sybt20161024_10q.htm Table Of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended September 30, 2016

 

OR

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to _______________.

 

Commission file number               1-13661       

 

STOCK YARDS BANCORP, INC.     

(Exact name of registrant as specified in its charter)

 

 

Kentucky 

 

61-1137529 

(State or other jurisdiction of   

 

(I.R.S. Employer 

incorporation or organization) 

 

Identification No.) 

 

1040 East Main Street, Louisville, Kentucky 40206     

(Address of principal executive offices including zip code)

 

(502) 582-2571

(Registrant’s telephone number, including area code)

 

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 or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

Accelerated filer

Non-accelerated filer (Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

Yes     ☐               No    

 

 

The number of shares of the registrant’s Common Stock, no par value, outstanding as of October 27, 2016, was 22,575,981.

 

 
 

Table Of Contents
 

 

Stock Yards Bancorp, inc. and subsidiary

Index

 

Item 

 

Page 

     
PART I – FINANCIAL INFORMATION
     
Item 1. Financial Statements  
     

The following consolidated financial statements of Stock Yards Bancorp, Inc. and Subsidiary are submitted herewith:  

 

 

 

 

Consolidated Balance Sheets September 30, 2016 (Unaudited) and December 31, 2015

3

     

 

Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2016 and 2015

4

     

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2016 and 2015

5

     

 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2016 and 2015

6

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) the nine months ended September 30, 2016 and 2015

7

     

 

Notes to Consolidated Financial Statements (Unaudited)

8

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 61
     
Item 4. Controls and Procedures 61
     
PART II – OTHER INFORMATION
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 62
     
Item 6. Exhibits 62

 

 

 
1

Table Of Contents
 

 

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:

 

ASU  Accounting Standards Update
   

Bancorp 

Stock Yards Bancorp, Inc. 

   

Bank 

Stock Yards Bank & Trust Company 

   
BOLI Bank Owned Life Insurance
   
BP Basis Point = 1/100th of one percent
   
Dodd-Frank Act  Dodd-Frank Wall Street Reform and Consumer Protection Act
   
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
   
WM Wealth management and trust
   
LIBOR London Interbank Offered Rate
   
MSR Mortgage Servicing Right
   
OAEM Other Assets Especially Mentioned
   
OREO Other Real Estate Owned
   
PSU  Performance Stock Unit
   
RSU Restricted Stock Unit
   
SAR  Stock Appreciation Right
   
SEC Securities and Exchange Commission
   
TDR Troubled Debt Restructuring
   
US GAAP United States Generally Accepted Accounting Principles
   
VA U.S. Department of Veterans Affairs

 

 
2

Table Of Contents
 

 

Item 1. Financial Statements

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2016 (unaudited) and December 31, 2015

(In thousands, except share data)

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 
Assets                

Cash and due from banks

  $ 41,533     $ 35,895  

Federal funds sold and interest bearing deposits

    16,360       67,938  

Cash and cash equivalents

    57,893       103,833  

Mortgage loans held for sale

    5,959       6,800  

Securities available-for-sale (amortized cost of $533,873 in 2016 and $564,391 in 2015)

    541,681       565,876  

Federal Home Loan Bank stock and other securities

    6,347       6,347  

Loans

    2,222,706       2,033,007  

Less allowance for loan losses

    24,369       22,441  

Net loans

    2,198,337       2,010,566  

Premises and equipment, net

    42,903       39,557  

Bank owned life insurance

    31,653       30,996  

Accrued interest receivable

    6,952       6,610  

Other assets

    46,940       46,216  

Total assets

  $ 2,938,665     $ 2,816,801  

Liabilities and Stockholders’ Equity

               

Deposits:

               

Non-interest bearing

  $ 680,078     $ 583,768  

Interest bearing

    1,710,519       1,787,934  

Total deposits

    2,390,597       2,371,702  

Securities sold under agreements to repurchase

    67,315       64,526  

Federal funds purchased and other short-term borrowing

    76,387       22,477  

Federal Home Loan Bank advances

    51,366       43,468  

Accrued interest payable

    116       127  

Other liabilities

    41,314       27,982  

Total liabilities

    2,627,095       2,530,282  

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 22,562,572 and 14,919,351 shares in 2016 and 2015, respectively

    36,068       10,616  

Additional paid-in capital

    24,050       44,180  

Retained earnings

    247,011       231,091  

Accumulated other comprehensive income

    4,441       632  

Total stockholders’ equity

    311,570       286,519  

Total liabilities and stockholders’ equity

  $ 2,938,665     $ 2,816,801  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income (Unaudited)

For the three and nine months ended September 30, 2016 and 2015

(In thousands, except per share data)

 

   

For three months ended

   

For nine months ended

 
   

September 30,

   

September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Interest income:

                               

Loans

  $ 23,436     $ 20,924     $ 67,992     $ 61,951  

Federal funds sold and interest bearing deposits

    95       65       395       184  

Mortgage loans held for sale

    66       67       185       180  

Securities – taxable

    2,047       1,936       6,325       5,939  

Securities – tax-exempt

    298       292       907       877  

Total interest income

    25,942       23,284       75,804       69,131  

Interest expense:

                               

Deposits

    941       900       2,916       2,811  

Federal funds purchased and other short-term borrowing

    19       7       57       19  

Securities sold under agreements to repurchase

    38       42       100       111  

Federal Home Loan Bank advances

    184       254       552       694  

Total interest expense

    1,182       1,203       3,625       3,635  

Net interest income

    24,760       22,081       72,179       65,496  

Provision for loan losses

    1,250             2,500        

Net interest income after provision for loan losses

    23,510       22,081       69,679       65,496  

Non-interest income:

                               

Wealth management and trust services

    4,800       4,373       14,219       13,576  

Service charges on deposit accounts

    2,544       2,342       6,952       6,621  

Bankcard transaction

    1,455       1,223       4,198       3,591  

Mortgage banking

    1,072       772       2,896       2,513  

Securities brokerage

    558       585       1,539       1,545  

Bank owned life insurance

    216       222       657       670  

Other

    713       468       1,757       1,361  

Total non-interest income

    11,358       9,985       32,218       29,877  

Non-interest expenses:

                               

Salaries and employee benefits

    12,048       11,333       36,214       33,816  

Net occupancy

    1,646       1,518       4,716       4,437  

Data processing

    1,747       1,572       5,172       4,782  

Furniture and equipment

    277       282       853       789  

FDIC insurance

    356       318       1,035       932  

Amortization of investments in tax credit partnerships

    1,015       158       3,046       475  

Other

    3,429       3,249       9,215       9,845  

Total non-interest expenses

    20,518       18,430       60,251       55,076  

Income before income taxes

    14,350       13,636       41,646       40,297  

Income tax expense

    3,883       4,352       11,235       12,756  

Net income

  $ 10,467     $ 9,284     $ 30,411     $ 27,541  

Net income per share:

                               

Basic

  $ 0.47     $ 0.42     $ 1.36     $ 1.25  

Diluted

  $ 0.46     $ 0.41     $ 1.34     $ 1.23  

Average common shares:

                               

Basic

    22,385       22,131       22,325       22,056  

Diluted

    22,803       22,479       22,711       22,410  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
4

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

For the three and nine months ended September 30, 2016 and 2015

(In thousands)

 

   

Three months ended

   

Nine months ended

 
   

September 30,

   

September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Net income

  $ 10,467     $ 9,284     $ 30,411     $ 27,541  

Other comprehensive income, net of tax:

                               

Unrealized gains (losses) on securities available for sale:

                               

Unrealized gains (losses) arising during the period  (net of tax of ($616), $1,089, $2,213 and $683, respectively)

    (1,147 )     2,023       4,110       1,270  

Unrealized gains (losses) on hedging instruments:

                               

Unrealized gains (losses) arising during the period (net of tax of $74, ($124), ($162) and ($135), respectively)

    137       (231 )     (301 )     (250 )

Other comprehensive income (loss), net of tax

    (1,010 )     1,792       3,809       1,020  

Comprehensive income

  $ 9,457     $ 11,076     $ 34,220     $ 28,561  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the nine months ended September 30, 2016 and 2015

(In thousands, except per share data)

 

   

Common stock

                   

Accumulated

other

         
   

Number of

           

Additional

   

Retained

   

comprehensive

         
   

shares

   

Amount

   

paid-in capital

   

earnings

   

income (loss)

   

Total

 
                                                 

Balance December 31, 2014

    14,745     $ 10,035     $ 38,191     $ 209,584     $ 2,085     $ 259,895  

Net income

                      27,541             27,541  
                                                 

Other comprehensive income, net of tax

                            1,020       1,020  
                                                 

Stock compensation expense

                1,561                   1,561  
                                                 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    145       483       3,074       (1,533 )           2,024  
                                                 

Cash dividends, $0.71 per share

                      (10,519 )           (10,519 )
                                                 

Shares cancelled

    (21 )     (70 )     (609 )     105             (574 )
                                                 

Balance September 30, 2015

    14,869     $ 10,448     $ 42,217     $ 225,178     $ 3,105     $ 280,948  
                                                 

Balance December 31, 2015

    14,919     $ 10,616     $ 44,180     $ 231,091     $ 632     $ 286,519  
                                                 

Net income

                      30,411             30,411  
                                                 

Other comprehensive income, net of tax

                            3,809       3,809  
                                                 

Stock compensation expense

                1,646                   1,646  
                                                 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    159       527       3,404       (2,903 )           1,028  
                                                 

3 for 2 stock split

    7,494       24,956       (24,956 )                  
                                                 

Cash dividends, $0.53 per share

                      (11,843 )           (11,843 )
                                                 

Shares cancelled

    (9 )     (31 )     (224 )     255              
                                                 

Balance September 30, 2016

    22,563     $ 36,068     $ 24,050     $ 247,011     $ 4,441     $ 311,570  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended September 30, 2016 and 2015

(In thousands)

 

   

2016

   

2015

 

Operating activities:

               

Net income

  $ 30,411     $ 27,541  

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

               

Provision for loan losses

    2,500        

Depreciation, amortization and accretion, net

    8,016       5,088  

Deferred income tax expense (benefit)

    (320 )     1,326  

Gain on sales of mortgage loans held for sale

    (1,825 )     (1,611 )

Origination of mortgage loans held for sale

    (91,195 )     (90,997 )

Proceeds from sale of mortgage loans held for sale

    93,861       90,816  

Bank owned life insurance income

    (657 )     (670 )

Loss on the disposal of premises and equipment

    163       3  

Loss (gain) on the sale of other real estate

    (382 )     153  

Stock compensation expense

    1,646       1,561  

Excess tax benefits from share-based compensation arrangements

    (963 )     (366 )

Increase in accrued interest receivable and other assets

    (6,145 )     (1,049 )

Increase in accrued interest payable and other liabilities

    14,253       2,509  

Net cash provided by operating activities

    49,363       34,304  

Investing activities:

               

Purchases of securities available for sale

    (327,711 )     (203,465 )

Proceeds from sale of securities available for sale

          5,934  

Proceeds from maturities of securities available for sale

    355,943       206,734  

Net increase in loans

    (191,793 )     (90,224 )

Purchases of premises and equipment

    (5,906 )     (3,136 )

Proceeds from disposal of premises and equipment

    53        

Proceeds from sale of foreclosed assets

    1,403       2,332  

Net cash used in investing activities

    (168,011 )     (81,825 )

Financing activities:

               

Net increase in deposits

    18,895       17,951  

Net increase in securities sold under agreements to repurchase and federal funds purchased

    56,699       12,709  

Proceeds from Federal Home Loan Bank advances

    199,000       78,200  

Repayments of Federal Home Loan Bank advances

    (191,102 )     (71,333 )

Issuance of common stock for options and performance stock units

    1,599       1,994  

Excess tax benefits from share-based compensation arrangements

    963       366  

Common stock repurchases

    (1,534 )     (910 )

Cash dividends paid

    (11,812 )     (10,503 )

Net cash provided by financing activities

    72,708       28,474  

Net decrease in cash and cash equivalents

    (45,940 )     (19,047 )

Cash and cash equivalents at beginning of period

    103,833       74,241  

Cash and cash equivalents at end of period

  $ 57,893     $ 55,194  

Supplemental cash flow information:

               

Income tax payments

  $ 9,190     $ 10,177  

Cash paid for interest

    3,636       3,640  

Supplemental non-cash activity:

               

Transfers from loans to other real estate owned

  $ 1,522     $ 1,043  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
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Stock Yards Bancorp, inc. and subsidiary

 

Notes to Consolidated Financial Statements (Unaudited) 

 

(1)

Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles (US GAAP) for complete financial statements. The consolidated unaudited financial statements 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.

