UNITED STATESUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ Quarterly |
For the quarterly period ended September 30, 2017March 31, 2019
ORor
☐ | Transition |
For the transition period from _____________ to _______________.Commission File Number: 1-13661
Commission file number 1-13661
STOCK YARDS BANCORP, INC.YARDSBANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky | 61-1137529 | ||
(State | |||
incorporation or organization) | (I.R.S. Employer Identification No.) |
1040 East Main Street, Louisville, Kentucky 40206
(Address of principal executive offices including zip code)
1040 East Main Street, Louisville, Kentucky | 40206 | |
(Address of principal executive offices) | (Zip Code) |
(502) 582-2571
(Registrant’sRegistrant’s telephone number, including area code)code: (502) 582-2571
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☑ ☐ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☑ ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:Act.
Large accelerated filer ☒ |
| Accelerated filer ☐ |
| |||
Non-accelerated filer |
| Smaller reporting company | ☐ | |||
Emerging growth company ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)Act).
Yes ☐ Yes ☒ No ☑
The number of shares outstanding of the registrant’sregistrant’s Common Stock, no par value, outstanding as of October 26, 2017April 25, 2019, was 22,670,610.22,822,822.
Stock Yards Bancorp, inc. and subsidiaryTABLE OF CONTENTS
Index
Stock Yards Bancorp, inc. and subsidiary
Index
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:
Allowance | Allowance for loan and lease losses |
ASU | Accounting Standards Update |
ASC | Accounting Standards Codification |
Bancorp | Stock Yards Bancorp, Inc. |
Bank | Stock Yards Bank & Trust Company |
BOLI | Bank |
BP | Basis |
CECL | Current Expected Credit Losses |
COSO | Committee of Sponsoring Organizations |
CRA | Community Reinvestment Act of 1977 |
CRE | Commercial real estate |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
EPS | Earnings |
FASB | Financial Accounting Standards Board |
FDIC | Federal Deposit Insurance Corporation |
FHA | Federal Housing Administration |
FHLB | Federal Home Loan Bank |
FHLMC | Federal Home Loan Mortgage Corporation |
FNMA | Federal National Mortgage Association |
GNMA | Government National Mortgage Association |
|
|
LIBOR | London Interbank Offered Rate |
Loans | Loans and leases |
MSR | Mortgage |
OAEM | Other |
OREO | Other |
Provision | Provision for loan and lease losses |
PSU | Performance |
RSU | Restricted |
SAR | Stock |
SEC | Securities and Exchange Commission |
| Securities sold under agreements to repurchase |
TCE | Tangible common equity |
TDR | Troubled Debt |
| United States Generally Accepted Accounting Principles |
VA | U.S. Department of Veterans Affairs |
WM&T | Wealth Management and Trust |
(In thousands, except share data) | ||||||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
| 2017 | 2016 | 2019 | 2018 | ||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | 47,700 | $ | 39,709 | $ | 44,014 | $ | 51,892 | ||||||||
Federal funds sold and interest bearing deposits | 81,378 | 8,264 | ||||||||||||||
Federal funds sold and interest bearing due from banks | 67,326 | 147,047 | ||||||||||||||
Cash and cash equivalents | 129,078 | 47,973 | 111,340 | 198,939 | ||||||||||||
Mortgage loans held for sale | 5,459 | 3,213 | 2,981 | 1,675 | ||||||||||||
Securities available-for-sale (amortized cost of $571,953 in 2017 and $571,936 in 2016) | 571,522 | 570,074 | ||||||||||||||
Federal Home Loan Bank stock and other securities | 7,666 | 6,347 | ||||||||||||||
Loans | 2,335,120 | 2,305,375 | ||||||||||||||
Less allowance for loan losses | 24,948 | 24,007 | ||||||||||||||
Net loans | 2,310,172 | 2,281,368 | ||||||||||||||
Securities available for sale | 507,131 | 436,995 | ||||||||||||||
Federal Home Loan Bank stock | 9,779 | 10,370 | ||||||||||||||
Loans and leases | 2,525,709 | 2,548,171 | ||||||||||||||
Allowance for loan and lease losses | 26,464 | 25,534 | ||||||||||||||
Net loans and leases | 2,499,245 | 2,522,637 | ||||||||||||||
Premises and equipment, net | 41,498 | 42,384 | 45,718 | 44,764 | ||||||||||||
Bank owned life insurance | 31,854 | 31,867 | 32,447 | 32,273 | ||||||||||||
Accrued interest receivable | 8,162 | 6,878 | 8,710 | 8,360 | ||||||||||||
Other assets | 50,502 | 49,377 | 63,665 | 46,911 | ||||||||||||
Total assets | $ | 3,155,913 | $ | 3,039,481 | $ | 3,281,016 | $ | 3,302,924 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Liabilities | ||||||||||||||||
Deposits: | ||||||||||||||||
Non-interest bearing | $ | 676,824 | $ | 680,156 | $ | 698,783 | $ | 711,023 | ||||||||
Interest bearing | 1,805,142 | 1,840,392 | 2,053,757 | 2,083,333 | ||||||||||||
Total deposits | 2,481,966 | 2,520,548 | 2,752,540 | 2,794,356 | ||||||||||||
Securities sold under agreements to repurchase | 71,863 | 67,595 | 34,633 | 36,094 | ||||||||||||
Federal funds purchased and other short-term borrowings | 161,961 | 47,374 | ||||||||||||||
Federal funds purchased | 12,218 | 10,247 | ||||||||||||||
Federal Home Loan Bank advances | 50,110 | 51,075 | 47,853 | 48,177 | ||||||||||||
Accrued interest payable | 212 | 144 | 709 | 762 | ||||||||||||
Other liabilities | 55,546 | 38,873 | 55,069 | 46,788 | ||||||||||||
Total liabilities | 2,821,658 | 2,725,609 | 2,903,022 | 2,936,424 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Commitments and contingent liabilities (note 15) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding | - | - | — | — | ||||||||||||
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 22,669,339 and 22,617,098 shares in 2017 and 2016, respectively | 36,424 | 36,250 | ||||||||||||||
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 22,822,822 and 22,749,139 shares in 2019 and 2018, respectively | 36,934 | 36,689 | ||||||||||||||
Additional paid-in capital | 30,681 | 26,682 | 39,914 | 36,797 | ||||||||||||
Retained earnings | 267,681 | 252,439 | 303,659 | 298,156 | ||||||||||||
Accumulated other comprehensive loss | (531 | ) | (1,499 | ) | (2,513 | ) | (5,142 | ) | ||||||||
Total stockholders’ equity | 334,255 | 313,872 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,155,913 | $ | 3,039,481 | ||||||||||||
Total stockholders’ equity | 377,994 | 366,500 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,281,016 | $ | 3,302,924 |
See accompanying notes to unaudited consolidated financial statements. |
| ||||||||||
For the three | ||||||||||
|
For three months ended | For the nine months ended | Three months ended | ||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
(In thousands, except per share data) | 2019 | 2018 | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans | $ | 25,401 | $ | 23,436 | $ | 73,812 | $ | 67,992 | ||||||||||||||||
Federal funds sold and interest bearing deposits | 388 | 95 | 798 | 395 | ||||||||||||||||||||
Interest income | ||||||||||||||||||||||||
Loans and leases | $ | 31,544 | $ | 27,062 | ||||||||||||||||||||
Federal funds sold and interest bearing due from banks | 733 | 268 | ||||||||||||||||||||||
Mortgage loans held for sale | 48 | 66 | 145 | 185 | 37 | 35 | ||||||||||||||||||
Securities – taxable | 2,003 | 2,047 | 6,173 | 6,325 | ||||||||||||||||||||
Securities – tax-exempt | 271 | 298 | 829 | 907 | ||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Taxable | 2,568 | 2,138 | ||||||||||||||||||||||
Tax-exempt | 147 | 241 | ||||||||||||||||||||||
Total interest income | 28,111 | 25,942 | 81,757 | 75,804 | 35,029 | 29,744 | ||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Interest expense | ||||||||||||||||||||||||
Deposits | 1,593 | 941 | 4,237 | 2,916 | 5,066 | 2,077 | ||||||||||||||||||
Securities sold under agreements to repurchase | 25 | 33 | ||||||||||||||||||||||
Federal funds purchased and other short-term borrowing | 77 | 19 | 125 | 57 | 60 | 90 | ||||||||||||||||||
Securities sold under agreements to repurchase | 33 | 38 | 100 | 100 | ||||||||||||||||||||
Federal Home Loan Bank advances | 244 | 184 | 715 | 552 | 221 | 235 | ||||||||||||||||||
Total interest expense | 1,947 | 1,182 | 5,177 | 3,625 | 5,372 | 2,435 | ||||||||||||||||||
Net interest income | 26,164 | 24,760 | 76,580 | 72,179 | 29,657 | 27,309 | ||||||||||||||||||
Provision for loan losses | 150 | 1,250 | 1,650 | 2,500 | 600 | 735 | ||||||||||||||||||
Net interest income after provision for loan losses | 26,014 | 23,510 | 74,930 | 69,679 | ||||||||||||||||||||
Non-interest income: | ||||||||||||||||||||||||
Net interest income after provision | 29,057 | 26,574 | ||||||||||||||||||||||
Non-interest income | ||||||||||||||||||||||||
Wealth management and trust services | 5,025 | 4,800 | 15,272 | 14,219 | 5,439 | 5,500 | ||||||||||||||||||
Service charges on deposit accounts | 2,522 | 2,544 | 7,368 | 6,952 | ||||||||||||||||||||
Bankcard transactions | 1,492 | 1,455 | 4,412 | 4,198 | ||||||||||||||||||||
Mortgage banking | 781 | 1,072 | 2,380 | 2,896 | ||||||||||||||||||||
Gain on call of securities available for sale | 31 | — | 31 | — | ||||||||||||||||||||
Securities brokerage | 551 | 558 | 1,584 | 1,539 | ||||||||||||||||||||
Deposit service charges | 1,247 | 1,411 | ||||||||||||||||||||||
Debit and credit card income | 1,744 | 1,508 | ||||||||||||||||||||||
Treasury management fees | 1,157 | 1,047 | ||||||||||||||||||||||
Mortgage banking income | 482 | 576 | ||||||||||||||||||||||
Net investment product sales commissions and fees | 356 | 404 | ||||||||||||||||||||||
Bank owned life insurance | 204 | 216 | 964 | 657 | 178 | 187 | ||||||||||||||||||
Other | 497 | 713 | 1,564 | 1,757 | 459 | 276 | ||||||||||||||||||
Total non-interest income | 11,103 | 11,358 | 33,575 | 32,218 | 11,062 | 10,909 | ||||||||||||||||||
Non-interest expenses: | ||||||||||||||||||||||||
Salaries and employee benefits | 12,983 | 12,048 | 39,244 | 36,214 | ||||||||||||||||||||
Net occupancy | 1,621 | 1,646 | 4,765 | 4,716 | ||||||||||||||||||||
Data processing | 1,920 | 1,747 | 5,909 | 5,172 | ||||||||||||||||||||
Furniture and equipment | 316 | 277 | 861 | 853 | ||||||||||||||||||||
Non-interest expenses | ||||||||||||||||||||||||
Compensation | 11,801 | 10,970 | ||||||||||||||||||||||
Employee benefits | 2,642 | 2,633 | ||||||||||||||||||||||
Net occupancy and equipment | 1,858 | 1,818 | ||||||||||||||||||||||
Technology and communication | 1,773 | 1,630 | ||||||||||||||||||||||
Debit and credit card processing | 587 | 566 | ||||||||||||||||||||||
Marketing and business development | 625 | 646 | ||||||||||||||||||||||
Postage, printing, and supplies | 406 | 391 | ||||||||||||||||||||||
Legal and professional | 534 | 493 | ||||||||||||||||||||||
FDIC insurance | 242 | 356 | 716 | 1,035 | 238 | 242 | ||||||||||||||||||
Amortization of investments in tax credit partnerships | 616 | 1,015 | 1,847 | 3,046 | ||||||||||||||||||||
Amortization/impairment of investments in tax credit partnerships | 52 | — | ||||||||||||||||||||||
Capital and deposit based taxes | 904 | 852 | ||||||||||||||||||||||
Other | 3,619 | 3,429 | 10,469 | 9,215 | 1,219 | 786 | ||||||||||||||||||
Total non-interest expenses | 21,317 | 20,518 | 63,811 | 60,251 | 22,639 | 21,027 | ||||||||||||||||||
Income before income taxes | 15,800 | 14,350 | 44,694 | 41,646 | 17,480 | 16,456 | ||||||||||||||||||
Income tax expense | 4,096 | 3,883 | 11,597 | 11,235 | 1,839 | 3,052 | ||||||||||||||||||
Net income | $ | 11,704 | $ | 10,467 | $ | 33,097 | $ | 30,411 | $ | 15,641 | $ | 13,404 | ||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | 0.52 | $ | 0.47 | $ | 1.47 | $ | 1.36 | ||||||||||||||||
Diluted | $ | 0.51 | $ | 0.46 | $ | 1.44 | $ | 1.34 | ||||||||||||||||
Net income per share, basic | $ | 0.69 | $ | 0.59 | ||||||||||||||||||||
Net income per share, diluted | $ | 0.68 | $ | 0.58 | ||||||||||||||||||||
Average common shares: | ||||||||||||||||||||||||
Basic | 22,542 | 22,385 | 22,524 | 22,325 | 22,661 | 22,577 | ||||||||||||||||||
Diluted | 22,964 | 22,803 | 22,984 | 22,711 | 22,946 | 22,931 |
See accompanying notes to unaudited consolidated financial statements. |
|
For the three |
|
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 11,704 | $ | 10,467 | $ | 33,097 | $ | 30,411 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Unrealized gains (losses) on securities available for sale: | ||||||||||||||||
Unrealized gains (losses) arising during the period, net of tax $29, ($616), $512, and $2,213, respectively | 56 | (1,147 | ) | 950 | 4,110 | |||||||||||
Reclassification adjustment for securities (gains) realized in income (net of tax of $(11), $0, $(11), and $0, respectively) | (20 | ) | — | (20 | ) | — | ||||||||||
Unrealized losses on hedging instruments: | ||||||||||||||||
Unrealized gains (losses) arising during the period, net of tax benefit of $23, $74, $21, ($162), respectively | 43 | 137 | 38 | (301 | ) | |||||||||||
Other comprehensive income (loss), net of tax | 79 | (1,010 | ) | 968 | 3,809 | |||||||||||
Comprehensive income | $ | 11,783 | $ | 9,457 | $ | 34,065 | $ | 34,220 |
Three months ended | ||||||||
March 31, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Net income | $ | 15,641 | $ | 13,404 | ||||
Other comprehensive income | ||||||||
Change in unrealized gain (loss) on available for sale debt securities | 3,425 | (4,707 | ) | |||||
Change in fair value of derivatives used in cash flow hedges | (208 | ) | 392 | |||||
Total other comprehensive income (loss), before income tax | 3,217 | (4,315 | ) | |||||
Tax effect | 588 | (907 | ) | |||||
Other comprehensive income (loss), net of tax | 2,629 | (3,408 | ) | |||||
Comprehensive income | $ | 18,270 | $ | 9,996 |
See accompanying notes to unaudited consolidated financial statements. |
|
For the |
|
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Common stock | Additional | other | Common stock | Additional | other | |||||||||||||||||||||||||||||||||||||||||||
Number of | paid-in | Retained | comprehensive | Number of | paid-in | Retained | comprehensive | |||||||||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | shares | Amount | capital | earnings | loss | Total | ||||||||||||||||||||||||||||||||||||||||||
shares | Amount | capital | earnings | income (loss) | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2015 | 14,919 | $ | 10,616 | $ | 44,180 | $ | 231,091 | $ | 632 | $ | 286,519 | |||||||||||||||||||||||||||||||||||||
Balance, January 1, 2018 | 22,679 | $ | 36,457 | $ | 31,924 | $ | 267,193 | $ | (1,930 | ) | $ | 333,644 | ||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 13,404 | — | 13,404 | ||||||||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive loss | — | — | — | — | (3,408 | ) | (3,408 | ) | ||||||||||||||||||||||||||||||||||||||||
Reclassification adjustment under Accounting Standards Update 2018-02 | 506 | (506 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||
Stock compensation expense | — | — | 823 | — | — | 823 | ||||||||||||||||||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | 52 | 174 | 205 | (1,914 | ) | — | (1,535 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared, $0.23 per share | — | — | — | (5,226 | ) | — | (5,226 | ) | ||||||||||||||||||||||||||||||||||||||||
Shares cancelled | (1 | ) | (4 | ) | (35 | ) | 39 | — | — | |||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2018 | 22,730 | $ | 36,627 | $ | 32,917 | $ | 274,002 | $ | (5,844 | ) | $ | 337,702 | ||||||||||||||||||||||||||||||||||||
Balance, January 1, 2019 | 22,749 | $ | 36,689 | $ | 36,797 | $ | 298,156 | $ | (5,142 | ) | $ | 366,500 | ||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 30,411 | - | 30,411 | — | — | — | 15,641 | — | 15,641 | ||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 3,809 | 3,809 | — | — | — | — | 2,629 | 2,629 | ||||||||||||||||||||||||||||||||||||
Stock compensation expense | - | - | 1,646 | - | - | 1,646 | — | — | 863 | — | — | 863 | ||||||||||||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax | 159 | 527 | 3,404 | (2,903 | ) | - | 1,028 | 74 | 245 | 2,254 | (4,452 | ) | — | (1,953 | ) | |||||||||||||||||||||||||||||||||
3 for 2 stock split | 7,494 | 24,956 | (24,956 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||
Cash dividends declared, $0.25 per share | ��� | — | — | (5,686 | ) | — | (5,686 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends, $0.53 per share | - | - | - | (11,843 | ) | - | (11,843 | ) | ||||||||||||||||||||||||||||||||||||||||
Shares cancelled | (9 | ) | (31 | ) | (224 | ) | 255 | - | - | |||||||||||||||||||||||||||||||||||||||
Balance September 30, 2016 | 22,563 | $ | 36,068 | $ | 24,050 | $ | 247,011 | $ | 4,441 | $ | 311,570 | |||||||||||||||||||||||||||||||||||||
Balance December 31, 2016 | 22,617 | $ | 36,250 | $ | 26,682 | $ | 252,439 | $ | (1,499 | ) | $ | 313,872 | ||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 33,097 | - | 33,097 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 968 | 968 | ||||||||||||||||||||||||||||||||||||||||||
Stock compensation expense | - | - | 2,012 | - | - | 2,012 | ||||||||||||||||||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | 59 | 198 | 2,142 | (4,669 | ) | - | (2,329 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends, $0.59 per share | - | - | - | (13,365 | ) | - | (13,365 | ) | ||||||||||||||||||||||||||||||||||||||||
Shares cancelled | (7 | ) | (24 | ) | (155 | ) | 179 | - | - | |||||||||||||||||||||||||||||||||||||||
Balance September 30, 2017 | 22,669 | $ | 36,424 | $ | 30,681 | $ | 267,681 | $ | (531 | ) | $ | 334,255 | ||||||||||||||||||||||||||||||||||||
Balance March 31, 2019 | 22,823 | $ | 36,934 | $ | 39,914 | $ | 303,659 | $ | (2,513 | ) | $ | 377,994 |
See accompanying notes to unaudited consolidated financial statements. |
| ||||||||||
For the | ||||||||||
|
2017 | 2016 | |||||||||||||||
(In thousands) | 2019 | 2018 | ||||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 33,097 | $ | 30,411 | $ | 15,641 | $ | 13,404 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Provision for loan losses | 1,650 | 2,500 | ||||||||||||||
Provision for loan and lease losses | 600 | 735 | ||||||||||||||
Depreciation, amortization and accretion, net | 6,848 | 8,016 | 783 | 1,326 | ||||||||||||
Deferred income tax provision | (1,811 | ) | (320 | ) | ||||||||||||
Gain on call of securities available for sale | (31 | ) | — | |||||||||||||
Deferred income tax (benefit) expense | (1,028 | ) | 488 | |||||||||||||
Gain on sales of mortgage loans held for sale | (1,453 | ) | (1,825 | ) | (238 | ) | (314 | ) | ||||||||
Origination of mortgage loans held for sale | (74,857 | ) | (91,195 | ) | (13,346 | ) | (18,245 | ) | ||||||||
Proceeds from sale of mortgage loans held for sale | 74,064 | 93,861 | 12,278 | 17,284 | ||||||||||||
Bank owned life insurance income | (964 | ) | (657 | ) | (178 | ) | (187 | ) | ||||||||
Loss on the disposal of premises and equipment | - | 163 | ||||||||||||||
(Gain) on the sale of foreclosed assets | (39 | ) | (382 | ) | ||||||||||||
Loss (gain) on the disposal of premises and equipment | 4 | (6 | ) | |||||||||||||
Gain on the sale of other real estate | (22 | ) | (109 | ) | ||||||||||||
Operating lease payments | (354 | ) | — | |||||||||||||
Stock compensation expense | 2,012 | 1,646 | 863 | 823 | ||||||||||||
Excess tax benefits from share-based compensation arrangements | (1,353 | ) | (963 | ) | (311 | ) | (316 | ) | ||||||||
Decrease in accrued interest receivable and other assets | (5,651 | ) | (6,145 | ) | ||||||||||||
Increase in accrued interest payable and other liabilities | 18,062 | 14,253 | ||||||||||||||
Net change in accrued interest receivable and other assets | (1,237 | ) | 112 | |||||||||||||
Net change in accrued interest payable and other liabilities | (2,400 | ) | (3,716 | ) | ||||||||||||
Net cash provided by operating activities | 49,574 | 49,363 | 11,055 | 11,279 | ||||||||||||
Investing activities: | ||||||||||||||||
Purchases of securities available for sale | (422,190 | ) | (327,711 | ) | (174,490 | ) | (199,946 | ) | ||||||||
Proceeds from sale of securities available for sale | - | - | ||||||||||||||
Proceeds from maturities of securities available for sale | 420,179 | 355,943 | ||||||||||||||
Purchase of Federal Home Loan Bank stock | (1,319 | ) | - | |||||||||||||
Net increase in loans | (30,454 | ) | (191,793 | ) | ||||||||||||
Proceeds from maturities and paydowns of securities available for sale | 108,124 | 171,308 | ||||||||||||||
Purchases of Federal Home Loan Bank stock | — | (1,230 | ) | |||||||||||||
Proceeds from sales of Federal Home Loan Bank stock | 590 | — | ||||||||||||||
Net change in loans | 17,800 | (104,505 | ) | |||||||||||||
Purchases of premises and equipment | (1,733 | ) | (5,853 | ) | (1,999 | ) | (1,111 | ) | ||||||||
Proceeds from disposal of premises and equipment | 40 | 215 | ||||||||||||||
Proceeds from mortality benefit of bank owned life insurance | 970 | - | 908 | — | ||||||||||||
Proceeds from sale of foreclosed assets | 2,432 | 1,403 | ||||||||||||||
Other investment activities | (824 | ) | (349 | ) | ||||||||||||
Proceeds from sale of other real estate | 512 | 2,658 | ||||||||||||||
Net cash used in investing activities | (32,115 | ) | (168,011 | ) | (49,339 | ) | (132,960 | ) | ||||||||
Financing activities: | ||||||||||||||||
Net (decrease) increase in deposits | (38,582 | ) | 18,895 | |||||||||||||
Net decrease in deposits | (41,816 | ) | (4,931 | ) | ||||||||||||
Net increase in securities sold under agreements to repurchase and federal funds purchased | 118,855 | 56,699 | 510 | 51,300 | ||||||||||||
Proceeds from Federal Home Loan Bank advances | 90,000 | 199,000 | 30,000 | 30,000 | ||||||||||||
Repayments of Federal Home Loan Bank advances | (90,965 | ) | (191,102 | ) | (30,324 | ) | (30,318 | ) | ||||||||
Proceeds (used for) and received from settlement of stock awards | (216 | ) | 1,599 | |||||||||||||
Excess tax benefits from share-based compensation arrangements | - | 963 | ||||||||||||||
Common stock repurchases | (2,113 | ) | (1,534 | ) | ||||||||||||
Issuance of common stock for stock appreciation rights and performance stock units | (210 | ) | (156 | ) | ||||||||||||
Common stock repurchases of restricted shares surrendered for taxes | (1,743 | ) | (1,379 | ) | ||||||||||||
Cash dividends paid | (13,333 | ) | (11,812 | ) | (5,732 | ) | (5,207 | ) | ||||||||
Net cash provided by financing activities | 63,646 | 72,708 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 81,105 | (45,940 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (49,315 | ) | 39,309 | |||||||||||||
Net change in cash and cash equivalents | (87,599 | ) | (82,372 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | 47,973 | 103,833 | 198,939 | 139,248 | ||||||||||||
Cash and cash equivalents at end of period | $ | 129,078 | $ | 57,893 | $ | 111,340 | $ | 56,876 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Income tax payments | $ | 11,063 | $ | 9,190 | $ | — | $ | — | ||||||||
Cash paid for interest | 5,109 | 3,636 | 5,425 | 2,383 | ||||||||||||
Supplemental non-cash activity: | ||||||||||||||||
Transfers from loans to foreclosed assets | $ | - | $ | 1,522 | ||||||||||||
Initial recognition of right-of-use lease assets | 16,747 | — | ||||||||||||||
Initial recognition of operating lease liabilities | 18,067 | — | ||||||||||||||
Transfers from loans to other real estate owned | $ | — | $ | 270 |
See accompanying notes to unaudited consolidated financial statements. |
Stock Yards Bancorp, inc. and subsidiaryNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
(1) | Basis of Presentation and Summary of Significant Accounting Policies |
The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles (US GAAP) for complete financial statements. The consolidated unaudited financial statementsBasis of Stock Yards Bancorp, Inc. (“Bancorp”) and its subsidiary reflect all adjustments (consisting only of adjustments of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods.
Presentation – The unaudited consolidated financial statements include the accounts of Stock Yards Bancorp, Inc. (“Holding Company”), and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”). SignificantAll significant inter-company transactions and accounts have been eliminated in consolidation. All companies are collectively referred to as “Bancorp” or the “Company.”
The Bank, chartered in 1904, is a Louisville, Kentucky-based, state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio Metropolitan Statistical Areas (“MSAs”) through 38 full service banking center locations.
As of March 31, 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, workplace banking, 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 approximately $3 billion in assets under management, provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and notes thereto included in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.
Significant Accounting Policies - In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, valuation of available-for sale securities, other real estate owned and income tax assets, and estimated liabilities and expense.
A description of other significant accounting policies is presented in the notes to Consolidated Financial StatementsBancorp’s Annual Report on Form 10-K for the year ended December 31, 2016 included in Stock Yards Bancorp, Inc.’s Annual Report on Form 10-K. Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.2018.
Interim resultsCritical Accounting Policies - An allowance has been established to provide for probable losses on loans that may not be fully repaid. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries. Loans are typically charged off when management deems them uncollectible and after underlying collateral has been liquidated; however, collection efforts continue and future recoveries may occur. Periodically, loans are partially charged off to the three and nine-month periods ended September 30, 2017 are not necessarily indicativenet realizable value based upon evaluation of resultsrelated underlying collateral, including Bancorp’s proclivity for the entire year.resolution.
Critical Accounting Policies
The allowance for loan lossesmethodology is management’s estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Loan losses are charged against the allowance when management believes uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management has identified the accounting policy related to the allowance and provision for loan losses as critical to the understanding of Bancorp’s results of operations and discussed this conclusion with the Audit Committee of the Board of Directors. Since application of this policy requires significant management assumptions and estimates, it could result in materially different amounts to be reported if conditions or underlying circumstances were to change. The provision for loan losses reflects an allowance methodology driven by risk ratings, historical losses, specific loan loss allocations, and qualitative factors. Assumptions include manyThe level of the March 31, 2019 allowance reflected a number of factors, such as changes in borrowers’ financial conditionincluding credit quality metrics which can change quickly or historical loss ratios related to certain loan portfolios which may or may not be indicativewere generally consistent with prior periods, and expansion of future losses. In the first quarter of 2017, Bancorp extended the historical look-back period used to capture Bancorp’s historical loss ratios from 2432 quarters to 2836 quarters. This extensionexpansion of the historical period was applied to all classes and segments of the portfolio. The expansionExpansion of the look-back period for the historical loss rates used in the quantitative allocation caused management to review of the overall methodology for the qualitative factors to ensure Bancorp waswe were appropriately capturing the risk not addressed in the quantitative historical loss rates used in the quantitative allocation, resulting in the same expansion of the look-back period for the qualitative factors.rate. Management believes the extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. ToBased on the extentlook-back period extension, the allowance level increased approximately $2.0 million for the first three months of 2019. Key indicators of loan quality continued to trend at levels consistent with prior periods, however management recognizes that management’s assumptions prove incorrect, results from operations coulddue 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 materially affectedread in Bancorp’s Annual Report on Form 10K.
Accounting Standards Updates (“ASUs”)
The following ASU was issued prior to March 31, 2019 and is considered relevant to Bancorp’s financial statements. Generally, if an issued-but-not-yet-effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, (“CECL”). This ASU significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Bancorp expects to recognize a higher or lower provision for loan losses. The accounting policy relatedone-time cumulative-effect adjustment to the allowance on January 1, 2020. Interagency guidance issued in December 2018 allows for loan losses is applicablea three year phase-in of the cumulative-effect adjustment for regulatory capital reporting.
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 commercial bankingCECL 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 concluded upon its CECL loan segmentation and initial segment of Bancorp. The impactcalculation methodologies. Bancorp is currently exploring regression techniques and any associated risks relatedhas begun to this policy on Bancorp’s business operations are discussed in the “Allowance for Loan Losses” section below.run forecasting scenarios.
