 11.82 | 13.00 | ||||||||||||
Bank | 12.82 | 12.65 | 11.60 | 12.65 | ||||||||||||
Leverage (2) | ||||||||||||||||
Leverage(2) | ||||||||||||||||
Consolidated | 11.57 | 11.33 | 10.91 | 11.33 | ||||||||||||
Bank | 11.31 | 11.02 | 10.70 | 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 in Bancorp'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 Tiercommon equity tier 1 Risk-Based Capitalrisk-based capital ratio, an 8.0% Tiertier 1 Risk-Based Capitalrisk-based capital ratio, a 10.0% Total Risk-Based Capitaltotal risk-based capital ratio and a 5.0% Tier 1 Leverageleverage 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 Tiercommon equity tier 1 Risk-Based Capitalrisk-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 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 Tiertotal risk-based capital, common equity tier I Risk Based, Tierrisk-based capital, tier I Risk Based Capitalrisk-based capital and Tier I Leverage Capital.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.capital conservation buffer.
Non-GAAP Financial Measures
The following table provides a reconciliation of total stockholders’ equity in accordance with GAAP to tangible stockholders’ equity, in accordance with applicable regulatory requirements, a non-GAAP disclosure. Bancorp provides the tangible book value per share, a non-GAAP measure, in addition to those defined by banking regulators, because of its widespread use by investors as a means to evaluate capital adequacy.
The following table reconciles Bancorp’s calculation of tangible common equity to amounts reported under GAAP.GAAP:
(In thousands, except per share data) | March 31, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | ||||||||||||
Total stockholders equity - GAAP | $ | 377,994 | $ | 366,500 | ||||||||||||
Less: core deposit intangible | (1,015 | ) | (1,057 | ) | ||||||||||||
Less: goodwill | (682 | ) | (682 | ) | ||||||||||||
Total stockholders' equity - GAAP | $ | 389,365 | $ | 366,500 | ||||||||||||
Less: Goodwill | (12,826 | ) | (682 | ) | ||||||||||||
Less: Core deposit intangible | (2,461 | ) | (1,057 | ) | ||||||||||||
Tangible common equity - Non-GAAP | $ | 376,297 | $ | 364,761 | $ | 374,078 | $ | 364,761 | ||||||||
Total assets - GAAP | $ | 3,281,016 | $ | 3,302,924 | $ | 3,463,823 | $ | 3,302,924 | ||||||||
Less: core deposit intangible | (1,015 | ) | (1,057 | ) | ||||||||||||
Less: goodwill | (682 | ) | (682 | ) | ||||||||||||
Less: Goodwill | (12,826 | ) | (682 | ) | ||||||||||||
Less: Core deposit intangible | (2,461 | ) | (1,057 | ) | ||||||||||||
Tangible assets - Non-GAAP | $ | 3,279,319 | $ | 3,301,185 | $ | 3,448,536 | $ | 3,301,185 | ||||||||
Total shareholders' equity to total assets - GAAP | 11.52 | % | 11.10 | % | ||||||||||||
Total stockholders' equity to total assets - GAAP | 11.24 | % | 11.10 | % | ||||||||||||
Tangible common equity to tangible assets - Non-GAAP | 11.47 | 11.05 | 10.85 | 11.05 | ||||||||||||
Number of outstanding shares | 22,823 | 22,749 | ||||||||||||||
Total shares outstanding | 22,721 | 22,749 | ||||||||||||||
Book value per share - GAAP | $ | 16.56 | $ | 16.11 | $ | 17.14 | $ | 16.11 | ||||||||
Tangible common equity per share - Non-GAAP | 16.49 | 16.03 | 16.46 | 16.03 | ||||||||||||
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.