 

The unaudited consolidated financial statements include the accounts of Stock Yards Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”). Significant intercompany transactions and accounts have been eliminated in consolidation. 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 the 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 Statements for the year ended December 31, 2015 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.

 

Interim results for the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results for the entire year.

 

Critical Accounting Policies

 

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 the 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 reflects an allowance methodology that is driven by risk ratings, historical losses, and qualitative factors. Assumptions include many factors such as changes in borrowers’ financial condition which can occur quickly or historical loss ratios related to certain loan portfolios which may or may not be indicative of future losses. In the second quarter of 2015, Bancorp extended the historical period used to capture Bancorp’s historical loss ratios from 12 quarters to 24 quarters. Management believes the extension of the look-back period is appropriate to capture the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. To the extent that management’s assumptions prove incorrect, the results from operations could be materially affected by a higher or lower provision for loan losses. The accounting policy related to the allowance for loan losses is applicable to the commercial banking segment of Bancorp.

 

The allowance for loan losses 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 the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Bancorp’s allowance calculation includes allocations to loan portfolio segments at September 30, 2016 for qualitative factors including, among other factors, economic and business conditions in each of our primary markets, the quality and experience of lending staff and management, exceptions 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, dependency upon the 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 uses the sum of all allowance amounts derived as described above as the appropriate level of allowance for loan and lease losses. Changes in the criteria used in this evaluation or the 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 and lease losses based on their judgments and estimates.

 

(2)

Securities

 

The amortized cost, unrealized gains and losses, and fair value of securities available-for-sale follows:

 

(in thousands)

 

Amortized

   

Unrealized

   

 

 

September 30, 2016

  cost    

Gains

   

Losses

    Fair value  
                                 

Government sponsored enterprise obligations

  $ 316,763     $ 4,080     $ 114     $ 320,729  

Mortgage-backed securities - government agencies

    158,478       2,767       168       161,077  

Obligations of states and political subdivisions

    57,979       1,229       41       59,167  

Corporate equity securities

    653       55       -       708  
                                 

Total securities available for sale

  $ 533,873     $ 8,131     $ 323     $ 541,681  
                                 

December 31, 2015

                               

U.S. Treasury and other U.S. Government obligations

  $ 79,999     $ 1     $ -     $ 80,000  

Government sponsored enterprise obligations

    251,190       1,468       765       251,893  

Mortgage-backed securities - government agencies

    170,139       1,143       1,654       169,628  

Obligations of states and political subdivisions

    62,410       1,342       50       63,702  

Corporate equity securities

    653       -       -       653  
                                 

Total securities available for sale

  $ 564,391     $ 3,954     $ 2,469     $ 565,876  

 

Corporate equity securities consist of common stock in a publicly-traded business development company.

 

There were no securities classified as held to maturity as of September 30, 2016 or December 31, 2015.

 

No securities were sold in 2016. In 2015, Bancorp sold securities with total fair market value of $5.9 million, generating no gain or loss. These securities consisted of mortgage-backed securities with small remaining balances and agency securities. These sales were made in the ordinary course of portfolio management. Management has the intent and ability to hold all remaining investment securities available-for-sale for the foreseeable future.

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

A summary of the available-for-sale investment securities by contractual maturity groupings as of September 30, 2016 is shown below.

 

(in thousands)

 

 

   

 

 

Securities available-for-sale

  Amortized cost     Fair value  
                 

Due within 1 year

  $ 135,930     $ 136,043  

Due after 1 but within 5 years

    108,969       110,468  

Due after 5 but within 10 years

    19,293       19,633  

Due after 10 years

    110,550       113,752  

Mortgage-backed securities – government agencies

    158,478       161,077  

Corporate equity securities

    653       708  

Total securities available-for-sale

  $ 533,873     $ 541,681  

 

 

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations. In addition to equity securities, the investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.

 

Securities with a carrying value of approximately $323.3 million at September 30, 2016 and $380.7 million at December 31, 2015 were pledged to secure accounts of commercial depositors in cash management accounts, public deposits, and deposits for certain wealth management and trust accounts.

 

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Securities with unrealized losses at September 30, 2016 and December 31, 2015, not recognized in the statements of income are as follows:

 

(in thousands)

 

Less than 12 months

   

12 months or more

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

September 30, 2016

 

value

   

losses

   

value

   

losses

   

value

   

losses

 
                                                 

Government sponsored enterprise obligations

  $ 135,908     $ 78     $ 3,834     $ 36     $ 139,742     $ 114  

Mortgage-backed securities - government agencies

    14,945       36       10,729       132       25,674       168  

Obligations of states and political subdivisions

    8,717       30       1,489       11       10,206       41  
                                                 

Total temporarily impaired securities

  $ 159,570     $ 144     $ 16,052     $ 179     $ 175,622     $ 323  
                                                 

December 31, 2015

                                               

Government sponsored enterprise obligations

  $ 102,098     $ 500     $ 8,469     $ 265     $ 110,567     $ 765  

Mortgage-backed securities - government agencies

    49,774       662       29,936       992       79,710       1,654  

Obligations of states and political subdivisions

    13,225       31       1,955       19       15,180       50  
                                                 

Total temporarily impaired securities

  $ 165,097     $ 1,193     $ 40,360     $ 1,276     $ 205,457     $ 2,469  

 

Applicable dates for determining when securities are in an unrealized loss position are September 30, 2016 and December 31, 2015. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past twelve months, but is not in the “Investments with an Unrealized Loss of less than 12 months” category above.

 

Unrealized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is due to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach their maturity date and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consist of 42 and 70 separate investment positions as of September 30, 2016 and December 31, 2015, 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, 2016.

 

FHLB stock and other securities are investments held by Bancorp which are not readily marketable and are carried at cost. This category includes holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock which are required for access to FHLB borrowing, and are classified as restricted securities.

 

 
11

Table Of Contents
 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(3)

Loans

 

Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:

 

(in thousands)

 

September 30, 2016

   

December 31, 2015

 

Commercial and industrial

  $ 708,508     $ 644,398  

Construction and development, excluding undeveloped land

    171,994       134,482  

Undeveloped land

    19,993       21,185  
                 

Real estate mortgage:

               

Commercial investment

    510,128       436,989  

Owner occupied commercial

    412,733       420,666  

1-4 family residential

    245,229       226,575  

Home equity - first lien

    54,837       50,115  

Home equity - junior lien

    65,605       63,066  

Subtotal: Real estate mortgage

    1,288,532       1,197,411  
                 

Consumer

    33,679       35,531  
                 

Total loans

  $ 2,222,706     $ 2,033,007  

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

The following table presents the balance in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of September 30, 2016 and December 31, 2015.

 

(in thousands)

 

Type of loan

         

September 30, 2016

 

Commercial

and

industrial

   

Construction

and development

excluding

undeveloped

land

   

Undeveloped

land

   

Real estate

mortgage

   

Consumer

   

Total

 
                                                 

Loans

  $ 708,508     $ 171,994     $ 19,993     $ 1,288,532     $ 33,679     $ 2,222,706  
                                                 

Loans collectively evaluated for impairment

  $ 705,335     $ 171,084     $ 19,338     $ 1,284,798     $ 33,592     $ 2,214,147  
                                                 

Loans individually evaluated for impairment

  $ 3,115     $ 910     $ 655     $ 3,121     $ 87     $ 7,888  
                                                 

Loans acquired with deteriorated credit quality

  $ 58     $ -     $ -     $ 613     $ -     $ 671  

 

   

Commercial

and

industrial

   

Construction

and development

excluding

undeveloped

land

   

Undeveloped

land

   

Real estate

mortgage

   

Consumer

   

Total

 

Allowance for loan losses

                                               

At December 31, 2015

  $ 8,645     $ 1,760     $ 814     $ 10,875     $ 347     $ 22,441  

Provision (credit)

    2,415       229       (128 )     (131 )     115       2,500  

Charge-offs

    (627 )     -       -       (426 )     (419 )     (1,472 )

Recoveries

    252       21       -       318       309       900  

At September 30, 2016

  $ 10,685     $ 2,010     $ 686     $ 10,636     $ 352     $ 24,369  
                                                 

Allowance for loans collectively evaluated for impairment

  $ 9,296     $ 1,865     $ 652     $ 10,483     $ 291     $ 22,587  
                                                 

Allowance for loans individually evaluated for impairment

  $ 1,389     $ 145     $ 34     $ 153     $ 61     $ 1,782  
                                                 

Allowance for loans acquired with deteriorated credit quality

  $ -     $ -     $ -     $ -     $ -     $ -  

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(in thousands)

 

Type of loan

         

December 31, 2015

 

Commercial

and

industrial

   

Construction

and development

excluding

undeveloped

land

   

Undeveloped

land

   

Real estate

mortgage

   

Consumer

   

Total

 
                                                 

Loans

  $ 644,398     $ 134,482     $ 21,185     $ 1,197,411     $ 35,531     $ 2,033,007  
                                                 

Loans collectively evaluated for impairment

  $ 639,760     $ 134,160     $ 21,185     $ 1,192,864     $ 35,463     $ 2,023,432  
                                                 

Loans individually evaluated for impairment

  $ 4,635     $ -     $ -     $ 4,050     $ 68     $ 8,753  
                                                 

Loans acquired with deteriorated credit quality

  $ 3     $ 322     $ -     $ 497     $ -     $ 822  

 

   

Commercial

and

industrial

   

Construction

and development

excluding

undeveloped

land

   

Undeveloped

land

   

Real estate

mortgage

   

Consumer

   

Total

 

Allowance for loan losses

                                               

At December 31, 2014

  $ 11,819     $ 721     $ 1,545     $ 10,541     $ 294     $ 24,920  

Provision (credit)

    793       1,065       (2,131 )     872       151       750  

Charge-offs

    (4,065 )     (26 )     -       (693 )     (597 )     (5,381 )

Recoveries

    98       -       1,400       155       499       2,152  

At December 31, 2015

  $ 8,645     $ 1,760     $ 814     $ 10,875     $ 347     $ 22,441  
                                                 

Allowance for loans collectively evaluated for impairment

  $ 8,377     $ 1,760     $ 814     $ 10,667     $ 279     $ 21,897  
                                                 

Allowance for loans individually evaluated for impairment

  $ 268     $ -     $ -     $ 208     $ 68     $ 544  
                                                 

Allowance for loans acquired with deteriorated credit quality

  $ -     $ -     $ -     $ -     $ -     $ -  

 

The considerations by Bancorp in computing its allowance for loan losses are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:

 

 

Commercial and industrial loans: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the 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 loan may 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 including any pre-sold 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.

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

 

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, and can be affected by market conditions and time to sell lots at an adequate price. Credit risk is also affected by availability of permanent financing, 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 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 in addition to the borrower. 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 evidenced by increased vacancy rates, which in turn, could have an effect on credit quality. 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 and stock prices, will have a significant effect on credit quality in this loan category.

 

 

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, 2016 and December 31, 2015. 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, 2014

  $ 62     $ 266  
                 

Accretion

    (59 )     (77 )

Reclassifications from (to) non-accretable discount

    -       -  

Disposals

    -       -  

Balance at December 31, 2015

  $ 3     $ 189  
                 

Accretion

    (3 )     (41 )

Reclassifications from (to) non-accretable discount

    -       -  

Disposals

    -       -  

Balance at September 30, 2016

  $ -     $ 148  

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

The following tables present loans individually evaluated for impairment as of September 30, 2016 and December 31, 2015.