Stock Yards Bancorp, inc. and subsidiary
Recently adopted accounting standards
Bancorp’s allowance calculation includes allocations adopted ASU 2016-02, Leases and related amendments using an alternative transition method, effective January 1, 2019 and upon adoption recorded $17 million of right-of-use lease assets and $18 million of operating lease liabilities on its balance sheet as of March 31, 2019. Prior periods have not been restated. The right-of-use lease asset and operating lease liability are recorded in others assets and other liabilities, respectively, on the consolidated balance sheet. Bancorp elected all applicable practical expedients, including the option to loan portfolio segments at September 30, 2017 for qualitative factors including, among other factors, local economic and business conditions in eachexpense short-term leases, which are defined as leases with a term of our primary markets, quality and experience of lending staff and management, exceptionsone year or less. Bancorp also elected not to lending policies, levels of and trends in past due loans and loan classifications, concentrations of credit such as collateral type, trends in portfolio growth, changes in value of underlying collateral for collateral-dependent loans, effect of other external factors such as the national economic and business trends, quality and depth of the loan review function, and management’s judgement of current trends and potential risks. Bancorp utilizes the sum of all allowance amounts derived as described above as the appropriate level of allowance for loan andseparate lease losses. Changes in criteria used in this evaluation or availability of new information could cause the allowance to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan losses based on their judgments and estimates.components from non-lease components.
|
|
The amortized cost, unrealized gainsadoption of this ASU did not have a meaningful impact on Bancorp's performance metrics, including regulatory capital ratios and losses, and fair valuereturn on average assets. Additionally, Bancorp does not believe that the adoption of securities available-for-sale follow:
(in thousands) | Amortized | Unrealized |
| |||||||||||||
September 30, 2017 | cost | Gains | Losses | Fair value | ||||||||||||
Government sponsored enterprise obligations | $ | 372,596 | $ | 846 | $ | 778 | $ | 372,664 | ||||||||
Mortgage-backed securities - government agencies | 147,604 | 697 | 1,581 | 146,720 | ||||||||||||
Obligations of states and political subdivisions | 51,100 | 611 | 89 | 51,622 | ||||||||||||
Corporate equity securities | 653 | - | 137 | 516 | ||||||||||||
Total securities available for sale | $ | 571,953 | $ | 2,154 | $ | 2,585 | $ | 571,522 | ||||||||
December 31, 2016 | ||||||||||||||||
U.S. Treasury and other U.S. Government obligations | $ | 74,997 | $ | 1 | $ | - | $ | 74,998 | ||||||||
Government sponsored enterprise obligations | 268,784 | 800 | 1,494 | 268,090 | ||||||||||||
Mortgage-backed securities - government agencies | 170,344 | 735 | 2,236 | 168,843 | ||||||||||||
Obligations of states and political subdivisions | 57,158 | 682 | 396 | 57,444 | ||||||||||||
Corporate equity securities | 653 | 46 | - | 699 | ||||||||||||
Total securities available for sale | $ | 571,936 | $ | 2,264 | $ | 4,126 | $ | 570,074 |
Corporate equity securities consistthis ASU by its clients will have a significant impact on Bancorp's ability to underwrite credit when client financial statements are presented inclusive of common stock in a publicly-traded business development company.
There were no securities classified as held to maturity asthe requirements of September 30, 2017 or December 31, 2016.this ASU. See the note titled “Leases” for additional information on lease activities.
(2) | Pending Acquisition |
Stock Yards
Effective December 19, 2018, Bancorp inc.executed a definitive Share Purchase Agreement (“Agreement”), pursuant to which Bancorp will acquire all of the outstanding common stock of privately held King Bancorp, Inc. (“King”). King, headquartered in Louisville, is the holding company for King Southern Bank, which operates five branches – three in the greater Louisville area and subsidiarytwo in Nelson County, approximately 60 miles southeast of Louisville, Kentucky.
Under the terms of the Agreement, Bancorp will acquire all of King’s outstanding common stock in an all-cash transaction, resulting in a total cash payment to King’s existing shareholders of approximately $28 million. Bancorp will fund the cash payment through existing resources on hand.
The acquisition is scheduled to close as of end of business April 30, 2019, subject to completion of closing conditions. As of March 31, 2019, King had approximately $193 million in assets, $167 million in loans, $125 million in deposits and $16 million in tangible common equity.
(3) | Securities |
All of Bancorp’s securities are classified as available for sale. Amortized cost, unrealized gains and losses, and fair value of securities follow:
(In thousands) | Amortized | Unrealized | ||||||||||||||
March 31, 2019 | cost | Gains | Losses | Fair value | ||||||||||||
Government sponsored enterprise obligations | $ | 344,590 | $ | 139 | $ | (1,863 | ) | $ | 342,866 | |||||||
Mortgage backed securities - government agencies | 138,768 | 570 | (2,207 | ) | 137,131 | |||||||||||
Obligations of states and political subdivisions | 27,095 | 97 | (58 | ) | 27,134 | |||||||||||
Total securities available for sale | $ | 510,453 | $ | 806 | $ | (4,128 | ) | $ | 507,131 | |||||||
December 31, 2018 | ||||||||||||||||
Government sponsored enterprise obligations | 264,234 | 156 | (3,351 | ) | 261,039 | |||||||||||
Mortgage backed securities - government agencies | 149,748 | 282 | (3,753 | ) | 146,277 | |||||||||||
Obligations of states and political subdivisions | 29,760 | 107 | (188 | ) | 29,679 | |||||||||||
Total securities available for sale | $ | 443,742 | $ | 545 | $ | (7,292 | ) | $ | 436,995 |
At March 31, 2019 and December 31, 2018, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.
Bancorp sold nodid not sell securities during the three or nine monththree-month periods ending September 30, 2016March 31, 2019 or 2017. One security was called prior to maturity in the third quarter of 2017 resulting in the receipt of a pre-payment penalty. The penalty income was classified as a realized gain on the call of available for sale securities.2018.
A summary of the available-for-sale investment securities available for sale by contractual maturity groupings as of September 30, 2017 is shown below.follows:
(in thousands) |
|
| ||||||
Securities available-for-sale | Amortized cost | Fair value | ||||||
Due within 1 year | $ | 216,651 | $ | 216,696 | ||||
Due after 1 but within 5 years | 74,383 | 74,529 | ||||||
Due after 5 but within 10 years | 14,085 | 14,031 | ||||||
Due after 10 years | 118,577 | 119,030 | ||||||
Mortgage-backed securities - government agencies | 147,604 | 146,720 | ||||||
Corporate equity securities | 653 | 516 | ||||||
Total securities available-for-sale | $ | 571,953 | $ | 571,522 |
(In thousands) | Amortized Cost | Fair Value | ||||||
Due within 1 year | $ | 205,633 | $ | 205,367 | ||||
Due after 1 year but within 5 years | 60,622 | 60,113 | ||||||
Due after 5 years but within 10 years | 7,171 | 7,091 | ||||||
Due after 10 years | 98,259 | 97,429 | ||||||
Mortgage backed securities - government agencies | 138,768 | 137,131 | ||||||
Total securities available for sale | $ | 510,453 | $ | 507,131 |
Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations. In addition to equity securities, theobligations with or without prepayment penalties. The investment portfolio includes agency mortgage-backedmortgage backed securities, which are guaranteed by agencies such as the FHLMC, FNMA,Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), and GNMA.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.
Bancorp pledges portions of its investment securities portfolio to secure public fund deposits, cash balances of certain wealth management and trust accounts, and securities sold under agreements to repurchase. TheSecurities with a carrying value of these$355.6 million and $355.1 million were pledged securities was approximately $329.7 million at September 30, 2017March 31, 2019 and $380.4 million at December 31, 2016.
Stock Yards Bancorp, inc.commercial depositors in cash management accounts, public deposits, and subsidiaryuninsured cash balances for WM&T accounts.
Securities with unrealized losses at September 30, 2017March 31, 2019 and December 31, 2016, not recognized in the statements of income are as2018 follows:
(in thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | value | losses | value | losses | value | losses | ||||||||||||||||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||||||||
Government sponsored enterprise obligations | $ | 190,462 | $ | 135 | $ | 70,176 | $ | 643 | $ | 260,638 | $ | 778 | ||||||||||||||||||||||||||||||||||||
Mortgage-backed securities - government agencies | 13,227 | 117 | 65,781 | 1,464 | 79,008 | 1,581 | ||||||||||||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 9,307 | 13 | 6,287 | 76 | 15,594 | 89 | ||||||||||||||||||||||||||||||||||||||||||
Corporate equity securities | 516 | 137 | - | - | 516 | 137 | ||||||||||||||||||||||||||||||||||||||||||
March 31, 2019 | value | losses | value | losses | value | losses | ||||||||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | $ | 213,512 | $ | 402 | $ | 142,244 | $ | 2,183 | $ | 355,756 | $ | 2,585 | ||||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
Government sponsored enterprise obligations | $ | 154,951 | $ | 1,344 | $ | 3,485 | $ | 150 | $ | 158,436 | $ | 1,494 | $ | 183,279 | $ | (151 | ) | $ | 133,375 | $ | (1,712 | ) | $ | 316,654 | $ | (1,863 | ) | |||||||||||||||||||||
Mortgage-backed securities - government agencies | 115,374 | 1,873 | 9,914 | 363 | 125,288 | 2,236 | — | — | 109,690 | (2,207 | ) | 109,690 | (2,207 | ) | ||||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 29,893 | 380 | 1,478 | 16 | 31,371 | 396 | — | — | 15,490 | (58 | ) | 15,490 | (58 | ) | ||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | $ | 300,218 | $ | 3,597 | $ | 14,877 | $ | 529 | $ | 315,095 | $ | 4,126 | $ | 183,279 | $ | (151 | ) | $ | 258,555 | $ | (3,977 | ) | $ | 441,834 | $ | (4,128 | ) | |||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Government sponsored enterprise obligations | 96,740 | (38 | ) | 149,320 | (3,313 | ) | 246,060 | (3,351 | ) | |||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities - government agencies | 3,108 | (5 | ) | 120,848 | (3,748 | ) | 123,956 | (3,753 | ) | |||||||||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 814 | (1 | ) | 17,639 | (187 | ) | 18,453 | (188 | ) | |||||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | $ | 100,662 | $ | (44 | ) | $ | 287,807 | $ | (7,248 | ) | $ | 388,469 | $ | (7,292 | ) |
Applicable dates for determining when securities are in an unrealized loss position are September 30, 2017March 31, 2019 and December 31, 2016.2018. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past twelve months, but is not in the “investments“Investments with an unrealized loss of less than 12 months” category above.
Unrealized losses on Bancorp’sBancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is due to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach their maturity date and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consist of 105 and 117 separate investment positions as of March 31, 2019 and December 31, 2018, respectively. Because management does not intend to sell the investments, and it is not likely that Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Bancorp does not consider these securities to be other-than-temporarily impaired at September 30, 2017.March 31, 2019.
FHLB stock and other securities are investments held by Bancorp which are not readily marketable and are carried at cost. This category includes Federal Home Loan Bank of Cincinnati (FHLB)(“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 borrowing.advances.
Stock Yards Bancorp, inc. and subsidiary
| Loans and leases |
CompositionComposition of loans, net of deferred fees and costs, by primary loan portfolio class follows:
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Commercial and industrial | $ | 750,728 | $ | 736,841 | ||||
Construction and development, excluding undeveloped land | 174,310 | 192,348 | ||||||
Undeveloped land | 20,989 | 21,496 | ||||||
Real estate mortgage: | ||||||||
Commercial investment | 576,810 | 538,886 | ||||||
Owner occupied commercial | 397,804 | 408,292 | ||||||
1-4 family residential | 261,707 | 249,498 | ||||||
Home equity - first lien | 51,925 | 55,325 | ||||||
Home equity - junior lien | 63,416 | 67,519 | ||||||
Subtotal: Real estate mortgage | 1,351,662 | 1,319,520 | ||||||
Consumer | 37,431 | 35,170 | ||||||
Total loans | $ | 2,335,120 | $ | 2,305,375 |
(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 |
Stock Yards Bancorp, inc. and subsidiary(1) Consists of land acquired for development by the borrower, but for which no development has yet taken place.
The following table presents the balance of the recorded investment inLoans to directors and their associates, including loans to companies for which directors are principal owners and allowance for loan losses by portfolio segmentexecutive officers totaled $52.8 million and based on impairment evaluation method$52.7 million, as of September 30, 2017March 31, 2019 and December 31, 2016.
(in thousands) | Type of loan | |||||||||||||||||||||||
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
September 30, 2017 | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Loans | $ | 750,728 | $ | 174,310 | $ | 20,989 | $ | 1,351,662 | $ | 37,431 | $ | 2,335,120 | ||||||||||||
Loans collectively evaluated for impairment | $ | 748,591 | $ | 173,573 | $ | 20,515 | $ | 1,348,774 | $ | 37,375 | $ | 2,328,828 | ||||||||||||
Loans individually evaluated for impairment | $ | 2,137 | $ | 737 | $ | 474 | $ | 2,403 | $ | 56 | $ | 5,807 | ||||||||||||
Loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | 485 | $ | - | $ | 485 |
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
industrial | land | land | mortgage | Consumer | Total | |||||||||||||||||||
Allowance for loan losses | ||||||||||||||||||||||||
At December 31, 2016 | $ | 10,483 | $ | 1,923 | $ | 684 | $ | 10,573 | $ | 344 | $ | 24,007 | ||||||||||||
Provision (credit) | 1,518 | 9 | (85 | ) | 54 | 154 | 1,650 | |||||||||||||||||
Charge-offs | (770 | ) | - | - | (45 | ) | (418 | ) | (1,233 | ) | ||||||||||||||
Recoveries | 128 | - | - | 98 | 298 | 524 | ||||||||||||||||||
At September 30, 2017 | $ | 11,359 | $ | 1,932 | $ | 599 | $ | 10,680 | $ | 378 | $ | 24,948 | ||||||||||||
Allowance for loans collectively evaluated for impairment | $ | 10,705 | $ | 1,932 | $ | 599 | $ | 10,668 | $ | 322 | $ | 24,226 | ||||||||||||
Allowance for loans individually evaluated for impairment | $ | 654 | $ | - | $ | - | $ | 12 | $ | 56 | $ | 722 | ||||||||||||
Allowance for loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
Stock Yards Bancorp, inc. and subsidiary
(in thousands) | Type of loan | |||||||||||||||||||||||
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
December 31, 2016 | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Loans | $ | 736,841 | $ | 192,348 | $ | 21,496 | $ | 1,319,520 | $ | 35,170 | $ | 2,305,375 | ||||||||||||
Loans collectively evaluated for impairment | $ | 734,139 | $ | 191,810 | $ | 21,022 | $ | 1,316,400 | $ | 35,111 | $ | 2,298,482 | ||||||||||||
Loans individually evaluated for impairment | $ | 2,682 | $ | 538 | $ | 474 | $ | 2,516 | $ | 59 | $ | 6,269 | ||||||||||||
Loans acquired with deteriorated credit quality | $ | 20 | $ | - | $ | - | $ | 604 | $ | - | $ | 624 |
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
industrial | land | land | mortgage | Consumer | Total | |||||||||||||||||||
Allowance for loan losses | ||||||||||||||||||||||||
At December 31, 2015 | $ | 8,645 | $ | 1,760 | $ | 814 | $ | 10,875 | $ | 347 | $ | 22,441 | ||||||||||||
Provision (credit) | 2,775 | 275 | (130 | ) | (68 | ) | 148 | 3,000 | ||||||||||||||||
Charge-offs | (1,216 | ) | (133 | ) | - | (576 | ) | (568 | ) | (2,493 | ) | |||||||||||||
Recoveries | 279 | 21 | - | 342 | 417 | 1,059 | ||||||||||||||||||
At December 31, 2016 | $ | 10,483 | $ | 1,923 | $ | 684 | $ | 10,573 | $ | 344 | $ | 24,007 | ||||||||||||
Allowance for loans collectively evaluated for impairment | $ | 9,276 | $ | 1,923 | $ | 683 | $ | 10,573 | $ | 285 | $ | 22,740 | ||||||||||||
Allowance for loans individually evaluated for impairment | $ | 1,207 | $ | - | $ | 1 | $ | - | $ | 59 | $ | 1,267 | ||||||||||||
Allowance for loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
The considerations by Bancorp in computing its allowance for loan losses are determined based on various risk characteristics of each loan segment. Relevant risk characteristics are as follows:
|
|
|
|
Stock Yards Bancorp, inc. and subsidiary
|
|
|
|
|
|
Bancorp has loans that were acquired for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amount of those loans is included in the balance sheet amounts of loans at September 30, 2017 and December 31, 2016. Changes in the fair value adjustment for acquired impaired loans are shown in the following table:
(in thousands) | Accretable discount | Non- accretable discount | ||||||
Balance at December 31, 2015 | $ | 3 | $ | 189 | ||||
Accretion | (3 | ) | (41 | ) | ||||
Reclassifications from (to) non-accretable discount | - | - | ||||||
Disposals | - | - | ||||||
Balance at December 31, 2016 | $ | - | $ | 148 | ||||
Accretion | - | - | ||||||
Reclassifications from (to) non-accretable discount | - | - | ||||||
Disposals | - | - | ||||||
Balance at September 30, 2017 | $ | - | $ | 148 |
Stock Yards Bancorp, inc. and subsidiary
The following tables present loans individually evaluated for impairment as of September 30, 2017 and December 31, 2016.
Unpaid | Average | |||||||||||||||
(in thousands) | Recorded | principal | Related | recorded | ||||||||||||
September 30, 2017 | investment | balance | allowance | investment | ||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||
Commercial and industrial | $ | 350 | $ | 540 | $ | - | $ | 228 | ||||||||
Construction and development, excluding undeveloped land | 737 | 907 | - | 533 | ||||||||||||
Undeveloped land | 474 | 506 | - | 413 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | 55 | 55 | - | 124 | ||||||||||||
Owner occupied commercial | 1,470 | 1,908 | - | 1,264 | ||||||||||||
1-4 family residential | 785 | 785 | - | 759 | ||||||||||||
Home equity - first lien | - | - | - | - | ||||||||||||
Home equity - junior lien | 81 | 81 | - | 224 | ||||||||||||
Subtotal: Real estate mortgage | 2,391 | 2,829 | - | 2,371 | ||||||||||||
Consumer | - | 17 | - | - | ||||||||||||
Subtotal | $ | 3,952 | $ | 4,799 | $ | - | $ | 3,545 | ||||||||
Loans with an allowance recorded: | ||||||||||||||||
Commercial and industrial | $ | 1,787 | $ | 2,321 | $ | 654 | $ | 2,343 | ||||||||
Construction and development, excluding undeveloped land | - | - | - | - | ||||||||||||
Undeveloped land | - | - | - | 60 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | - | - | - | - | ||||||||||||
Owner occupied commercial | - | - | - | - | ||||||||||||
1-4 family residential | 12 | 12 | 12 | 3 | ||||||||||||
Home equity - first lien | - | - | - | - | ||||||||||||
Home equity - junior lien | - | - | - | - | ||||||||||||
Subtotal: Real estate mortgage | 12 | 12 | 12 | 3 | ||||||||||||
Consumer | 56 | 56 | 56 | 58 | ||||||||||||
Subtotal | $ | 1,855 | $ | 2,389 | $ | 722 | $ | 2,464 | ||||||||
Total: | ||||||||||||||||
Commercial and industrial | $ | 2,137 | $ | 2,861 | $ | 654 | $ | 2,571 | ||||||||
Construction and development, excluding undeveloped land | 737 | 907 | - | 533 | ||||||||||||
Undeveloped land | 474 | 506 | - | 473 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | 55 | 55 | - | 124 | ||||||||||||
Owner occupied commercial | 1,470 | 1,908 | - | 1,264 | ||||||||||||
1-4 family residential | 797 | 797 | 12 | 762 | ||||||||||||
Home equity - first lien | - | - | - | - | ||||||||||||
Home equity - junior lien | 81 | 81 | - | 224 | ||||||||||||
Subtotal: Real estate mortgage | 2,403 | 2,841 | 12 | 2,374 | ||||||||||||
Consumer | 56 | 73 | 56 | 58 | ||||||||||||
Total | $ | 5,807 | $ | 7,188 | $ | 722 | $ | 6,009 |
Stock Yards Bancorp, inc. and subsidiary
Unpaid | Average | |||||||||||||||
(in thousands) | Recorded | principal | Related | recorded | ||||||||||||
December 31, 2016 | investment | balance | allowance | investment | ||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||
Commercial and industrial | $ | 322 | $ | 465 | $ | - | $ | 1,947 | ||||||||
Construction and development, excluding undeveloped land | 538 | 708 | - | 108 | ||||||||||||
Undeveloped land | 233 | 265 | - | 76 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | 107 | 107 | - | 193 | ||||||||||||
Owner occupied commercial | 1,042 | 1,479 | - | 1,356 | ||||||||||||
1-4 family residential | 895 | 896 | - | 962 | ||||||||||||
Home equity - first lien | - | - | - | 3 | ||||||||||||
Home equity - junior lien | 472 | 472 | - | 333 | ||||||||||||
Subtotal: Real estate mortgage | 2,516 | 2,954 | - | 2,847 | ||||||||||||
Consumer | - | - | - | 18 | ||||||||||||
Subtotal | $ | 3,609 | $ | 4,392 | $ | - | $ | 4,996 | ||||||||
Loans with an allowance recorded: | ||||||||||||||||
Commercial and industrial | $ | 2,360 | $ | 2,835 | $ | 1,207 | $ | 1,619 | ||||||||
Construction and development, excluding undeveloped land | - | - | - | 182 | ||||||||||||
Undeveloped land | 241 | 241 | 1 | 149 | ||||||||||||
Real estate mortgage | ||||||||||||||||
Commercial investment | - | - | - | - | ||||||||||||
Owner occupied commercial | - | - | - | 554 | ||||||||||||
1-4 family residential | - | - | - | - | ||||||||||||
Home equity - first lien | - | - | - | - | ||||||||||||
Home equity - junior lien | - | - | - | - | ||||||||||||
Subtotal: Real estate mortgage | - | - | - | 554 | ||||||||||||
Consumer | 59 | 59 | 59 | 63 | ||||||||||||
Subtotal | $ | 2,660 | $ | 3,135 | $ | 1,267 | $ | 2,567 | ||||||||
Total: | ||||||||||||||||
Commercial and industrial | $ | 2,682 | $ | 3,300 | $ | 1,207 | $ | 3,566 | ||||||||
Construction and development, excluding undeveloped land | 538 | 708 | - | 290 | ||||||||||||
Undeveloped land | 474 | 506 | 1 | 225 | ||||||||||||
Real estate mortgage | - | - | - | - | ||||||||||||
Commercial investment | 107 | 107 | - | 193 | ||||||||||||
Owner occupied commercial | 1,042 | 1,479 | - | 1,910 | ||||||||||||
1-4 family residential | 895 | 896 | - | 962 | ||||||||||||
Home equity - first lien | - | - | - | 3 | ||||||||||||
Home equity - junior lien | 472 | 472 | - | 333 | ||||||||||||
Subtotal: Real estate mortgage | 2,516 | 2,954 | - | 3,401 | ||||||||||||
Consumer | 59 | 59 | 59 | 81 | ||||||||||||
Total | $ | 6,269 | $ | 7,527 | $ | 1,267 | $ | 7,563 |
Differences between recorded investment amounts and unpaid principal balance amounts are due to partial charge-offs and interest paid on non-accrual loans which have occurred over the life of loans. Unpaid principal balance is reduced by these items to arrive at the recorded investment in the loan.
Stock Yards Bancorp, inc. and subsidiary
Impaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (TDRs), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over 90 days past due and still accruing interest. Bancorp had loans totaling $261 thousand past due more than 90 days and still accruing interest at September 30, 2017, compared with $438 thousand at December 31, 2016.
The following table presents the recorded investment in non-accrual loans as of September 30, 2017 and December 31, 2016.
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Commercial and industrial | $ | 1,256 | $ | 1,767 | ||||
Construction and development, excluding undeveloped land | 737 | 538 | ||||||
Undeveloped land | 474 | 474 | ||||||
Real estate mortgage | ||||||||
Commercial investment | 55 | 107 | ||||||
Owner occupied commercial | 1,470 | 1,042 | ||||||
1-4 family residential | 785 | 984 | ||||||
Home equity - first lien | - | - | ||||||
Home equity - junior lien | 81 | 383 | ||||||
Subtotal: Real estate mortgage | 2,391 | 2,516 | ||||||
Consumer | - | - | ||||||
Total | $ | 4,858 | $ | 5,295 |
In the course of working with borrowers, Bancorp may elect to restructure contractual terms of certain loans. Troubled debt restructurings (TDRs) occur when, for economic or legal reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider.
At September 30, 2017 Bancorp had $949 thousand of loans classified as TDRs, all of which were accruing interest consistent with their modified terms. One residential real estate loan with a recorded investment of $12 thousand was modified and classified as a TDR in the three-month period ended September 30, 2017. Interest due and unpaid was capitalized into the principal balance resulting in the TDR classification. A specific reserve was established for the entire recorded investment of this loan. One additional loan, a commercial loan with a recorded investment of $35 thousand at September 30, 2017, was modified and classified as a TDR previously in the nine-month period ended September 30, 2017. The pre and post-modification balance for this loan was $39 thousand. The monthly payment amount of this loan was modified to enable the borrower to fulfill the loan agreement. A specific reserve was established for the entire recorded investment of this loan.
Stock Yards Bancorp, inc. and subsidiary
At September 30, 2016 Bancorp had $999 thousand of accruing loans classified as TDR. Bancorp did not modify or classify any additional loans as TDR during the three or nine month periods ended September 30, 2016.
No loans classified and reported as TDRs within the twelve months prior to September 30, 2017 defaulted during the three or nine-month periods ended September 30, 2017. Likewise, no loans classified and reported as troubled debt restructured within the twelve months prior to September 30, 2016 defaulted during the three-month or nine-month periods ended September 30, 2016. Loans accounted for as TDRs include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. Loans accounted for as TDRs are individually evaluated for impairment and, at September 30, 2017, had a total allowance allocation of $142 thousand, compared with $207 thousand at December 31, 2016.
At September 30, 2017 and December 31, 2016, Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDRs.
At September 30, 2017 formal foreclosure proceedings were in process on two loans with a total recorded investment of $75 thousand.
The following table presents aging of the recorded investment in loans as of September 30, 2017 and December 31, 2016.
Recorded | ||||||||||||||||||||||||||||
(in thousands) | 90 or more | investment | ||||||||||||||||||||||||||
days past | > 90 days | |||||||||||||||||||||||||||
30-59 days | 60-89 days | due (includes | Total | Total | and | |||||||||||||||||||||||
September 30, 2017 | Current | past due | past due | non-accrual) | past due | loans | accruing | |||||||||||||||||||||
Commercial and industrial | $ | 747,316 | $ | 2,149 | $ | 7 | $ | 1,256 | $ | 3,412 | $ | 750,728 | $ | - | ||||||||||||||
Construction and development, excluding undeveloped land | 173,573 | - | - | 737 | 737 | 174,310 | - | |||||||||||||||||||||
Undeveloped land | 20,515 | - | - | 474 | 474 | 20,989 | - | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | 574,088 | 2,667 | - | 55 | 2,722 | 576,810 | - | |||||||||||||||||||||
Owner occupied commercial | 395,924 | 47 | 363 | 1,470 | 1,880 | 397,804 | - | |||||||||||||||||||||
1-4 family residential | 259,729 | 330 | 602 | 1,046 | 1,978 | 261,707 | 261 | |||||||||||||||||||||
Home equity - first lien | 51,836 | 89 | - | - | 89 | 51,925 | - | |||||||||||||||||||||
Home equity - junior lien | 62,892 | 165 | 278 | 81 | 524 | 63,416 | - | |||||||||||||||||||||
Subtotal: Real estate mortgage | 1,344,469 | 3,298 | 1,243 | 2,652 | 7,193 | 1,351,662 | 261 | |||||||||||||||||||||
Consumer | 37,196 | 226 | 9 | - | 235 | 37,431 | - | |||||||||||||||||||||
Total | $ | 2,323,069 | $ | 5,673 | $ | 1,259 | $ | 5,119 | $ | 12,051 | $ | 2,335,120 | $ | 261 | ||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 734,682 | $ | 84 | $ | 290 | $ | 1,785 | $ | 2,159 | $ | 736,841 | $ | 18 | ||||||||||||||
Construction and development, excluding undeveloped land | 191,810 | - | - | 538 | 538 | 192,348 | - | |||||||||||||||||||||
Undeveloped land | 21,022 | - | - | 474 | 474 | 21,496 | - | |||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||
Commercial investment | 537,998 | 631 | 64 | 193 | 888 | 538,886 | 86 | |||||||||||||||||||||
Owner occupied commercial | 406,726 | 342 | - | 1,224 | 1,566 | 408,292 | 182 | |||||||||||||||||||||
1-4 family residential | 246,730 | 1,174 | 576 | 1,018 | 2,768 | 249,498 | 34 | |||||||||||||||||||||
Home equity - first lien | 55,027 | 231 | 21 | 46 | 298 | 55,325 | 46 | |||||||||||||||||||||
Home equity - junior lien | 66,911 | 99 | 126 | 383 | 608 | 67,519 | 72 | |||||||||||||||||||||
Subtotal: Real estate mortgage | 1,313,392 | 2,477 | 787 | 2,864 | 6,128 | 1,319,520 | 420 | |||||||||||||||||||||
Consumer | 34,965 | 28 | 105 | 72 | 205 | 35,170 | - | |||||||||||||||||||||
Total | $ | 2,295,871 | $ | 2,589 | $ | 1,182 | $ | 5,733 | $ | 9,504 | $ | 2,305,375 | $ | 438 |
Stock Yards Bancorp, inc. and subsidiary
2018, respectively.