The following table reconciles Bancorp’s calculation of adjusted efficiency ratios to the ratio reported under GAAP.GAAP:
Three months ended | Three months ended | Six months ended | ||||||||||||||||||||||
March 31, | June 30, | June 30, | ||||||||||||||||||||||
(Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
Non-interest expenses | $ | 22,639 | $ | 21,027 | $ | 25,464 | $ | 22,136 | $ | 48,103 | $ | 43,163 | ||||||||||||
Net interest income (tax-equivalent) | 29,713 | 27,402 | 30,829 | 28,759 | 60,542 | 56,161 | ||||||||||||||||||
Non-interest income | 11,062 | 10,909 | 12,263 | 11,435 | 23,325 | 22,344 | ||||||||||||||||||
Total revenue | $ | 40,775 | $ | 38,311 | $ | 43,092 | $ | 40,194 | $ | 83,867 | $ | 78,505 | ||||||||||||
Efficiency ratio - GAAP | 55.52 | % | 54.89 | % | 59.09 | % | 55.07 | % | 57.36 | % | 54.98 | % | ||||||||||||
(amounts in thousands) | 2019 | 2018 | ||||||
Non-interest expense | $ | 22,639 | $ | 21,027 | ||||
Less: amortization of investments in tax credit partnerships | (52 | ) | - | |||||
Adjusted non-interest expense | 22,587 | 21,027 | ||||||
Net interest income (tax-equivalent) | 29,713 | 27,402 | ||||||
Non-interest income | 11,062 | 10,909 | ||||||
Total revenue | $ | 40,775 | $ | 38,311 | ||||
Adjusted efficiency ratio - Non-GAAP | 55.39 | % | 54.89 | % | ||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Non-interest expenses | $ | 25,464 | $ | 22,136 | $ | 48,103 | $ | 43,163 | ||||||||
Less: amortization of investments in tax credit partnerships | (52 | ) | (58 | ) | (104 | ) | (58 | ) | ||||||||
Adjusted non-interest expense | 25,412 | 22,078 | 47,999 | 43,105 | ||||||||||||
Net interest income (tax-equivalent) | 30,829 | 28,759 | 60,542 | 56,161 | ||||||||||||
Non-interest income | 12,263 | 11,435 | 23,325 | 22,344 | ||||||||||||
Total revenue | $ | 43,092 | $ | 40,194 | $ | 83,867 | $ | 78,505 | ||||||||
Adjusted efficiency ratio - Non-GAAP | 58.97 | % | 54.93 | % | 57.23 | % | 54.91 | % | ||||||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk.Risk.
Information required by this item is included in Part I Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4. Controls and Procedures.Procedures.
As of the end of the period covered by this report, an evaluation was carried out by Stock Yards Bancorp, Inc.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’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, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings.Proceedings.
In the ordinary course of operations, Bancorp and the Bank are defendants in various legal proceedings. There is no proceeding pending or threatened litigation, to the knowledge of management, 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 March 31,June 30, 2019.
Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | |||||||||||||
Jan 1 - Jan 31 | 5,654 | $ | 34.25 | — | — | |||||||||||
Feb 1 - Feb 28 | 7,156 | 35.96 | — | — | ||||||||||||
Mar 1 - Mar 31 | 38,068 | 33.79 | — | — | ||||||||||||
Total (1) | 50,878 | $ | 34.15 | — | — | |||||||||||
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 | ||||||||||||||||
Apr 1 - April 30 | 110 | $ | 34.35 | — | — | |||||||||||||||
May 1 - May 31 | 26,260 | 33.83 | 26,260 | 33.83 | ||||||||||||||||
June 1 - June 30 | 83,770 | 34.29 | 81,078 | 34.25 | ||||||||||||||||
Total | 110,140 | $ | 34.18 | 107,338 | 34.15 | 892,662 | ||||||||||||||
(1) | Activity |
Effective 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 the Company’s total common shares outstanding. Stock repurchases are expected to be 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 shares prior to the plan’s expiration. As of June 30, 2019, Bancorp had 892,662 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.
The following exhibits are filed or furnished as a part of this report:
101 | The following financial statements from the Stock Yards Bancorp, Inc. |
(1) |
|
|
(2) | Consolidated Statements of Income |
(3) | Consolidated Statements of Comprehensive Income |
| Consolidated Statements of |
| Consolidated Statements of |
|
|
(6) | Notes to Consolidated Financial Statements |
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, INC. | |||
| (Registrant) | |||
Date: August 6 , 2019 | By: | /s/ James A. Hillebrand | |
James A. Hillebrand, | |||
Chief Executive Officer | |||
| Date: August 6 , 2019 | /s/ T. Clay Stinnett | ||
|
|
| |
| |||
| |||
| |||
|
|
| |
| |||
Treasurer and Chief Financial Officer (Principal Financial Officer) | |||
65
78