 

(in thousands)

         

Unpaid

           

Average

 

September 30, 2016

 

Recorded

investment

   

principal

balance

   

Related

allowance

   

recorded

investment

 
                                 

Loans with no related allowance recorded:

                               

Commercial and industrial

  $ 999     $ 1,440     $ -     $ 2,354  

Construction and development, excluding undeveloped land

    -       -       -       -  

Undeveloped land

    149       149       -       37  
                                 

Real estate mortgage

                               

Commercial investment

    94       94       -       214  

Owner occupied commercial

    1,060       1,497       -       1,434  

1-4 family residential

    920       920       -       980  

Home equity - first lien

    -       -       -       3  

Home equity - junior lien

    559       559       -       299  

Subtotal: Real estate mortgage

    2,633       3,070       -       2,930  
                                 

Consumer

    26       26       -       22  

Subtotal

  $ 3,807     $ 4,685     $ -     $ 5,343  
                                 

Loans with an allowance recorded:

                               

Commercial and industrial

  $ 2,116     $ 2,590     $ 1,389     $ 1,433  

Construction and development, excluding undeveloped land

    910       910       145       228  

Undeveloped land

    506       506       34       127  
                                 

Real estate mortgage

                               

Commercial investment

    -       -       -       -  

Owner occupied commercial

    488       488       153       693  

1-4 family residential

    -       -       -       -  

Home equity - first lien

    -       -       -       -  

Home equity - junior lien

    -       -       -       -  

Subtotal: Real estate mortgage

    488       488       153       693  
                                 

Consumer

    61       61       61       65  

Subtotal

  $ 4,081     $ 4,555     $ 1,782     $ 2,546  
                                 

Total:

                               

Commercial and industrial

  $ 3,115     $ 4,030     $ 1,389     $ 3,787  

Construction and development, excluding undeveloped land

    910       910       145       228  

Undeveloped land

    655       655       34       164  
                                 

Real estate mortgage

    -       -       -       -  

Commercial investment

    94       94       -       214  

Owner occupied commercial

    1,548       1,985       153       2,127  

1-4 family residential

    920       920       -       980  

Home equity - first lien

    -       -       -       3  

Home equity - junior lien

    559       559       -       299  

Subtotal: Real estate mortgage

    3,121       3,558       153       3,623  
                                 

Consumer

    87       87       61       87  

Total

  $ 7,888     $ 9,240     $ 1,782     $ 7,889  

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(in thousands)

         

Unpaid

           

Average

 

December 31, 2015

 

Recorded

investment

   

principal

balance

   

Related

allowance

   

recorded

investment

 
                                 

Loans with no related allowance recorded:

                               

Commercial and industrial

  $ 3,119     $ 3,859     $ -     $ 1,414  

Construction and development, excluding undeveloped land

    -       151       -       21  

Undeveloped land

    -       -       -       -  
                                 

Real estate mortgage

                               

Commercial investment

    278       278       -       178  

Owner occupied commercial

    1,743       2,713       -       1,622  

1-4 family residential

    906       906       -       661  

Home equity - first lien

    13       13       -       37  

Home equity - junior lien

    92       92       -       69  

Subtotal: Real estate mortgage

    3,032       4,002       -       2,567  
                                 

Consumer

    -       -       -       3  

Subtotal

  $ 6,151     $ 8,012     $ -     $ 4,005  
                                 

Loans with an allowance recorded:

                               

Commercial and industrial

  $ 1,516     $ 3,087     $ 268     $ 4,612  

Construction and development, excluding undeveloped land

    -       -       -       368  

Undeveloped land

    -       -       -       -  
                                 

Real estate mortgage

                               

Commercial investment

    -       -       -       92  

Owner occupied commercial

    1,018       1,018       208       1,266  

1-4 family residential

    -       -       -       188  

Home equity - first lien

    -       -       -       -  

Home equity - junior lien

    -       -       -       -  

Subtotal: Real estate mortgage

    1,018       1,018       208       1,546  
                                 

Consumer

    68       68       68       72  

Subtotal

  $ 2,602     $ 4,173     $ 544     $ 6,598  
                                 

Total:

                               

Commercial and industrial

  $ 4,635     $ 6,946     $ 268     $ 6,026  

Construction and development, excluding undeveloped land

    -       151       -       389  

Undeveloped land

    -       -       -       -  
                                 

Real estate mortgage

    -       -       -       -  

Commercial investment

    278       278       -       270  

Owner occupied commercial

    2,761       3,731       208       2,888  

1-4 family residential

    906       906       -       849  

Home equity - first lien

    13       13       -       37  

Home equity - junior lien

    92       92       -       69  

Subtotal: Real estate mortgage

    4,050       5,020       208       4,113  
                                 

Consumer

    68       68       68       75  

Total

  $ 8,753     $ 12,185     $ 544     $ 10,603  

 

Differences between recorded investment amounts and unpaid principal balance amounts less related allowance are due to partial charge-offs which have occurred over the life of loans.

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Impaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (TDR), 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 past due more than 90 days and still accruing interest totaling $80 thousand at September 30, 2016, compared with $176 thousand at December 31, 2015.

 

The following table presents the recorded investment in non-accrual loans as of September 30, 2016 and December 31, 2015.

 

(in thousands)

 

September 30, 2016

   

December 31, 2015

 
                 

Commercial and industrial

  $ 2,177     $ 3,643  

Construction and development, excluding undeveloped land

    910       -  

Undeveloped land

    655       -  
                 

Real estate mortgage

               

Commercial investment

    94       278  

Owner occupied commercial

    1,548       2,761  

1-4 family residential

    920       906  

Home equity - first lien

    -       13  

Home equity - junior lien

    559       92  

Subtotal: Real estate mortgage

    3,121       4,050  
                 

Consumer

    26       -  
                 

Total

  $ 6,889     $ 7,693  


At September 30, 2016 and December 31, 2015, Bancorp had $999 thousand and $1.1 million of accruing loans classified as TDR, respectively. Bancorp did not modify and classify any additional loans as TDR during the three or nine month periods ended September 30, 2016 or 2015.

 

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. Likewise, no loans classified and reported as troubled debt restructured within the twelve months prior to September 30, 2015 defaulted during the three-month or nine-month periods ended September 30, 2015. Loans accounted for as TDR 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 TDR, which have not defaulted, are individually evaluated for impairment and, at September 30, 2016, had a total allowance allocation of $314 thousand, compared with $177 thousand at December 31, 2015.

 

At September 30, 2016 and December 31, 2015, Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDR.

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

The following table presents the aging of the recorded investment in loans as of September 30, 2016 and December 31, 2015.

 

(in thousands)

                 

 

                           

 

 

September 30, 2016

 

30-59 days

past due

   

60-89 days

past due

   

90 or more

days past

due (includes)

non-accrual)

   

Total

past due

   

Current

   

Total

loans

   

Recorded

investment

> 90 days

and

accruing

 
                                                         

Commercial and industrial

  $ 40     $ 140     $ 2,177     $ 2,357     $ 706,151     $ 708,508     $ -  

Construction and development, excluding undeveloped land

    235       214       910       1,359       170,635       171,994       -  

Undeveloped land

    -       -       654       654       19,339       19,993       -  

Real estate mortgage

                                                       

Commercial investment

    380       171       94       645       509,483       510,128       -  

Owner occupied commercial

    1,220       331       1,548       3,099       409,634       412,733       -  

1-4 family residential

    1,292       966       954       3,212       242,017       245,229       34  

Home equity - first lien

    -       -       46       46       54,791       54,837       46  

Home equity - junior lien

    641       31       560       1,232       64,373       65,605       -  

Subtotal: Real estate mortgage

    3,533       1,499       3,202       8,234       1,280,298       1,288,532       80  

Consumer

    16       1       26       43       33,636       33,679       -  

Total

  $ 3,824     $ 1,854     $ 6,969     $ 12,647     $ 2,210,059     $ 2,222,706     $ 80  
                                                         

December 31, 2015

                                                       
                                                         

Commercial and industrial

  $ 238     $ 327     $ 3,643     $ 4,208     $ 640,190     $ 644,398     $ -  

Construction and development, excluding undeveloped land

    -       -       -       -       134,482       134,482       -  

Undeveloped land

    -       -       -       -       21,185       21,185       -  

Real estate mortgage

                                                       

Commercial investment

    290       140       278       708       436,281       436,989       -  

Owner occupied commercial

    -       -       2,761       2,761       417,905       420,666       -  

1-4 family residential

    1,147       94       1,082       2,323       224,252       226,575       176  

Home equity - first lien

    35       51       13       99       50,016       50,115       -  

Home equity - junior lien

    285       173       92       550       62,516       63,066       -  

Subtotal: Real estate mortgage

    1,757       458       4,226       6,441       1,190,970       1,197,411       176  

Consumer

    343       8       -       351       35,180       35,531       -  

Total

  $ 2,338     $ 793     $ 7,869     $ 11,000     $ 2,022,007     $ 2,033,007     $ 176  

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

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 a well-defined weakness or weaknesses that jeopardize repayment of the debt. Default is a distinct possibility if the deficiencies are not corrected.

 

 

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, 2016 and December 31, 2015, the internally assigned risk grades of loans by category were as follows:

  

(in thousands)

                                       

 

 

September 30, 2016

 

Pass

   

OAEM

   

Substandard

   

Substandard

non-performing

   

Doubtful

   

Total

loans

 
                                                 

Commercial and industrial

  $ 684,445     $ 15,290     $ 5,658     $ 3,115     $ -     $ 708,508  

Construction and development, excluding undeveloped land

    170,755       -       329       910       -       171,994  

Undeveloped land

    19,338       -       1       654       -       19,993  

Real estate mortgage

                                               

Commercial investment

    508,150       1,884       -       94       -       510,128  

Owner occupied commercial

    401,383       8,294       1,508       1,548       -       412,733  

1-4 family residential

    244,275       -       -       954       -       245,229  

Home equity - first lien

    54,791       -       -       46       -       54,837  

Home equity -  junior lien

    65,045       -       -       560       -       65,605  

Subtotal: Real estate mortgage

    1,273,644       10,178       1,508       3,202       -       1,288,532  

Consumer

    33,592       -       -       87       -       33,679  

Total

  $ 2,181,774     $ 25,468     $ 7,496     $ 7,968     $ -     $ 2,222,706  
                                                 
                                                 

December 31, 2015

                                               
                                                 

Commercial and industrial

  $ 612,853     $ 19,672     $ 7,238     $ 4,635     $ -     $ 644,398  

Construction and development, excluding undeveloped land

    133,342       773       367       -       -       134,482  

Undeveloped land

    20,513       517       155       -       -       21,185  

Real estate mortgage

                                               

Commercial investment

    434,528       2,183       -       278       -       436,989  

Owner occupied commercial

    397,357       17,135       3,413       2,761       -       420,666  

1-4 family residential

    224,645       848       -       1,082       -       226,575  

Home equity - first lien

    50,102       -       -       13       -       50,115  

Home equity - junior lien

    62,924       50       -       92       -       63,066  

Subtotal: Real estate mortgage

    1,169,556       20,216       3,413       4,226       -       1,197,411  

Consumer

    35,463       -       -       68       -       35,531  

Total

  $ 1,971,727     $ 41,178     $ 11,173     $ 8,929     $ -     $ 2,033,007  

 

 
21

Table Of Contents
 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(4)

Deposits

 

The composition of interest bearing deposits outstanding at September 30, 2016 (unaudited) and December 31, 2015 are as follows:

 

   

September 30,

   

December 31,

 

(In thousands)

 

2016

   

2015

 
                 

Interest bearing demand

  $ 665,360     $ 737,347  

Savings

    136,503       127,496  

Money market

    662,416       655,729  

Time deposits:

               
less than $100,000     150,466       161,738  
$100,000-$250,000     61,366       66,636  
Greater than $250,000     34,408       38,988  

Total time deposits

    246,240       267,362  
                 

Total interest bearing deposits

  $ 1,710,519     $ 1,787,934  

 

Maturities of time deposits of $100,000 or more outstanding at September 30, 2016 are summarized as follows:

 

(In thousands)

 

Amount

 
         

3 months or less

  $ 20,746  

Over 3 through 6 months

    13,345  

Over 6 through 12 months

    30,556  

Over 12 months

    31,127  

Total

  $ 95,774  

 

(5)

Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase, which represent excess funds from commercial customers as part of a cash management service, totaled $67.3 million and $64.5 million at September 30, 2016 and December 31, 2015, respectively. Bancorp enters into sales of securities under agreement to repurchase at a specified future date. At September 30, 2016, 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 under the control of Bancorp.

 

(6)

Federal Home Loan Bank Advances

 

Bancorp had outstanding borrowings totaling of $51.4 million and $43.5 million at September 30, 2016 and December 31, 2015, respectively, via 14 separate fixed-rate advances. 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 $21.4 million, principal and interest payments are due monthly based on an amortization schedule.

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

 The following is a summary of the contractual maturities and average effective rates of outstanding advances:

 

(In thousands)

 

September 30, 2016

   

December 31, 2015

 

Year

 

Advance

   

Fixed Rate

   

Advance

   

Fixed Rate

 

2016

  $ 30,000       0.55

%

  $ 30,000       0.55

%

2020

    1,802       2.23       1,838       2.23  

2021

    377       2.12       429       2.12  

2024

    2,713       2.36       2,865       2.36  

2025

    6,160       2.43       6,991       2.44  

2026

    9,000       1.99       -       -  

2028

    1,314       1.48       1,345       1.48  
                                 

Total

  $ 51,366       1.22

%

  $ 43,468       1.09

%

 

In addition to the fixed-rate advances listed above, Bancorp had a $60 million cash management advance from the FHLB. This advance matured in the first week of October 2016 and was used to manage Bancorp’s overall cash position. Due to the short nature 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 totaling $651.1 million under a blanket mortgage collateral agreement and FHLB stock. Bancorp believes these borrowings to be an effective alternative to higher cost time deposits to manage interest rate risk associated with long-term fixed rate loans. At September 30, 2016, the amount of available credit from the FHLB totaled $366.5 million.