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:
● | Other assets especially mentioned (“OAEM”): Loans classified as OAEM have potential weaknesses that deserve management's close attention. These potential weaknesses may result in deterioration of repayment prospects for the loan or of Bancorp's credit position at some future date. |
● | Substandard: Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have |
● | Substandard non-performing: Loans classified as substandard non-performing have all the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as troubled debt restructurings. Loans are placed on non-accrual status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more. |
● | Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. |
Stock Yards Bancorp, inc. and subsidiary
As of September 30, 2017 and December 31, 2016, the internallyInternally assigned risk grades of loans by loan portfolio class classification category were as follows:
(in thousands) | Substandard | Total | ||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | Pass | OAEM | Substandard | non-performing | Doubtful | loans | ||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Substandard | Total | ||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2019 | Pass | OAEM | Substandard | non-performing | Doubtful | loans | ||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 726,194 | $ | 7,464 | $ | 14,197 | $ | 2,873 | $ | - | $ | 750,728 | $ | 791,469 | $ | 18,453 | $ | 17,607 | $ | 218 | $ | — | $ | 827,747 | ||||||||||||||||||||||||
Construction and development, excluding undeveloped land | 174,310 | - | - | - | - | 174,310 | 216,115 | — | — | — | — | 216,115 | ||||||||||||||||||||||||||||||||||||
Undeveloped land | 20,485 | - | 30 | 474 | - | 20,989 | 28,433 | — | — | — | — | 28,433 | ||||||||||||||||||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial investment | 575,339 | 761 | 420 | 290 | - | 576,810 | 580,591 | 1,145 | 4,224 | 688 | — | 586,648 | ||||||||||||||||||||||||||||||||||||
Owner occupied commercial | 383,387 | 10,313 | 2,869 | 1,235 | - | 397,804 | 408,777 | 13,628 | 4,292 | 1,466 | — | 428,163 | ||||||||||||||||||||||||||||||||||||
1-4 family residential | 256,458 | 3,018 | 1,172 | 1,059 | - | 261,707 | 275,293 | 1,522 | 161 | 871 | — | 277,847 | ||||||||||||||||||||||||||||||||||||
Home equity - first lien | 51,923 | 2 | - | - | - | 51,925 | 48,587 | — | — | 69 | — | 48,656 | ||||||||||||||||||||||||||||||||||||
Home equity - junior lien | 63,029 | 73 | 233 | 81 | - | 63,416 | 66,129 | 235 | 19 | 454 | — | 66,837 | ||||||||||||||||||||||||||||||||||||
Subtotal: Real estate mortgage | 1,330,136 | 14,167 | 4,694 | 2,665 | - | 1,351,662 | 1,379,377 | 16,530 | 8,696 | 3,548 | — | 1,408,151 | ||||||||||||||||||||||||||||||||||||
Consumer | 37,269 | 102 | 4 | 56 | - | 37,431 | 45,263 | — | — | — | — | 45,263 | ||||||||||||||||||||||||||||||||||||
Total | $ | 2,288,394 | $ | 21,733 | $ | 18,925 | $ | 6,068 | $ | - | $ | 2,335,120 | $ | 2,460,657 | $ | 34,983 | $ | 26,303 | $ | 3,766 | $ | — | $ | 2,525,709 | ||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 714,025 | $ | 14,266 | $ | 5,850 | $ | 2,700 | $ | - | $ | 736,841 | $ | 803,073 | $ | 11,516 | $ | 18,703 | $ | 232 | $ | — | $ | 833,524 | ||||||||||||||||||||||||
Construction and development, excluding undeveloped land | 191,455 | - | 355 | 538 | - | 192,348 | 220,532 | 4,200 | — | 318 | — | 225,050 | ||||||||||||||||||||||||||||||||||||
Undeveloped land | 21,022 | - | - | 474 | - | 21,496 | 29,618 | — | — | 474 | — | 30,092 | ||||||||||||||||||||||||||||||||||||
Real estate mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial investment | 538,688 | - | 5 | 193 | - | 538,886 | 586,543 | 1,815 | 15 | 237 | — | 588,610 | ||||||||||||||||||||||||||||||||||||
Owner occupied commercial | 396,997 | 7,960 | 2,111 | 1,224 | - | 408,292 | 411,722 | 9,030 | 4,500 | 1,121 | — | 426,373 | ||||||||||||||||||||||||||||||||||||
1-4 family residential | 247,888 | - | 592 | 1,018 | - | 249,498 | 273,537 | 1,544 | 162 | 774 | — | 276,017 | ||||||||||||||||||||||||||||||||||||
Home equity - first lien | 55,279 | - | - | 46 | - | 55,325 | 49,500 | — | — | — | — | 49,500 | ||||||||||||||||||||||||||||||||||||
Home equity - junior lien | 66,710 | - | 426 | 383 | - | 67,519 | 70,437 | 249 | 19 | 242 | — | 70,947 | ||||||||||||||||||||||||||||||||||||
Subtotal: Real estate mortgage | 1,305,562 | 7,960 | 3,134 | 2,864 | - | 1,319,520 | 1,391,739 | 12,638 | 4,696 | 2,374 | — | 1,411,447 | ||||||||||||||||||||||||||||||||||||
Consumer | 35,039 | - | - | 131 | - | 35,170 | 48,058 | — | — | — | — | 48,058 | ||||||||||||||||||||||||||||||||||||
Total | $ | 2,267,103 | $ | 22,226 | $ | 9,339 | $ | 6,707 | $ | - | $ | 2,305,375 | $ | 2,493,020 | $ | 28,354 | $ | 23,399 | $ | 3,398 | $ | — | $ | 2,548,171 |
Stock YardsThe following table presents the activity in the allowance by loan portfolio class:
Type of loan | ||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
(In thousands) | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Balance, January 1, 2019 | $ | 11,965 | $ | 1,760 | $ | 752 | $ | 10,681 | $ | 376 | $ | 25,534 | ||||||||||||
Provision (credit) | (302 | ) | (79 | ) | (90 | ) | 1,300 | (229 | ) | 600 | ||||||||||||||
Charge-offs | (3 | ) | — | — | — | (96 | ) | (99 | ) | |||||||||||||||
Recoveries | 102 | 203 | — | 20 | 104 | 429 | ||||||||||||||||||
Balance, March 31, 2019 | $ | 11,762 | $ | 1,884 | $ | 662 | $ | 12,001 | $ | 155 | $ | 26,464 |
Construction | ||||||||||||||||||||||||
and development | ||||||||||||||||||||||||
Commercial | excluding | |||||||||||||||||||||||
and | undeveloped | Undeveloped | Real estate | |||||||||||||||||||||
(In thousands) | industrial | land | land | mortgage | Consumer | Total | ||||||||||||||||||
Balance, January 1, 2018 | $ | 11,276 | $ | 1,724 | $ | 521 | $ | 11,012 | $ | 352 | $ | 24,885 | ||||||||||||
Provision (credit) | 761 | 296 | (39 | ) | (309 | ) | 26 | 735 | ||||||||||||||||
Charge-offs | (1,409 | ) | — | — | — | (119 | ) | (1,528 | ) | |||||||||||||||
Recoveries | 10 | — | — | 4 | 97 | 111 | ||||||||||||||||||
Balance, March 31, 2018 | $ | 10,638 | $ | 2,020 | $ | 482 | $ | 10,707 | $ | 356 | $ | 24,203 |
The considerations by Bancorp inc. and subsidiary
in computing its allowance are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:
| Commercial and industrial: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from cash flows of the business. A decline in the strength of the business or a weakened economy and resultant decreased consumer and/or business spending may have an effect on the credit quality in this loan category. |
● | Construction and development, excluding undeveloped land: Loans in this category primarily include owner-occupied and investment construction loans and commercial development projects. In most cases, construction loans require only interest to be paid during construction. Upon completion or stabilization, the construction loans generally convert to permanent financing in the real estate mortgage segment, requiring principal amortization. Repayment of development loans is derived from sale of lots or units. Credit risk is affected by construction delays, cost overruns, market conditions and availability of permanent financing; to the extent such permanent financing is not being provided by Bancorp. |
● | Undeveloped land: Loans in this category are secured by land acquired for development by the borrower, but for which no development has yet taken place. Credit risk is primarily dependent upon the financial strength of the borrower, but can also be affected by market conditions and time to sell lots at an adequate price in the future. Credit risk is also affected by availability of permanent financing, including to the end user, to the extent such permanent financing is not being provided by Bancorp. |
● | Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential real estate, owner-occupied real estate used for business purposes, and income-producing investment properties. For owner occupied residential and owner-occupied commercial real estate, repayment is dependent on financial strength of the borrower. For income-producing investment properties, repayment is dependent on financial strength of tenants, and to a lesser extent the borrowers’ financial strength, once the project is stabilized. Underlying properties are generally located in Bancorp's primary market area. Cash flows of income producing investment properties may be adversely impacted by a downturn in the economy as reflected in increased vacancy rates, which in turn, will have an effect on credit quality and property values. Overall health of the economy, including unemployment rates and real estate prices, has an effect on credit quality in this loan category. |
● | Consumer: Loans in this category may be either secured or unsecured and repayment is dependent on credit quality of the individual borrower and, if applicable, adequacy of collateral securing the loan. Therefore, overall health of the economy, including unemployment rates as well as home and securities prices, will have a significant effect on credit quality in this loan category. |
Impaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (“TDRs”), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over 90 days past due and still accruing interest. Bancorp had $454 thousand past due more than 90 days and still accruing interest at March 31, 2019, compared with $745 thousand at December 31, 2018, and none at March 31, 2018.
The following table presents the recorded investment in non-accrual loans:
(In thousands) | March 31, 2019 | December 31, 2018 | ||||||
Commercial and industrial | $ | 193 | $ | 192 | ||||
Construction and development, excluding undeveloped land | — | 318 | ||||||
Undeveloped land | — | 474 | ||||||
Real estate mortgage | ||||||||
Commercial investment | 317 | 138 | ||||||
Owner occupied commercial | 1,466 | 586 | ||||||
1-4 family residential | 843 | 760 | ||||||
Home equity - first lien | — | — | ||||||
Home equity - junior lien | 454 | 143 | ||||||
Subtotal: Real estate mortgage | 3,080 | 1,627 | ||||||
Consumer | — | — | ||||||
Total loans | $ | 3,273 | $ | 2,611 |
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.
At March 31, 2019 and December 31, 2018, Bancorp had $39 thousand and $42 thousand of accruing loans classified as TDRs, respectively. Bancorp did not modify and classify any additional loans as TDRs during the three-month periods ended March 31, 2019 or March 31, 2018, respectively. No loans classified and reported as TDRs within the twelve months prior to March 31, 2019 defaulted during the three-month period ended March 31, 2019. Loans accounted for as TDRs may include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties.
At March 31, 2019 and December 31, 2018, Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDRs.
As of March 31, 2019 formal foreclosure proceedings were in process on consumer residential mortgage loans with a total recorded investment of $795 thousand, as compared with $528 thousand as of December 31, 2018.
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:
(In thousands) | Loans | Allowance | ||||||||||||||||||||||||||||||
March 31, 2019 |
Loans individually evaluated for impairment | Loans collectively evaluated for impairment | Loans acquired with deteriorated credit quality | Total loans | Loans individually evaluated for impairment | Loans collectively evaluated for impairment | Loans acquired with deteriorated credit quality | Total allowance | ||||||||||||||||||||||||
Commercial and industrial | $ | 218 | $ | 827,529 | $ | - | $ | 827,747 | $ | 25 | $ | 11,737 | $ | - | $ | 11,762 | ||||||||||||||||
Construction and development, excluding undeveloped land | - | 216,115 | - | 216,115 | - | 1,884 | - | 1,884 | ||||||||||||||||||||||||
Undeveloped land | - | 28,433 | - | 28,433 | - | 662 | - | 662 | ||||||||||||||||||||||||
Real estate mortgage | 3,094 | 1,405,057 | - | 1,408,151 | 14 | 11,987 | - | 12,001 | ||||||||||||||||||||||||
Consumer | - | 45,263 | - | 45,263 | - | 155 | - | 155 | ||||||||||||||||||||||||
Total | $ | 3,312 | $ | 2,522,397 | $ | - | $ | 2,525,709 | $ | 39 | $ | 26,425 | $ | - | $ | 26,464 |
(In thousands) | Loans | Allowance | ||||||||||||||||||||||||||||||
December 31, 2018 |
Loans individually evaluated for impairment | Loans collectively evaluated for impairment | Loans acquired with deteriorated credit quality | Total loans | Loans individually evaluated for impairment | Loans collectively evaluated for impairment | Loans acquired with deteriorated credit quality | Total allowance | ||||||||||||||||||||||||
Commercial and industrial | $ | 220 | $ | 833,304 | $ | - | $ | 833,524 | $ | 28 | $ | 11,937 | $ | - | $ | 11,965 | ||||||||||||||||
Construction and development, excluding undeveloped land | 318 | 224,732 | - | 225,050 | - | 1,760 | - | 1,760 | ||||||||||||||||||||||||
Undeveloped land | 474 | 29,618 | - | 30,092 | - | 752 | - | 752 | ||||||||||||||||||||||||
Real estate mortgage | 1,641 | 1,409,806 | - | 1,411,447 | 14 | 10,667 | - | 10,681 | ||||||||||||||||||||||||
Consumer | - | 48,058 | - | 48,058 | - | 376 | - | 376 | ||||||||||||||||||||||||
Total | $ | 2,653 | $ | 2,545,518 | $ | - | $ | 2,548,171 | $ | 42 | $ | 25,492 | $ | - | $ | 25,534 |
The following tables present loans individually evaluated for impairment by loan portfolio class:
As of | Three months ended | |||||||||||||||||||
March 31, 2019 | March 31, 2019 | |||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | principal | Related | recorded | income | ||||||||||||||||
(In thousands) | investment | balance | allowance | investment | recognized | |||||||||||||||
Impaired loans with no related allowance: | ||||||||||||||||||||
Commercial and industrial | $ | 193 | $ | 710 | $ | - | $ | 192 | $ | - | ||||||||||
Construction and development, excluding undeveloped land | - | - | - | 159 | - | |||||||||||||||
Undeveloped land | - | - | - | 237 | - | |||||||||||||||
Real estate mortgage | ||||||||||||||||||||
Commercial investment | 317 | 317 | - | 227 | - | |||||||||||||||
Owner occupied commercial | 1,466 | 1,904 | - | 1,026 | - | |||||||||||||||
1-4 family residential | 843 | 843 | - | 801 | - | |||||||||||||||
Home equity - first lien | - | - | - | - | - | |||||||||||||||
Home equity - junior lien | 454 | 454 | - | 299 | - | |||||||||||||||
Subtotal: Real estate mortgage | 3,080 | 3,518 | - | 2,353 | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Subtotal | $ | 3,273 | $ | 4,228 | $ | - | $ | 2,941 | $ | - | ||||||||||
Impaired loans with an allowance: | ||||||||||||||||||||
Commercial and industrial | $ | 25 | $ | 25 | $ | 25 | $ | 27 | $ | 1 | ||||||||||
Construction and development, excluding undeveloped land | - | - | - | - | - | |||||||||||||||
Undeveloped land | - | - | - | - | - | |||||||||||||||
Real estate mortgage | ||||||||||||||||||||
Commercial investment | - | - | - | - | - | |||||||||||||||
Owner occupied commercial | - | - | - | - | - | |||||||||||||||
1-4 family residential | 14 | 14 | 14 | 14 | - | |||||||||||||||
Home equity - first lien | - | - | - | - | - | |||||||||||||||
Home equity - junior lien | - | - | - | - | - | |||||||||||||||
Subtotal: Real estate mortgage | 14 | 14 | 14 | 14 | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Subtotal | $ | 39 | $ | 39 | $ | 39 | $ | 41 | $ | 1 | ||||||||||
Total: | ||||||||||||||||||||
Commercial and industrial | $ | 218 | $ | 735 | $ | 25 | $ | 219 | $ | 1 | ||||||||||
Construction and development, excluding undeveloped land | - | - | - | 159 | - | |||||||||||||||
Undeveloped land | - | - | - | 237 | - | |||||||||||||||
Real estate mortgage | ||||||||||||||||||||
Commercial investment | 317 | 317 | - | 227 | - | |||||||||||||||
Owner occupied commercial | 1,466 | 1,904 | - | 1,026 | - | |||||||||||||||
1-4 family residential | 857 | 857 | 14 | 815 | - | |||||||||||||||
Home equity - first lien | - | - | - | - | - | |||||||||||||||
Home equity - junior lien | 454 | 454 | - | 299 | - | |||||||||||||||
Subtotal: Real estate mortgage | 3,094 | 3,532 | 14 | 2,367 | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total impaired loans | $ | 3,312 | $ | 4,267 | $ | 39 | $ | 2,982 | $ | 1 |
As of | Three months ended | |||||||||||||||||||
December 31, 2018 | March 31, 2018 | |||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | principal | Related | recorded | income | ||||||||||||||||
(In thousands) | investment | balance | allowance | investment | recognized | |||||||||||||||
Impaired loans with no related allowance: | ||||||||||||||||||||
Commercial and industrial | $ | 192 | $ | 707 | $ | - | $ | 161 | $ | - | ||||||||||
Construction and development, excluding undeveloped land | 318 | 489 | - | 437 | - | |||||||||||||||
Undeveloped land | 474 | 506 | - | 474 | - | |||||||||||||||
Real estate mortgage | ||||||||||||||||||||
Commercial investment | 138 | 138 | - | 35 | - | |||||||||||||||
Owner occupied commercial | 586 | 1,023 | - | 1,503 | - | |||||||||||||||
1-4 family residential | 760 | 760 | - | 1,242 | - | |||||||||||||||
Home equity - first lien | - | - | - | - | - | |||||||||||||||
Home equity - junior lien | 143 | 143 | - | 73 | - | |||||||||||||||
Subtotal: Real estate mortgage | 1,627 | 2,064 | - | 2,853 | - | |||||||||||||||
Consumer | - | - | - | 23 | - | |||||||||||||||
Subtotal | $ | 2,611 | $ | 3,766 | $ | - | $ | 3,948 | $ | - | ||||||||||
Impaired loans with an allowance: | ||||||||||||||||||||
Commercial and industrial | $ | 28 | $ | 28 | $ | 28 | $ | 1,851 | $ | - | ||||||||||
Construction and development, excluding undeveloped land | - | - | - | - | - | |||||||||||||||
Undeveloped land | - | - | - | 24 | - | |||||||||||||||
Real estate mortgage | ||||||||||||||||||||
Commercial investment | - | - | - | - | - | |||||||||||||||
Owner occupied commercial | - | - | - | 897 | - | |||||||||||||||
1-4 family residential | 14 | 14 | 14 | 14 | - | |||||||||||||||
Home equity - first lien | - | - | - | - | - | |||||||||||||||
Home equity - junior lien | - | - | - | - | - | |||||||||||||||
Subtotal: Real estate mortgage | 14 | 14 | 14 | 911 | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Subtotal | $ | 42 | $ | 42 | $ | 42 | $ | 2,786 | $ | - | ||||||||||
Total: | ||||||||||||||||||||
Commercial and industrial | $ | 220 | $ | 735 | $ | 28 | $ | 2,012 | $ | - | ||||||||||
Construction and development, excluding undeveloped land | 318 | 489 | - | 437 | - | |||||||||||||||
Undeveloped land | 474 | 506 | - | 498 | - | |||||||||||||||
Real estate mortgage | - | - | - | - | - | |||||||||||||||
Commercial investment | 138 | 138 | - | 35 | - | |||||||||||||||
Owner occupied commercial | 586 | 1,023 | - | 2,400 | - | |||||||||||||||
1-4 family residential | 774 | 774 | 14 | 1,256 | - | |||||||||||||||
Home equity - first lien | - | - | - | - | - | |||||||||||||||
Home equity - junior lien | 143 | 143 | - | 73 | - | |||||||||||||||
Subtotal: Real estate mortgage | 1,641 | 2,078 | 14 | 3,764 | - | |||||||||||||||
Consumer | - | - | - | 23 | - | |||||||||||||||
Total impaired loans | $ | 2,653 | $ | 3,808 | $ | 42 | $ | 6,734 | $ | - |
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:
Recorded | ||||||||||||||||||||||||||||
(In thousands) | 90 or more | investment | ||||||||||||||||||||||||||
days past due | > 90 days | |||||||||||||||||||||||||||
30-59 days | 60-89 days | (includes all | Total | Total | and | |||||||||||||||||||||||
March 31, 2019 | Current | past due | past due | non-accrual) | past due | loans | accruing | |||||||||||||||||||||
Commercial and industrial | $ | 827,165 | $ | 366 | $ | 23 | $ | 193 | $ | 582 | $ | 827,747 | $ | - | ||||||||||||||
Construction and development, excluding undeveloped land | 216,115 | - | - | - | - | 216,115 | - | |||||||||||||||||||||
Undeveloped land | 28,433 | - | - | - | - | 28,433 | - | |||||||||||||||||||||
Real estate mortgage: | ||||||||||||||||||||||||||||
Commercial investment | 585,673 | 232 | 56 | 687 | 975 | 586,648 | 370 | |||||||||||||||||||||
Owner occupied commercial | 426,347 | 350 | - | 1,466 | 1,816 | 428,163 | - | |||||||||||||||||||||
1-4 family residential | 276,143 | 594 | 252 | 858 | 1,704 | 277,847 | 15 | |||||||||||||||||||||
Home equity - first lien | 48,498 | 49 | 40 | 69 | 158 | 48,656 | 69 | |||||||||||||||||||||
Home equity - junior lien | 66,188 | 171 | 24 | 454 | 649 | 66,837 | - | |||||||||||||||||||||
Subtotal: Real estate mortgage | 1,402,849 | 1,396 | 372 | 3,534 | 5,302 | 1,408,151 | 454 | |||||||||||||||||||||
Consumer | 45,239 | 24 | - | - | 24 | 45,263 | - | |||||||||||||||||||||
Total | $ | 2,519,801 | $ | 1,786 | $ | 395 | $ | 3,727 | $ | 5,908 | $ | 2,525,709 | $ | 454 | ||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||
Commercial and industrial | $ | 832,923 | $ | 197 | $ | 200 | $ | 204 | $ | 601 | $ | 833,524 | $ | 12 | ||||||||||||||
Construction and development, excluding undeveloped land | 224,732 | - | - | 318 | 318 | 225,050 | - | |||||||||||||||||||||
Undeveloped land | 29,552 | 66 | - | 474 | 540 | 30,092 | - | |||||||||||||||||||||
Real estate mortgage: | ||||||||||||||||||||||||||||
Commercial investment | 586,884 | 1,382 | 107 | 237 | 1,726 | 588,610 | 99 | |||||||||||||||||||||
Owner occupied commercial | 421,143 | 2,732 | 1,377 | 1,121 | 5,230 | 426,373 | 535 | |||||||||||||||||||||
1-4 family residential | 274,547 | 374 | 336 | 760 | 1,470 | 276,017 | - | |||||||||||||||||||||
Home equity - first lien | 49,321 | 179 | - | - | 179 | 49,500 | - | |||||||||||||||||||||
Home equity - junior lien | 70,467 | 182 | 56 | 242 | 480 | 70,947 | 99 | |||||||||||||||||||||
Subtotal: Real estate mortgage | 1,402,362 | 4,849 | 1,876 | 2,360 | 9,085 | 1,411,447 | 733 | |||||||||||||||||||||
Consumer | 48,058 | - | - | - | - | 48,058 | - | |||||||||||||||||||||
Total | $ | 2,537,627 | $ | 5,112 | $ | 2,076 | $ | 3,356 | $ | 10,544 | $ | 2,548,171 | $ | 745 |
(5) | Goodwill and Intangible Assets |
US GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Evaluations have resulted in no indication of impairment. Bancorp currently has recorded goodwill in the amount of $682 thousand fromrelated to a 1996 bank acquisition. No impairment charges have been deemed necessary or recorded to date, as the 1996 acquisitionfair value is substantially in excess of an Indiana bank.the carrying value. This goodwill is assigned to the commercial banking segment of Bancorp.
Bancorp recorded a gross core deposit intangible totaling $2.5 million as a result of its 2013 acquisition of THE BANCorp, Inc. This intangible is being amortized over the expected life of the underlying deposits to which the intangible is attributable. At September 30, 2017,March 31, 2019, and December 31, 2018, the unamortized core deposit intangible was $1.3$1.0 million, as compared to $1.4and $1.1 million, at December 31, 2016.respectively.
Mortgage servicing rights (MSRs)(“MSRs”), a component of other assets, are initially recognized at fair value when mortgage loans are sold with servicing retained. The MSRs are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. MSRs are evaluated quarterly for impairment by comparing carrying value to fair value. Estimated fair values of MSRs at both September 30, 2017March 31, 2019 and December 31, 20162018 were $2.7 million.$3.2 million and $3.6 million, respectively. Total outstanding principal balances of loans serviced for others were $350.1$324.9 million and $372.2$327.9 million at September 30, 2017,March 31, 2019, and December 31, 2016,2018, respectively.
Changes in the net carrying amount of MSRs for the nine months ended September 30, 2017 and 2016 are shown in the following table:follows:
For the nine months | Three months ended | |||||||||||||||
ended September 30, | March 31, | |||||||||||||||
(in thousands) | 2017 | 2016 | ||||||||||||||
(In thousands) | 2019 | 2018 | ||||||||||||||
Balance at beginning of period | $ | 921 | $ | 1,018 | $ | 1,022 | $ | 875 | ||||||||
Additions for mortgage loans sold | 143 | 105 | 80 | 21 | ||||||||||||
Amortization | (222 | ) | (192 | ) | (32 | ) | (35 | ) | ||||||||
Balance at end of period | $ | 842 | $ | 931 | $ | 1,070 | $ | 861 |
Stock Yards Bancorp, inc. and subsidiary
| Income Taxes |
In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Historically, the franchise tax, a component of non-interest expenses, was assessed at 1.1% of net capital and averaged $2.5 million annually over the prior two year-end periods. The Kentucky corporate income tax will be assessed at 5% of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, during the first quarter of 2019, Bancorp established a Kentucky state deferred tax asset related to existing temporary differences estimated to reverse after the effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of federal impact of $1.3 million, or approximately $0.06 per diluted share for the first quarter 2019. While this is positive in the short-term, Bancorp anticipates an unfavorable impact of approximately $200 thousand per year beginning in 2021. Components of income tax expense (benefit) from operations were as follows:follow:
Three months ended | Nine months ended | Three months ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||
Current income tax expense | ||||||||||||||||||||||||
(In thousands) | 2019 | 2018 | ||||||||||||||||||||||
Current income tax expense: | ||||||||||||||||||||||||
Federal | $ | 5,211 | $ | 4,363 | $ | 12,936 | $ | 10,958 | $ | 2,726 | $ | 2,436 | ||||||||||||
State | 179 | 287 | 472 | 597 | 141 | 128 | ||||||||||||||||||
Total current income tax expense | 5,390 | 4,650 | 13,408 | 11,555 | 2,867 | 2,564 | ||||||||||||||||||
Deferred income tax (benefit) expense | ||||||||||||||||||||||||
Deferred income tax expense (benefit) : | ||||||||||||||||||||||||
Federal | (1,583 | ) | (692 | ) | (2,240 | ) | (302 | ) | 565 | 467 | ||||||||||||||
State | (44 | ) | (75 | ) | (30 | ) | (18 | ) | (1,613 | ) | 21 | |||||||||||||
Total deferred income tax expense (benefit) | (1,627 | ) | (767 | ) | (2,270 | ) | (320 | ) | ||||||||||||||||
Total deferred income tax expense | (1,048 | ) | 488 | |||||||||||||||||||||
Change in valuation allowance | 333 | - | 459 | - | 20 | - | ||||||||||||||||||
Total income tax expense | $ | 4,096 | $ | 3,883 | $ | 11,597 | $ | 11,235 | $ | 1,839 | $ | 3,052 |
An analysis of the difference between statutory and effective income tax rates for the nine months ended September 30, 2017 and 2016 follows:
Nine months ended September 30, | Three months ended March 31, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
U.S. federal statutory income tax rate | 35.0 | % | 35.0 | % | 21.0 | % | 21.0 | % | ||||||||
Tax credits | (4.6 | ) | (9.4 | ) | ||||||||||||
Kentucky state income tax enactment | (7.3 | ) | - | |||||||||||||
Excess tax benefits from share-based compensation arrangements | (3.0 | ) | - | (1.7 | ) | (1.9 | ) | |||||||||
Increase in cash surrender value of life insurance | (1.4 | ) | (0.9 | ) | (1.2 | ) | (0.4 | ) | ||||||||
Tax credits | (0.7 | ) | (0.4 | ) | ||||||||||||
Tax exempt interest income | (1.1 | ) | (1.3 | ) | (0.3 | ) | (0.5 | ) | ||||||||
State income taxes, net of federal benefit | 0.7 | 0.9 | 0.7 | 0.7 | ||||||||||||
Other, net | 0.3 | 2.7 | - | - | ||||||||||||
Effective income tax rate | 25.9 | % | 27.0 | % | 10.5 | % | 18.5 | % |
State income tax expense represents taxes owed in Indiana. State income taxes in Kentucky and Ohio state bank taxes are based on capital levels, and are recorded as other non-interest expense.
Bancorp’s results for the first nine months of 2017 reflect implementation of Accounting Standards Update 2016-09, which provides guidance for the recognition of excess See comment above regarding recent changes in Kentucky tax benefits or deficiencies related to share-based payment awards. Effective for fiscal years beginning after December 15, 2016, ASU 2016-09 changes the way these benefits and deficiencies are recorded. Prior to 2017 they were recorded in additional paid-in capital, and therefore did not affect earnings. Beginning in 2017, these amounts are being recorded as tax expense or benefit in the income statement. For the three and nine month periods ending September 30, 2017 Bancorp recorded benefits of $241 thousand and $1.4 million, respectively, within the provision for income tax expense for such awards.
Stock Yards Bancorp, inc. and subsidiary
law.
US GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’smanagement’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the gross amount of unrecognized tax benefits was immaterial to the consolidated financial statements of the Company. Federal and state income tax returns are subject to examination for the years after 2012.2014.
| Deposits |
The composition of the Bank’s deposits outstanding at September 30, 2017 (unaudited) and December 31, 2016 is as follows:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Non-interest bearing demand | $ | 676,824 | $ | 680,156 | ||||
Interest bearing deposits: | ||||||||
Interest bearing demand | 725,368 | 768,139 | ||||||
Savings | 149,596 | 140,030 | ||||||
Money market | 698,198 | 682,421 | ||||||
Time deposits of more than $250,000 | 33,270 | 40,427 | ||||||
Other time deposits | 198,710 | 209,375 | ||||||
Total time deposits | 231,980 | 249,802 | ||||||
Total interest bearing deposits | 1,805,142 | 1,840,392 | ||||||
Total deposits | $ | 2,481,966 | $ | 2,520,548 |
(In thousands) | March 31, 2019 | December 31, 2018 | ||||||
Non-interest bearing demand deposits | $ | 698,783 | $ | 711,023 | ||||
Interest bearing deposits: | ||||||||
Interest bearing demand | 847,240 | 892,867 | ||||||
Savings | 160,988 | 155,007 | ||||||
Money market | 689,085 | 688,744 | ||||||
Time deposits of $250 or more | 54,479 | 55,182 | ||||||
Other time deposits (1) | 301,965 | 291,533 | ||||||
Total time deposits | 356,444 | 346,715 | ||||||
Total interest bearing deposits | 2,053,757 | 2,083,333 | ||||||
Total deposits | $ | 2,752,540 | $ | 2,794,356 |
(1) | Includes $29.8 million in brokered deposits as of both March 31, 2019 and December 31, 2018. |
Maturities of time deposits of $250,000 or more, than $250,000, outstanding at September 30, 2017,March 31, 2019, are summarized as follows:
(in thousands) | Amount | |||
3 months or less | $ | 11,463 | ||
Over 3 through 6 months | 3,938 | |||
Over 6 through 12 months | 10,942 | |||
Over 1 through 3 years | 6,410 | |||
Over 3 years | 517 | |||
Total | $ | 33,270 |
(In thousands) | Amount | |||
3 months or less | $ | 8,750 | ||
Over 3 months through 6 months | 6,320 | |||
Over 6 months through 12 months | 9,862 | |||
Over 1 year through 3 years | 28,054 | |||
Over 3 years | 1,493 | |||
Total time deposits of $250 or more | $ | 54,479 |
Stock Yards Bancorp, inc. and subsidiary
| Securities Sold Under Agreements to Repurchase |
Securities sold under agreements to repurchase, whichSSUAR represent excess funds froma funding source of Bancorp and are primarily used by commercial customers as part of ain conjunction with collateralized corporate cash management service, totaled $71.9 millionaccounts. Such repurchase agreements are considered financing agreements and $67.6 million at September 30, 2017 and December 31, 2016, respectively. Bancorp enters into sales of securities under agreement to repurchase at a specified futuremature within one business day from the transaction date. At September 30, 2017,March 31, 2019, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities which were owned and controlled by and under the control of Bancorp.
Information concerning SSR follows:
(Dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||||
Outstanding balance at end of period | $ | 34,633 | $ | 36,094 | ||||
Weighted average interest rate at end of period | 0.30 | % | 0.24 | % |
Three months ended | ||||||||
March 31, | ||||||||
(Dollars in thousands) | 2019 | 2018 | ||||||
Average outstanding balance during the period | $ | 37,528 | $ | 71,276 | ||||
Average interest rate during the period | 0.27 | % | 0.19 | % | ||||
Maximum outstanding at any month end during the period | $ | 38,445 | $ | 74,725 |
| Federal Home Loan Bank Advances |
Bancorp had outstanding borrowings totaling $50.1$47.9 million and $51.1$48.2 million at September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively, via 14 separate FHLB fixed-rate advances. As of September 30, 2017,March 31, 2019, for two advances totaling $30 million, both of which are non-callable, interest payments are due monthly, with principal due at maturity. For the remaining advances, totaling $20.1 million, principal and interest payments are due monthly based on an amortization schedule.
The following is a summary of the contractual maturities and average effective rates of outstanding advances:
(In thousands) | September 30, 2017 | December 31, 2016 | March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||
Year | Advance | Fixed Rate | Advance | Fixed Rate | Advance | Weighted average Fixed Rate | Advance | Weighted average Fixed Rate | ||||||||||||||||||||||||
2017 | $ | 30,000 | 1.24 | % | $ | 30,000 | 0.70 | % | ||||||||||||||||||||||||
2019 | $ | 30,000 | 2.61 | % | $ | 30,000 | 2.54 | % | ||||||||||||||||||||||||
2020 | 1,753 | 2.23 | 1,790 | 2.23 | 1,678 | 2.23 | 1,691 | 2.23 | ||||||||||||||||||||||||
2021 | 306 | 2.12 | 359 | 2.12 | 196 | 2.12 | 215 | 2.12 | ||||||||||||||||||||||||
2024 | 2,505 | 2.36 | 2,661 | 2.36 | 2,186 | 2.36 | 2,240 | 2.36 | ||||||||||||||||||||||||
2025 | 5,615 | 2.43 | 6,025 | 2.43 | 4,494 | 2.42 | 4,626 | 2.42 | ||||||||||||||||||||||||
2026 | 8,658 | 1.99 | 8,936 | 1.99 | 8,089 | 1.99 | 8,185 | 1.99 | ||||||||||||||||||||||||
2028 | 1,273 | 1.48 | 1,304 | 1.48 | 1,210 | 1.49 | 1,220 | 1.49 | ||||||||||||||||||||||||
Total | $ | 50,110 | 1.61 | % | $ | 51,075 | 1.30 | % | $ | 47,853 | 2.43 | % | $ | 48,177 | 2.39 | % |
In addition to fixed-rateFHLB advances listed above, at September 30, 2017 Bancorp had a $150 million cash management advance from the FHLB. This advance matured in the first week of October, 2017 and was used to manage Bancorp’s overall cash position. Due to the short term of the advance, it was recorded on the consolidated balance sheet within Federal funds purchased and other short-term borrowings.
Advances from the FHLB are collateralized by certain commercial and residential real estate mortgage loans under a blanket mortgage collateral pledge agreement and FHLB stock. Bancorp at times utilizesviews these borrowingsadvances to matchbe an effective alternative to brokered deposits to fund long-term fixed rate loans.loan growth. At September 30, 2017,March 31, 2019, and December 31, 2018, the amount of available credit from the FHLB totaled $367.3 million.$523.7 million, and $537.0 million, respectively. Bancorp also had $105 million in federal funds lines available from correspondent banks at both March 31, 2019, and December 31, 2018.
Stock Yards Bancorp, inc. and subsidiary
| Other Comprehensive Income (Loss) |
The following table illustrates activity within the balances ofin accumulated other comprehensive income (“AOCI”) by component, and is shown for the ninethree months ended September 30, 2017March 31, 2019 and 2016.2018.
Net unrealized | Net unrealized | Minimum | ||||||||||||||
gains on | gains (losses) | pension | ||||||||||||||
securities | on cash | liability | ||||||||||||||
(in thousands) | available-for-sale | flow hedges | adjustment | Total | ||||||||||||
Balance at December 31, 2015 | $ | 965 | $ | (60 | ) | $ | (273 | ) | $ | 632 | ||||||
Net current period other comprehensive gain (loss) | 4,110 | (301 | ) | - | 3,809 | |||||||||||
Balance at September 30, 2016 | $ | 5,075 | $ | (361 | ) | $ | (273 | ) | $ | 4,441 | ||||||
Balance at December 31, 2016 | $ | (1,211 | ) | $ | (16 | ) | $ | (272 | ) | $ | (1,499 | ) | ||||
Net current period other comprehensive income gain | 950 | 38 | - | 988 | ||||||||||||
Amounts reclassified from other comprehensive income | (20 | ) | - | - | (20 | ) | ||||||||||
Net current-period other comprehensive income | 930 | 38 | - | 968 | ||||||||||||
Balance at September 30, 2017 | $ | (281 | ) | $ | 22 | $ | (272 | ) | $ | (531 | ) |
Net unrealized | Net unrealized | Minimum | ||||||||||||||
gains (losses) | gains (losses) | pension | ||||||||||||||
on securities | on cash | liability | ||||||||||||||
(In thousands) | available for sale | flow hedges | adjustment | Total | ||||||||||||
Balance, January 1, 2018 | $ | (1,781 | ) | $ | 193 | $ | (342 | ) | $ | (1,930 | ) | |||||
Net current period other comprehensive income (loss) | (3,718 | ) | 310 | - | (3,408 | ) | ||||||||||
Reclassification adjustment for adoption of ASU 2018-02 | (496 | ) | 41 | (51 | ) | (506 | ) | |||||||||
Balance, March 31, 2018 | $ | (5,995 | ) | $ | 544 | $ | (393 | ) | $ | (5,844 | ) | |||||
Balance, January 1, 2019 | $ | (5,330 | ) | $ | 408 | $ | (220 | ) | $ | (5,142 | ) | |||||
Net current period other comprehensive income (loss) | 2,794 | (174 | ) | 9 | 2,629 | |||||||||||
Balance, March 31, 2019 | $ | (2,536 | ) | $ | 234 | $ | (211 | ) | $ | (2,513 | ) |
| Preferred Stock |
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.
Stock Yards Bancorp, inc. and subsidiary
| Net Income Per Share |
The following table reflects, for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:
Three months ended | Nine months ended | Three months ended | ||||||||||||||||||||||
(in thousands, except per share data) | September 30, | September 30, | ||||||||||||||||||||||
(In thousands, except per share data) | March 31, | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
Net income | $ | 11,704 | $ | 10,467 | $ | 33,097 | $ | 30,411 | $ | 15,641 | $ | 13,404 | ||||||||||||
Average basic shares outstanding | 22,542 | 22,385 | 22,524 | 22,325 | ||||||||||||||||||||
Weighted average shares outstanding - basic | 22,661 | 22,577 | ||||||||||||||||||||||
Dilutive securities | 422 | 418 | 460 | 386 | 285 | 354 | ||||||||||||||||||
Average shares outstanding including dilutive securities including dilutive securities | 22,964 | 22,803 | 22,984 | 22,711 | ||||||||||||||||||||
Weighted average shares outstanding- diluted | 22,946 | 22,931 | ||||||||||||||||||||||
Net income per share, basic | $ | 0.52 | $ | 0.47 | $ | 1.47 | $ | 1.36 | $ | 0.69 | $ | 0.59 | ||||||||||||
Net income per share, diluted | $ | 0.51 | $ | 0.46 | $ | 1.44 | $ | 1.34 | $ | 0.68 | $ | 0.58 |
SARs of 188 thousand granted at prices ranging from $33.08 to $40.00 were outstanding at March 31, 2019, but not included in the computation of diluted EPS because they were antidilutive. They could, however, be dilutive to EPS in the future.
| Defined Benefit |
Bancorp sponsors an unfunded, non-qualified, defined benefit retirement plan for three key officers (two(one current and onetwo retired), and has no plans to increase the number of or benefits to participants. Benefits vest based on 25 years of service. All three officersservice and all participants are fully vested as of September 2017.vested. Actuarially determined pension costs are expensed and accrued over the service period, and benefits are paid from Bancorp’s assets. Bancorp maintains life insurance policies, for which it is the beneficiary, on participants and certain former executives. Income from these policies is utilized to offset costs of benefits. Net periodic benefits costs, which include interestbenefit cost and amortization of net losses, totaled $34 thousand and $33 thousandwas immaterial for the three-month periods ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the net periodic benefit costs totaled $103 thousand and $100 thousand, respectively.all respective periods.
| Stock-Based Compensation |
The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.
Bancorp currently has one stock-based compensation plan. At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. NoIn 2018 shareholders approved an additional 500 thousand shares were made available.for issuance under the plan. As of September 30, 2017,March 31, 2019, there were 285,133506 thousand shares available for future awards.
Options, whichStock Options – Bancorp had no stock options outstanding as of March 31, 2019 and December 31, 2018.
Stock appreciation rights (“SARs”) – SARs granted have not been granted since 2007, had a vesting schedule of 20% per year and as of February 2017; all options have been exercised or expired. Stock appreciation rights (“SARs”) have a vesting schedule of 20% per year. SARs expire ten years after the grant date unless unvested grants are forfeited due to employment termination. SARs granted under the 2005 plan expire as late as 2025.
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.
2019 | 2018 | |||||||
Dividend yield | 2.52 | % | 2.56 | % | ||||
Expected volatility | 20.40 | % | 20.17 | % | ||||
Risk free interest rate | 2.55 | % | 2.96 | % | ||||
Expected life of SARs (in years) | 7.2 | 7.0 |
Restricted sharesstock awards (“RSAs”) – RSAs granted to officers vest over five years. All restricted shares have been granted at a price equal to the market value of common stock at the time of grant. For all grants prior to 2015, grantees wereare entitled to dividend payments during the vesting period. For grants in 2015 and after,forward, forfeitable dividends are deferred until shares are vested.
Stock Yards Bancorp, inc. and subsidiaryRSAs is equal to the market value of the shares on the date of grant.
Grants of performance stock units (“PSUs”) – PSUs vest based upon service and a three-year performance period, which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the fairmarket value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Beginning in 2015, grantsGrants require a one year post-vesting holding period. For 2015, 2016period and 2017, the fair value of such grants incorporates a liquidity discount of 4.80%, 4.50% and 5.12%, respectively, related to the holding period.period of 4.1%, 4.3% and 5.1% for 2019, 2018, and 2017, respectively.
Grants of restricted stock units (“RSUs”) – RSUs are only granted to directors, are time-based and vest 12 months after grant date. Because grantees are entitled to deferred dividend payments at the end of the vesting period, fair value of the RSUs is equal to the fairequals market value of underlying shares on the date of grant.
Bancorp utilized cash of $210 thousand during the first three months of 2019 for the purchase of shares upon the vesting of RSUs. This compares with cash used of $156 thousand during the first three months of 2018 for the purchase of shares upon the vesting of RSUs net of cash received for RSUs exercised.
Bancorp has recognized stock-based compensation expense SARs, RSAs, and PSUs within salariescompensation expense, and employee benefitsRSUs for employees, anddirectors within other non-interest expense, for directors, in the consolidated statements of income as follows:
For three months ended | For nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Stock-based compensation expense before income taxes | $ | 670 | $ | 573 | $ | 2,012 | $ | 1,646 | ||||||||
Less: deferred tax benefit | (235 | ) | (200 | ) | (704 | ) | (576 | ) | ||||||||
Reduction of net income | $ | 435 | $ | 373 | $ | 1,308 | $ | 1,070 |
Three months ended March 31, 2019 | ||||||||||||||||||||
(In thousands) | Stock Appreciation Rights | Restricted Stock Awards | Restricted Stock Units | Performance Stock Units | Total | |||||||||||||||
Expense | $ | 84 | $ | 293 | $ | 81 | $ | 405 | $ | 863 | ||||||||||
Deferred tax benefit | (18 | ) | (61 | ) | (17 | ) | (85 | ) | (181 | ) | ||||||||||
Total net expense | $ | 66 | $ | 232 | $ | 64 | $ | 320 | $ | 682 |
Three months ended March 31, 2018 | ||||||||||||||||||||
(In thousands) | Stock Appreciation Rights | Restricted Stock Awards | Restricted Stock Units | Performance Stock Units | Total | |||||||||||||||
Expense | $ | 73 | $ | 276 | $ | 63 | $ | 411 | $ | 823 | ||||||||||
Deferred tax benefit | (15 | ) | (58 | ) | (13 | ) | (87 | ) | (173 | ) | ||||||||||
Total net expense | $ | 58 | $ | 218 | $ | 50 | $ | 324 | $ | 650 |
Bancorp’s net income for the three and nine-month periods ended September 30, 2017 reflected the implementation of ASU 2016-09 which changed the way excess tax benefits and deficiencies related to share-based compensation are recorded. Prior to 2017 these were recorded directly to additional paid-in capital and, thus did not affect earnings. Beginning in 2017 these are recorded as a tax expense or benefit in the income statement. For the three and nine months ended September 30, 2017 these benefits resulted in a $241 thousand and a $1.4 million increase in net income, respectively. This tax benefit is not reflected in the table above.
Bancorp expects to record an additional $679 thousand of stock-based compensation expense in 2017 for equity grants outstanding as of September 30, 2017. As of September 30, 2017,March 31, 2019, Bancorp has $4.9$7.6 million of unrecognized stock-based compensation expense that is expectedestimated to be recorded as compensation expense over the next five years as awards vest. Bancorp used cash of $216 thousand during the first nine months of 2017 for purchase of shares upon vesting of restricted stock units, net of cash received for options exercised. This compares to cash received of $1.6 million during the first nine months of 2016 for similar activity.follows:
(In thousands) | Stock | |||||||||||||||||||
Year ended | Appreciation Rights | Restricted Stock Awards | Restricted Stock Units | Performance Stock Units | Total | |||||||||||||||
Remainder of 2019 | $ | 253 | $ | 900 | $ | 248 | $ | 1,215 | $ | 2,616 | ||||||||||
2020 | 293 | 1,053 | 2 | 947 | 2,295 | |||||||||||||||
2021 | 235 | 833 | - | 466 | 1,534 | |||||||||||||||
2022 | 181 | 561 | - | - | 742 | |||||||||||||||
2023 | 105 | 310 | - | - | 415 | |||||||||||||||
2024 | 7 | 25 | - | - | 32 | |||||||||||||||
Total estimated expense | $ | 1,074 | $ | 3,682 | $ | 250 | $ | 2,628 | $ | 7,634 |
Stock Yards Bancorp, inc. and subsidiary
Fair values of Bancorp’s SARs are estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options and SARs. This model requires input of assumptions, changes to which can materially affect the fair value estimate. Fair value of restricted shares is equal to Bancorp’s closing stock price on the date of grant. The following assumptions were used in SAR valuations at the grant date in each year:
2017 | 2016 | |||||||
Dividend yield | 2.72 | % | 2.94 | % | ||||
Expected volatility | 19.47 | % | 19.31 | % | ||||
Risk free interest rate | 2.29 | % | 1.70 | % | ||||
Expected life of SARs (in years) | 7.0 | 7.3 |
Dividend yield and expected volatility are based on historical information for Bancorp for time periods corresponding to the expected life of options and SARs granted. Expected volatility is the price volatility of the underlying shares for the expected term measured on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the award. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.
Stock Yards Bancorp, inc. and subsidiary
A summary of stock option andtable summarizes SARs activity and related information for the twelve month period ended December 31, 2016 and the nine month period ended September 30, 2017 follows:information:
Weighted | Weighted | ||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted | Aggregate | Weighted | average | Weighted |
| Weighted | average | ||||||||||||||||||||||||||||||||||||||||||||
Options | average | intrinsic | average | remaining | average | Aggregate | average | remaining | |||||||||||||||||||||||||||||||||||||||||||
and SARs | Exercise | exercise | value | fair | contractual | Exercise | exercise | intrinsic | fair | contractual | |||||||||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | SARs | price | price | value(1) | value | life (in years) | |||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | price | price | (in thousands) | value | life (in years) | ||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Vested and exercisable | 656 | $ | 14.02 | - | 19.44 | $ | 15.75 | $ | 6,191 | $ | 3.39 | 3.7 | |||||||||||||||||||||||||||||||||||||||
Unvested | 266 | 15.24 | - | 24.55 | 18.66 | 1,733 | 3.29 | 7.7 | |||||||||||||||||||||||||||||||||||||||||||
Total outstanding | 922 | 14.02 | - | 24.55 | 16.59 | 7,924 | 3.36 | 4.8 | |||||||||||||||||||||||||||||||||||||||||||
Outstanding, January 1, 2018 | 704 | $14.02 | - | $40.00 | $ | 19.51 | $ | 12,923 | $ | 3.47 | 5.1 | ||||||||||||||||||||||||||||||||||||||||
Granted | 88 | 25.76 | - | 33.08 | 25.84 | 1,866 | 3.56 | 100 | 35.90 | - | 39.32 | 37.75 | - | 6.07 | |||||||||||||||||||||||||||||||||||||
Exercised | (272 | ) | 14.02 | - | 17.89 | 16.38 | 4,155 | 3.73 | (73 | ) | 14.02 | - | 19.37 | 15.32 | 1,654 | 3.43 | |||||||||||||||||||||||||||||||||||
Forfeited | (3 | ) | 14.02 | - | 15.84 | 15.18 | 60 | 2.94 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
Outstanding, December 31, 2018 | 731 | $14.02 | - | $40.00 | $ | 22.42 | $ | 8,422 | $ | 3.82 | 5.2 | ||||||||||||||||||||||||||||||||||||||||
At December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Vested and exercisable | 475 | 14.02 | - | 24.56 | 15.72 | 14,820 | 3.16 | 4.3 | |||||||||||||||||||||||||||||||||||||||||||
Unvested | 260 | 15.24 | - | 33.08 | 21.53 | 6,623 | 3.43 | 7.8 | |||||||||||||||||||||||||||||||||||||||||||
Total outstanding | 735 | 14.02 | - | 33.08 | 17.78 | 21,443 | 3.26 | 5.5 | |||||||||||||||||||||||||||||||||||||||||||
Outstanding, January 1, 2019 | 731 | $14.02 | - | $40.00 | $ | 22.42 | $ | 8,422 | $ | 3.82 | |||||||||||||||||||||||||||||||||||||||||
Granted | 46 | 40.00 | - | 40.00 | 40.00 | - | 6.34 | 40 | 36.65 | - | 36.65 | 36.65 | - | 6.61 | |||||||||||||||||||||||||||||||||||||
Exercised | (47 | ) | 14.02 | - | 17.89 | 15.52 | 1,168 | 3.27 | (26 | ) | 14.02 | - | 19.37 | 14.71 | 529 | 3.55 | |||||||||||||||||||||||||||||||||||
Forfeited | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||
Outstanding, March 31, 2019 | 745 | $14.02 | - | $40.00 | $ | 23.45 | $ | 8,639 | $ | 3.98 | 5.4 | ||||||||||||||||||||||||||||||||||||||||
At September 30, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Vested and exercisable | 519 | 14.02 | - | 25.76 | 16.39 | 11,218 | 3.15 | 4.3 | 535 | $14.02 | - | $40.00 | $ | 19.01 | $ | 8,169 | $ | 3.35 | 4.1 | ||||||||||||||||||||||||||||||||
Unvested | 215 | 15.24 | - | 40.00 | 26.45 | 2,567 | 4.17 | 7.9 | 210 | 19.44 | - | 40.00 | 34.78 | 470 | 5.60 | 8.6 | |||||||||||||||||||||||||||||||||||
Total outstanding | 734 | 14.02 | - | 40.00 | 19.17 | $ | 13,785 | 3.45 | 5.3 | ||||||||||||||||||||||||||||||||||||||||||
Outstanding, March 31, 2019 | 745 | $14.02 | - | $40.00 | $ | 23.45 | $ | 8,639 | $ | 3.98 | 5.4 | ||||||||||||||||||||||||||||||||||||||||
Vested year-to-date | 92 | $ | 15.24 | - | 25.76 | $ | 19.34 | $ | 1,723 | $ | 3.18 | ||||||||||||||||||||||||||||||||||||||||
Vested at March 31, 2019 | 69 | $19.37 | - | $40.00 | $ | 26.77 | $ | 574 | $ | 4.44 |
Intrinsic
(1) - Intrinsic value for stock options and SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grantprice.46,410 shares had an intrinsic value of zero because the exercise price
The following table summarizes activity for those shares exceeded the current market price at September 30, 2017. There are no options outstanding as of September 30, 2017; all have been exercised or have expired.RSAs granted to officers:
(In thousands, except per share data) | RSAs | Grant date weighted average cost | ||||||
Unvested at January 1, 2018 | 119 | $ | 27.62 | |||||
Shares awarded | 40 | 35.89 | ||||||
Restrictions lapsed and shares released | (44 | ) | 23.62 | |||||
Shares forfeited | (5 | ) | 31.35 | |||||
Unvested at December 31, 2018 | 110 | $ | 32.09 | |||||
Unvested at January 1, 2019 | 110 | $ | 32.09 | |||||
Shares awarded | 39 | 34.88 | ||||||
Restrictions lapsed and shares released | (39 | ) | 28.66 | |||||
Shares forfeited | - | - | ||||||
Unvested at March 31, 2019 | 110 | $ | 34.31 |
Stock Yards Bancorp, inc. and subsidiary
A summary of activityExpected shares to be awarded for restricted shares of common stockPSUs granted to officers for the periods ending December 31, 2016 and September 30, 2017 is outlined in the following table:
Grant date | ||||||||
weighted- | ||||||||
Number | average cost | |||||||
Unvested at December 31, 2015 | 155,858 | $ | 18.98 | |||||
2016 activity: | ||||||||
Shares awarded | 51,122 | 25.78 | ||||||
Restrictions lapsed and shares released | (49,265 | ) | 17.98 | |||||
Shares forfeited | (12,480 | ) | 20.69 | |||||
Unvested at December 31, 2016 | 145,235 | $ | 21.57 | |||||
2017 activity: | ||||||||
Shares awarded | 28,625 | 44.85 | ||||||
Restrictions lapsed and shares released | (46,220 | ) | 19.76 | |||||
Shares forfeited | (7,154 | ) | 25.03 | |||||
Unvested at September 30, 2017 | 120,486 | $ | 27.59 |
Bancorp awarded PSUs to executive officers of Bancorp, the three-year performance period for which began January 1 of the award year. Shares awarded in 2017 under the 2014 grant totaled 50,022. Shares awarded in 2016 under the 2013 grant totaled 55,188.year are as follows:
The following table outlines outstanding PSU grants:
Vesting | Expected | Vesting | Expected | |||||||||||||||||||||
Grant | period | Fair | shares to | period | Fair | shares to | ||||||||||||||||||
year | in years | value | be awarded | in years | value | be awarded | ||||||||||||||||||
2015 | 3 | $ | 20.02 | 51,910 | ||||||||||||||||||||
2016 | 3 | 22.61 | 58,786 | |||||||||||||||||||||
2017 | 3 | 35.66 | 24,756 | 3 | $ | 35.66 | 61,893 | |||||||||||||||||
2018 | 3 | 31.54 | 50,352 | |||||||||||||||||||||
2019 | 3 | 32.03 | 43,602 |
In the first quarter of 2017,2019, Bancorp awarded 4,6809,834 RSUs to directors of Bancorp with a grant date fair value of $220$330 thousand. No awards were made in the second or third quarters of 2017.
|
|
In April 2016 Bancorp declared a 3 for 2 stock split effected as a 50% stock dividend payable in May 2016. Share and per share information has been adjusted for this split.
Stock Yards Bancorp, inc. and subsidiary
(15) | Commitments and Contingent Liabilities |
As of September 30, 2017,March 31, 2019 and December 31, 2018, Bancorp had various commitments outstanding that arose in the normal course of business, including standby letterssuch as unused commitments or lines of credit and commitments made to extend credit,lend in the future, which are properly not reflected in the consolidated financial statements. In management’s opinion, at September 30, 2017Total off balance sheet commitments to extend credit of $709.7 million, including standby letters of credit of $17.6 million, represent normal banking transactions. Commitments to extend credit were $628.3 million, including letters of credit of $15.6 million, as of December 31, 2016. follows:
(In thousands) | March 31, 2019 | December 31, 2018 | ||||||
Commercial and Industrial | $ | 354,903 | $ | 309,920 | ||||
Construction - Commercial | 201,465 | 163,314 | ||||||
Construction - Residential | 14,785 | 16,050 | ||||||
Home Equity | 149,584 | 147,907 | ||||||
Credit Cards | 19,912 | 20,003 | ||||||
Overdrafts | 21,558 | 21,751 | ||||||
Letters of credit | 20,374 | 20,891 | ||||||
Other | 33,748 | 33,369 | ||||||
Future loan commitments | 213,087 | 101,399 | ||||||
Total off balance sheet commitments to extend credit | $ | 1,029,416 | $ | 834,604 |
Commitments to extend credit are an agreement to lend to a customer as long as collateral is available as agreed upon and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Commitments to extend credit are mainly comprised of commercial lines of credit, construction and home equity credit lines and credit cards issued to commercial customers. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case by case basis. The amount of collateral obtained if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, securities, equipment, and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments. At September 30, 2017,March 31, 2019 and December 31, 2018, Bancorp had accrued $350 thousand in other liabilities for inherent risks related to unfunded credit commitments.
Standby letters of credit and financial guarantees written are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party. Those guarantees are primarily issued to support customer commercial transactions. Standby letters of credit generally have maturities of one to two years.
As part of the normal course of business Bancorp entered into an agreement to purchase 29 automatic teller machines (ATMs) over the next three years at a total price of $1.2 million. Management was able to secure favorable pricing by contractually committing to purchase the machines.
Also, as of September 30, 2017,March 31, 2019, in the normal course of business, there were pending legal actions and administrative proceedings in which claims for damages are asserted and/asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or losses could be incurred. We record a liability for these matters if an unfavorable outcome is probable and the amountresults of loss can be reasonably estimated, including expected insurance coverage. For proceedings where the reasonable estimateoperations of loss is a range, we record a best estimate of loss within the range. At September 30, 2017 we have recorded a liability of $266 thousand for such matters.Bancorp.
(16) | Assets and Liabilities Measured and Reported at Fair Value |
Bancorp followsFair value represents the provisions of authoritative guidance for fair value measurements. This guidance is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by US GAAP. The guidance also prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in US GAAP.
Authoritative guidance defines fair value as theexchange price that would be received to sellfor an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants aton the measurement date. The guidance also establishes a hierarchy to group assets and liabilities carried at fair value inThere are three levels based upon the markets in which the assets and liabilities trade and the source of assumptionsinputs that may be used to determinemeasure fair value. These levels are:values:
● | Level 1: Valuation is based upon quoted (unadjusted) prices for identical instruments traded in active markets. |
Stock Yards Bancorp, inc. and subsidiary
● | Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
● | Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect internal estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include pricing models, discounted cash flows and other similar techniques. |
Authoritative guidance requires maximummaximization of use of observable inputs and minimumminimization of use of unobservable inputs in fair value measurements. Where there exists limited or no observable market data, Bancorp derives its own estimates by generally considering characteristics of the asset/liability, the current economic and competitive environment and other factors. For this reason, results cannot be determined with precision and may not be realized on an actual sale or immediate settlement of the asset or liability.
Bancorp’s investmentAt March 31, 2019 and December 31, 2018, Bancorp’s securities available-for-saleavailable for sale portfolio and interest rate swaps arewere recorded at fair value on a recurring basis. Other accounts including mortgage servicing rights, impaired loans and other real estate owned may be recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets.
The portfolio of investment securities available-for-sale is comprised of U.S. Treasury and other U.S. government obligations, debt securities of U.S. government-sponsored corporations (including mortgage-backed securities), obligations of state and political subdivisions and corporate equity securities. U.S. Treasury and publicly traded corporate equity securities are priced using quoted prices of identical securities in an active market. These measurements are classified as Level 1 in the hierarchy above. All otheravailable 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 generally observable in the market place and can be derived from or supported by observable data. These measurements are classified as Level 2 in the hierarchy above.2.
Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements generallyfor interest rate swaps are based on benchmark forward yield curves and other relevant observable market data. For purposes of potential valuation adjustments to derivative positions, Bancorp evaluates the credit risk of its counterparties as well as its own credit risk. To date, Bancorp has not realized any losses due to a counterparty’scounterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2017.the reporting period. Interest rate swaps are valued using primarily Level 2 inputs.
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.
Stock Yards Bancorp, inc. and subsidiary
Below are the carryingCarrying values of assets measured at fair value on a recurring basis.basis follows:
(in thousands) | Fair value at September 30, 2017 | |||||||||||||||||||||||||||||||
(In thousands) | Fair value at March 31, 2019 | |||||||||||||||||||||||||||||||
Assets | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Investment securities available-for-sale | ||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||
Government sponsored enterprise obligations | $ | 372,664 | $ | - | $ | 372,664 | $ | - | $ | 342,866 | $ | - | $ | 342,866 | $ | - | ||||||||||||||||
Mortgage-backed securities - government agencies | 146,720 | - | 146,720 | - | ||||||||||||||||||||||||||||
Mortgage backed securities - government agencies | 137,131 | - | 137,131 | - | ||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 51,622 | - | 51,622 | - | 27,134 | - | 27,134 | - | ||||||||||||||||||||||||
Corporate equity securities | 516 | 516 | - | - | ||||||||||||||||||||||||||||
Total investment securities available-for-sale | 571,522 | 516 | 571,006 | - | ||||||||||||||||||||||||||||
Total Securities available for sale | 507,131 | - | 507,131 | - | ||||||||||||||||||||||||||||
Interest rate swaps | 182 | - | 182 | - | 524 | - | 524 | - | ||||||||||||||||||||||||
Total assets | $ | 571,704 | $ | 516 | $ | 571,188 | $ | - | $ | 507,655 | $ | - | $ | 507,655 | $ | - | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 148 | $ | - | $ | 148 | $ | - | $ | 240 | $ | - | $ | 240 | $ | - |
(In thousands) | Fair value at December 31, 2018 | |||||||||||||||
Assets | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Securities available for sale | ||||||||||||||||
Government sponsored enterprise obligations | 261,039 | - | 261,039 | - | ||||||||||||
Mortgage backed securities - government agencies | 146,277 | - | 146,277 | - | ||||||||||||
Obligations of states and political subdivisions | 29,679 | - | 29,679 | - | ||||||||||||
Total Securities available for sale | 436,995 | - | 436,995 | - | ||||||||||||
Interest rate swaps | 1,035 | - | 1,035 | - | ||||||||||||
Total assets | $ | 438,030 | $ | - | $ | 438,030 | $ | - | ||||||||
Liabilities | ||||||||||||||||
Interest rate swaps | $ | 543 | $ | - | $ | 543 | $ | - |
(in thousands) | Fair value at December 31, 2016 | |||||||||||||||
Assets | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Investment securities available-for-sale | ||||||||||||||||
U.S. Treasury and other U.S. government obligations | $ | 74,998 | $ | 74,998 | $ | - | $ | - | ||||||||
Government sponsored enterprise obligations | 268,090 | - | 268,090 | - | ||||||||||||
Mortgage-backed securities - government agencies | 168,843 | - | 168,843 | - | ||||||||||||
Obligations of states and political subdivisions | 57,444 | - | 57,444 | - | ||||||||||||
Corporate equity securities | 699 | 699 | - | - | ||||||||||||
Total investment securities available-for-sale | 570,074 | 75,697 | 494,377 | - | ||||||||||||
Interest rate swaps | 203 | - | 203 | - | ||||||||||||
Total assets | $ | 570,277 | $ | 75,697 | $ | 494,580 | $ | - | ||||||||
Liabilities | ||||||||||||||||
Interest rate swaps | $ | 178 | $ | - | $ | 178 | $ | - |
For the securities portfolio, Bancorp monitors the valuation technique used by pricing agencies to ascertain when transfers between levels have occurred. The nature of other assets and liabilities measured at fair value is such that transfers in and out of any level are expected to be rare. For the three months ended March 31, 2019, there were no transfers between Levels 1, 2, or 3.