 

 
23

Table Of Contents
 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(7)

Other Comprehensive Income

 

The following table illustrates activity within the balances in accumulated other comprehensive income by component, and is shown for the nine months ended September 30, 2016 and 2015.

 

(in thousands)

 

Net unrealized

gains on

securities

available-for-sale

   

Net unrealized

gains (losses)

on cash

flow hedges

   

Minimum

pension

liability

adjustment

   

Total

 
                                 

Balance at December 31, 2014

  $ 2,456     $ 16     $ (387 )   $ 2,085  
                                 

Net current period other comprehensive gain (loss)

    1,270       (250 )     -       1,020  

Balance at September 30, 2015

  $ 3,726     $ (234 )   $ (387 )   $ 3,105  
                                 
                                 

Balance at December 31, 2015

  $ 965     $ (60 )   $ (273 )   $ 632  
                                 

Net current period other comprehensive income gain (loss)

    4,110       (301 )     -       3,809  

Balance at September 30, 2016

  $ 5,075     $ (361 )   $ (273 )   $ 4,441  

 

 

(8)

Derivative Financial Instruments

 

Occasionally, Bancorp enters into free-standing interest rate swaps for the benefit of its commercial customers who desire to hedge their exposure to rising interest rates. Bancorp offsets its interest rate exposure on these transactions by entering into offsetting swap agreements with substantially matching terms with approved reputable independent counterparties. These undesignated derivative instruments 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 the undesignated interest rate swap agreements for the first nine months of 2016 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 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, collateral, borrower credit limits and monitoring procedures, and does not expect any counterparties to fail their obligations.

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

At September 30, 2016 and December 31, 2015, Bancorp had outstanding undesignated interest rate swap contracts as follows:

 

(dollar amounts in thousands)

 

Receiving

   

Paying

 
   

September 30,

   

December 31,

   

September 30,

   

December 31,

 
   

2016

   

2015

   

2016

   

2015

 

Notional amount

  $ 38,706     $ 10,788     $ 38,706     $ 10,788  

Weighted average  maturity (years)

    10.2       6.9       10.2       6.9  

Fair value

  $ (1,372 )   $ (461 )   $ 1,372     $ 461  

 

In 2013, 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, 2013 and ends December, 2016. 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, 2015 and matures December, 2020. For purposes of hedging, the rolling fixed rate advances are considered to be floating rate liabilities. The interest rate swaps involve exchange of Bancorp’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.

 

The following table details Bancorp’s derivative position designated as a cash flow hedge, and the fair values as of September 30, 2016 and December 31, 2015.

 

(dollars in thousands)

                               

Notional

amount

 

Maturity

date

 

Receive (variable)

index

 

Pay fixed

swap rate

   

Fair value

September 30, 2016

   

Fair value

December 31, 2015

 
$ 10,000   12/6/2016  

US 3 Month LIBOR

    0.72 %   $ 2     $ 8  
  20,000   12/6/2020  

US 3 Month LIBOR

    1.79 %     (558 )     (101 )
$ 30,000             1.43 %   $ (556 )   $ (93 )

 

 

(9)

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. Annual evaluations have resulted in no indication of impairment. Bancorp currently has goodwill in the amount of $682 thousand from the 1996 acquisition of an Indiana bank. 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, 2016, the unamortized core deposit intangible was $1.5 million.

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Mortgage servicing rights (MSRs) 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 September 30, 2016 and December 31, 2015 were $2.3 million and $3.1 million, respectively. Total outstanding principal balances of loans serviced for others were $374.4 million and $410.8 million at September 30, 2016, and December 31, 2015, respectively.

 

Changes in the net carrying amount of MSRs for the nine months ended September 30, 2016 and 2015 are shown in the following table:

 

   

For the nine months

 
   

ended September 30,

 

(in thousands)

 

2016

   

2015

 

Balance at beginning of period

  $ 1,018     $ 1,131  

Additions for mortgage loans sold

    105       306  

Amortization

    (192 )     (569 )

Balance at September 30

  $ 931     $ 868  

 

(10)

Defined Benefit Retirement Plan

 

Bancorp sponsors an unfunded, non-qualified, defined benefit retirement plan for three key officers (two current and one retired), and has no plans to increase the number of or benefits to participants. Benefits vest based on 25 years of service. The retired officer and one current officer are fully vested, and one current officer will be fully vested in 2017. Actuarially determined pension costs are expensed and accrued over the service period, and benefits are paid from Bancorp’s assets. Net periodic benefits costs, which include interest cost and amortization of net losses, totaled $33 thousand and $36 thousand, for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the net periodic benefit costs totaled $100 thousand and $107 thousand, respectively.

 

(11)

Commitments and Contingent Liabilities

 

As of September 30, 2016, Bancorp had various commitments outstanding that arose in the normal course of business, including standby letters of credit and commitments to extend credit, which are properly not reflected in the consolidated financial statements. In management’s opinion, commitments to extend credit of $646.6 million including standby letters of credit of $14.5 million represent normal banking transactions. Commitments to extend credit were $636.9 million, including letters of credit of $12.8 million, as of December 31, 2015. Commitments to extend credit are agreements to lend to a customer as long as collateral is available 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 is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, 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, 2016, Bancorp has accrued $317 thousand in other liabilities for inherent risks related to unfunded credit commitments.

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Standby letters of credit and financial guarantees written are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private commercial transactions. Standby letters of credit generally have maturities of one to two years.

 

Also, as of September 30, 2016, in the normal course of business, there were pending legal actions and proceedings in which claims for damages are 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 results of operations of Bancorp.

 

(12)

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.

 

(13)

Stock Split

 

On April 29, 2016 Bancorp declared a 3 for 2 stock split to be effected as a 50% stock dividend to shareholders of record on May 13, 2016, payable May 27, 2016. Share and per share information has been adjusted for this split.

 

(14)

Stock-Based Compensation

 

The fair value of all 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. No additional shares were made available. As of September 30, 2016, there were 388,339 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015; however, options and SARs granted under this plan expire as late as 2025.

 

Options, which have not been granted since 2007, generally had a vesting schedule of 20% per year. Stock appreciation rights (“SARs”) granted have a vesting schedule of 20% per year. Options and SARs expire ten years after the grant date unless forfeited due to employment termination.

 

Restricted shares 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 are entitled to dividend payments during the vesting period. For grants in 2015 and 2016, forfeitable dividends are deferred until shares are vested.

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Grants of performance stock units (“PSUs”) vest based upon service and a single 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 fair value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Beginning in 2015, grants require a one year post-vesting holding periods. For 2015 and 2016, the fair value of such grants incorporates a liquidity discount of 4.80% and 4.50%, respectively, related to the holding period.

 

Grants of restricted stock units (“RSUs”) 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 estimated based on fair value of underlying shares on the date of grant.

 

Bancorp has recognized stock-based compensation expense, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows:

 

   

For three months ended

   

For nine months ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2016

   

2015

   

2016

   

2015

 

Stock-based compensation expense before income taxes

  $ 573     $ 566     $ 1,646     $ 1,561  

Less: deferred tax benefit

    (200 )     (198 )     (576 )     (546 )

Reduction of net income

  $ 373     $ 368     $ 1,070     $ 1,015  

 

Bancorp expects to record an additional $541 thousand of stock-based compensation expense in 2016 for equity grants outstanding as of September 30, 2016. As of September 30, 2016, Bancorp has $4.2 million of unrecognized stock-based compensation expense that is expected to be recorded as compensation expense over the next five years as awards vest. Bancorp received cash of $1.6 million and $2.0 million from the exercise of options during the first nine months of 2016 and 2015, respectively.

 

Fair values of Bancorp’s stock options and 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 the input of assumptions, changes to which can materially affect the fair value estimate. Fair value of restricted shares is determined by 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:

 

   

2016

   

2015

 
                 

Dividend yield

    2.94 %     2.97 %

Expected volatility

    19.31 %     22.81 %

Risk free interest rate

    1.70 %     1.91 %

Expected life of SARs (years)

    7.3       7.5  

 

Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of options and 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 options. 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 and SARs activity and related information for the nine months ended September 30, 2016 follows:

 

   

Options

and SARs

(in thousands)

   

Exercise

price

   

Weighted

average

exercise

price

   

Aggregate

intrinsic

value

(in thousands)

   

Weighted

average

fair

value

   

Weighted

average

remaining

contractual

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  
                                                     
                                                     

Granted

    87         25.76         25.76       629       3.56          

Exercised

    (190 )     14.02 - 17.89       16.36       2,405       3.71          

Forfeited

    (3 )     14.02 - 15.84       15.18       33       2.94          
                                                     

At September 30, 2016

                                                   

Vested and exercisable

    556       14.02 - 24.56       15.83       9,533       3.25       4.0  

Unvested

    260       15.24 - 25.76       21.48       2,979       3.43       8.0  

Total outstanding

    816       14.02 - 25.76       17.63     $ 12,512       3.31       5.3  
                                                     

Vested year-to-date

    92       15.24 - 24.56       17.46     $ 1,432       3.14          

 

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 grant price.

 

A summary of activity for the periods ending December 31, 2015 and September 30, 2016 for restricted shares of common stock granted to officers is outlined in the following table:

 

   

Number

   

Grant date

weighted-

average cost

 

Unvested at December 31, 2014

    171,139     $ 16.63  

Shares awarded

    52,898       22.99  

Restrictions lapsed and shares released

    (61,205 )     15.89  

Shares forfeited

    (6,974 )     18.97  

Unvested at December 31, 2015

    155,858     $ 18.98  

Shares awarded

    51,122       25.78  

Restrictions lapsed and shares released

    (48,711 )     17.94  

Shares forfeited

    (12,007 )     20.69  

Unvested at September 30, 2016

    146,262     $ 21.55  

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Bancorp awarded performance-based restricted stock units (“PSUs”) to executive officers of Bancorp, the single three-year performance period for which began January 1 of the award year. The following table outlines the PSU grants.

 

   

Vesting

           

Expected

 

Grant

 

period

   

Fair

   

shares to

 

year

 

in years

   

value

   

be awarded

 

2014

    3     $ 17.61       50,024  

2015

    3       20.02       36,337  

2016

    3       22.61       27,663  

 

In the first quarter of 2016, Bancorp awarded 8,144 RSUs to directors of Bancorp with a grant date fair value of $200 thousand. In the second quarter of 2016, 1,018 RSUs were cancelled, leaving 7,126 RSUs outstanding with a grant date fair value of $175 thousand.

 

 

 

(15)

Net Income Per Share

 

The following table reflects, for the three and nine months ended September 30, 2016 and 2015, net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:

 

   

Three months ended

   

Nine months ended

 

(In thousands, except per share data)

 

September 30,

   

September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Net income

  $ 10,467     $ 9,284     $ 30,411     $ 27,541  

Average shares outstanding

    22,385       22,131       22,325       22,056  

Dilutive securities

    418       348       386       354  
                                 

Average shares outstanding including dilutive securities

    22,803       22,479       22,711       22,410  
                                 

Net income per share, basic

  $ 0.47     $ 0.42     $ 1.36     $ 1.25  

Net income per share, diluted

  $ 0.46     $ 0.41     $ 1.34     $ 1.23  

 

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(16)

Segments

 

Bancorp’s principal activities include commercial banking and wealth management and trust. 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 brokerage activity. Wealth management and trust provides financial management services including investment management, trust and estate administration, and retirement plan services.

 

Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax exempt activity. All tax exempt activity and provision for loan losses have been allocated to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.

 

Selected financial information by business segment for the three and nine month periods ended September 30, 2016 and 2015 follows:

 

           

Wealth

         
   

Commercial

   

management

         

(in thousands)

 

banking

   

and trust

   

Total

 

Three months ended September 30, 2016

                       

Net interest income

  $ 24,690     $ 70     $ 24,760  

Provision for loan losses

    1,250       -       1,250  

Wealth management and trust services

    -       4,800       4,800  

All other non-interest income

    6,558       -       6,558  

Non-interest expense

    17,722       2,796       20,518  

Income before income taxes

    12,276       2,074       14,350  

Income tax expense

    3,142       741       3,883  

Net income

  $ 9,134     $ 1,333     $ 10,467  
                         

Three months ended September 30, 2015

                       

Net interest income

  $ 22,034     $ 47     $ 22,081  

Provision (credit) for loan losses

    -       -       -  

Wealth management and trust services

    -       4,373       4,373  

All other non-interest income

    5,612       -       5,612  

Non-interest expense

    15,785       2,645       18,430  

Income before income taxes

    11,861       1,775       13,636  

Income tax expense

    3,720       632       4,352  

Net income

  $ 8,141     $ 1,143     $ 9,284  

  

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

           

Wealth

         
   

Commercial

   

management

         

(in thousands)

 

banking

   

and trust

   

Total

 

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  
                         

Nine months ended September 30, 2015

                       

Net interest income

  $ 65,350     $ 146     $ 65,496  

Provision (credit) for loan losses

    -       -       -  

Wealth management and trust services

    -       13,576       13,576  

All other non-interest income

    16,301       -       16,301  

Non-interest expense

    46,991       8,085       55,076  

Income before income taxes

    34,660       5,637       40,297  

Income tax expense

    10,749       2,007       12,756  

Net income

  $ 23,911     $ 3,630     $ 27,541  

 

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(17)

Income Taxes

 

Components of income tax expense from operations were as follows:

 

   

Three months ended

   

Nine months ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2016

   

2015

   

2016

   

2015

 

Current income tax expense

                               

Federal

  $ 4,363     $ 4,057     $ 10,958     $ 11,017  

State

    287       140       597       413  

Total current income tax expense

    4,650       4,197       11,555       11,430  
                                 

Deferred income tax expense (benefit)

                               

Federal

    (692 )     147       (302 )     1,240  

State

    (75 )     8       (18 )     86  

Total deferred income tax expense (benefit)

    (767 )     155       (320 )     1,326  

Change in valuation allowance

    -       -       -       -  

Total income tax expense

  $ 3,883     $ 4,352     $ 11,235     $ 12,756  

 

An analysis of the difference between statutory and effective income tax rates for the nine months ended September 30, 2016 and 2015 follows:

 

   

Nine months ended September 30,

 
   

2016

   

2015

 

U.S. federal statutory tax rate

    35.0

%

    35.0

%

Tax exempt interest income

    (1.3 )     (1.4 )

Tax credits

    (9.4 )     (2.4 )

Increase in cash surrender value of life insurance

    (0.9 )     (0.6 )

State income taxes, net of federal benefit

    0.9       0.8  

Other, net

    2.7       0.3  

Effective income tax rate

    27.0

%

    31.7

%

 

State income tax expense represents tax owed in Indiana. Kentucky and Ohio state bank taxes are based on capital levels, and are recorded as other non-interest expense.

 

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’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, 2016 and December 31, 2015, 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 2011.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(18)

Assets and Liabilities Measured and Reported at Fair Value

 

Bancorp follows 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 the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. The guidance also establishes a hierarchy to group assets and liabilities carried at fair value in three levels based upon the markets in which the assets and liabilities trade and the reliability of assumptions used to determine fair value. These levels are:

 

 

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.

 

 

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 maximum use of observable inputs and minimum 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 investment securities available-for-sale and interest rate swaps are recorded at fair value on a recurring basis. Other accounts including mortgage servicing rights, impaired loans and other real estate owned may be recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets.

 

The portfolio of investment securities available-for-sale is comprised of U.S. Treasury and other U.S. government obligations, debt securities of U.S. government-sponsored corporations (including mortgage-backed securities), obligations of state and political subdivisions and corporate equity securities. U.S. Treasury and 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 other 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.

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements generally 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’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2016.

 

Below are the carrying values of assets measured at fair value on a recurring basis.

 

(in thousands)

 

Fair value at September 30, 2016

 

Assets

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Investment securities available-for-sale

                               

Government sponsored enterprise obligations

  $ 320,729     $ -     $ 320,729     $ -  

Mortgage-backed securities - government agencies

    161,077       -       161,077       -  

Obligations of states and political subdivisions

    59,167       -       59,167       -  

Corporate equity securities

    708       708       -       -  
                                 

Total investment securities available-for-sale

    541,681       708       540,973       -  
                                 

Interest rate swaps

    1,372       -       1,372       -  
                                 

Total assets

  $ 543,053     $ 708     $ 542,345     $ -  
                                 

Liabilities

                               
                                 

Interest rate swaps

  $ 1,928     $ -     $ 1,928     $ -  

 

(in thousands)

 

Fair value at December 31, 2015

 

Assets

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Investment securities available-for-sale

                               

U.S. Treasury and other U.S. government obligations

  $ 80,000     $ 80,000     $ -     $ -  

Government sponsored enterprise obligations

    251,893       -       251,893       -  

Mortgage-backed securities - government agencies

    169,628       -       169,628       -  

Obligations of states and political subdivisions

    63,702       -       63,702       -  

Corporate equity securities

    653       653       -       -  
                                 

Total investment securities available-for-sale

    565,876       80,653       485,223       -  
                                 

Interest rate swaps

    461       -       461       -  
                                 

Total assets

  $ 566,337     $ 80,653     $ 485,684     $ -  
                                 

Liabilities

                               
                                 

Interest rate swaps

  $ 554     $ -     $ 554     $ -  

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

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, 2016 or December 31, 2015.

 

MSRs are recorded at fair value upon capitalization, are amortized to correspond with estimated servicing income, and are periodically assessed for impairment based on fair value at the reporting date. 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, 2016 and December 31, 2015 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 below for September 30, 2016 or December 31, 2015. See Note 9 for more information regarding MSRs.

 

For impaired loans in the table below, the fair value is calculated as the carrying value of only loans with a specific valuation allowance, less the specific 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 the 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. As of September 30, 2016, total impaired loans with a valuation allowance were $4.1 million, and the specific allowance totaled $1.8 million, resulting in a fair value of $2.3 million, compared with total impaired loans with a valuation allowance of $2.6 million, and the specific allowance allocation totaling $544 thousand, resulting in a fair value of $2.1 million at December 31, 2015. Losses represent the change in specific allowances for the period indicated.

 

Other real estate owned (“OREO”), which is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is based on appraisals performed by external parties which use judgments and assumptions that are property-specific and sensitive to changes in the overall economic environment. Appraisals may be further discounted based on management’s historical knowledge and/or changes in market conditions from the date of the most recent appraisal. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. For OREO in the 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, 2016 and December 31, 2015, carrying value of all other real estate owned was $5.0 million and $4.5 million, respectively.

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Below are the carrying values of assets measured at fair value on a non-recurring basis.

 

(in thousands)

 

Fair value at September 30, 2016

   

Losses for 9 month

 
                                   

period ended

 
   

Total

   

Level 1

   

Level 2

   

Level 3

   

September 30, 2016

 

Impaired loans

  $ 2,299     $ -     $ -     $ 2,299     $ (1,612 )

Other real estate owned

    4,301       -       -       4,301       (62 )

Total

  $ 6,600     $ -     $ -     $ 6,600     $ (1,674 )

 

(in thousands)

 

Fair value at December 31, 2015

   

Losses for 9 month

 
                                   

period ended

 
   

Total

   

Level 1

   

Level 2

   

Level 3

   

September 30, 2015

 

Impaired loans

  $ 2,058     $ -     $ -     $ 2,058     $ (1,147 )

Other real estate owned

    3,782       -       -       3,782          

Total

  $ 5,840     $ -     $ -     $ 5,840     $ (1,147 )

 

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 September 30, 2016, 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, 2016, the significant unobservable inputs used in the fair value measurements are presented below.

 

   

Fair

   

Valuation

   

unobservable

   

average of

 

(Dollars in thousands)

 

Value

   

technique

   

input

   

input

 
                             

Impaired loans -  collateral dependent

  $ 2,299    

Appraisal

   

Appraisal discounts

      12.3

%

Other real estate owned

    4,301    

Appraisal

   

Appraisal discounts

      19.2  

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(19)

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’s financial instruments are as follows:

 

(in thousands)

 

Carrying

                                 

September 30, 2016

 

amount

   

Fair value

   

Level 1

   

Level 2

   

Level 3

 
                                         

Financial assets

                                       

Cash and short-term investments

  $ 57,893     $ 57,893     $ 57,893     $ -     $ -  

Mortgage loans held for sale

    5,959       6,206       -       6,206       -  

Federal Home Loan Bank stock and other securities

    6,347       6,347       -       6,347       -  

Loans, net

    2,198,337       2,232,177       -       -       2,232,177  

Accrued interest receivable

    6,952       6,952       6,952       -       -  
                                         

Financial liabilities

                                       

Deposits

    2,390,597       2,390,642       -       -       2,390,642  

Short-term borrowings

    143,702       143,702       -       143,702       -  

FHLB advances

    51,366       53,091       -       53,091       -  

Accrued interest payable

    116       116       116       -       -  

 

(in thousands)

 

Carrying

                                 

December 31, 2015

 

amount

   

Fair value

   

Level 1

   

Level 2

   

Level 3

 
                                         

Financial assets

                                       

Cash and short-term investments

  $ 103,833     $ 103,833     $ 103,833     $ -     $ -  

Mortgage loans held for sale

    6,800       7,112       -       7,112       -  

Federal Home Loan Bank stock and other securities

    6,347       6,347       -       6,347       -  

Loans, net

    2,010,566       2,021,776       -       -       2,021,776  

Accrued interest receivable

    6,610       6,610       6,610       -       -  
                                         

Financial liabilities

                                       

Deposits

    2,371,702       2,371,300       -       -       2,371,300  

Short-term borrowings

    87,003       87,003       -       87,003       -  

FHLB advances

    43,468       43,647       -       43,647       -  

Accrued interest payable

    127       127       127       -       -  

 

 

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.

 

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. Fair value of commitments to extend credit, letters of credit and lines of credit is not presented since management believes the fair value to be insignificant.

 

Limitations

 

Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect estimates.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(20)

Regulatory Matters

 

Bancorp and the Bank are subject to various capital requirements prescribed by banking regulations and administered by state and federal banking agencies. Under these requirements, Bancorp and the Bank must meet minimum amounts and percentages of Tier 1, common equity Tier 1, and total capital, as defined, to risk weighted assets and Tier 1 capital to average assets. Risk weighted assets 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 further subject to qualitative judgments by regulators as to components, risk weighting 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.

 

In 2013, the Federal Reserve Board and the FDIC approved rules that substantially amended regulatory risk-based capital rules applicable to Bancorp and the Bank. The rules implemented regulatory capital reforms of the Basel Committee on Banking Supervision reflected in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" (Basel III) and changes required by the Dodd-Frank Act. Basel III regulatory capital reforms became effective for Bancorp and the Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Bancorp and the Bank met all capital requirements to which they were subject as of September 30, 2016.

 

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios as of September 30, 2016 and December 31, 2015.

 

(Dollars in thousands)

 

Actual

   

Minimum for adequately capitalized

   

Minimum for well capitalized

 

September 30, 2016

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                                 

Total risk-based capital (1)

                                               

Consolidated

  $ 330,597       13.05

%

  $ 202,665       8.00

%

    NA    

 

NA  

Bank

    319,526       12.64       202,232       8.00     $ 252,790       10.00  
                                                 

Common equity tier 1 risk-based capital

                                               

Consolidated

    305,886       12.07       114,042       4.50    

 

NA    

 

NA  

Bank

    294,815       11.66       113,779       4.50       151,706       6.00  
                                                 

Tier 1 risk-based capital (1)

                                               

Consolidated

    305,886       12.07       152,056       6.00       NA    

 

NA  

Bank

    294,815       11.66       151,706       6.00       151,706       6.00  
                                                 

Leverage (2)

                                               

Consolidated

    305,886       10.63       115,103       4.00    

 

NA    

 

NA  

Bank

    294,815       10.26       114,938       4.00       143,672       5.00  

 

 

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

(Dollars in thousands)

 

Actual

   

Minimum for adequately capitalized

   

Minimum for well capitalized

 

December 31, 2015

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                                 

Total risk-based capital (1)

                                               

Consolidated

  $ 307,666       13.31

%

  $ 184,923       8.00

%

    NA       NA  

Bank

    298,129       12.91       184,743       8.00     $ 230,929       10.00  
                                                 

Common equity tier 1 risk-based capital

                                               

Consolidated

    284,793       12.32       104,023       4.50       NA       NA  

Bank

    275,256       11.92       103,914       4.50       138,552       6.00  
                                                 

Tier 1 risk-based capital (1)

                                               

Consolidated

    284,793       12.32       138,698       6.00       NA       NA  

Bank

    275,256       11.92       138,552       6.00       138,552       6.00  
                                                 

Leverage (2)

                                               

Consolidated

    284,793       10.53       108,183       4.00       NA       NA  

Bank

    275,256       10.19       108,049       4.00       135,062       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 companies.