Bancorp had no financial instruments classified within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis at September 30, 2017March 31, 2019 or December 31, 2016.2018.
Stock Yards Bancorp, inc. and subsidiary
MSRs are recordedDiscussion of assets measured at fair value upon capitalization,on a non-recurring basis follows:
Mortgage Servicing Rights – On at least a quarterly basis, MSRs are amortized to correspond with estimated servicing income, and are periodically assessedevaluated for impairment based onupon the fair value atof the reporting date.MSRs as compared to carrying amount. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At September 30, 2017March 31, 2019 and December 31, 20162018, there was no valuation allowance for the mortgage servicing rights, as the fair value exceeded the cost. Accordingly, the MSRs are not included in either table belowthe following tabular disclosure for September 30, 2017March 31, 2019 or December 31, 2016. See Note 4 for more information regarding MSRs.2018.
ForImpaired loans - Collateral-dependent impaired loans in the table below,generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals. Also, fair value is calculated as the carrying value of loans with a specific valuation allowance, less the specific allowance, and the carrying value of collateral dependent loans that have been charged down to their fair value.valuation allowance. Fair value of impaired loans was primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. Bancorp determines the value of real estate collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. For other assets, Bancorp relies on both internal and third party assessments of asset value, based on information provided by the borrower, following methodologies similar to those described for real estate. As of September 30, 2017,March 31, 2019, total impaired collateral dependent loans charged down to their fair value and impaired loans with a valuation allowance were $3.2 million,$408 thousand, and the specific allowance totaled $722$39 thousand, resulting in a fair value of $2.5 million,$369 thousand, compared with total collateral dependent loans charged down to their fair value and impaired loans with a valuation allowance of $4.2 million,$967 thousand, and the specific allowance allocation totaling $1.3 million,$42 thousand, resulting in a fair value of $2.9 million$925 thousand at December 31, 2016.2018. Losses represent charge offs and changes in specific allowances for the periodperiods indicated.
Other real estate owned (“OREO”), which is carried - Assets acquired through or instead of loan foreclosure are initially recorded at thefair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value is periodically assessed for impairment based on fair value at the reporting date.less estimated costs to sell. Fair value is commonly based on recent real estate appraisals 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’smanagement’s historical knowledge and/or changes in market conditions from the date of the most recent appraisal. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. For OREO in the table below, fair value is the carrying value of only parcels of OREO which have a carrying value equal to appraised value. Losses represent write-downs which occurred during the period indicated. At September 30, 2017March 31, 2019 and December 31, 2016,2018, carrying value of all other real estate owned was $2.6$878 thousand and $1.0 million, and $5.0 million, respectively.
Stock Yards Bancorp, inc. and subsidiary
Below are the carrying values of assets measured at fair value on a non-recurring basis. Impaired loan amounts reported represent only those impaired loans with specific valuation allowances and collateral dependent impaired loans charged down to their carrying value.
(in thousands) | Fair value at September 30, 2017 | Losses for 9 month | ||||||||||||||||||||||||||||||||||||||
(In thousands) | Fair value at March 31, 2019 | Losses recorded: | ||||||||||||||||||||||||||||||||||||||
period ended | Three months ended | |||||||||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | September 30, 2017 | Total | Level 1 | Level 2 | Level 3 | March 31, 2019 | |||||||||||||||||||||||||||||||
Impaired loans | $ | 2,530 | $ | - | $ | - | $ | 2,530 | $ | (280 | ) | $ | 369 | $ | - | $ | - | $ | 369 | $ | (3 | ) | ||||||||||||||||||
Other real estate owned | 2,640 | - | - | 2,640 | (171 | ) | 239 | - | - | 239 | - | |||||||||||||||||||||||||||||
Total | $ | 5,170 | $ | - | $ | - | $ | 5,170 | $ | (451 | ) | $ | 608 | $ | - | $ | - | $ | 608 | $ | (3 | ) |
(in thousands) | Fair value at December 31, 2016 | Losses for 9 month | ||||||||||||||||||||||||||||||||||||||
(In thousands) | Fair value at December 31, 2018 | Losses recorded: | ||||||||||||||||||||||||||||||||||||||
period ended | Three months ended | |||||||||||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | September 30, 2016 | Total | Level 1 | Level 2 | Level 3 | March 31, 2018 | |||||||||||||||||||||||||||||||
Impaired loans | $ | 2,933 | $ | - | $ | - | $ | 2,933 | $ | (1,612 | ) | $ | 925 | $ | - | $ | - | $ | 925 | $ | (1,711 | ) | ||||||||||||||||||
Other real estate owned | 4,488 | - | - | 4,488 | (62 | ) | 239 | - | - | 239 | - | |||||||||||||||||||||||||||||
Total | $ | 7,421 | $ | - | $ | - | $ | 7,421 | $ | (1,674 | ) | $ | 1,164 | $ | - | $ | - | $ | 1,164 | $ | (1,711 | ) |
For the securities portfolio, Bancorp monitors the valuation technique used by pricing agencies to ascertain when transfers between levels have occurred. The nature of other assets and liabilities measured at fair value is such that transfers in and out of any level are expected to be rare. For the nine months ended September 30, 2017, there were no transfers between Levels 1, 2, or 3.
For Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2017,March 31, 2019, the significant unobservable inputs used in the fair value measurements are presented below.
Significant | Weighted | Range | ||||||||||||||||||||
Fair | Valuation | unobservable | average of | Fair | Valuation | Unobservable | (weighted | |||||||||||||||
(dollars in thousands) | Value | technique | input | input | ||||||||||||||||||
(Dollars in thousands) | value | technique | inputs | average) | ||||||||||||||||||
Impaired loans - collateral dependent | $ | 2,530 | Appraisal | Appraisal discounts | 15.0 | % | $ | 369 | Appraisal | Appraisal discounts | 9.8 | % | ||||||||||
Other real estate owned | 2,640 | Appraisal | Appraisal discounts | 23.4 | 239 | Appraisal | Appraisal discounts | 22.0 |
Stock Yards Bancorp, inc. and subsidiary
(17) | Disclosure of Financial Instruments Not Reported at Fair Value |
US GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. Carrying amounts, estimated fair values, and placement in the fair value hierarchy of Bancorp’sBancorp’s financial instruments are as follows:
(in thousands) | Carrying | |||||||||||||||||||
September 30, 2017 | amount | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and short-term investments | $ | 129,078 | $ | 129,078 | $ | 129,078 | $ | - | $ | - | ||||||||||
Mortgage loans held for sale | 5,459 | 6,005 | - | 6,005 | - | |||||||||||||||
Federal Home Loan Bank stock and other securities | 7,666 | 7,666 | - | 7,666 | - | |||||||||||||||
Loans, net | 2,310,172 | 2,302,466 | - | - | 2,302,466 | |||||||||||||||
Accrued interest receivable | 8,162 | 8,162 | 8,162 | - | - | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 2,481,966 | 2,480,641 | - | - | 2,480,641 | |||||||||||||||
Short-term borrowings | 233,824 | 233,824 | - | 233,824 | - | |||||||||||||||
FHLB advances | 50,110 | 50,070 | - | 50,070 | - | |||||||||||||||
Secured borrowings | 18,351 | 18,210 | ||||||||||||||||||
Accrued interest payable | 212 | 212 | 212 | - | - |
(in thousands) | Carrying | |||||||||||||||||||
December 31, 2016 | amount | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and short-term investments | $ | 47,973 | $ | 47,973 | $ | 47,973 | $ | - | $ | - | ||||||||||
Mortgage loans held for sale | 3,213 | 3,481 | - | 3,481 | - | |||||||||||||||
Federal Home Loan Bank stock and other securities | 6,347 | 6,347 | - | 6,347 | - | |||||||||||||||
Loans, net | 2,281,368 | 2,284,569 | - | - | 2,284,569 | |||||||||||||||
Accrued interest receivable | 6,878 | 6,878 | 6,878 | - | - | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 2,520,548 | 2,519,725 | - | - | 2,519,725 | |||||||||||||||
Short-term borrowings | 114,969 | 114,969 | - | 114,969 | - | |||||||||||||||
FHLB advances | 51,075 | 50,806 | - | 50,806 | - | |||||||||||||||
Secured borrowings | 15,814 | 15,731 | ||||||||||||||||||
Accrued interest payable | 144 | 144 | 144 | - | - |
(In thousands) | Carrying | |||||||||||||||||||
March 31, 2019 | amount | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 111,340 | $ | 111,340 | $ | 111,340 | $ | - | $ | - | ||||||||||
Mortgage loans held for sale | 2,981 | 3,089 | - | 3,089 | - | |||||||||||||||
Federal Home Loan Bank stock | 9,779 | 9,779 | 9,779 | |||||||||||||||||
Loans, net | 2,499,245 | 2,486,416 | - | - | 2,486,416 | |||||||||||||||
Accrued interest receivable | 8,710 | 8,710 | 8,710 | - | - | |||||||||||||||
Liabilities | ||||||||||||||||||||
Non-interest bearing deposits | 698,783 | 698,783 | 698,783 | - | - | |||||||||||||||
Transaction deposits | 1,697,313 | 1,697,313 | - | 1,697,313 | - | |||||||||||||||
Time deposits | 356,444 | 355,947 | - | 355,947 | - | |||||||||||||||
Securities sold under agreement to repurchase | 34,633 | 34,633 | - | 34,633 | - | |||||||||||||||
Federal funds purchased | 12,218 | 12,218 | - | 12,218 | - | |||||||||||||||
FHLB advances | 47,853 | 47,295 | - | 47,295 | - | |||||||||||||||
Accrued interest payable | 709 | 709 | 709 | - | - |
Stock Yards Bancorp, inc. and subsidiary
Management used the following methods and assumptions to estimate the fair value of each class of financial instrument for which it is practicable to estimate the value.
Cash, short-term investments, accrued interest receivable/payable and short-term borrowings
For these short-term instruments, carrying amount is a reasonable estimate of fair value.
Mortgage loans held for sale
Mortgage loans held for sale are initially recorded at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is determined by market quotes for similar loans based on loan type, term, rate, size and the borrower’s credit score.
Federal Home Loan Bank stock and other securities
For these securities without readily available market values, carrying amount is a reasonable estimate of fair value as it equals the amount due from FHLB or other issuer at upon redemption.
Loans, net
US GAAP prescribes the exit price concept for estimating fair value of loans. Because there is not an active market (exit price) for trading virtually all types of loans in Bancorp’s portfolio, fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities (entrance price).
Deposits
Fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. Fair value of fixed-rate certificates of deposits is estimated by discounting future cash flows using the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank advances
Fair value of FHLB advances is estimated by discounting future cash flows using estimates of current market rate for instruments with similar terms and remaining maturities.
Secured BorrowingsSecured borrowings represent sold participation loans for which Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their share of the loan without permission from Bancorp. US GAAP requires the participated portion of these loans to be recorded as secured borrowings. Secured borrowings are included in other liabilities on the consolidated balance sheets.
Commitments to extend credit and standby letters of credit
Fair values of commitments to extend credit are estimated using fees currently charged to enter into similar agreements and creditworthiness of customers. Fair values of standby letters of credit are based on fees currently charged for similar agreements or estimated cost to terminate them or otherwise settle obligations with counterparties at the reporting date.
(In thousands) | Carrying | |||||||||||||||||||
December 31, 2018 | amount | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 198,939 | $ | 198,939 | $ | 198,939 | $ | - | $ | - | ||||||||||
Mortgage loans held for sale | 1,675 | 1,743 | - | 1,743 | - | |||||||||||||||
Federal Home Loan Bank stock | 10,370 | 10,370 | 10,370 | |||||||||||||||||
Loans, net | 2,522,637 | 2,508,587 | - | - | 2,508,587 | |||||||||||||||
Accrued interest receivable | 8,360 | 8,360 | 8,360 | - | - | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Non-interest bearing deposits | 711,023 | 711,023 | 711,023 | - | - | |||||||||||||||
Transaction deposits | 1,736,618 | - | - | 1,736,618 | - | |||||||||||||||
Time deposits | 346,715 | - | - | 345,273 | - | |||||||||||||||
Securities sold under agreement to repurchase | 36,094 | 36,094 | - | 36,094 | - | |||||||||||||||
Federal funds purchased | 10,247 | 10,247 | - | 10,247 | - | |||||||||||||||
FHLB advances | 48,177 | 47,227 | - | 47,227 | - | |||||||||||||||
Accrued interest payable | 762 | 762 | 762 | - | - |
Limitations
Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’sBancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect estimates.
Stock Yards Bancorp, inc. and subsidiary
(18) | Derivative Financial Instruments |
Periodically, Bancorp enters into an interest rate swap transaction with a borrower, who desires to hedge their exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the consolidated balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition are expected to have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements for the first ninethree months of 20172019 were offsetting and therefore had no net effect on Bancorp’s earnings or cash flows.
Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposure.exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of nonperformance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, limits, collateral, and monitoring procedures, and does not expect any counterparties to fail their obligations.obligations.
At September 30, 2017March 31, 2019 and December 31, 2016,2018, Bancorp had outstanding undesignated interest rate swap contracts as follows:
(dollar amounts in thousands) | Receiving | Paying | ||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Notional amount | $ | 53,214 | $ | 43,986 | $ | 53,214 | $ | 43,986 | ||||||||
Weighted average maturity (years) | 8.9 | 9.9 | 8.9 | 9.9 | ||||||||||||
Fair value | $ | 148 | $ | (178 | ) | $ | (148 | ) | $ | 178 |
(Dollars in thousands) | Receiving | Paying | ||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Notional amount | $ | 54,286 | $ | 55,505 | $ | 54,286 | $ | 55,505 | ||||||||
Weighted average maturity (years) | 7.7 | 8.0 | 7.7 | 8.0 | ||||||||||||
Fair value | $ | 217 | $ | 519 | $ | 240 | $ | 543 |
In 2016, Bancorp entered into an interest rate swap to hedge cash flows of a $10 million rolling fixed-rate three-month FHLB borrowing. The swap began December 6, 2016 and ends December 6, 2021. In 2015, Bancorp entered into an interest rate swap to hedge cash flows of a $20 million rolling fixed-rate three-month FHLB borrowing. The swap began December 9, 2015 and matures December 6, 2020. For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities. Interest rate swaps involve exchange of Bancorp’sBancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated, and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings.
Stock Yards Bancorp, inc. and subsidiary
The following table details Bancorp’sBancorp’s derivative position designated as a cash flow hedges,hedge, and the fair values as of September 30, 2017March 31, 2019 and December 31, 2016.2018.
(dollars in thousands) | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||
Fair value | Fair value | |||||||||||||||||||||||||||||||||
Notional | Notional | Maturity | Receive (variable) | Pay fixed | assets (liabilities) | Notional | Maturity | Receive (variable) | Pay fixed | assets (liabilities) | ||||||||||||||||||||||||
amount | amount | date | index | swap rate | September 30, 2017 | December 31, 2016 | amount | date | index | swap rate | March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
$ | 10,000 | 12/6/2021 | US 3 Month LIBOR | 1.89 | % | $ | 26 | $ | 16 | 10,000 | 12/6/2021 | US 3 Month LIBOR | 1.89 | % | $ | 106 | $ | 193 | ||||||||||||||||
20,000 | 12/6/2020 | US 3 Month LIBOR | 1.79 | % | 8 | 9 | 20,000 | 12/6/2020 | US 3 Month LIBOR | 1.79 | % | 201 | 323 | |||||||||||||||||||||
$ | 30,000 | 1.82 | % | $ | 34 | $ | 25 | 30,000 | 1.82 | % | $ | 307 | $ | 516 |
(19) | Regulatory Matters |
Bancorp and the Bank are subject to variouscapital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, prescribed by banking regulations and administered by state and federal banking agencies. The final rules implementingin part, dependent on the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective on January 1, 2015 with full compliance with allindividual risk profiles of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Thefinancial institutions. Failure to meet minimum capital level requirements applicable to bankscan initiate certain mandatory and bank holding companies subject topossibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the rules are:
a total risk-based capital ratio of 8%
a common equity tier 1 capital ratio of 4.5%
a tier 1 risk-based capital ratio of 6%
a tier 1 leverage ratio of 4%
Under these requirements, Bancorpregulatory framework for prompt corrective action, the Holding Company and the Bank must meet minimumspecific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and percentages of Tier 1 capital, common equity Tier 1 capital, and total capital to risk weighted assets, and Tier 1 capital to average assets. Risk weighted assetsclassification are determined by applying certain risk weightings prescribed by regulation to various categories of assets and off-balance sheet commitments. Capital and risk weighted assets may be furtheralso subject to qualitative judgments by the regulators as toregarding components, risk weightingweightings and other factors. Failure to meet capital requirements can result in certain mandatory, and possibly discretionary, corrective actions prescribed by regulation or determined to be necessary by regulators, which could materially affect the unaudited consolidated financial statements.
TheBanking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III rules also establisheddefine “well capitalized” as a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total Risk-Based Capital ratio and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and Bank must hold a capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements. The capital conservation buffer phased in from 2016 to 2019 on the following schedule: a capital conservation buffer of 2.5%, to be phased in over three years through December 31, 2018, above the regulatory minimum risk-based capital ratios. When0.625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875% effective January 1, 2018; and a fully phased in thecapital conservation buffer will result in the following minimum ratios:
a common equity tierof 2.5% on January 1, risk-based capital ratio of 7.0%,
a tier 1 risk-based capital ratio of 8.5%, and
a total risk-based capital ratio of 10.5%.
The rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. Bancorp opted out of this requirement.2019.
Stock Yards Bancorp inc.continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based, Tier I Risk Based Capital and subsidiary
As of September 30, 2017,Tier I Leverage Capital. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements to be considered well capitalized underas defined by the rules,FRB and is not subject to limitations duethe FDIC, in addition to the capital conservation buffer.Capital Conservation Buffer.
The following tables set sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios as of September 30, 2017 and December 31, 2016.ratios:
(dollars in thousands) | Actual | Minimum for adequately capitalized | Minimum for well capitalized | |||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Actual | Minimum for adequately capitalized | Minimum for well capitalized | |||||||||||||||||||||||||||||||||||||||||||||
March 31, 2019 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
Total risk-based capital (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 358,610 | 13.64 | % | $ | 210,328 | 8.00 | % | NA | NA | $ | 405,845 | 14.04 | % | $ | 231,221 | 8.00 | % | NA | NA | ||||||||||||||||||||||||||||
Bank | 346,040 | 13.20 | 209,721 | 8.00 | $ | 262,152 | 10.00 | % | 396,707 | 13.74 | 230,901 | 8.00 | $ | 288,626 | 10.00 | % | ||||||||||||||||||||||||||||||||
Common equity tier 1 risk-based capital | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 333,312 | 12.67 | 118,382 | 4.50 | NA | NA | 379,031 | 13.11 | 130,062 | 4.50 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 320,742 | 12.23 | 118,016 | 4.50 | 157,355 | 6.00 | 369,893 | 12.82 | 129,882 | 4.50 | 187,607 | 6.50 | ||||||||||||||||||||||||||||||||||||
Tier 1 risk-based capital (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 333,312 | 12.67 | 157,843 | 6.00 | NA | NA | 379,031 | 13.11 | 173,416 | 6.00 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 320,742 | 12.23 | 157,355 | 6.00 | 157,355 | 6.00 | 369,893 | 12.82 | 173,176 | 6.00 | 230,901 | 8.00 | ||||||||||||||||||||||||||||||||||||
Leverage (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 333,312 | 11.02 | 120,984 | 4.00 | NA | NA | 379,031 | 11.57 | 130,989 | 4.00 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 320,742 | 10.61 | 120,921 | 4.00 | 151,151 | 5.00 | 369,893 | 11.31 | 130,837 | 4.00 | 163,546 | 5.00 |
(dollars in thousands) | Actual | Minimum for adequately capitalized | Minimum for well capitalized | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2016 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Actual | Minimum for adequately capitalized | Minimum for well capitalized | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
Total risk-based capital (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 338,525 | 13.04 | % | $ | 207,684 | 8.00 | % | NA | NA | $ | 396,019 | 13.91 | % | $ | 227,714 | 8.00 | % | NA | NA | ||||||||||||||||||||||||||||
Bank | 325,630 | 12.57 | 207,243 | 8.00 | $ | 259,053 | 10.00 | % | 385,637 | 13.56 | 227,462 | 8.00 | $ | 284,327 | 10.00 | % | ||||||||||||||||||||||||||||||||
Common equity tier 1 risk-based capital | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 314,147 | 12.10 | 116,832 | 4.50 | NA | NA | 370,135 | 13.00 | 128,089 | 4.50 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 301,252 | 11.63 | 116,564 | 4.50 | 155,418 | 6.00 | 359,753 | 12.65 | 127,947 | 4.50 | 184,813 | 6.50 | ||||||||||||||||||||||||||||||||||||
Tier 1 risk-based capital (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 314,147 | 12.10 | 155,775 | 6.00 | NA | NA | 370,135 | 13.00 | 170,785 | 6.00 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 301,252 | 11.63 | 155,418 | 6.00 | 155,418 | 6.00 | 359,753 | 12.65 | 170,596 | 6.00 | 227,462 | 8.00 | ||||||||||||||||||||||||||||||||||||
Leverage (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 314,147 | 10.54 | 119,221 | 4.00 | NA | NA | 370,135 | 11.33 | 130,698 | 4.00 | NA | NA | ||||||||||||||||||||||||||||||||||||
Bank | 301,252 | 10.11 | 119,190 | 4.00 | 148,987 | 5.00 | 359,753 | 11.02 | 130,569 | 4.00 | 163,211 | 5.00 |
(1) | Ratio is computed in relation to risk-weighted assets. |
(2) | Ratio is computed in relation to average assets. |
NA | Not applicable. Regulatory framework does not define well capitalized for holding |
Stock Yards Bancorp, inc. and subsidiary
(20) | Segments |
Bancorp’sBancorp’s principal activities include commercial banking and wealth management and trust (WM&T).WM&T. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage origination and securities brokerageinvestment products sales activity. WM&T provides financial management services including investment management, trust and estate administration, and retirement plan services.
Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax exempt activity. All tax exempt activity and provision for loan losses have been allocated to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’segments’ operations if they were independent entities.
Principally, all of the net assets of Stock Yards Bancorp Inc. are involved in the commercial banking segment. Bancorp has goodwillGoodwill of $682,000 related to a bank acquisition in 1996 which has been assigned to the commercial banking segment. Assets assigned to WM&T primarily consist of net premises and equipment, net of accumulated depreciation.equipment.
Selected financial information by business segment for the three and nine month periods ended September 30, 2017March 31, 2019 and 20162018 follows:
Wealth | Wealth | |||||||||||||||||||||||
Commercial | management | Commercial | management | |||||||||||||||||||||
(in thousands) | banking | and trust | Total | |||||||||||||||||||||
(In thousands) | banking | and trust | Total | |||||||||||||||||||||
Three months ended September 30, 2017 | ||||||||||||||||||||||||
Three months ended March 31, 2019 | ||||||||||||||||||||||||
Net interest income | $ | 26,089 | $ | 75 | $ | 26,164 | $ | 29,581 | $ | 76 | $ | 29,657 | ||||||||||||
Provision for loan losses | 150 | - | 150 | |||||||||||||||||||||
Provision | 600 | - | 600 | |||||||||||||||||||||
Wealth management and trust services | - | 5,025 | 5,025 | - | 5,439 | 5,439 | ||||||||||||||||||
All other non-interest income | 6,078 | - | 6,078 | 5,623 | - | 5,623 | ||||||||||||||||||
Non-interest expense | 18,491 | 2,826 | 21,317 | |||||||||||||||||||||
Income before income taxes | 13,526 | 2,274 | 15,800 | |||||||||||||||||||||
Non-interest expenses | 19,606 | 3,033 | 22,639 | |||||||||||||||||||||
Income before income tax expense | 14,998 | 2,482 | 17,480 | |||||||||||||||||||||
Income tax expense | 3,284 | 812 | 4,096 | 1,300 | 539 | 1,839 | ||||||||||||||||||
Net income | $ | 10,242 | $ | 1,462 | $ | 11,704 | $ | 13,698 | $ | 1,943 | $ | 15,641 | ||||||||||||
Segment assets | $ | 3,153,886 | $ | 2,027 | $ | 3,155,913 | $ | 3,279,248 | $ | 1,768 | $ | 3,281,016 | ||||||||||||
Three months ended September 30, 2016 | ||||||||||||||||||||||||
Three months ended March 31, 2018 | ||||||||||||||||||||||||
Net interest income | $ | 24,690 | $ | 70 | $ | 24,760 | $ | 27,238 | $ | 71 | $ | 27,309 | ||||||||||||
Provision for loan losses | 1,250 | - | 1,250 | |||||||||||||||||||||
Provision | 735 | - | 735 | |||||||||||||||||||||
Wealth management and trust services | - | 4,800 | 4,800 | - | 5,500 | 5,500 | ||||||||||||||||||
All other non-interest income | 6,558 | - | 6,558 | 5,409 | - | 5,409 | ||||||||||||||||||
Non-interest expense | 17,722 | 2,796 | 20,518 | |||||||||||||||||||||
Income before income taxes | 12,276 | 2,074 | 14,350 | |||||||||||||||||||||
Non-interest expenses | 17,829 | 3,198 | 21,027 | |||||||||||||||||||||
Income before income tax expense | 14,083 | 2,373 | 16,456 | |||||||||||||||||||||
Income tax expense | 3,142 | 741 | 3,883 | 2,537 | 515 | 3,052 | ||||||||||||||||||
Net income | $ | 9,134 | $ | 1,333 | $ | 10,467 | $ | 11,546 | $ | 1,858 | $ | 13,404 | ||||||||||||
Segment assets | $ | 2,936,542 | $ | 2,123 | $ | 2,938,665 | $ | 3,283,539 | $ | 1,941 | $ | 3,285,480 |
(21) | Revenue from Contracts with Customers |
All of Bancorp’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The table below presents Bancorp’s sources of non-interest income with items outside the scope of ASC 606 noted as such:
Three months ended March 31, 2019 | ||||||||||||
(Dollars in thousands) | Commercial | WM&T | Consolidated | |||||||||
Wealth management and trust services | $ | - | $ | 5,439 | $ | 5,439 | ||||||
Deposit service charges | 1,247 | 1,247 | ||||||||||
Debit and credit card income | 1,744 | 1,744 | ||||||||||
Treasury management fees | 1,157 | 1,157 | ||||||||||
Mortgage banking income (1) | 482 | 482 | ||||||||||
Net investment product sales commissions and fees | 356 | 356 | ||||||||||
Bank owned life insurance (1) | 178 | 178 | ||||||||||
Other (2) | 459 | 459 | ||||||||||
Total non-interest income | $ | 5,623 | $ | 5,439 | $ | 11,062 |
Three months ended March 31, 2018 | ||||||||||||
(Dollars in thousands) | Commercial | WM&T | Consolidated | |||||||||
Wealth management and trust services | $ | - | $ | 5,500 | $ | 5,500 | ||||||
Deposit service charges | 1,411 | 1,411 | ||||||||||
Debit and credit card income | 1,508 | 1,508 | ||||||||||
Treasury management fees | 1,047 | 1,047 | ||||||||||
Mortgage banking income (1) | 576 | 576 | ||||||||||
Net investment product sales commissions and fees | 404 | 404 | ||||||||||
Bank owned life insurance (1) | 187 | 187 | ||||||||||
Other (2) | 276 | 276 | ||||||||||
Total non-interest income | $ | 5,409 | $ | 5,500 | $ | 10,909 |
(1) Outside of scope of ASC 606
(2) Outside of scope of ASC 606 with the exception of safe deposit fee which were nominal.
Revenue sources within the scope of ASC 606 are discussed below.
Bancorp earns fees from its deposit customers for transactions-based, account management, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payments fees, and ACH fees, are recognized at the time the transaction is executed as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided. Overdraft fees are recognized at the point in time that the overdraft occurs. Deposit service charges are withdrawn from customer’s account balances.
Treasury management transaction fees are recognized at the time the transaction is executed as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided. Treasury management fees are withdrawn from customer’s account balances.
WM&T provides customers fiduciary and investment management services as agreed upon in asset management contracts. The contracts require WM&T to provide a series of distinct services for which fees are earned over time. The contracts are cancellable upon demand with fees typically based upon the asset value of investments. Revenue is accrued and recognized monthly based upon month-end asset values and collected from the customer predominately in the following month except for a small percentage of fees collected quarterly. Incentive compensation related to WM&T activities is considered a cost of obtaining the contract. Contracts between WM&T and clients do not permit performance based fees and accordingly, none of the fees earned by WM&T are performance based. Trust fees receivable as of March 31, 2019 were $2.0 million compared with $1.9 million as of December 31, 2018.
Investment products sales commissions and fees represent the Bank’s share of transaction fees and wrap fees resulting from investment services and programs provided through an agent relationship with a third party broker-dealer. Transaction fees are assessed at the time of the transaction. Those fees are collected and recognized on a monthly basis. Trailing fees are based upon market value and are assessed, collected, and recognized on a quarterly basis. Because the Bank acts as an agent in arranging the relationship between the customer and third party provider, and does not control the services rendered, investment product sales commissions and fees are reported net of related costs, including incentive compensation expense of $1 thousand and $1 thousand, and trading activity charges of $133 and $137 thousand, for the three month periods ended March 31, 2019, and 2018 respectively.
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 quarter of 2019.
Bancorp’s revenue on the consolidated statement of income is categorized by product type, which effectively depicts how the nature, timing, and extent of cash flows are affected by economic factors.