 

(21)

Subsequent Event

 

In 2004, Bancorp invested $1.4 million in Indiana Business Bancorp (“IBB”), and included the investment in other assets. Due to a decline in the market value of the stock, Bancorp recorded an impairment charge totaling $866 thousand in 2008. In April 2016, Lizton Financial Corporation (“Lizton”) and IBB entered into an agreement for Lizton to acquire all of the shares of IBB for $7.25 per share. The transaction was completed in October 2016, resulting in a $588 thousand pre-tax recovery, which was recorded in other income in the fourth quarter of 2016.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations


This item discusses the results of operations for Stock Yards Bancorp, Inc. (“Bancorp” or “Company”), and its subsidiary, Stock Yards Bank & Trust Company (“Bank”) for the three and nine months ended September 30, 2016 and compares these periods with the same periods of the previous year. Unless otherwise indicated, all references in this discussion to the Bank include Bancorp. In addition, the discussion describes changes in the financial condition of Bancorp and the Bank that have occurred during the first nine months of 2016 compared with same periods in the year ended December 31, 2015. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes presented in Part 1, Item 1 of this report.

 

This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although Bancorp believes assumptions underlying forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to the following: economic conditions both generally and more specifically in markets in which Bancorp and the Bank operate; competition for Bancorp’s customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of Bancorp’s customers; and other risks detailed in Bancorp’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.

 

Overview of 2016 through September 30

 

Bancorp completed the first nine months of 2016 with net income of $30.4 million, a 10.4% increase over the comparable period in 2015. The increase is primarily due to higher net interest income and non-interest income. These increases were partially offset by higher non-interest expense and higher provision for loan losses. Diluted earnings per share for the first nine months of 2016 were $1.34, compared with the first nine months of 2015 at $1.23. Bancorp's performance for the first nine months of 2016 reflected several positive factors, including:

 

 

Strong organic net loan growth, accelerating from the pace set over the past two years;

 

Continued high credit quality;

 

Diverse sources of fee income contributing to revenue growth; and

 

Solid returns on average assets and equity of 1.42% and 13.51%, respectively.

 

As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. Loan and deposit volumes are influenced by competition, new account acquisition efforts and economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.

 

Net interest income increased $6.7 million, or 10.2%, for the first nine months of 2016, compared with the same period in 2015. The positive effects of increased volumes of earning assets and lower costs on time deposits were partially offset by the negative effect of declining interest rates earned. Net interest margin declined to 3.60% for the first nine months of 2016, compared with 3.71% for the same period of 2015.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

In response to internal assessment of risk inherent in the loan portfolio, including net loan growth, Bancorp recorded a $2.5 million provision for loan losses in the first nine months of 2016, compared with no provision in the first nine months of 2015. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for the inherent losses on outstanding loans.

 

Total non-interest income in the first nine months of 2016 increased $2.3 million, or 7.8%, compared with the same period in 2015, and comprised 31.6% of total revenues, as compared to 31.3% for the same period in 2015. Bancorp experienced increases in virtually all areas of non-interest income.

 

Total non-interest expense in the first nine months of 2016 increased $5.2 million, or 9.4%, compared with the same period in 2015, primarily due to increases in salaries, benefits and expenses related to the Bancorp’s expansion in the Cincinnati and Indianapolis markets during 2015. Included are higher amortization expenses for investments in tax-credit partnerships, which resulted in a reduction in the effective tax rate, generating income tax savings that exceeded the amortization expense. These expenses were partially offset by gains on sales of foreclosed assets. Bancorp's efficiency ratio in the first nine months of 2016 was 57.4% compared to 57.3% in the same period in 2015. Excluding amortization of the investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 54.5% and 56.8% for the first nine months of 2016 and 2015, respectively. See the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.

 

Bancorp’s effective tax rate decreased to 27.0% in 2016 from 31.7% in 2015. The decrease in the effective tax rate from 2015 to 2016 is largely the result of higher tax credits in 2016.

 

Tangible common equity (TCE), a non-GAAP measure, is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. The ratio of tangible common equity to total tangible assets was 10.54% as of September 30, 2016, compared with 10.10% at December 31, 2015. See the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.

 

On April 29, 2016 Bancorp declared a 3 for 2 stock split to be effected as a 50% stock dividend to shareholders of record on May 13, 2016, payable May 27, 2016. Share and per share information has been adjusted for this dividend.

 

The following sections provide more details on subjects presented in this overview.

 

a)

Results Of Operations

 

Net income of $10.5 million for the three months ended September 30, 2016 increased $1.2 million, or 12.7%, from $9.3 million for the comparable 2015 period. This represents a record net income for the second consecutive quarter. Basic net income per share was $0.47 for the third quarter of 2016, an increase of 11.9% from the $0.42 for the third quarter of 2015. Net income per share on a diluted basis was $0.46 for the third quarter of 2016, a record and an increase of 12.2% from the $0.41 for the same period in 2015. See Note 15 for additional information related to net income per share.

 

Annualized return on average assets and annualized return on average stockholders’ equity were 1.44% and 13.47%, respectively, for the third quarter of 2016, compared with 1.44% and 13.32%, respectively, for the same period in 2015.

 

Net income of $30.4 million for the nine months ended September 30, 2016 increased $2.9 million, or 10.4%, from $27.5 million for the comparable 2015 period. Basic net income per share was $1.36 for the first nine months of 2016, an increase of 8.8% from the $1.25 for the first nine months of 2015. Net income per share on a diluted basis was $1.34 for the first nine months of 2016, an increase of 8.9% from the $1.23 for the first nine months of 2015.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Annualized return on average assets and annualized return on average stockholders’ equity were 1.42% and 13.51%, respectively, for the first nine months of 2016, compared with 1.46% and 13.59%, respectively, for the same period in 2015.

 

Net Interest Income

 

The following tables present average balance sheets for the three and nine month periods ended September 30, 2016 and 2015 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.

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

Average Balances and Interest Rates – Taxable Equivalent Basis

 

   

Three months ended September 30

 
   

2016

   

2015

 
   

Average

           

Average

   

Average

           

Average

 

(Dollars in thousands)

 

balances

   

Interest

   

rate

   

balances

   

Interest

   

rate

 

Earning assets:

                                               

Federal funds sold and interest bearing deposits

  $ 72,673     $ 95       0.52

%

  $ 86,008     $ 65       0.30

%

Mortgage loans held for sale

    5,070       66       5.18       5,045       67       5.27  

Securities:

                                               

Taxable

    406,481       1,984       1.94       343,302       1,872       2.16  

Tax-exempt

    59,981       426       2.83       59,185       418       2.80  

FHLB stock and other securities

    6,347       63       3.95       6,347       64       4.00  

Loans, net of unearned income

    2,171,772       23,511       4.31       1,916,477       21,029       4.35  

Total earning assets

    2,722,324       26,145       3.82       2,416,364       23,515       3.86  

Less allowance for loan losses

    23,634                       23,428                  
      2,698,690                       2,392,936                  

Non-earning assets:

                                               

Cash and due from banks

    41,682                       39,840                  

Premises and equipment

    42,665                       40,274                  

Accrued interest receivable and other assets

    100,109                       87,630                  

Total assets

  $ 2,883,146                     $ 2,560,680                  
                                                 

Interest bearing liabilities:

                                               

Deposits:

                                               

Interest bearing demand deposits

  $ 698,874     $ 232       0.13

%

  $ 516,090     $ 130       0.10

%

Savings deposits

    136,292       11       0.03       121,031       10       0.03  

Money market deposits

    655,912       346       0.21       644,107       330       0.20  

Time deposits

    247,237       352       0.57       275,949       430       0.62  

Securities sold under agreements to repurchase

    68,835       38       0.22       71,144       42       0.23  

Federal funds purchased and other short term borrowings

    23,471       19       0.32       16,156       7       0.17  

FHLB advances

    44,194       184       1.66       42,732       254       2.36  
                                                 

Total interest bearing liabilities

    1,874,815       1,182       0.25       1,687,209       1,203       0.28  
                                                 

Non-interest bearing liabilities:

                                               

Non-interest bearing demand deposits

    656,689                       572,406                  

Accrued interest payable and other liabilities

    42,597                       24,502                  

Total liabilities

    2,574,101                       2,284,117                  

Stockholders’ equity

    309,045                       276,563                  

Total liabilities and stockholders’ equity

  $ 2,883,146                     $ 2,560,680                  

Net interest income

          $ 24,963                     $ 22,312          

Net interest spread

                    3.57

%

                    3.58

%

Net interest margin

                    3.65

%

                    3.66

%

 

 
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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

 

   

Nine months ended September 30

 
   

2016

   

2015

 
   

Average

           

Average

   

Average

           

Average

 

(Dollars in thousands)

 

balances

   

Interest

   

rate

   

balances

   

Interest

   

rate

 

Earning assets:

                                               

Federal funds sold and interest bearing deposits

  $ 100,653     $ 395       0.52

%

  $ 76,508     $ 184       0.32

%

Mortgage loans held for sale

    4,918       185       5.02       5,464       180       4.40  

Securities:

                                               

Taxable

    413,508       6,135       1.98       349,494       5,749       2.20  

Tax-exempt

    61,417       1,298       2.82       59,516       1,255       2.82  

FHLB stock and other securities

    6,347       190       4.00       6,347       190       4.00  

Loans, net of unearned income

    2,113,744       68,238       4.31       1,888,839       62,273       4.41  

Total earning assets

    2,700,587       76,441       3.78       2,386,168       69,831       3.91  

Less allowance for loan losses

    23,057                       24,437                  
      2,677,530                       2,361,731                  

Non-earning assets:

                                               

Cash and due from banks

    40,097                       38,196                  

Premises and equipment

    41,500                       39,981                  

Accrued interest receivable and other assets

    94,263                       88,590                  

Total assets

  $ 2,853,390                     $ 2,528,498                  
                                                 

Interest bearing liabilities:

                                               

Deposits:

                                               

Interest bearing demand deposits

  $ 710,417     $ 735       0.14

%

  $ 511,325     $ 393       0.10

%

Savings deposits

    134,004       35       0.03       118,126       31       0.04  

Money market deposits

    652,406       1,060       0.22       651,185       985       0.20  

Time deposits

    254,172       1,086       0.57       289,788       1,402       0.65  

Securities sold under agreements to repurchase

    60,438       100       0.22       64,541       111       0.23  

Federal funds purchased and other short term borrowings

    25,021       57       0.30       15,484       19       0.16  

FHLB advances

    43,533       552       1.69       40,196       694       2.31  
                                                 

Total interest bearing liabilities

    1,879,991       3,625       0.26       1,690,645       3,635       0.29  
                                                 

Non-interest bearing liabilities:

                                               

Non-interest bearing demand deposits

    637,812                       541,919                  

Accrued interest payable and other liabilities

    34,844                       24,979                  

Total liabilities

    2,552,647                       2,257,543                  

Stockholders’ equity

    300,743                       270,955                  

Total liabilities and stockholders’ equity

  $ 2,853,390                     $ 2,528,498                  

Net interest income

          $ 72,816                     $ 66,196          

Net interest spread

                    3.52

%

                    3.62

%

Net interest margin

                    3.60

%

                    3.71

%

 

 
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Notes to the average balance and interest rate tables:

 

 

Net interest income, the most significant component of the Bank's earnings is total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.

 

 

Net interest spread is the difference between taxable equivalent rates earned on interest earning assets less the rate expensed on interest bearing liabilities.

 

 

Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is affected by both interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity.

 

 

Interest income on a fully tax equivalent basis includes additional amounts of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and tax-exempt loans has been calculated on a fully tax equivalent basis using a federal income tax rate of 35%. Approximate tax equivalent adjustments to interest income were $203 thousand and $231 thousand, respectively, for the three month periods ended September 30, 2016 and 2015 and $637 thousand and $700 thousand, respectively, for the nine month periods ended September 30, 2016 and 2015.

 

 

Average balances for loans include the principal balance of non-accrual loans and exclude participation loans accounted for as secured borrowings. These participation loans averaged $16.3 million and $7.3 million, respectively, for the three month periods ended September 30, 2016 and 2015 and $11.2 million and $7.8 million, respectively, for the nine month periods ended September 30, 2016 and 2015.

 

Fully taxable equivalent net interest income of $25.0 million for the three months ended September 30, 2016 increased $2.7 million, or 11.9%, from $22.3 million for the same period in 2015. Positive effects of increased volumes on loans and lower costs on time deposits and FHLB advances were partially offset by the negative effect of declining interest rates earned on loans. Net interest spread and net interest margin were 3.57% and 3.65%, respectively, for the third quarter of 2016 and 3.58% and 3.66%, respectively, for the third quarter of 2015.

 

Fully taxable equivalent net interest income of $72.8 million for the nine months ended September 30, 2016 increased $6.6 million, or 10.0%, from $66.2 million for the same period in 2015. Positive effects of increased volumes on earning assets and lower costs on time deposits and FHLB advances were partially offset by the negative effect of declining interest rates earned. Net interest spread and net interest margin were 3.52% and 3.60%, respectively, for the first nine months of 2016 and 3.62% and 3.71%, respectively, for the first nine months of 2015.