(22) | Leases |
Bancorp has operating leases for various branch locations with terms remaining from three months to 14 years, some of which include options to extend the leases in five year increments. Options reasonably expected to be exercised are included in determination of the right of use asset. Bancorp elected the practical expedient to expense short-term lease expense associated with leases with original terms 12 months or less. Bancorp elected not to separate non-lease components from lease components for its operating leases. The right-of-use lease asset and operating lease liability are recorded in others assets and other liabilities, respectively, on the consolidated balance sheet.
Balance sheet, income statement, and cash flow detail regarding operating leases follows:
(In thousands) | As of and for the | ||||
three months ended | |||||
Balance Sheet | March 31, 2019 | ||||
Operating lease right-of-use assets | $ | 16,392 | included in other assets | ||
Operating lease liabilities | 17,713 | included in other liabilities | |||
Weighted average remaining lease term (years) | 12.28 | ||||
Weighted average discount rate | 3.61 | % | |||
Maturities of lease liabilities: | |||||
Year 1 | $ | 1,953 | |||
Year 2 | 1,940 | ||||
Year 3 | 1,918 | ||||
Year 4 | 1,942 | ||||
Year 5 | 1,974 | ||||
Thereafter | 12,323 | ||||
Total lease payments | $ | 22,050 | |||
Less imputed interest | 4,337 | ||||
Total | $ | 17,713 |
(In thousands) | Three months ended | |||
Income Statement | March 31, 2019 | |||
Components of lease expense | ||||
Operating lease cost | $ | 508 | ||
Variable lease cost | 39 | |||
Less sublease income | 14 | |||
Total lease cost | $ | 533 |
(In thousands) | Three months ended | |||
Cash flow Statement | March 31, 2019 | |||
Supplemental cash flow information: | ||||
Operating cash flows from operating leases | $ | 354 |
As of March 31, 2019 Bancorp had not entered into any lease agreements that had yet to commence.
Stock Yards Bancorp, inc. and subsidiary
Wealth | ||||||||||||
Commercial | management | |||||||||||
(in thousands) | banking | and trust | Total | |||||||||
Nine months ended September 30, 2017 | ||||||||||||
Net interest income | $ | 76,350 | $ | 230 | $ | 76,580 | ||||||
Provision for loan losses | 1,650 | - | 1,650 | |||||||||
Wealth management and trust services | - | 15,272 | 15,272 | |||||||||
All other non-interest income | 18,303 | - | 18,303 | |||||||||
Non-interest expense | 54,756 | 9,055 | 63,811 | |||||||||
Income before income taxes | 38,247 | 6,447 | 44,694 | |||||||||
Income tax expense | 9,295 | 2,302 | 11,597 | |||||||||
Net income | $ | 28,952 | $ | 4,145 | $ | 33,097 | ||||||
Segment assets | $ | 3,153,886 | $ | 2,027 | $ | 3,155,913 | ||||||
Nine months ended September 30, 2016 | ||||||||||||
Net interest income | $ | 71,985 | $ | 194 | $ | 72,179 | ||||||
Provision for loan losses | 2,500 | - | 2,500 | |||||||||
Wealth management and trust services | - | 14,219 | 14,219 | |||||||||
All other non-interest income | 17,999 | - | 17,999 | |||||||||
Non-interest expense | 51,914 | 8,337 | 60,251 | |||||||||
Income before income taxes | 35,570 | 6,076 | 41,646 | |||||||||
Income tax expense | 9,064 | 2,171 | 11,235 | |||||||||
Net income | $ | 26,506 | $ | 3,905 | $ | 30,411 | ||||||
Segment assets | $ | 2,936,542 | $ | 2,123 | $ | 2,938,665 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This item discusses the results ofand operations for Stock Yards Bancorp, Inc. (“Bancorp” or “Company”Holding Company”), and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”) for the three and nine months ended September 30, 2017March 31, 2019 and compares these periodsthis period with the same periodsperiod of the previous year. Unless otherwise indicated, all referencesAll significant inter-company transactions and accounts have been eliminated in this discussionconsolidation. All companies are collective referred to as “Bancorp” or the Bank include Bancorp. In addition, the discussion describes changes in the financial condition“Company.”
Management’s Discussion and Analysis of BancorpFinancial Condition and the Bank that have occurred during the first nine monthsResults of 2017 compared with same period in 2016. This discussionOperations should be read in conjunction with the consolidated financial statements and accompanying notes presented in Part 1 Item 1 of this report.“Financial Statements.”
Stock Yards Bancorp, Inc. is a financial holding company headquartered in Louisville, Kentucky.
The Bank, chartered in 1904, state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio Metropolitan Statistical Areas (“MSAs”) through 38 full service banking center locations.
This report contains forward-lookingforward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although Bancorp believes assumptions underlying forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to the following: economic conditions both generally and more specifically in markets in which Bancorp and the Bank operate; competition for Bancorp’s customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of Bancorp’s customers; and other risks detailed in Bancorp’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.
Recent Developments
In April 2018, the Kentucky Legislature mandated combined filings for unitary businesses for taxable years beginning on or after January 1, 2019, unless an election is made otherwise. In March 2019, Kentucky legislation was enacted transitioning financial institutions from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Therefore, Bancorp will begin filing a Kentucky combined filing in 2021 that will include the Bank unless Bancorp timely elects alternative filing. Bancorp’s holding company historically, by nature of its operations, has generated net operating losses. Bancorp has filed as a separate company in Kentucky and has a Kentucky net operating loss (“NOL”) carryforward.
As of March 31, 2019, Bancorp had not yet concluded whether it would make the election for consolidated filing. During April 2019, HB 458 was enacted which allowed for certain net operating loss carryforwards to be utilized in a combined filing return. Bancorp estimates that based on the default combined filing requirement or if it were to elect for consolidated filing, it would record a state NOL tax benefit, net of federal impact, of approximately $2 million or approximately $0.09 per diluted share for the second quarter 2019.
Stock Yards Bancorp, inc. and subsidiaryIssued but Not Yet Effective Accounting Standards Updates (“ASUs”)
OverviewFor disclosure regarding the impact to Bancorp’s financial statements of 2017 through September 30, 2017issued-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 March 31, 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, workplace banking, 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 approximately $3 billion in assets under management, provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets that Bancorp operates in.
Overview - Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018
Three months ended March 31, (In thousands, except per share data) | 2019 | 2018 | $ Change | % Change | ||||||||||||
Net income | $ | 15,641 | $ | 13,404 | $ | 2,237 | 16.7 | % | ||||||||
Diluted earnings per share | $ | 0.68 | $ | 0.58 | $ | 0.10 | 17.2 | % | ||||||||
Return on average assets | 1.94 | % | 1.76 | % | 18 bps | 10.2 | % | |||||||||
Return on average equity | 17.09 | % | 16.15 | % | 94 bps | 5.8 | % |
Bancorp completed the first ninethree months of 20172019 with record net income of $33.1$15.6 million, an 8.8%a 16.7% increase over the comparable period in 2016.2018. The increase is primarily due to higher net interest income driven by year-over-year average loan growth, higher non-interest income led by treasury management fees and debit and credit card income, and a reductionlower effective income tax rate resulting from a Kentucky tax law change enacted in provision for loan losses. These increases were partially offset by higher non-interest expense.March, 2019. Diluted earnings per share for the first ninethree months of 20172019 were $1.44,a record $0.68, compared with $1.34to $0.58 for the first ninethree months of 2016. Bancorp's performance2018.
Key factors affecting Bancorp’s results for the first nine monthsquarter of 2017 reflected several positive factors, including:2019 included:
● | Average loans increased $96.0 million year over year, contributing to a 17.8% increase in interest income on a comparable quarter basis, while total average deposits increased 7.0% to support loan growth; |
● | Continued strong loan production was offset by a high level of loan payoffs; |
● | Net interest margin rose 10 basis points compared with the same quarter of 2018 consistent with higher yields on loans, loan prepayment penalties and an increase in non-interest bearing deposits; |
● | Credit quality metrics remained strong, as Bancorp experienced its second consecutive quarter of net loan loss recoveries; |
● | The |
|
|
|
|
|
|
● |
|
● |
|
As is the case with most banks, Bancorp’sBancorp’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. Loan and deposit volumes areNew business volume is influenced by competition, new account acquisition efforts and economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.
Net interest income increased $4.4$2.3 million, or 6.1%8.6%, for the first ninethree months of 2017,2019, as compared with the same period in 2016.2018. Net interest margin increased to 3.63%3.89% for the first ninethree months of 2017,2019, compared with 3.60%3.79% for the same period of 2016.
For2018. Increasing average rates earned on interest earning assets, along with the nine-monthimpact 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 ended September 30, 2017, Bancorp recordedin 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 $1.7 million provisionresult 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 loan losses, comparedthe first three months of 2018 to $2.5 million1.83% for the same period in 2016. The2019, 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 establishmaintain an allowance for loan losses 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 infor the first ninethree months of 20172019 increased $1.4 million,$153 thousand, or 4.2%1.4%, compared with the same period in 2016, and2018. Non-interest income comprised 30.0%27.2% of total revenues, defined as net interest income and non-interest income, as compared to 31.6%with 28.5% for the same period in 2016. Continuing2018. Bancorp’s WM&T services comprised 49.2% of Bancorp’s non-interest income, despite a slight reduction in revenue in the trendsfirst three months of 2016, Bancorp’s wealth management and trust department (WM&T) led the increase with a 7.4%2019 of 1.1%, or $1.1 million increase over$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 2016.2018. 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 ninethree months of 20172019 increased $3.6$1.6 million, or 5.9%7.7%, compared with the same period in 2016, primarily due to increases2018. Increases in salariescompensation, technology and employee benefits, as well ascommunication, and other expenses related todrove the Bancorp’s continued growth and improvements in technology infrastructure. Amortization expenses for investments in tax-credit partnerships, which had a significant impact on earnings in 2016, decreased by $1.2 million, or 39.4%, in the first nine months of 2017 as compared to the same period in 2016.increase. Bancorp's efficiency ratio in the first ninethree months of 20172019 was 57.6%55.52% compared to 57.4%with 54.89% in the same period in 2016. Excluding amortization2018.
Bancorp recorded income tax expense of the investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 55.9% and 54.5%$1.8 million for the first ninethree months of 20172019, compared to $3.1 million for the same period in 2018. The effective rate for the corresponding three month periods was 10.5% and 2016,18.5%, respectively. SeeThe decrease in the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.
Stock Yards Bancorp, inc. and subsidiary
Bancorp’s effective tax rate decreasedfrom 2018 to 25.9%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 2017 from 27.0% in 2016. In 2017 Bancorp adopted ASU 2016-09 “Compensation – Stock Compensation Improvements to Employee Share-Based Payment Accounting”.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 new standard requires excessKentucky corporate income tax benefitswill be assessed at 5% of Kentucky taxable income and deficiencies related to share-based payment awards towill be reflected in the statement of operationsincluded as a component of current and deferred state income tax expense. Associated with this change, during the provision for income taxes. Forfirst quarter of 2019, Bancorp established a Kentucky state deferred tax asset related to existing temporary differences estimated to reverse after the nine months ended September 30, 2017effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of $1.4federal impact of $1.3 million, or approximately $0.06 per diluted share for such tax benefits against the provision for income tax expense. Prior to adoptionfirst quarter 2019. While this is positive in the short-term, Bancorp anticipates an unfavorable impact of ASU 2016-09 these tax benefits were recorded directly to additional paid-in capital.approximately $200 thousand per year beginning in 2021.
The ratio of shareholder’sstockholder’s equity to total assets was 10.59%11.52% as of September 30, 2017March 31, 2019 as compared with 10.33%11.10% at December 31, 2016. Tangible2018. Total equity increased $11.5 million in the first quarter of 2019 as net income of $15.6 million was offset by dividends declared of $5.7 million. Bancorp’s ratio of tangible common equity (TCE),(“TCE”) to total tangible assets was 11.47% as of March 31, 2019, compared with 11.05% at December 31, 2018. TCE, a non-GAAPnon-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. The ratioIt consists of tangiblea company’s common equity to totalless any preferred equity, less intangible assets. Tangible common equity is divided by tangible assets, was 10.54% as of September 30, 2017, compared with 10.26% at December 31, 2016.which equals total assets less intangible assets. See the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.
In April 2016 Bancorp declared a 3 for 2 stock split effected as a 50% stock dividend payable in May 2016. Share and per share information has been adjusted for this dividend.Results of Operations
The following sections provide more details on Bancorp’s financial condition and results of operation.
|
|
NetNet income of $11.7$15.6 million for the three months ended September 30, 2017March 31, 2019 increased $1.2$2.2 million, or 11.8%16.4%, from $10.5$13.4 million for the comparable 20162018 period. Basic net income per share was $0.52$0.69 for the thirdfirst quarter of 2017,2019, an increase of 10.6%16.9% from the $0.47$0.59 for the thirdfirst quarter of 2016.2018. Net income per share on a diluted basis was $0.51$0.68 for the thirdfirst quarter of 2017, as compared to $0.462019, an increase of 17.2% from the $0.58 for the same period in 2016.2018. See Note 1112 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’ equity were 1.53% and 14.03%, respectively, for the third quarter of 2017, compared with 1.44% and 13.47%, respectively, for the same period in 2016.
Net income of $33.1 million for the nine months ended September 30, 2017 increased $2.7 million, or 8.8%, from $30.4 million for the comparable 2016 period. Basic net income per share was $1.47 for the first nine months of 2017, an increase of 8.1% from the $1.36 for the period in 2016. Net income per share on a diluted basis was $1.44 for the first nine months of 2017, an increase of 7.5% from the $1.34 for the same period in 2016. See Note 11 for additional information related to net income per share.
Annualized return on average assets and annualized return on average stockholders’stockholders’ equity were 1.47%1.94% and 13.65%17.09%, respectively, for the first nine monthsquarter of 2017,2019, compared with 1.42%1.76% and 13.51%16.15%, respectively, for the same period in 2016.2018.
Stock Yards Bancorp, inc. and subsidiary
Net Interest Income
The following table presentspresents average balance sheets for the three and nine month periods ended September 30, 2017March 31, 2019 and 20162018 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 September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(Dollars in thousands) | balances | Interest | rate | balances | Interest | rate | ||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Federal funds sold and interest bearing deposits | $ | 120,927 | $ | 388 | 1.27 | % | $ | 72,673 | $ | 95 | 0.52 | % | ||||||||||||
Mortgage loans held for sale | 3,515 | 48 | 5.42 | 5,070 | 66 | 5.18 | ||||||||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | 387,696 | 1,920 | 1.96 | 406,481 | 1,984 | 1.94 | ||||||||||||||||||
Tax-exempt | 51,905 | 388 | 2.97 | 59,981 | 426 | 2.83 | ||||||||||||||||||
FHLB stock and other securities | 7,666 | 83 | 4.30 | 6,347 | 63 | 3.95 | ||||||||||||||||||
Loans, net of unearned income | 2,289,435 | 25,484 | 4.42 | 2,171,772 | 23,511 | 4.31 | ||||||||||||||||||
Total earning assets | 2,861,144 | 28,311 | 3.93 | 2,722,324 | 26,145 | 3.82 | ||||||||||||||||||
Less allowance for loan losses | 25,434 | 23,634 | ||||||||||||||||||||||
2,835,710 | 2,698,690 | |||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 41,550 | 41,682 | ||||||||||||||||||||||
Premises and equipment | 41,395 | 42,665 | ||||||||||||||||||||||
Accrued interest receivable and other assets | 108,433 | 100,109 | ||||||||||||||||||||||
Total assets | $ | 3,027,088 | $ | 2,883,146 | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Interest bearing demand deposits | $ | 725,822 | $ | 418 | 0.23 | % | $ | 698,874 | $ | 232 | 0.13 | % | ||||||||||||
Savings deposits | 150,332 | 55 | 0.15 | 136,292 | 11 | 0.03 | ||||||||||||||||||
Money market deposits | 691,726 | 741 | 0.43 | 655,912 | 346 | 0.21 | ||||||||||||||||||
Time deposits | 232,773 | 379 | 0.65 | 247,237 | 352 | 0.57 | ||||||||||||||||||
Securities sold under agreements to repurchase | 73,806 | 33 | 0.18 | 68,835 | 38 | 0.22 | ||||||||||||||||||
Federal funds purchased and other short term borrowings | 27,535 | 77 | 1.11 | 23,471 | 19 | 0.32 | ||||||||||||||||||
FHLB advances | 50,221 | 244 | 1.93 | 44,194 | 184 | 1.66 | ||||||||||||||||||
Total interest bearing liabilities | 1,952,215 | 1,947 | 0.40 | 1,874,815 | 1,182 | 0.25 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing demand deposits | 697,815 | 656,689 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 46,194 | 42,597 | ||||||||||||||||||||||
Total liabilities | 2,696,224 | 2,574,101 | ||||||||||||||||||||||
Stockholders’ equity | 330,864 | 309,045 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,027,088 | $ | 2,883,146 | ||||||||||||||||||||
Net interest income | $ | 26,364 | $ | 24,963 | ||||||||||||||||||||
Net interest spread | 3.53 | % | 3.57 | % | ||||||||||||||||||||
Net interest margin | 3.66 | % | 3.65 | % |
Stock Yards Bancorp, inc. and subsidiary
|
Nine months ended September 30, | Three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 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 deposits | $ | 97,543 | $ | 798 | 1.09 | % | $ | 100,653 | $ | 395 | 0.52 | % | ||||||||||||||||||||||||||||||||||||
Federal funds sold and interest bearing due from banks | $ | 122,189 | $ | 733 | 2.43 | % | $ | 71,186 | $ | 268 | 1.53 | % | ||||||||||||||||||||||||||||||||||||
Mortgage loans held for sale | 3,656 | 145 | 5.30 | 4,918 | 185 | 5.02 | 1,727 | 37 | 8.69 | 2,098 | 35 | 6.77 | ||||||||||||||||||||||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 406,476 | 5,944 | 1.96 | 413,508 | 6,135 | 1.98 | 409,835 | 2,411 | 2.39 | 373,314 | 2,027 | 2.20 | ||||||||||||||||||||||||||||||||||||
Tax-exempt | 53,568 | 1,186 | 2.96 | 61,417 | 1,298 | 2.82 | 27,784 | 175 | 2.55 | 44,394 | 296 | 2.70 | ||||||||||||||||||||||||||||||||||||
FHLB stock and other securities | 6,801 | 229 | 4.50 | 6,347 | 190 | 4.00 | ||||||||||||||||||||||||||||||||||||||||||
FHLB stock | 10,192 | 157 | 6.25 | 7,687 | 111 | 5.86 | ||||||||||||||||||||||||||||||||||||||||||
Loans, net of unearned income | 2,275,320 | 74,055 | 4.35 | 2,113,744 | 68,238 | 4.31 | 2,528,625 | 31,572 | 5.06 | 2,432,659 | 27,100 | 4.52 | ||||||||||||||||||||||||||||||||||||
Total earning assets | 2,843,364 | 82,357 | 3.87 | 2,700,587 | 76,441 | 3.78 | 3,100,352 | 35,085 | 4.59 | 2,931,338 | 29,837 | 4.13 | ||||||||||||||||||||||||||||||||||||
Less allowance for loan losses | 24,891 | 23,057 | 26,127 | 25,063 | ||||||||||||||||||||||||||||||||||||||||||||
2,818,473 | 2,677,530 | 3,074,225 | 2,906,275 | |||||||||||||||||||||||||||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 40,547 | 40,097 | 41,653 | 39,985 | ||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment | 41,798 | 41,500 | ||||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net | 45,340 | 41,891 | ||||||||||||||||||||||||||||||||||||||||||||||
Accrued interest receivable and other assets | 106,035 | 94,263 | 110,039 | 102,740 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 3,006,853 | $ | 2,853,390 | $ | 3,271,257 | $ | 3,090,891 | ||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing demand deposits | $ | 739,295 | $ | 1,076 | 0.19 | % | $ | 710,417 | $ | 735 | 0.14 | % | $ | 861,020 | $ | 1,404 | 0.66 | % | $ | 817,567 | $ | 623 | 0.31 | % | ||||||||||||||||||||||||
Savings deposits | 147,471 | 123 | 0.11 | 134,004 | 35 | 0.03 | 157,053 | 96 | 0.25 | 154,607 | 56 | 0.15 | ||||||||||||||||||||||||||||||||||||
Money market deposits | 693,656 | 1,968 | 0.38 | 652,406 | 1,060 | 0.22 | 677,512 | 1,974 | 1.18 | 686,699 | 953 | 0.56 | ||||||||||||||||||||||||||||||||||||
Time deposits | 239,250 | 1,070 | 0.60 | 254,172 | 1,086 | 0.57 | 353,245 | 1,592 | 1.83 | 234,383 | 445 | 0.77 | ||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 67,556 | 100 | 0.20 | 60,438 | 100 | 0.22 | 37,528 | 25 | 0.27 | 71,276 | 33 | 0.19 | ||||||||||||||||||||||||||||||||||||
Federal funds purchased and other short term borrowings | 20,581 | 125 | 0.81 | 25,021 | 57 | 0.30 | 11,428 | 60 | 2.13 | 26,259 | 90 | 1.39 | ||||||||||||||||||||||||||||||||||||
FHLB advances | 50,541 | 715 | 1.89 | 43,533 | 552 | 1.69 | 47,962 | 221 | 1.87 | 49,247 | 235 | 1.94 | ||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities | 1,958,350 | 5,177 | 0.35 | 1,879,991 | 3,625 | 0.26 | 2,145,748 | 5,372 | 1.02 | 2,040,038 | 2,435 | 0.48 | ||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities: | �� | |||||||||||||||||||||||||||||||||||||||||||||||
Non-interest bearing demand deposits | 680,831 | 637,812 | 694,871 | 669,929 | ||||||||||||||||||||||||||||||||||||||||||||
Accrued interest payable and other liabilities | 43,437 | 34,844 | 59,568 | 44,354 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 2,682,618 | 2,552,647 | 2,900,187 | 2,754,321 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 371,070 | 336,570 | ||||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 324,235 | 300,743 | ||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 3,006,853 | $ | 2,853,390 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholder's equity | $ | 3,271,257 | $ | 3,090,891 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 77,180 | $ | 72,816 | $ | 29,713 | $ | 27,402 | ||||||||||||||||||||||||||||||||||||||||
Net interest spread | 3.52 | % | 3.52 | % | 3.57 | % | 3.65 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin | 3.63 | % | 3.60 | % | 3.89 | % | 3.79 | % |
Stock Yards Bancorp, inc. and subsidiary
Notes to the average balance and interest rate tables:
● |
|
● |
|
|
|
| Interest income on a fully tax equivalent basis includes additional |
● |
|
● | 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 |
● | Net interest spread is the |
● | 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 |
Fully taxable equivalent net interest income of $26.4 million for the three months ended September 30, 2017 increased $1.4 million, or 5.6%, from $25.0 million for the same period in 2016. Bancorp recognized positive effects of increased average balances on loans, resulting from loan growth in 2016, and increased rates on all earning asset categories following rate increases by the Federal Reserve, were partially offset by the negative effect of increased rates for all funding sources, and increased average balances for all funding sources except certificate of deposit accounts. To date in 2017 the Federal Reserve twice raised the target Fed Funds rate with 25 basis point increases in both March and June. Management increased rates paid on retail deposits accounts in conjunction with the March rate hike. Those deposit customers had not seen a rate increase on their accounts in over ten years. The June increase resulted in most of the variable rate loan portfolio breaking through applicable floor rates which will enhance margin going forward. Net interest spread and net interest margin were 3.53%3.57% and 3.66%3.89%, respectively, for the thirdfirst quarter of 20172019, and 3.57%3.65% and 3.65%3.79%, respectively, for the thirdfirst quarter of 2016. Heightened competition on pricing, effects of liquidity and a flattening yield curve contributed to pressure on net interest margin.
2018. Fully taxable equivalent net interest income of $77.2$29.7 million for the ninethree months ended September 30, 2017March 31, 2019 increased $4.4$2.3 million, or 6.0%8.4%, from $72.8$27.4 million for the same period in 2016. Positive effects2018. Fully taxable equivalent interest income increased $5.2 million or 17.6% for the first quarter of 2019, as compared with the first quarter of 2018, due primarily to increased average loan balances on loans, resultingstemming from 2018 loan growth, in 2016, andas well as increased rates earned on otherloans. Wall Street Journal Prime interest rate was 75 basis points (“bps”) higher in the first quarter 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. Taxable securities, and federal funds sold and interest bearing due from banks average balances also increased in the first quarter 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 wereincreased $169.0 million or 5.77% to $3.1 billion for the first three months of 2019, as compared with the same period in 2018. The average rate on earnings assets increased 46 bps to 4.59%, as Bancorp benefited from a generally higher interest rate environment.
Interest expense increased due primarily to rising deposit costs, and strategic growth in interest bearing demand deposits and time deposits. Average interest bearing liabilities increased $105.7 million, or 5.2%, to $2.1 billion for the first three months of 2019, as compared with the same period in 2018. Growth in average interest bearing demand deposits and time deposits was partially offset by the negative effectdeclines in money market deposits, and securities sold under agreements to repurchase. The average cost of increasing rates and average balances for all funding sources except certificates of deposits. Average rates on loansinterest bearing liabilities increased period54 bps to period while the rates on taxable securities decreased. Net interest spread and net interest margin were 3.52% and 3.63%, respectively,1.02% for the first nine monthsquarter of 2017 and 3.52% and 3.60%, respectively, for2019, as compared with the first nine monthsquarter of 2016.2018. 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 62 bps, and 106 bps, respectively, in the first 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 million, or 47.3%, as customers migrated from lower yielding collateralized products to higher yielding non-collateralized deposits.
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 shorter end of the curve.
Stock Yards Bancorp, inc. and subsidiary
Average earning assets increased $138.8 million or 5.1% to $2.9 billion for the three month period ended September 30, 2017 as compared to the same time period in 2016, reflecting growth in the loan portfolio and to a lesser extent fed funds sold. Average interest bearing liabilities increased $77 million or 4.1% for the third quarter of September 30, 2017 as compared to the third quarter of 2016. A decrease in volume of time deposits partially offset increases in all other interest bearing deposit and borrowing categories. Average earning assets increased $142.8 million or 5.3%, to $2.8 billion for the first nine months of 2017 as compared with 2016, reflecting increases in the loan portfolio, the majority of which was garnered in 2016. Average interest bearing liabilities increased $78.4 million, or 4.1%, to $1.95 billion for the first nine months of 2017, as compared with the same period in 2016. Increases in the volume of interest bearing demand deposits, savings deposits, money market deposit accounts, securities sold under agreements to repurchase, and FHLB advances, were partially offset by decreases in volume of time deposits, and other short term borrowing products.
Asset/Liability Management and Interest Rate Risk
Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.
Interest Rate Simulation Sensitivity Analysis
Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities and off-balance sheet financial instruments.liabilities. By estimating effects of interest rate increases and decreases,fluctuations, the model can reveal approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual expected results.
The September 30, 2017March 31, 2019 simulation analysis, which shows minimalmoderate interest rate sensitivity, indicates that Bancorp is asset sensitive as increases in interest rates of 100 to 200 basis points would have a positive effect on net interest income. If rates raiseincome, and decreases of 100 to 200 basis points in interest rates would have a negative effect on net interest income. The moderate increase in net interest income would increase 2.12%. The excess liquidity held in interest bearing deposit accounts and other short-term investments along withthe rising rate scenarios is primarily due to variable rate loans now at or above their floors gives Bancorp significant assets that will reprice as rates move. Those sameand short-term investments repricing more quickly than deposits and short-term borrowings. Asset balances subject to immediate repricing cause an estimated decline in net interest income in a down 100 and 200 basis point rate scenario.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 March 31, 2019
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
Approximately 61%60% of Bancorp’sBancorp’s loan portfolio has fixed rates and 39% of its loan portfolio iswith 40% priced at variable rates. With the Prime rate currently at 4.25%5.50%, and after the .25% increase in Prime in June of 2017, the majority of Bancorp’s variable rate loans now have interestare beyond their floors and will reprice as rates at or above their floors.
Stock Yards Bancorp, inc. and subsidiary
change.
Undesignated derivative instruments described in Note 1817 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 in other non-interest income.income as interest rates fluctuate. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above.
Derivatives designated as cash flow hedges 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 for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for inherent losses on outstanding loans. The allowance for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysisreflects results of risk in the loan portfolio. The provision reflects an allowance methodology that is driven by risk ratings, historical losses, specific loan loss allocations, and qualitative factors. 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 first nine months of 2017, and the resulting allowance level, reflected a number ofinherent losses on outstanding loans. The provision reflects many factors including stabletrends in the portfolio, as well as changes in quantitative and acceptable creditqualitative 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.
Key indicators of loan quality metrics, modest loan growthremained consistent with prior years with the exception of increased classified balances which increased $9.9 million during the period, and an expansionfirst quarter of 2019, as compared with December 31, 2018. Also, consistent with Bancorp’s methodology, the historical look-back period was extended from 2432 to 36 quarters to 28 quarters. This expansionin the first quarter of the look-back period was applied2019 to all classes and segments of the portfolio. TheManagement believes the expansion of the look-back period for the historical loss rates used in the quantitative allocation caused management to review the overall methodology for the qualitative factors to ensure Bancorp was appropriately capturing the risk not addressed in the historical loss rates used in the quantitative allocation, resulting in the same expansion of the look-back period for the qualitative factors. Management believes the extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. Key indicatorsportfolio, and captures the effects of loan quality continued to show improvement during 2017, with levels of non-performing loans continuing a five year downward trend. Classified assets, after experiencing a slight elevationfull economic cycle. Based on the prior quarter stabilized inlook-back period extension, the third quarter. Bancorp recorded provision for loan losses of $150 thousand and $1.7allowance level increased approximately $2.0 million for the first three and nine month periodsmonths of 2017, respectively, as compared to $1.3 million and $2.5 million2019. Additional information regarding Bancorp’s methodology for evaluating the same periodsadequacy of the allowance can be read in 2016.the Company’s Annual Report on Form 10K.
Management usesNon-performing loans, consisting of TDRs, non-accrual loans, and loans over 90 days past due still accruing, increased to $3.8 million at March 31, 2019 from $3.4 million at December 31, 2018, while decreasing $8.5 million from $12.3 million at March 31, 2018. Bancorp considers the present asset quality metrics to be strong; however, recognizing the cyclical nature of the lending business, this trend is expected to normalize over the long term.
Bancorp’s loan grading procedures which result in specific allowance allocations for estimated inherent riskportfolio is diversified with no significant concentrations of loss. For allcredit. Geographically, most loans graded, but not individually reviewed for allowance purposes, a general allowance allocation is computed using historical data based on actual loss experience. Specific and general allocations plus consideration of qualitative factors represent management’s best estimate of probable losses containedare extended to borrowers in the loan portfolio at the evaluation date. Althoughmetropolitan areas of Louisville, Indianapolis and Cincinnati. The adequacy of the allowance for loan losses is comprisedmonitored on an ongoing basis and it is the opinion of specific and general allocations,management that the entirebalance of the allowance at March 31, 2019 is availableadequate to absorb any credit losses. Based on this detailed analysis of credit risk, management considers the allowance for loan losses adequate to cover probable losses inherent in the loan portfolio at September 30, 2017.as of the financial statement date.