 

Average earning assets increased $314.4 million or 13.2%, to $2.7 billion for the first nine months of 2016 as compared with 2015, reflecting increases in the loan portfolio, available-for-sale investments, federal funds sold and interest bearing deposits. Average interest bearing liabilities increased $189.3 million, or 11.2%, to $1.9 billion for the first nine months of 2016 as compared with the same period in 2015 primarily due to increases in interest bearing demand and savings deposits, federal funds purchased and FHLB advances, partially offset by decreases in time deposits and securities sold under agreements to repurchase.

 

 
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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 the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The 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 does not indicate actual expected results.

 

Bancorp assumes certain correlation rates, often referred to as a “beta” of interest-bearing deposits, wherein the rates paid to customers change at a different pace when compared with changes in benchmark interest rates. Generally, certificates of deposit are assumed to have a high correlation rate, while interest-bearing checking accounts are assumed to have a lower correlation rate. Actual results may differ due to factors including competitive pricing and money supply; however, Bancorp uses its historical experience as well as industry data to inform its assumptions.

 

The September 30, 2016 simulation analysis, which shows little interest rate sensitivity, indicates that an increase in interest rates of 100 to 200 basis points would have a negative effect on net interest income, and a decrease of 100 basis points in interest rates would also have a negative impact. The scenario of rates decreasing 200 bp is not reasonably possible given current low rates for short-term instruments and most deposits.

 

These estimates are summarized below.

 

   

Net interest income

change

 
         
         

Increase 200bp

    (1.10 )%

Increase 100bp

    (1.13 )

Decrease 100bp

    (3.69 )

Decrease 200bp

    N/A  

 

Management expects that net interest margin will remain under pressure for both loans and deposits through 2016, primarily as a result of the current competitive environment. A near term increase in short term interest rates of 25 bps could benefit Bancorp if deposit rates do not rise, whereas rates on earning assets, such as loans, federal funds sold, and interest bearing deposits, rise.  While that was the result of the most recent rate increase by the Federal Reserve, such results are not guaranteed. Approximately 64% of the Bancorp’s loan portfolio has fixed rates and 12% of its loan portfolio is priced at variable rates with floors of 4% or higher.  Since the prime rate is currently 3.50%, a rise in rates could have a negative impact on net interest income because interest rates would need to move more than 50 bps before rising rates could affect loans with floors, whereas deposit rates could adjust immediately.  This effect is captured in the simulation analysis above. 

 

 
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Undesignated derivative instruments described in Note 8 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 or non-interest expense. 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 8 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 (loss).

 

Provision for Loan 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 analysis of risk in the loan portfolio. Based on this analysis, the provision for loan losses is determined and recorded. The provision reflects an allowance methodology that is driven by risk ratings, historical losses, and qualitative factors. Bancorp recorded a $2.5 million provision for loan losses in the first nine months of 2016, compared with no provision for the same period of 2015.

 

Management uses loan grading procedures which result in specific allowance allocations for estimated inherent risk of loss. For all loans graded, but not individually reviewed for allowance purposes, a general allowance allocation is computed using historical data based on actual loss experience. Specific and general allocations plus consideration of qualitative factors represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available 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, 2016.

 

 
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An analysis of the changes in the allowance for loan losses and selected ratios for the three and nine month periods ended September 30, 2016 and 2015 follows:

 

(Dollars in thousands)

  Three months ended September 30,     Nine months ended September 30,  
   

2016

   

2015

   

2016

   

2015

 
                                 

Balance at the beginning of the period

  $ 23,141     $ 23,308     $ 22,441     $ 24,920  

Provision for loan losses

    1,250       -       2,500       -  

Loan charge-offs, net of recoveries

    (22 )     (1,694 )     (572 )     (3,306 )

Balance at the end of the period

  $ 24,369     $ 21,614     $ 24,369     $ 21,614  

Average loans, net of unearned income

  $ 2,188,089     $ 1,923,762     $ 2,124,921     $ 1,896,592  

Provision for loan losses to average loans (1)

    0.06 %     0.00 %     0.12 %     0.00 %

Net loan charge-offs to average loans (1)

    0.00 %     0.09 %     0.03 %     0.17 %

Allowance for loan losses to average loans

    1.11 %     1.12 %     1.15 %     1.14 %

Allowance for loan losses to period-end loans

    1.10 %     1.11 %     1.10 %     1.11 %

 

(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.

 

An analysis of net charge-offs by loan category for the three and nine month periods ended September 30, 2016 and 2015 follows:

 

(in thousands)

 

Three months

   

Nine months

 
   

ended September 30,

   

ended September 30,

 

Net loan charge-offs (recoveries)

 

2016

   

2015

   

2016

   

2015

 

Commercial and industrial

  $ 18     $ 1,983     $ 375     $ 3,299  

Construction and development, excluding undeveloped land

    (11 )     0       (21 )     -  

Undeveloped land

    0       (650 )     -       (650 )

Real estate mortgage - commercial investment

    (67 )     122       (226 )     353  

Real estate mortgage - owner occupied commercial

    (9 )     108       305       97  

Real estate mortgage - 1-4 family residential

    64       78       63       127  

Home equity

    (34 )     (15 )     (34 )     (7 )

Consumer

    61       68       110       87  

Total net loan charge-offs

  $ 22     $ 1,694     $ 572     $ 3,306  

 

 
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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, 2016 and 2015.

 

   

Three months

   

Nine months

 
   

ended September 30,

   

ended September 30,

 

(In thousands)

 

2016

   

2015

   

% Change

   

2016

   

2015

   

% Change

 
                                                 

Non-interest income:

                                               

Wealth management and trust services

  $ 4,800     $ 4,373       9.8

%

  $ 14,219     $ 13,576       4.7

%

Service charges on deposit accounts

    2,544       2,342       8.6       6,952       6,621       5.0  

Bankcard transaction

    1,455       1,223       19.0       4,198       3,591       16.9  

Mortgage banking

    1,072       772       38.9       2,896       2,513       15.2  

Securities brokerage

    558       585       (4.6 )     1,539       1,545       (0.4 )

Bank owned life insurance

    216       222       (2.7 )     657       670       (1.9 )

Other

    713       468       52.4       1,757       1,361       29.1  

Total non-interest income

  $ 11,358     $ 9,985       13.8

%

  $ 32,218     $ 29,877       7.8

%

Non-interest expenses:

                                               

Salaries and employee benefits

  $ 12,048     $ 11,333       6.3

%

  $ 36,214     $ 33,816       7.1

%

Net occupancy

    1,646       1,518       8.4       4,716       4,437       6.3  

Data processing

    1,747       1,572       11.1       5,172       4,782       8.2  

Furniture and equipment

    277       282       (1.8 )     853       789       8.1  

FDIC insurance

    356       318       11.9       1,035       932       11.1  

Amortization of investment in tax credit partnerships

    1,015       158       542.4       3,046       475       541.3  

Other

    3,429       3,249       5.5       9,215       9,845       (6.4 )

Total non-interest expenses

  $ 20,518     $ 18,430       11.3

%

  $ 60,251     $ 55,076       9.4

%

 

The largest component of non-interest income is revenue from the Bancorp’s wealth management and trust (“WM&T”) department. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. Wealth management and trust’s revenue is accelerating due largely to new account growth, with approximately $2.4 billion in assets under management as of September 30, 2016, as compared with $2.2 billion at September 30, 2015. WM&T services revenue, which constitutes an year-to-date average of 44% of non-interest income, increased $427 thousand, or 9.8%, for the third quarter of 2016, and $643 thousand, or 4.7% for the first nine months of 2016, as compared with the same periods in 2015. Recurring revenues, which generally comprise over 95% of the wealth management and trust revenue, increased $473 thousand, or 3.6%, for the first nine months of 2016, compared with the same period of 2015. Most recurring revenue earned for managing accounts is based on a percentage of market value on a monthly basis. 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. Total non-recurring revenue increased $170 thousand for the first nine months of 2016, compared with the same period in 2015, primarily due to estate fees earned. Management believes that the new account growth in the WM&T department provides a strong foundation for future earnings and factors significantly into Bancorp’s future financial results while providing strategic diversity to revenue streams.

 

 
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Service charges on deposit accounts increased $202 thousand, or 8.6%, in the third quarter of 2016, and $331 thousand, or 5.0%, for the first nine months of 2016, as compared with the same periods in 2015. The increases for 2016 are primarily due to introduction of a new checking account product with ancillary benefits, added this year. This new product provided approximately $166 thousand in service charge income for the third quarter of 2016. Another significant component of service charges is related to fees earned on overdrawn checking accounts. Management expects this source of revenue to slowly decline due to anticipated changes in customer behavior and ongoing regulatory restrictions. This component of service charge income is generally driven by transaction volume, which can fluctuate throughout the year.

 

Bankcard transaction revenue increased $232 thousand, or 19.0%, in the third quarter of 2016, and $607 thousand, or 16.9% for the first nine months of 2016, as compared with the same periods in 2015. Bankcard transaction revenue primarily represents income the Bank derives from customers’ use of debit and credit cards. Interchange income on debit cards increased slightly for both the three and nine-month periods, primarily a result of increased volume, however, Bancorp expects a slight decrease in interchange rates on debit cards as service providers gravitate to lower cost options in a competitive market. Late in 2015, Bancorp began offering credit cards to business customers. Revenue on credit cards totaled $206,000 for the third quarter and $520,000 for the first nine months of 2016. Bancorp expects volume of credit card transactions to increase as customers are added.

 

Mortgage banking revenue primarily includes gains on sales of mortgage loans. Bancorp’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, VA and FHA financing, for purchases and refinances, as well as programs for first-time home buyers. Interest rates on mortgage loans directly impact the volume of business transacted by the mortgage banking department. Mortgage banking revenue increased $300 thousand, or 38.9%, in the third quarter of 2016, and $383 thousand or 15.2%, for the first nine months of 2016, as compared with the same periods in 2015, attributable mainly to slightly higher sales prices on loans. Rates declined in 2016 compared with the same period in 2015, stimulating refinancing activity during the third quarter of 2016. The impact of the additional refinance activity was partially offset by a slight decline in purchasing activity for the period.

 

Brokerage commissions and fees decreased slightly for the three and nine-month periods, as compared with the same periods in 2015. These decreases correspond primarily to overall brokerage volume. 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 $216 thousand and $222 thousand for the third quarter of 2016 and 2015, respectively, and totaled $657 thousand and $670 thousand for the first nine months of 2016 and 2015, respectively. BOLI represents the cash surrender value for life insurance policies on certain key employees who have provided consent for Bancorp to be the beneficiary of a portion of such policies. BOLI income results from the related change in cash surrender value and any death benefits received under the policies. This income helps offset the cost of various employee benefits.

 

Other non-interest income increased $245 thousand, or 52.4%, for the third quarter of 2016, and $396 thousand, or 29.1% for the first nine months of 2016, as compared with the same periods in 2015. Included in this category is swap fee income, which totaled $436 thousand and $17 thousand for the first nine months of 2016 and 2015, respectively. Opportunities to earn swap fee income are infrequent due to the specialized nature of the transactions. This category includes a variety of other income sources, none of which resulted in individually significant variances.

 

 
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Salaries and employee benefits increased $715 thousand, or 6.3%, for the third quarter of 2016, and $2.4 million, or 7.1% for the first nine months of 2016, as compared with the same periods of 2015. For the third quarter and the first nine months, the increase is largely due to higher compensation expenses, reflecting both increased incentive compensation related to accelerated loan and earnings growth as well as the addition of personnel associated with continued expansion in the Cincinnati and Indianapolis markets. These increases were partially offset by lower health insurance costs. The Bank’s employee health insurance is a self-insured plan and related expenses fluctuate with claims experience. At September 30, 2016, Bancorp had 558 full-time equivalent employees compared with 546 at September 30, 2015.

 

Net occupancy expense increased $128 thousand, or 8.4%, in the third quarter of 2016, and $279 thousand, or 6.3%, for the first nine months of 2016, as compared with the same periods of 2015. The increase was largely due to higher rent and depreciation for locations added during 2015 and increased maintenance expense company-wide.

 

Data processing expense increased $175 thousand, or 11.1% in the third quarter of 2016, and $390 thousand, or 8.2% for the first nine months of 2016, compared with the same periods of 2015, primarily due to increases in computer maintenance and repair costs resulting from system improvements and expenses related to the issuance and processing of business credit cards.  This category includes ongoing computer software amortization, equipment depreciation, and expenditures related to investments in technology needed to maintain and improve the quality of delivery channels and internal resources .