Stock Yards Bancorp, inc. and subsidiary
An analysis of the changes in the allowance for loan losses and selected ratios for the three and nine month periods ended September 30, 2017 and 2016 follows:
(dollars in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Balance at the beginning of the period | $ | 25,115 | $ | 23,141 | $ | 24,007 | $ | 22,441 | ||||||||
Provision for loan losses | 150 | 1,250 | 1,650 | 2,500 | ||||||||||||
Loan charge-offs, net of recoveries | (317 | ) | (22 | ) | (709 | ) | (572 | ) | ||||||||
Balance at the end of the period | $ | 24,948 | $ | 24,369 | $ | 24,948 | $ | 24,369 | ||||||||
Average loans, net of unearned income | $ | 2,289,436 | $ | 2,188,089 | $ | 2,275,320 | $ | 2,124,921 | ||||||||
Provision for loan losses to average loans (1) | 0.01 | % | 0.06 | % | 0.07 | % | 0.12 | % | ||||||||
Net loan charge-offs to average loans (1) | 0.01 | % | 0.00 | % | 0.03 | % | 0.03 | % | ||||||||
Allowance for loan losses to average loans | 1.09 | % | 1.11 | % | 1.09 | % | 1.15 | % | ||||||||
Allowance for loan losses to period-end loans | 1.07 | % | 1.10 | % | 1.07 | % | 1.10 | % | ||||||||
(1) Amounts not annualized |
(Dollars in thousands) | Three months ended March 31, | |||||||
2019 | 2018 | |||||||
Balance at the beginning of the period | $ | 25,534 | $ | 24,885 | ||||
Provision | 600 | 735 | ||||||
Total charge-offs | 99 | 1,528 | ||||||
Total recoveries | (429 | ) | (111 | ) | ||||
Net loan charge-offs (recoveries) | (330 | ) | 1,417 | |||||
Balance at the end of the period | $ | 26,464 | $ | 24,203 | ||||
Average loans, net of unearned income | $ | 2,528,625 | $ | 2,432,659 | ||||
Provision to average loans and leases (1) | 0.02 | % | 0.03 | % | ||||
Net loan charge-offs (recoveries) to average loans and leases (1) | (0.01 | )% | 0.06 | % | ||||
Allowance to average loans and leases | 1.05 | % | 0.99 | % | ||||
Allowance to period-end loans and leases | 1.05 | % | 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 commercial loan was charged off to its net realizable value in the first quarter of 2018, which resulted in increased net charge offs for the three month period ending March 31, 2018. The increase in the allowance in the first quarter of 2019 was mainly due to qualitative considerations, increased classified loan balances in the first quarter of 2019, offset by net recoveries of $330 thousand. At March 31, 2019, and December 31, 2018, the allowance remained adequate to cover potential losses in the loan portfolio, in management’s opinion.
An analysis of net charge-offs (recoveries) by loan category for the three and nine month periods ended September 30, 2017 and 2016portfolio segment follows:
(in thousands) | Three months | Nine months | ||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
Net loan charge-offs (recoveries) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Commercial and industrial | $ | 280 | $ | 18 | $ | 642 | $ | 375 | ||||||||
Construction and development, excluding undeveloped land | - | (11 | ) | - | (21 | ) | ||||||||||
Undeveloped land | - | - | - | - | ||||||||||||
Real estate mortgage - commercial investment | (16 | ) | (67 | ) | (52 | ) | (226 | ) | ||||||||
Real estate mortgage - owner occupied commercial | - | (9 | ) | - | 305 | |||||||||||
Real estate mortgage - 1-4 family residential | (1 | ) | 64 | (5 | ) | 63 | ||||||||||
Home equity | (5 | ) | (34 | ) | 4 | (34 | ) | |||||||||
Consumer | 59 | 61 | 120 | 110 | ||||||||||||
Total net loan charge-offs (recoveries) | $ | 317 | $ | 22 | $ | 709 | $ | 572 |
Three months | ||||||||
(In thousands) | ended March 31, | |||||||
2019 | 2018 | |||||||
Commercial and industrial | $ | (99 | ) | $ | 1,399 | |||
Construction and development, excluding undeveloped land | (203 | ) | - | |||||
Undeveloped land | - | - | ||||||
Real estate mortgage - commercial investment | (20 | ) | (1 | ) | ||||
Real estate mortgage - owner occupied commercial | - | - | ||||||
Real estate mortgage - 1-4 family residential | - | - | ||||||
Home equity | - | (3 | ) | |||||
Consumer | (8 | ) | 22 | |||||
Total net loan charge-offs (recoveries) | $ | (330 | ) | $ | 1,417 |
Stock Yards Bancorp, inc. and subsidiary
Non-interest Income and Expenses
The following table sets forth major components of non-interest income and expenses for the three and nine month periods ended September 30, 2017 and 2016.expenses.
Three months | Nine months | |||||||||||||||||||||||||||||||||||||||
ended September 30, | ended September 30, | Three months ended March 31, | ||||||||||||||||||||||||||||||||||||||
(In thousands) | 2017 | 2016 | % Change | 2017 | 2016 | % Change |
2019 | 2018 | $ Change | % Change | ||||||||||||||||||||||||||||||
Non-interest income: | ||||||||||||||||||||||||||||||||||||||||
Wealth management and trust services | $ | 5,025 | $ | 4,800 | 4.7 | % | $ | 15,272 | $ | 14,219 | 7.4 | % | $ | 5,439 | $ | 5,500 | $ | (61 | ) | (1.1 | )% | |||||||||||||||||||
Service charges on deposit accounts | 2,522 | 2,544 | (0.9 | ) | 7,368 | 6,952 | 6.0 | |||||||||||||||||||||||||||||||||
Bankcard transactions | 1,492 | 1,455 | 2.5 | 4,412 | 4,198 | 5.1 | ||||||||||||||||||||||||||||||||||
Mortgage banking | 781 | 1,072 | (27.1 | ) | 2,380 | 2,896 | (17.8 | ) | ||||||||||||||||||||||||||||||||
Gain (loss) on calls of securities available for sale | 31 | - | 0.0 | 31 | - | 0.0 | ||||||||||||||||||||||||||||||||||
Securities brokerage | 551 | 558 | (1.3 | ) | 1,584 | 1,539 | 2.9 | |||||||||||||||||||||||||||||||||
Deposit service charges | 1,247 | 1,411 | (164 | ) | (11.6 | ) | ||||||||||||||||||||||||||||||||||
Debit and credit card income | 1,744 | 1,508 | 236 | 15.6 | ||||||||||||||||||||||||||||||||||||
Treasury management fees | 1,157 | 1,047 | 110 | 10.5 | ||||||||||||||||||||||||||||||||||||
Mortgage banking income | 482 | 576 | (94 | ) | (16.3 | ) | ||||||||||||||||||||||||||||||||||
Net investment product sales commissions and fees | 356 | 404 | (48 | ) | (11.9 | ) | ||||||||||||||||||||||||||||||||||
Bank owned life insurance | 204 | 216 | (5.6 | ) | 964 | 657 | 46.7 | 178 | 187 | (9 | ) | (4.8 | ) | |||||||||||||||||||||||||||
Other | 497 | 713 | (30.3 | ) | 1,564 | 1,757 | (11.0 | ) | 459 | 276 | 183 | 66.3 | ||||||||||||||||||||||||||||
Total non-interest income | $ | 11,103 | $ | 11,358 | (2.2 | )% | $ | 33,575 | $ | 32,218 | 4.2 | % | $ | 11,062 | $ | 10,909 | $ | 153 | 1.4 | % | ||||||||||||||||||||
Non-interest expenses: | ||||||||||||||||||||||||||||||||||||||||
Salaries and employee benefits | $ | 12,983 | $ | 12,048 | 7.8 | % | $ | 39,244 | $ | 36,214 | 8.4 | % | ||||||||||||||||||||||||||||
Net occupancy | 1,621 | 1,646 | (1.5 | ) | 4,765 | 4,716 | 1.0 | |||||||||||||||||||||||||||||||||
Data processing | 1,920 | 1,747 | 9.9 | 5,909 | 5,172 | 14.2 | ||||||||||||||||||||||||||||||||||
Furniture and equipment | 316 | 277 | 14.1 | 861 | 853 | 0.9 | ||||||||||||||||||||||||||||||||||
Compensation | $ | 11,801 | $ | 10,970 | $ | 831 | 7.6 | % | ||||||||||||||||||||||||||||||||
Employee benefits | 2,642 | 2,633 | 9 | 0.3 | ||||||||||||||||||||||||||||||||||||
Net occupancy and equipment | 1,858 | 1,818 | 40 | 2.2 | ||||||||||||||||||||||||||||||||||||
Technology and communication | 1,773 | 1,630 | 143 | 8.8 | ||||||||||||||||||||||||||||||||||||
Debit and credit card processing | 587 | 566 | 21 | 3.7 | ||||||||||||||||||||||||||||||||||||
Marketing and business development | 625 | 646 | (21 | ) | (3.3 | ) | ||||||||||||||||||||||||||||||||||
Postage, printing, and supplies | 406 | 391 | 15 | 3.8 | ||||||||||||||||||||||||||||||||||||
Legal and professional | 534 | 493 | 41 | 8.3 | ||||||||||||||||||||||||||||||||||||
FDIC insurance | 242 | 356 | (32.0 | ) | 716 | 1,035 | (30.8 | ) | 238 | 242 | (4 | ) | (1.7 | ) | ||||||||||||||||||||||||||
Amortization of investment in tax credit partnerships | 616 | 1,015 | (39.3 | ) | 1,847 | 3,046 | (39.4 | ) | ||||||||||||||||||||||||||||||||
Amortization/impairment of investment in tax credit partnerships | 52 | - | 52 | 100.0 | ||||||||||||||||||||||||||||||||||||
Capital and deposit based taxes | 904 | 852 | 52 | 6.1 | ||||||||||||||||||||||||||||||||||||
Other | 3,619 | 3,429 | 5.5 | 10,469 | 9,215 | 13.6 | 1,219 | 786 | 433 | 55.1 | ||||||||||||||||||||||||||||||
Total non-interest expenses | $ | 21,317 | $ | 20,518 | 3.9 | % | $ | 63,811 | $ | 60,251 | 5.9 | % | $ | 22,639 | $ | 21,027 | $ | 1,612 | 7.7 | % |
The largest component of non-interest income is wealth management and trust (“WM&T”)&T revenue. The magnitude of WM&T revenue distinguishes Bancorp from most other community banks of similar asset size. WM&TTrust assets under management (AUM) totaled $2.7$2.97 billion at September 30, 2017,March 31, 2019, a 12.5%3.03% increase compared to $2.4with $2.88 billion at September 30, 2016.March 31, 2018, and a 7.41% increase from $2.76 billion at December 31, 2018. AUM are stated at market value and while the 2017 increase was partially the result of a rising stock market during the period, primarily it represents a continuance of the 2016 trend for new clients added.value. WM&T revenue, which constitutes an average of 45%represents 49% of non-interest income, increased $225decreased $61 thousand, or 4.7% and $1.1 million or 7.4%1.1%, for the three and nine month periodsmonths ended September 30, 2017 respectively,March 31, 2019 compared towith the same periodsperiod in 2016. Recurring fees, which generally comprise over 98%2018, as stock market declines experienced in the fourth quarter of the WM&T revenue, increased $340 thousand or 7.4% and $1.4 million, or 10.7%, for the respective three and nine month periods ended September 30, 2017, as compared to the same periods in 2016.2018 negatively impacted first quarter 2019 revenue. 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 98% of the WM&T revenue, decreased $83 thousand, or 1.5%, in the first quarter of 2019, compared with the same time period 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 decreased $115increased $22 thousand and $393 thousand foror 21.8% in the three and nine months ended September 30, 2017,first quarter of 2019 compared towith the same periods in 2016, primarily due to a decrease in estate fees period to period.first quarter 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. Based upon the stock market recovery in the first quarter of 2019, WM&T is expected to deliver low single digit growth in 2019, provided positive market trends continue, however market volatility could affect near-term results.
Trust Assets Under Management by Account Type | ||||||||||||||||
March 31, 2019 | March 31, 2018 | |||||||||||||||
(In thousands) | Managed | Non- managed (1) | Managed | Non- managed (1) | ||||||||||||
Investment advisory accounts | $ | 1,209,859 | $ | 19,446 | $ | 1,095,159 | $ | 18,290 | ||||||||
Personal trust accounts | 565,951 | 86,494 | 577,803 | 77,303 | ||||||||||||
Personal individual retirement acounts | 375,940 | 2,535 | 352,105 | 1,806 | ||||||||||||
Corporate retirement accounts | 48,390 | 381,859 | 53,935 | 403,879 | ||||||||||||
Foundation and endowment accounts | 207,910 | 1,176 | 193,258 | - | ||||||||||||
Total accounts | $ | 2,408,050 | $ | 491,510 | $ | 2,272,260 | $ | 501,278 | ||||||||
Custody and safekeeping accounts | - | 70,482 | - | 109,047 | ||||||||||||
Totals | $ | 2,408,050 | $ | 561,992 | $ | 2,272,260 | $ | 610,325 | ||||||||
Total managed and non-managed assets | $ | 2,970,042 | $ | 2,882,585 |
Stock Yards Bancorp, inc. and subsidiary
(1) Non-managed assets represent those for which WM&T does not have investment discretion.
The following table above provides information regarding AUM assets under management (“AUM”) by WM&T as of September 30, 2017 and 2016.&T. This table demonstrates that:
• Approximately 80%81% of WM&T’s assetsAUM are actively managed.
• Corporate retirement plan accounts consist primarily of participant directed assets.
• The amount of custody and safekeeping accounts is insignificant, and
• The majority of WM&T’s managed assets are in personal trust, agency, and investment advisory accounts.
Managed Trust Assets by Class of Investment | ||||||||
March 31, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Interest bearing deposits | $ | 130,599 | $ | 116,146 | ||||
US Treasury and government agency obligations | 57,856 | 44,265 | ||||||
State, county and municipal obligations | 130,570 | 136,972 | ||||||
Money market mutual funds | 6,516 | 8,409 | ||||||
Equity mutual funds | 575,471 | 561,059 | ||||||
Other mutual funds - fixed, balanced, and municipal | 299,217 | 306,731 | ||||||
Other notes and bonds | 169,565 | 135,634 | ||||||
Common and preferred stocks | 912,755 | 837,903 | ||||||
Real estate mortgages | 347 | 365 | ||||||
Real estate | 50,432 | 50,710 | ||||||
Other miscellaneous assets (1) | 74,722 | 74,066 | ||||||
Total managed assets | $ | 2,408,050 | $ | 2,272,260 |
(1) Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment trusts, and oil and gas rights.
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:
Assets Under Management by Account Type | ||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
Assets | Assets | |||||||||||||||
(in thousands) | Managed | Non- managed (1) | Managed | Non- managed (1) | ||||||||||||
Personal trust accounts | $ | 567,222 | $ | 96,005 | $ | 512,905 | $ | 62,221 | ||||||||
Personal investment retirement accounts | 340,159 | 7,142 | 311,215 | 10,024 | ||||||||||||
Corporate retirement accounts | 56,515 | 382,803 | 53,190 | 335,613 | ||||||||||||
Investment advisory accounts | 995,769 | 20,169 | 867,776 | - | ||||||||||||
Foundation and endowment accounts | 220,722 | - | 224,213 | - | ||||||||||||
Total fiduciary accounts | $ | 2,180,387 | $ | 506,119 | $ | 1,969,299 | $ | 407,858 | ||||||||
Custody and safekeeping accounts | - | 59,490 | - | 35,773 | ||||||||||||
Totals | $ | 2,180,387 | $ | 565,609 | $ | 1,969,299 | $ | 443,631 | ||||||||
Total managed and non-managed assets | $ | 2,745,996 | $ | 2,412,930 |
|
The composition of managed assets is divided approximately 60% in equities and 40% in fixed income securities, and this composition is relatively consistent from year to year, and
WM&T has no proprietary mutual funds.
Stock Yards Bancorp, inc. and subsidiary
Fiduciary and Related Trust Services Income | ||||||||
Three months ended March 31, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Investment advisory accounts | $ | 2,131 | $ | 2,079 | ||||
Personal trust accounts | 1,804 | 1,918 | ||||||
Personal individual retirement accounts | 890 | 873 | ||||||
Corporate retirement accounts | 327 | 379 | ||||||
Foundation and endowment accounts | 133 | 151 | ||||||
Custody and safekeeping accounts | 31 | 56 | ||||||
Brokerage and insurance services | 25 | 23 | ||||||
Other | 98 | 21 | ||||||
Total WM&T services | $ | 5,439 | $ | 5,500 |
The table below presents data regarding WM&T managed assets by class of investment for the periods ending September 30, 2017 and 2016. This table demonstrates that:
|
|
No Stock Yards Bank propriety mutual funds exist, and therefore no such investment options are available to WM&T clients.
Managed Assets by Class of Investment | ||||||||
As of September 30, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Interest bearing deposits | $ | 122,787 | $ | 127,570 | ||||
US Treasury and government agency obligations | 42,293 | 50,020 | ||||||
State, county and municipal obligations | 132,431 | 126,394 | ||||||
Money market mutual funds | 8,211 | 13,718 | ||||||
Equity mutual funds | 548,972 | 453,995 | ||||||
Other mutual funds - fixed, balanced, and municipal | 310,779 | 319,240 | ||||||
Other notes and bonds | 120,155 | 88,463 | ||||||
Common and preferred stocks | 795,732 | 688,543 | ||||||
Real estate mortgages | 373 | 392 | ||||||
Real estate | 43,664 | 44,572 | ||||||
Other miscellaneous assets (1) | 54,990 | 56,392 | ||||||
Total managed assets | $ | 2,180,387 | $ | 1,969,299 |
|
Stock Yards Bancorp, inc. and subsidiary
The table belowabove provides information regarding fee income earned by Bancorp’sBancorp’s WM&T department for the three and nine-month periods ended September 30, 2017 and 2016.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 considers and tailorsis tailored based on account type of account and other factors. For example, fee structures are in place for investment management, irrevocable trusts, revocable trusts, IRA accounts, 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.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.
Wealth Management and Trust Services Income | ||||||||||||||||
Three months | Nine months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Personal trust accounts | $ | 1,691 | $ | 1,707 | $ | 5,523 | $ | 5,427 | ||||||||
Personal retirement accounts | 832 | 778 | 2,426 | 2,229 | ||||||||||||
Corporate retirement accounts | 373 | 408 | 1,161 | 1,162 | ||||||||||||
Investment advisory accounts | 1,895 | 1,681 | 5,471 | 4,789 | ||||||||||||
Foundation and endowment | 135 | 126 | 400 | 364 | ||||||||||||
Custody and safekeeping | 36 | 27 | 119 | 73 | ||||||||||||
Brokerage and insurance | 9 | 13 | 28 | 35 | ||||||||||||
Other | 54 | 60 | 144 | 140 | ||||||||||||
Total | $ | 5,025 | $ | 4,800 | $ | 15,272 | $ | 14,219 |
Other Non-interest Income and Non-interest ExpenseAdditional sources of non-interest income
ServiceDeposit service charges on deposit accounts decreased $22$164 thousand, or 1% while increasing $416 thousand, or 6.0%11.6%, for the first three and nine month periodsmonths of 2017, respectively,2019, as compared with the same periodsperiod in 2016. The decline quarter over quarter was driven by a decline in fees assessed on overdrawn checking accounts. This component of service2018. Service charge income is generally driven by transaction volume, which can fluctuate throughout the year. Cash management services offered to commercial customers through our treasury management area continues to be a growing source of revenue. Treasury generated gross revenue grew 12% overThe first quarter decrease is consistent with the nine month period ended September 30, 2017, as compared to the same perioddecline in 2016. Fees chargedfees earned on overdrawn checking accounts declined 4% year over year. Managementaccounts. 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. Service charges were further impacted byrestrictions, the introduction of a new checking account productdecline is anticipated to be less significant than what was experienced in the thirdfirst quarter of 2016. The product provides ancillary services to customers, while carrying a monthly service charge. The income associated with the new checking account product was approximately $6412019.
Debit and credit card revenue increased $236 thousand, foror 15.6%, in the first ninethree months of 2017, as compared to $198 thousand for the same period in 2016.
Bankcard transaction revenue increased $37 thousand or 2.5% for the third quarter of 2017, and $214 thousand, or 5.1% for the first nine months of 2017, as compared2019, as compared with the same periodsperiod in 2016. Bankcard transaction revenue primarily represents income2018. The increase in the Bank derivesfirst quarter of 2019 reflected increased volume resulting from customers’ use of debit and credit cards. Bancorp began offeringcontinued growth in the commercial credit cards customer base. Volume, which is dependent on customer behavior and new accounts, is expected to business customers latecontinue to increase. Credit card interchange income and ancillary credit card fees increased $148 thousand, or 45%, and debit card interchange increased $88 thousand or 7.46%, in 2015. Revenue on credit cards totaled $276 thousand and $795 thousand for the first three and nine month periodsmonths of 2017, respectively,2019, as compared to $206 thousand and $520 thousand forwith the same periodsperiod in 2016.2018. Bancorp expects volume of credit card transactions to increase as this product is expanded within the commercial customer base. Interchange income on debit cards declined $35 thousand and $66 thousand in the three and nine month periods of 2017, respectively, compared to the same periods in 2016. Bancorp expects future decreasesexperience a slight decrease in interchange rates on debit cards as merchants structure their technologyservice providers gravitate to lower cost options within the market, however, growth in accounts is anticipated to offset the decline in rates.
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 an increase in the first three months of 2019 of $110 thousand or 10.5% over the same period in 2018. Bancorp continues to expect growth in this income category in 2019 based upon an expanding customer base and processes toas more existing customers take advantage of lower transactional pricing options, which do not favor Bancorp or the banking industry as a whole.
Stock Yards Bancorp, inc. and subsidiary
offered services.
Mortgage banking revenueincome primarily includes gains on sales of mortgage loans. Bancorp’sBancorp’s mortgage banking department originates residential mortgage loans to be sold in the secondary market. Interest rates on the loans sold are locked with the borrower and investor prior to closing the loans, thus Bancorp bears no interest rate risk related to these loans. The department offers conventional, VAVeterans Administration (“VA”) and FHAFederal Housing Authority (“FHA”) financing, for purchases and refinances, as well as programs for first-time home buyers. Changes in interestInterest rates on mortgage loans directly impact the volume of business transacted by the mortgage banking department. Mortgage banking revenue decreased $291$94 thousand, or 27.1% and $516 thousand, or 17.8%16.3%, for the respectivefirst three and nine month periods ended September 30, 2017months of 2019, as compared with the same periods in 2016, primarily2018, due to lower transaction volume. In Bancorp’s primary market of Louisville, Kentucky, the housing inventory wascontinued to be relatively low, particularly in the first half of 2017, contributing to this decline. Refinancing activity, which slowed in 2018 as a result of rising interest rates, could increase if mortgage rates decline in 2019.
Securities brokerage
Net investment product sales commissions and fees decreased $7$48 thousand, or 1.3% while increasing $45 thousand, or 2.9%11.9%, for the respective three and nine month periodsthree-month period ended September 30, 2017March 31, 2019, as compared with the same periodsperiod in 2016. Revenue fluctuations correspond2018. The decrease corresponds primarily to overall brokerage volume. Managed account balances were down in the first quarter of 2019 as a result of the stock market decline in the fourth quarter of 2018. 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) income totaled $204 thousand for the third quarter and $964 thousand for the first nine months of 2017, as compared to $216 thousand and $657 thousand for the same periods in 2016. The year to date increase in 2017 over 2016, was primarily due to $348 thousand in death benefit proceeds recorded in the second quarter of 2017. BOLIowned life insurance (“BOLI”) assets represent the cash surrender value forof life insurance policies on certain current and priorkey employees who have provided consent for Bancorp to be the beneficiary of a portion of such policies. BOLI income results from theThe related change in cash surrender value and any death benefits received under the policies.policies are recorded as non-interest income. This income helps offset the cost of various employee benefits. Income related to BOLI decreased to $178 thousand in the first quarter of 2019 compared with $187 thousand for the same time period in 2018, as a result of decreasing crediting rates on investments.
Other non-interest income decreased $216increased $183 thousand, or 30.3% and $193 thousand, or 11%66.3%, for the respective three and nine month periods ended September 30, 2017first quarter of 2019 compared with the same periodsperiod in 2016. The primary driver2018. In the first quarter of the decline was swap fee2019 Bancorp recognized income of $126 thousand related to incentive received to relocate a banking center location.
Non-interest expenses
Compensation, which declined $116includes salaries, incentives, bonuses, and stock based compensation, increased $831 thousand, in the third quarter and $251 thousandor 7.6%, for the first nine monthsquarter of 2017,2019, compared with the same period in 2018. Personnel additions related to Bancorp’s growth along with annual salary increases drove the increase. At March 31, 2019, Bancorp had 596 full-time equivalent employees compared with 589 at March 31, 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 were flat year over year. The directional inconsistency when comparing to compensation is attributable to lower health insurance claims during the first quarter of 2019 compared to the same period in 2018.
Net occupancy and equipment expense increased $40 thousand, or 2.2%, in the first quarter of 2019, as compared with the same periodsperiod in 2016. These fees are an infrequent source2018. This category primarily includes rent, depreciation, and maintenance, variances for which were not individually significant. Costs of revenue due tocapital asset additions flow through the unique naturestatement of income over the lives of the transactions. This category contains a varietyassets in the form of other income sources none of which resulted in individually significant variances.depreciation expense.
SalariesTechnology and employee benefitscommunications expense increased $935$143 thousand, or 7.8% for8.8% in the thirdfirst quarter of 2017, and $3.0 million, or 8.4%, for the first nine months of 2017, as2019 compared with the same periodsperiod in 2016. The increases are2018 due largely due to higher compensation expenses, reflecting addition of personnel and to a lesser extent, increased health care costs. The additions to staff were driven by expanding market presence in Cincinnati and Indianapolis, along with the need for front line lending and loan support staff across all markets. The Bank’s employee health insurance is a self-insured plan and related expenses fluctuate with claims experience. At September 30, 2017, Bancorp had 581 full-time equivalent employees compared with 558 at September 30, 2016.
Net occupancy expense decreased $25 thousand or 1.5% for the third quarter and increased $49 thousand or 1.0% for the nine months ended September 30, 2017, as compared with the same periods in 2016. The quarterly decrease was the result of timing of normal maintenance activities. The increase year over year was largely due to increased recurring expenses for multiple bank properties and a decrease in sub-lease rents.
Stock Yards Bancorp, inc. and subsidiary
Data processing expense increased $173 thousand or 9.9% in the third quarter of 2017 and $737 thousand, or 14.2% in the first nine months of 2017, as compared with the same periods in 2016. The increase was primarily a result of 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.
FurnitureBancorp outsources processing for debit and equipment expense credit card operations, which generate significant revenue. These expenses increase as transaction volume increases, offsetting a portion of corresponding revenue growth. Debit and credit card processing increased $39$21 thousand, or 14.1%3.7% in the third quarter of 2017 and $8 thousand or 0.9% for the first ninethree months of 2017,2019, as compared with the same periodsperiod in 2016. Costs2018, as a result of capital asset additions flow through the statement of income over the lives of the assetsrising transaction volume.
Marketing and business development expenses include all costs associated with promoting Bancorp, community investment, retaining customers, and acquiring new business. Expenses decreased $21 thousand, or 3.3% in the formfirst quarter of depreciation2019 compared with the first quarter of 2018. A general increase in travel, meals, and entertainment expense, was more than offset by a decline in contribution expense.
Postage, printing and supplies expenses increased $15 thousand, or 3.8% in the first quarter of 2019 compared with the same time period in 2018.
Legal and professional fees increased $41 thousand, or 8.3% to $534 thousand in the first quarter of 2019 from $493 thousand in the first quarter of 2018. Costs associated with CECL engagements drove the increase.
FDIC insurance expense decreased $114 thousand or 32% and $319 thousand, or 30.7%, for the respective three and nine month periods of 2017, as compared with the same periods in 2016.was flat year over year. The expense assessment is calculated by the FDIC, on a quarterly basis. During 2016 the FDIC revised the assessment criteriaand any fluctuation in expense is directly related to more closely align FDIC insurance expense with each financial institution’s risk profile. Bancorp benefited from this change.changes in Bancorp’s balance sheet.
AmortizationAmortization/impairment of investments in tax credit partnerships decreased $399increased $52 thousand for the thirdfirst quarter of 2017 and $1.2 million for the first nine months of 2017, as2019 compared with the same periodsperiod of 2016. This2018, as Bancorp did not record any expense reflects amortizationin the first quarter of investments in2018. These partnerships which generate federal income tax credits and vary widely depending upon the timing and magnitude of investments and related amortization.credits. For each of Bancorp’s investments in tax credit partnerships, the tax benefit compared with the amortizationrelated expenses results in a positive effect on net income. 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 $190$433 thousand, or 5.5% and $1.3 million or 13.6%55.1% in the respective three and nine month periods ending September 30, 2017, asfirst quarter of 2019 compared with the same periodsperiod in 2016.2018. The quarterly increase for 2019 was largely due to recording a $266director compensation increasing $260 thousand, liability related to an estimated loss from certain administrative proceedings arising in the course of our business. The increase for the year to date 2017 period was largelyprimarily due to a combinationmarket-tied deferred compensation, gains on the sale of numerous items, the largest of which are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Yards Bancorp, inc. and subsidiary
Income Taxes
Bancorp recorded income tax expense of $4.1 million and $11.6$1.8 million for the first three and nine month periods ended September 30, 2017, respectively, asmonths of 2019, compared with $3.9 million and $11.2to $3.1 million for the same periodsperiod in 2016.2018. The effective rate for both the corresponding three month periods was 10.5% and nine months ended September 30, 2017, was 25.9%18.5%, respectively. The decrease in 2017 as compared to 27.1% and 27.0% for the three and nine months ended September 30, 2016, respectively. Refer to Footnote 5 to the consolidated financial statements for a reconciliation of the statutory and effective income tax rates.
Bancorp invests in certain partnerships with customers that yield federal income tax credits, and these tax credits reduce the effective tax rate.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 levelKentucky corporate income tax will be assessed at 5% of this activity for the first nine months of 2017 was less than that of the comparable period in 2016 as is reflected in the comparable effect on effective tax rates for those periods. Taken as a whole, the tax benefit of these investments exceeds amortization expense associated with them, resulting in a positive impact on net income.
The effective tax rate in 2017 was largely reduced by the result of the adoption of ASU 2016-09 “Compensation – Stock Compensation Improvements to Employee Share-Based Payment Accounting”. The new standard requires excess tax benefitsKentucky taxable income and deficiencies related to share-based payment awards towill be reflected in the statement of operationsincluded as a component of current and deferred state income tax expense. Associated with this change, during the provision for income taxes. Forfirst quarter of 2019, Bancorp established a Kentucky state deferred tax asset related to existing temporary differences estimated to reverse after the three and nine months ended September 30, 2017effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of $241 thousand and $1.4federal impact of $1.3 million, respectively for such excess benefits against the provision for income tax expense. Prior to adoption of ASU 2016-09 these tax benefits were recorded directly to additional paid-in capital. Tax benefits recorded to capitalor approximately $0.06 per diluted share for the three and nine months ended September 30, 2016 were $443first quarter 2019. While this is positive in the short-term, Bancorp anticipates an unfavorable impact of approximately $200 thousand and $963 thousand, respectively.per year beginning in 2021.
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. A discussion of Bancorp’s commitments is included in Note 15.
Other commitments discussed in Bancorp’sBancorp’s Annual Report on Form 10-K for the year ended December 31, 2016,2018, 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 remained level at $3.3 billion at both March 31, 2019 and December 31, 2018. In the first three months of 2019 decreases in loans, federal funds sold and interest bearing due from banks, were offset by increased $116.4available for sale securities. Gross loans decreased $22.5 million, or 3.8%less than 1%, to $3.2 billion at September 30, 2017primarily as compared to $3.0 billion at December 31, 2016. Loans increased $29.7 million, or 1.3%, period to period, with increases primarily ina result of elevated commercial and industrial loans,loan and commercial real estate and(CRE) loan payoffs mainly attributable to a lesser degree, 1-4 family residential loans. The most significant decrease was seen in commercial construction and development loans, primarily the result of significant loan principal repayments where maturing loans were not replaced with permanent financing.underlying collateral sales. Securities available-for-saleavailable for sale increased by $1.4$70.1 million, duringor 16.0%, over the first ninethree months of 2017.2019, as excess liquidity was deployed into short-term securities. The majorityincrease also included market value improvement in the portfolio with net unrealized losses at March 31, 2019 of this increase the result of short-term investments made at quarter end largely offset by maturities during the first nine months of 2017. Included in securities available-for-sale are short-term U.S. government sponsored entities. These securities, which totaled $150$3.3 million at September 30, 2017 and $100as compared with $6.7 million at December 31, 2016, normally have2018. Other assets increased $16.8 million or 35.7%, primarily the result establishing a maturityright of less than one month, and are purchased at quarter-end as partuse lease asset upon adopting ASU 2016-02, Leases in the first quarter of a tax minimization strategy. The remaining variance was attributable to reduction in unrealized losses on the securities portfolio to $431 thousand at September 30, 2017 as compared to unrealized losses of $1.9 million at December 31, 2016. Funds from maturing available-for-sale investments were held as cash, or invested short term, to fund future loan growth.
Stock Yards Bancorp, inc. and subsidiary
2019.
Total liabilities increased $96.0 million,also remained level at $2.9 billion at both March 31, 2019 and December 31, 20162018. Total deposits decreased $41.8 million or 1.5%, consistent with expected seasonal decreases experienced in both non-interest bearing deposits, $12.2 million, or 1.7%, and interest bearing demand deposit accounts, $45.6 million, or 5.1%. Savings accounts increased $6.0 million, or 3.9%, and time deposits increased $9.7 million or 2.8%. Securities sold under agreements to September 30, 2017, from $2.7 billionrepurchase decreased $1.5 million, or 4.0%, due to $2.8 billion, respectively.normal cyclical activity, and the continuation of customers migrating to higher-yielding, non-collateralized deposits. Federal funds purchased and other short-term borrowing increased $114.6$2.0 million, or 19.2%, period to period, primarily the result of $150 million in borrowing for the short-term investments mentioned above.period. Bancorp uses short-term lines of credit to manage its overall liquidity position. Due to normal cyclical activity total deposits decreased $38.6 million or 1.5%, period to period. Interest bearing demand deposits accounts decreased, $42.7 million, or 5.6%; time deposits, $17.8 million, or 7.1%; and non-interest bearing demand deposit accounts, $3.3 million, or 0.5%. Money market deposit accounts and savings accounts increased, period to period, $15.7 million, or 2.3%, and $9.6 million, or 6.8%, respectively. Securities sold under agreements to repurchase increased $4.3 million, or 6.3%. Other liabilities increased $16.7$8.2 million, or 42.9%.
Elements17.7%, largely due to the addition of Loan Portfolio
The following table sets forthASU 2016-02, Leases, in the major classificationsfirst quarter of the loan portfolio.
(in thousands) | ||||||||
Loans by Type | September 30, 2017 | December 31, 2016 | ||||||
Commercial and industrial | $ | 750,728 | $ | 736,841 | ||||
Construction and development, excluding undeveloped land | 174,310 | 192,348 | ||||||
Undeveloped land (1) | 20,989 | 21,496 | ||||||
Real estate mortgage: | ||||||||
Commercial investment | 576,810 | 538,886 | ||||||
Owner occupied commercial | 397,804 | 408,292 | ||||||
1-4 family residential | 261,707 | 249,498 | ||||||
Home equity - first lien | 51,925 | 55,325 | ||||||
Home equity - junior lien | 63,416 | 67,519 | ||||||
Subtotal: real estate mortgage | 1,351,662 | 1,319,520 | ||||||
Consumer | 37,431 | 35,170 | ||||||
Total loans | $ | 2,335,120 | $ | 2,305,375 |
|
|
Stock Yards Bancorp, inc. and subsidiary
2019.
Loan Portfolio Composition
Composition of loans, net of deferred fees and costs, by primary loan portfolio growth built further onclass follows:
(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 momentum experienced in the second quarter of 2017, driven by solid loan production that continued to exceed the average pace recorded over the last three years. While all of the Company's markets participated in this growth, Indianapolis, through excellent leadership and a growing lending team, led the way. Still, the conversion of loan production into portfolio growth continued to track below the exceedingly strong rate that characterized 2016 due to several factors, including principal repayments primarily related to commercial construction projects and borrowers who sold collateral or their business. Also, management believes that business owners remain more cautious about the longer-term direction of the economy, awaiting greater clarity on possible tax reform. Considering its loan pipeline, management anticipates continued momentum in net loan growth in the fourth quarter of 2017, although net loan growth could be challenging if loan payoffs persist at high levels.borrower, but for which no development has yet taken place.
Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain sold participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their share ownership of the loan without permission from Bancorp. US GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the commercial and industrial and real estate mortgage loan totals above,portfolio segments, and a corresponding liability is recorded in other liabilities. At September 30, 2017March 31, 2019 and December 31, 2016,2018, the total participated portions of loans of this nature were $18.3$10.2 million and $15.8$10.5 million, respectively.
Allowance for loan lossesLoan and Lease Losses
An allowance for loan losses has been established to provide for probable losses on loans that may not be fully repaid. The allowance for loan losses is increased by provisions charged to expense and decreased by charge-offs, net of recoveries, if any.recoveries. Loans are typically charged off when management deems them uncollectible and after underlying collateral has been liquidated; however, collection efforts 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 biasproclivity for resolution.
The allowance methodology is driven by risk ratings, historical losses, and qualitative factors. The provision forlevel of the first nine months of 2017, and the resultingMarch 31, 2019 allowance level, reflected a number of factors, including a slight elevation in classified loanscredit quality metrics which were generally consistent with prior periods, and an expansion of the historical look-back period from 2432 quarters to 2836 quarters. This expansion of the look-backhistorical period was applied to all classes and segments of the portfolio. The expansionExpansion of the look-back period for the historical loss rates used in the quantitative allocation caused management to review of the overall methodology for the qualitative factors to ensure Bancorp waswe were appropriately capturing the risk not addressed in the quantitative historical loss rates used in the quantitative allocation.rate. Management believes the extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. Key indicators of loan quality continued to show improvement during 2017,trend at levels consistent with levelsprior periods, however management recognizes that due to the cyclical nature of non-performing loans continuing a five year downward trend. During its review of qualitative factors in the first nine months of 2017, Bancorp noted a potential exposure for one pool of classified loans. Due to this potential exposure, Bancorp increased its qualitative allocation forlending business, these trends will likely normalize over the allowance for the nine month period.
long term. Additional information regarding Bancorp’sBancorp’s methodology for evaluating the adequacy of the allowance for loan loss can be read in the Company’s annualBancorp’s Annual Report on Form 10K.
As of September 30, 2017March 31, 2019 the allowance for loan loss was $24.9$26.5 million, a $900$930 thousand increase overfrom the December 31, 20162018 balance of $24.0$25.5 million. For the comparative periods, the allowance as a percent of average loans was 1.09%1.05% and 1.11%1.01%, respectively. The allowance as a percent of period end loans, as of each period end, was 1.07%1.05% and 1.04%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, 2019, and December 31, 2018, the allowance remained adequate to cover potential losses in the loan portfolio, in management’s opinion.
Stock Yards Bancorp, inc. and subsidiary
Non-performing Loans and Assets
Information summarizing non-performing assets, including non-accrual loans follows:
(dollars in thousands) | September 30, 2017 | December 31, 2016 | ||||||||||||||
(Dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||||||||||||
Non-accrual loans (1) | $ | 4,858 | $ | 5,295 | $ | 3,273 | $ | 2,611 | ||||||||
Troubled debt restructuring | 949 | 974 | 39 | 42 | ||||||||||||
Loans past due 90 days or more and still accruing | 261 | 438 | 454 | 745 | ||||||||||||
Non-performing loans | 6,068 | 6,707 | ||||||||||||||
Total non-performing loans | 3,766 | 3,398 | ||||||||||||||
Foreclosed real estate | 2,640 | 5,033 | ||||||||||||||
Other real estate owned | 878 | 1,018 | ||||||||||||||
Non-performing assets | $ | 8,708 | $ | 11,740 | ||||||||||||
Total non-performing assets | $ | 4,644 | $ | 4,416 | ||||||||||||
Non-performing loans as a percentage of total loans | 0.26 | % | 0.29 | % | 0.15 | % | 0.13 | % | ||||||||
Non-performing assets as a percentage of total assets | 0.28 | % | 0.39 | % | 0.14 | % | 0.13 | % |
(1) No TDRs previously accruing were moved to non-accrual during the three month periods ending March 31, 2019. No TDRs were on non-accrual as of March 31, 2019 or December 31, 2018.
Non-performing
In total, non-performing assets as of September 30, 2017March 31, 2019 were comprised of 33 non-accrual29 loans, ranging in amount from $1 thousand to $907$667 thousand, fivetwo accruing TDRs, and foreclosed real estate held for sale. Foreclosed real estate held at September 30, 2017March 31, 2019 included properties of three former lending relationships, with a combined value of $2.6 million. At September 30, 2017 there were1-4 family residential property and two properties, with a combined recorded investment of $75 thousand, in the process of foreclosure.commercial real estate properties.
|
|
The following table sets forth the major classifications of non-accrual loans:
Non-accrual loans by type | ||||||||
(in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Commercial and industrial | $ | 1,256 | $ | 1,767 | ||||
Construction and development, excluding undeveloped land | 737 | 538 | ||||||
Undeveloped land | 474 | 474 | ||||||
Real estate mortgage | ||||||||
Real estate mortgage - commercial investment | 55 | 107 | ||||||
Real estate mortgage - owner occupied commercial | 1,470 | 1,042 | ||||||
Real estate mortgage - 1-4 family residential | 785 | 984 | ||||||
Home equity | 81 | 383 | ||||||
Subtotal: Real estate mortgage | 2,391 | 2,516 | ||||||
Home equity and consumer loans | - | - | ||||||
Total loans | $ | 4,858 | $ | 5,295 |
Stock Yards Bancorp, inc. and subsidiary
(In thousands) | March 31, 2019 | December 31, 2018 | ||||||
Commercial and industrial | $ | 193 | $ | 192 | ||||
Construction and development, excluding undeveloped land | - | 318 | ||||||
Undeveloped land | - | 474 | ||||||
Real estate mortgage | ||||||||
Commercial investment | 317 | 138 | ||||||
Owner occupied commercial | 1,466 | 586 | ||||||
1-4 family residential | 843 | 760 | ||||||
Home equity - first lien | - | - | ||||||
Home equity - junior lien | 454 | 143 | ||||||
Subtotal: Real estate mortgage | 3,080 | 1,627 | ||||||
Consumer | - | - | ||||||
Total loans | $ | 3,273 | $ | 2,611 |
Liquidity |
|
The role of liquidity management is to ensure funds are available to meet depositors’depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity is provided by short-term liquid assets that can be converted to cash, investment securities available-for-sale,available for sale, various lines of credit available to Bancorp, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than market rate.
Bancorp’sBancorp’s most liquid assets are comprised of cash and due from banks, available-for-saleavailable for sale marketable investment securities, federal funds sold and interest bearing depositsdue from accounts with banks. Federal funds sold and interest bearing depositsdue from bank accounts totaled $81.4$67.3 million at September 30, 2017.March 31, 2019. These investments normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $571.5
Available for sale securities totaled $507.1 million, at September 30, 2017. The portfolio includes maturities of approximately $216.7March 31, 2019, with $205.4 million in securities expected to mature over the next twelve months, including $150 million of short-term securities which matured in October 2017.12 months. Combined with federal funds sold and interest bearing deposits,due from bank accounts, these offer substantial resources to meet either new loan demand or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of its investmentthe securities portfolio to secure public fund deposits, cash balances of certain wealth management and trustWM&T accounts, and securities sold under agreements to repurchase. At September 30, 2017,March 31, 2019, total investment securities pledged for these purposes comprised 58%70% of the available-for-saleavailable for sale investment portfolio, leaving $241.8approximately $151.5 million of unpledged securities, including $150 million which matured the first week of October..securities.
Bancorp defines corehas a significant base of non-maturity customer deposits, defined as demand, savings, and money market deposit accounts and certificates of deposittime deposits less than or equal to $250,000. $250,000 (excluding brokered deposits). At September 30, 2017,March 31, 2019, such deposits totaled $2.4$2.7 billion and represented 99%97% of Bancorp’s total deposits, as compared to $2.5with $2.7 billion, or 98%97% of total deposits at December 31, 2016.2018. Because these deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships they do not put heavy pressure on liquidity. However, manyAs market conditions continue to improve, these balances may decrease, putting strain on Bancorp’s liquidity position. Bancorp began adding liquidity to the balance sheet in 2018 sheet through targeted certificate of Bancorp’s customers’ deposit balances are historically high.marketing campaigns. The campaigns generated $111 million in certificate of deposit growth in 2018.
As of September 30, 2017March 31, 2019, and December 31, 2018, Bancorp had no brokered deposits. This compares to $498 thousand, or 0.02% of total deposits, in brokered deposits at December 31, 2016.of $29.8 million.
Included in the total deposit balances at September 30, 2017March 31, 2019 is $122.4$191.3 million of public funds deposits generally comprised of accounts from local government agencies and public school districts in Bancorp’s markets.the markets Bancorp operates within. As a result of property tax collections in the latter part of each year these accounts provide seasonal excess balances that originate with tax payments and decline leading into the next 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 FHLB advances.the sales of securities under agreement to repurchase. As a member of the FHLB of Cincinnati, Bancorp has access to credit products offered by the FHLB. Bancorp views these borrowings as a low cost alternative to other timebrokered deposits. At September 30, 2017,March 31, 2019, available credit from the FHLB totaled $367.3 million.$523.7 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$105.0 million at September 30, 2017.both March 31, 2019, and December 31, 2018.
At September 30, 2017 Bancorp had a $150 million cash management advance from the FHLB. This advance matured in the first week of October, 2017 and was used to manage Bancorp’s overall cash position. Due to the short term of the advance, it was recorded on the consolidated balance sheet within Federal funds purchased and other short-term borrowings.
Stock Yards Bancorp, inc. and subsidiary
Bancorp’s principal source of cash is dividends paid to it as sole shareholder of the Bank. At September 30, 2017,March 31, 2019, the Bank maycould pay up to $70.3$68.4 million in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank. The Bank will pay the Holding Company a $28 million dividend in April, 2019, to consummate the acquisition of King Bancorp, Inc. This will not significantly hamper the Bank’s ability to pay dividends in the future.
Capital Resources |
|
At September 30, 2017,March 31, 2019, stockholders’ equity totaled $334.3$378.0 million, an increase of $20.4$11.5 million since December 31, 2016.2018. See the Consolidated Statement of Changes in Stockholders’ Equity for further detail of the changes in equity since the end of 2015.2018. One component of equity is accumulated other comprehensive income (loss) which, for Bancorp, consists of net unrealized gains or losses on securities available-for-saleavailable for sale and hedging instruments, as well as a minimum pension liability, each net of income taxes. Accumulated other comprehensive loss was $531 thousand$2.5 million at September 30, 2017March 31, 2019 compared with a loss of $1.5$5.1 million on December 31, 2016.2018. The $968 thousand positive difference$2.6 million increase is primarily a reflection of the effect of the changing interest rate environment during the first ninethree months of 2017 as short term rates increased slightly, while long term rates decreased, which decreased2019 on the valuation of Bancorp’s unrealized loss on securitiesportfolio of available for sale.sale securities.
As of September 30, 2017, Bancorp meets all requirements to be considered well capitalized under regulatory risk-based capital rules, and is not subject to limitations due to the capital conservation buffer. See Footnote 19 to the consolidated financials for more information regardingThe following table sets forth Bancorp’s and the Bank’s risk-basedrisk based capital amounts and ratios as of September 30, 2017 and December 31, 2016.ratios:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Total risk-based capital (1) | ||||||||
Consolidated | 14.04 | % | 13.91 | % | ||||
Bank | 13.74 | 13.56 | ||||||
Common equity tier 1 risk-based capital (1) | ||||||||
Consolidated | 13.11 | 13.00 | ||||||
Bank | 12.82 | 12.65 | ||||||
Tier 1 risk-based capital (1) | ||||||||
Consolidated | 13.11 | 13.00 | ||||||
Bank | 12.82 | 12.65 | ||||||
Leverage (2) | ||||||||
Consolidated | 11.57 | 11.33 | ||||||
Bank | 11.31 | 11.02 |
|
|
(2) | Ratio is computed in relation to average assets. |
In additionBancorp and the Bank are subject to capital ratios definedregulations in accordance with Basel III, as administered by banking regulators, Bancorp considers various ratios when evaluatingregulators. 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 overhead, including tangible common equity to tangible assets, tangible common equity per share, and adjusted efficiency ratio, all of which are non-GAAP measures.
Bancorp believes the tangible common equity ratios are important because of their widespread usepossibly additional discretionary actions by investors as means to evaluateregulators 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 they reflectcalculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the level of capital available to withstand unexpected market conditions. Because US GAAP does not include capital ratio measures, there are no US GAAP financial measures comparable to these ratios.regulators regarding components, risk weightings and other factors.
Stock YardsBanking 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 inc. and subsidiaryBank 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.
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’sBancorp’s calculation of tangible common equity to amounts reported under US GAAP.
(in thousands, except per share data) | September 30, 2017 | December 31, 2016 | ||||||
Total equity | $ | 334,255 | $ | 313,872 | ||||
Less core deposit intangible | (1,269 | ) | (1,405 | ) | ||||
Less goodwill | (682 | ) | (682 | ) | ||||
Tangible common equity | $ | 332,304 | $ | 311,785 | ||||
Total assets | $ | 3,155,913 | $ | 3,039,481 | ||||
Less core deposit intangible | (1,269 | ) | (1,405 | ) | ||||
Less goodwill | (682 | ) | (682 | ) | ||||
Total tangible assets | $ | 3,153,962 | $ | 3,037,394 | ||||
Total shareholders' equity to total assets | 10.59 | % | 10.33 | % | ||||
Tangible common equity ratio | 10.54 | 10.26 | ||||||
Number of outstanding shares | 22,669 | 22,617 | ||||||
Book value per share | $ | 14.75 | $ | 13.88 | ||||
Tangible common equity per share | 14.66 | 13.79 |
(In thousands, except per share data) | March 31, 2019 | December 31, 2018 | ||||||
Total stockholders equity - GAAP | $ | 377,994 | $ | 366,500 | ||||
Less: core deposit intangible | (1,015 | ) | (1,057 | ) | ||||
Less: goodwill | (682 | ) | (682 | ) | ||||
Tangible common equity - Non-GAAP | $ | 376,297 | $ | 364,761 | ||||
Total assets - GAAP | $ | 3,281,016 | $ | 3,302,924 | ||||
Less: core deposit intangible | (1,015 | ) | (1,057 | ) | ||||
Less: goodwill | (682 | ) | (682 | ) | ||||
Tangible assets - Non-GAAP | $ | 3,279,319 | $ | 3,301,185 | ||||
Total shareholders' equity to total assets - GAAP | 11.52 | % | 11.10 | % | ||||
Tangible common equity to tangible assets - Non-GAAP | 11.47 | 11.05 | ||||||
Number of outstanding shares | 22,823 | 22,749 | ||||||
Book value per share - GAAP | $ | 16.56 | $ | 16.11 | ||||
Tangible common equity per share - Non-GAAP | 16.49 | 16.03 |
InIn 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.
Stock Yards Bancorp, inc. and subsidiary
The following table reconciles Bancorp’sBancorp’s calculation of adjusted efficiency ratios to the ratio reported under US GAAP.
Three months ended | Nine months ended | Three months ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
(amounts in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||
Non-interest expense | $ | 21,317 | $ | 20,518 | $ | 63,811 | $ | 60,251 | ||||||||||||||||
(Dollars in thousands) | 2019 | 2018 | ||||||||||||||||||||||
Non-interest expenses | $ | 22,639 | $ | 21,027 | ||||||||||||||||||||
Net interest income (tax-equivalent) | 26,363 | 24,963 | 77,179 | 72,816 | 29,713 | 27,402 | ||||||||||||||||||
Non-interest income | 11,103 | 11,358 | 33,575 | 32,218 | 11,062 | 10,909 | ||||||||||||||||||
Total revenue | $ | 37,466 | $ | 36,321 | $ | 110,754 | $ | 105,034 | $ | 40,775 | $ | 38,311 | ||||||||||||
Efficiency ratio | 56.9 | % | 56.5 | % | 57.6 | % | 57.4 | % | ||||||||||||||||
Efficiency ratio - GAAP | 55.52 | % | 54.89 | % |
(amounts in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | ||||||||||||||||||
Non-interest expense | $ | 21,317 | $ | 20,518 | $ | 63,811 | $ | 60,251 | $ | 22,639 | $ | 21,027 | ||||||||||||
Less: amortization of investments in tax credit partnerships | (616 | ) | (1,015 | ) | (1,847 | ) | (3,046 | ) | (52 | ) | - | |||||||||||||
Adjusted non-interest expense | 20,701 | 19,503 | 61,964 | 57,205 | 22,587 | 21,027 | ||||||||||||||||||
Net interest income (tax-equivalent) | 26,363 | 24,963 | 77,179 | 72,816 | 29,713 | 27,402 | ||||||||||||||||||
Non-interest income | 11,103 | 11,358 | 33,575 | 32,218 | 11,062 | 10,909 | ||||||||||||||||||
Total revenue | $ | 37,466 | $ | 36,321 | $ | 110,754 | $ | 105,034 | $ | 40,775 | $ | 38,311 | ||||||||||||
Adjusted efficiency ratio | 55.3 | % | 53.7 | % | 55.9 | % | 54.5 | % | ||||||||||||||||
Adjusted efficiency ratio - Non-GAAP | 55.39 | % | 54.89 | % |
|
|
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for use in accounting for revenue arising from contracts with customers, and supersedes most current revenue recognition guidance. The ASU was originally effective for fiscal years and interim periods beginning after December 15, 2016. In August 2015, FASB issued ASU 2015-14 which delayed the effective date. The effective date will be annual reporting periods beginning after December 15, 2017, and the interim periods within that year. Bancorp has reviewed existing contractual arrangements and believes the majority of revenue earned is excluded from the scope of the pronouncement and the impact of adoption if any would be minimal. Bancorp continues to evaluate and develop processes and controls for procedural and disclosure requirements of the standard.
The FASB also issued a series of other ASUs, which update ASU 2014-09. The effective dates for ASU 2014-09 have been updated by ASU 2015-14, Deferral of the Effective Date. For public business entities, certain employee benefit plans, and certain not-for-profit entities, ASU 2014-09 is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Earlier application is permitted only as of annual and interim periods in fiscal years beginning after December 15, 2016. Bancorp is including these ASUs in its evaluation and implementation efforts relative to ASU 2014-09.
• ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
• ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
Stock Yards Bancorp, inc. and subsidiary
• ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
• ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value with changes in fair value recognized in net income. The ASU is effective for fiscal years and interim periods beginning after December 15, 2017. Because Bancorp does not have significant investments in equity securities, the adoption of ASU 2016-01 is not expected to have a significant impact on Bancorp’s operations or financial statements.
In February 2016, FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendment should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. Bancorp has evaluated existing lease commitments and does not expect adoption to significantly impact Bancorp’s financial condition or results of operations.
In June 2016, FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This standard will likely have a significant impact on the way Bancorp recognizes credit impairment on loans. Under current US GAAP, credit impairment losses are determined using an incurred-loss model, which recognizes credit losses only when it is probable that all contractual cash flows will not be collected. The initial recognition of loss under CECL differs from current US GAAP because recognition of credit losses will not be based on any triggering event. This should generally result in credit impairment being recognized earlier and immediately after the financial asset is originated or purchased. Bancorp continues to evaluate existing accounting processes, internal controls, and technology capabilities to determine what additional changes will be needed to address the new requirements. These processes and controls require significant judgment, collection and analysis of additional data, and use of estimates. Technology and other resources have been upgraded or modified to capture additional data to support the accounting and disclosure requirements. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2019.
In August 2016, FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s amendments add or clarify guidance on eight cash flow issues. The guidance in the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. Bancorp does not anticipate that adoption of the ASU will have a significant impact on the consolidated financial statements of the Company.
Stock Yards Bancorp, inc. and subsidiary
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize at the transaction date the income tax consequences of inter-company asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities may early adopt the ASU, but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year that includes that interim period. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. For all other entities, the ASU is effective for annual periods in fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019. Entities may early adopt the ASU and apply it to transactions that have not been reported in financial statements that have been issued or made available for issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update), which incorporates into the FASB Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The SEC staff had previously announced that registrants should include the disclosures starting with their December 2017 financial statements. Bancorp is evaluating the potential impact of implementation of this standard on the consolidated financial statements of the Company.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The changes are effective for public business entities that are SEC filers, for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the guidance in Subtopic 610-20 on accounting for derecognition of a nonfinancial asset. The ASU also defines in-substance nonfinancial assets and includes guidance on partial sales of nonfinancial assets. An entity is required to apply the amendments in this ASU at the same time that it applies ASU 2014-09. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
Stock Yards Bancorp, inc. and subsidiary
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires companies to present the service cost component of net benefit cost in the same line items in which they report compensation cost. Companies will present all other components of net benefit cost outside operating income, if this subtotal is presented. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting which clarifies what constitutes a modification of a share-based payment award. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260),Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815); I. Accounting for Certain Financial Instruments with Down Round Features. II. Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interests with a Scope Exception, which makes limited changes to as to classifying certain financial instruments as either liabilities or equity. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018.Early adoption is permitted, including adoption in an interim period. Because Bancorp does not have financial instruments with a down round feature, the implementation of ASU 2017-11 is not expected to have a significant impact on the consolidated financial statements of the Company.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815); Targeted Improvements for Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements under ASC 815. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption of this standard is permitted upon its issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Information required by this item is included in Part I Item 2, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Stock Yards Bancorp, inc. and subsidiary
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by Stock Yards Bancorp, maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it filesInc.’s management, with the Securities and Exchange Commission (SEC), and to record, process, summarize and disclose this information within the time periods specified in the rulesparticipation of the SEC.
Based on their evaluation of Bancorp’s disclosure controls and procedures, theits Chief Executive Officer and Chief Financial Officers have concluded that, becauseOfficer, of the material weakness described in Management’s Report on Internal Control Over Financial Reporting in our Annual Report on Form 10-K foreffectiveness of the year ended December 31, 2016, Bancorp’sCompany’s disclosure controls and procedures (as defined in RulesRule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective as of September 30, 2017. However, based on a number of factors, we believe. Based upon that evaluation, the consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial positionCompany’s Chief Executive Officer and results of operation and cash flows for the periods presented in conformity with US GAAP.
Changes in Internal Control overChief Financial Reporting
With regard to the material weakness, our remediation efforts began during the first quarter of 2017. We continue to strengthen how certain controls are designed, performed and documented. We have increased staffing in the internal loan review department, and engaged a third party to assist with loan review. We must now demonstrate the effectiveness ofOfficer concluded that these changes with an appropriate amount of consistency and for a sufficient period of time to conclude that the control is functioning properly. Other than these changes, based on the evaluation of Bancorp’s disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Chief Executive and Chief Financial Officers, there were no significant changes during the quarter ended September 30, 2017 in Bancorp’sCompany’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, Bancorp’sthe Company’s internal control over financial reporting.
In the ordinary course of operations, Bancorp and the Bank are defendants in various legal proceedings. There is no proceeding pending or 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 September 30, 2017.March 31, 2019.
Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plan | Maximum number of shares that may yet be purchased under the plan | |||||||||||||
July 1 - July 31 | - | $ | - | - | - | |||||||||||
August 1 - August 31 | 2,280 | $ | 35.62 | - | - | |||||||||||
Sep 1 - Sep 30 | 2,306 | $ | 37.52 | - | - | |||||||||||
Total | 4,586 | $ | 36.58 | - | - |
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 | — | — |
(1) | Activity represents shares of stock withheld to pay taxes due upon exercise of stock appreciation rights, vesting of restricted stock, and vesting of performance stock units. |
(1) Activity represents sharesThere were no equity securities of stock withheld to pay taxes due upon exercise of stock appreciation rights.the registrant sold without registration during the quarter covered by this report.
Stock Yards Bancorp, inc. and subsidiary
The following exhibits are filed or furnished as a part of this report:
Exhibit Number | Description of exhibit |
31.1 | |
31.2 | |
32 | |
101 | The following financial statements from the Stock Yards Bancorp, Inc. |
(1) | Consolidated Balance Sheets |
(2) | Consolidated Statements of Income |
(3) | Consolidated Statements of Comprehensive Income |
(4) | Consolidated |
(5) | Consolidated Statements of Cash Flows |
(6) | Notes to Consolidated Financial Statements |
Stock Yards Bancorp, inc. and subsidiary
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) | |||
|
| ||
Officer: | |||
Date: | By: | /s/ James A. Hillebrand | |
James A. Hillebrand, | |||
Chief Executive Officer |
Principal Financial Officer: | |||
Date: April 30, 2019 | By: | /s/ Nancy B. Davis | |
Nancy B. Davis, Executive Vice President, | |||
Treasurer and Chief Financial Officer |
65
71