 

Furniture and equipment expense increased $64 thousand, or 8.1% for the first nine months of 2016, as compared with the same periods in 2015. For the third quarter there was a minimal decrease over the comparable period in 2015. These fluctuations relate to a variety of factors, none of which were individually significant. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense.

 

FDIC insurance expense increased $38 thousand, or 11.9%, for the third quarter of 2016, and $103 thousand or 11.1% for the first nine months of 2016, as compared with the same periods in 2015. The assessment is calculated by the FDIC and adjusted quarterly. The increase in expense is due primarily to higher level of net assets driven by loan growth.

 

Amortization of investments in tax credit partnerships increased $857 thousand for the third quarter of 2016, and $2.6 million for the first nine months of 2016, compared with the same periods of 2015. This expense reflects amortization of investments in partnerships which generate historic income tax credits and vary widely depending upon the timing of investments and related amortization. For each of Bancorp’s investments in tax credit partnerships, when taken as a whole, the tax benefit compared with the amortization results in a positive effect on net income. See the Income Taxes section below for details on amortization and income tax impact for these credits.

 

Other non-interest expenses increased $180 thousand or 5.5% in the third quarter of 2016, but decreased $630 thousand or 6.4% for the first nine months of 2016, as compared with the same periods in 2015. The decreases for the nine month period are largely due to $382 thousand of net gains on sales of foreclosed assets in 2016 compared with $153 thousand of net losses in 2015. Additionally, Bancorp reduced the reserve for estimated losses on unfunded commitments by $115 thousand in the first nine months of 2016, compared with a provision expense of $372 thousand in 2015. This reserve is based on evaluation of credit risk related to available lines of credit in the loan portfolio and will fluctuate based on borrowers’ use and repayment of those lines. MSR amortization declined $375 thousand for the first nine months of 2016 compared with 2015, as pools of MSRs added several years ago were fully amortized in 2015. Other non-interest expense also includes legal and professional fees, advertising, printing, mail and telecommunications, none of which had individually significant variances.

 

 
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Income Taxes

 

For the first nine months of 2016, Bancorp recorded income tax expense of $11.2 million, compared with $12.8 million for the same period in 2015. The effective rate for the nine month period was 27.0% in 2016 and 31.7% in 2015. The decrease in the effective tax rate from 2015 to 2016 is largely the result of higher utilization of tax credits in 2016.

 

Bancorp invests in certain partnerships that yield historic and low-income housing tax credits. The amortization method for investments in historic tax credit partnerships is the cost method which matches the amortization period with the time frame over which the credits are realized. The tax benefits and related investment amortization expenses for low-income housing credits are recognized in income tax expense using a proportional amortization method which amortizes the investment in proportion to the tax credits and other tax benefits received.

 

Commitments

 

Bancorp uses a variety of financial instruments in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. A discussion of Bancorp’s commitments is included in Note 11.

 

Other commitments discussed in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, have not materially changed since that report was filed, relative to qualitative and quantitative disclosures of fixed and determinable contractual obligations.

 

b)

Financial Condition

 

Balance Sheet

 

Total assets increased $121.9 million, or 4.3%, from $2.8 billion on December 31, 2015 to $2.9 billion on September 30, 2016. In the first nine months of 2016 loans grew $189.7 million, or 9.3%, a result of loan production which outpaced what had previously been record production in 2015. All of the growth has been organic and each of Bancorp's three markets continues to participate in the accelerated lending activity. Loan growth during the nine month period reflects ongoing expansion in key categories, such as commercial and industrial lending, while limiting exposure to commercial investment real estate. Securities available-for-sale decreased by $24.2 million over the first nine months of 2016. The decrease was net of market value changes in the portfolio as unrealized gains of $1.5 million at December 31, 2015 increased to $7.8 million at September 30, 2016, a $6.3 million increase in the market value of the portfolio. Maturing available-for-sale investments were used to fund loan growth during the first nine months of 2016. Included in securities available-for-sale are short term obligations of U.S. Treasury or U.S. government sponsored entities. These securities, which totaled $100 million at September 30, 2016 and December 31, 2015, normally have a maturity of less than one month, and are purchased at quarter-end as part of a tax minimization strategy.

 

Total liabilities increased $96.8 million, or 3.8%, from $2.5 billion on December 31, 2015 to $2.6 billion on September 30, 2016. Total deposits increased $18.9 million or 0.8%, with the greatest increase in non-interest bearing deposit accounts. Non-interest bearing deposit accounts increased $96.3 million, or 16.5%, whereas interest bearing accounts decreased $77.4 million, or 4.3%, over the nine month period. Securities sold under agreements to repurchase increased $2.8 million or 4.3% due to normal cyclical activity. Federal funds purchased and other short-term borrowing increased $53.9 million. Bancorp uses short-term lines of credit to manage its overall liquidity position. Other liabilities increased $13.3 million or 47.6% largely due to an increase in secured borrowing related to participation loans. See the Elements of Loan Portfolio section below on details related to participations loans.

 

 
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Elements of Loan Portfolio

 

The following table sets forth the major classifications of the loan portfolio.

 

(in thousands)

               

Loans by Type

 

September 30, 2016

   

December 31, 2015

 

Commercial and industrial

  $ 708,508     $ 644,398  

Construction and development, excluding undeveloped land

    171,994       134,482  

Undeveloped land (1)

    19,993       21,185  

Real estate mortgage:

               

Commercial investment

    510,128       436,989  

Owner occupied commercial

    412,733       420,666  

1-4 family residential

    245,229       226,575  

Home equity - first lien

    54,837       50,115  

Home equity - junior lien

    65,605       63,066  

Subtotal: real estate mortgage

    1,288,532       1,197,411  

Consumer

    33,679       35,531  
                 

Total loans

  $ 2,222,706     $ 2,033,007  

 

 

(1)

Undeveloped land consists of land acquired for development by the 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, 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. These participated loans are included in the commercial and industrial and real estate mortgage loan totals above, and a corresponding liability is recorded in other liabilities. At September 30, 2016 and December 31, 2015, the total participated portions of loans of this nature were $16.0 million and $7.2 million, respectively.

 

 
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Non-performing Loans and Assets

 

Information summarizing non-performing assets, including non-accrual loans follows:

 

(Dollars in thousands)

 

September 30, 2016

   

December 31, 2015

 

Non-accrual loans

  $ 6,889     $ 7,693  

Troubled debt restructuring

    999       1,060  

Loans past due 90 days or more and still accruing

    80       176  

Non-performing loans

    7,968       8,929  

Foreclosed real estate

    5,042       4,541  

Non-performing assets

  $ 13,010     $ 13,470  

Non-performing loans as a percentage of total loans

    0.36 %     0.44 %

Non-performing assets as a percentage of total assets

    0.44 %     0.48 %

 

The following table sets forth the major classifications of non-accrual loans:

 

(in thousands)

               

Non-accrual loans by type

 

September 30, 2016

   

December 31, 2015

 

Commercial and industrial

  $ 2,177     $ 3,643  

Construction and development, excluding undeveloped land

    910       -  

Undeveloped land

    655       -  

Real estate mortgage - commercial investment

    94       278  

Real estate mortgage - owner occupied commercial

    1,548       2,761  

Real estate mortgage - 1-4 family residential

    920       906  

Home equity and consumer loans

    585       105  

Total loans

  $ 6,889     $ 7,693  

 

c)

Liquidity

 

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity is provided by short-term liquid assets that can be converted to cash, investment securities available-for-sale, various lines of credit available to Bancorp, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than market rate.

 

 
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Bancorp’s most liquid assets are comprised of cash and due from banks, available-for-sale marketable investment securities, federal funds sold and interest bearing deposits. Federal funds sold and interest bearing deposits totaled $16.4 million at September 30, 2016. 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 $541.7 million at September 30, 2016. The portfolio includes maturities of approximately $136.0 million over the next twelve months, including $100 million of short-term securities which matured in October 2016. Combined with federal funds sold and interest bearing deposits, these offer substantial resources to meet either new loan demand or reductions in Bancorp’s deposit funding base. 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. At September 30, 2016, total investment securities pledged for these purposes comprised 60% of the available-for-sale investment portfolio, leaving $323.3 million of unpledged securities.

 

Bancorp has a large base of non-maturity customer deposits, defined as demand, savings, and money market deposit accounts. At September 30, 2016, such deposits totaled $2.1 billion and represented 89.7% of Bancorp’s total deposits. 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, many of Bancorp’s customers’ deposit balances are historically high. When market conditions improve, these balances will likely decrease, putting some strain on Bancorp’s liquidity position. As of September 30, 2016, Bancorp had $498 thousand or 0.02% of total deposits, in brokered deposits.

 

Included in the total deposit balances at September 30, 2016 is $113.0 million of public funds deposits generally comprised of accounts from local government agencies and public school districts in our markets. 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 results in lower net interest margin, it has a positive impact on net interest income.

 

Other sources of funds available to meet daily needs include FHLB advances. As a member of the FHLB of Cincinnati, Bancorp has access to credit products offered by the FHLB. Bancorp views these borrowings as a low cost alternative to other time deposits. At September 30, 2016, available credit from the FHLB totaled $366.5 million. Additionally, Bancorp had available federal funds purchased lines with correspondent banks totaling $80 million at September 30, 2016.

 

Bancorp’s principal source of cash revenues is dividends paid to it as sole shareholder of the Bank. At September 30, 2016, the Bank may pay up to $76.9 million in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.

 

d)

Capital Resources

 

At September 30, 2016, stockholders’ equity totaled $311.6 million, an increase of $25.1 million since December 31, 2015. See the Consolidated Statement of Changes in Stockholders’ Equity for further detail of the changes in equity since the end of 2015. One component of equity is accumulated other comprehensive income which, for Bancorp, consists of net unrealized gains or losses on securities available-for-sale and hedging instruments, as well as a minimum pension liability, each net of taxes. Accumulated other comprehensive income was $4.4 million at September 30, 2016 compared with $632 thousand on December 31, 2015. The $3.8 million increase is primarily a reflection of the positive effect of the changing interest rate environment during the first nine months of 2016 on the valuation of Bancorp’s portfolio of securities available-for-sale.

 

 
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The following table sets forth Bancorp’s and the Bank’s risk based capital ratios as of September 30, 2016 and December 31, 2015.

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Total risk-based capital (1)

               

Consolidated

    13.05

%

    13.31

%

Bank

    12.64       12.91  
                 

Common equity tier 1 risk-based capital (1)

               

Consolidated

    12.07       12.32  

Bank

    11.66       11.92  
                 

Tier 1 risk-based capital (1)

               

Consolidated

    12.07       12.32  

Bank

    11.66       11.92  
                 

Leverage (2)

               

Consolidated

    10.63       10.53  

Bank

    10.26       10.19  

 

 

(1)

Under the banking agencies risk-based capital guidelines, assets and credit-equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together, resulting in the Bancorp's total risk-weighted assets. These ratios are computed in relation to average assets.

 

 

(2)

Ratio is computed in relation to average assets.

 

In 2013, the Federal Reserve Board and the FDIC approved rules that substantially amended the regulatory risk-based capital rules applicable to Bancorp and Bank. The rules implemented the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" (Basel III) and changes required by the Dodd-Frank Act. The Basel III regulatory capital reforms became effective for Bancorp and Bank on January 1, 2015, and included new minimum risk-based capital and leverage ratios. The minimum capital level requirements applicable to bank holding companies and banks subject to the rules are:

 

 

a common equity tier 1 capital ratio of 4.5%,

 

a tier 1 risk-based capital ratio of 6% (increased from 4%),

 

a total risk-based capital ratio of 8% (unchanged from current rules), and

 

a tier 1 leverage ratio of 4% for all institutions.

 

The rules also established a "capital conservation buffer" of 2.5%, to be phased in over three years through December 31, 2018, above the new regulatory minimum risk-based capital ratios, and will result in the following minimum ratios once the capital conservation buffer is fully phased in:

 

 

a common equity tier 1 risk-based capital ratio of 7.0%,

 

a tier 1 risk-based capital ratio of 8.5%, and

 

a total risk-based capital ratio of 10.5%.

 

 
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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.

 

As of September 30, 2016, Bancorp meets the requirements to be considered well capitalized under the rules, and is not subject to limitations due to the capital conservation buffer.

 

e)

Non-GAAP Financial Measures

 

In addition to capital ratios defined by banking regulators, Bancorp considers various ratios when evaluating capital adequacy and overhead, including tangible common equity to tangible assets, tangible common equity per share, and adjusted efficiency ratio, all of which are non-GAAP measures. Bancorp believes the tangible common equity ratios are important because of their widespread use by investors as means to evaluate capital adequacy, as they reflect the level of capital available to withstand unexpected market conditions. Because US GAAP does not include capital ratio measures, there are no US GAAP financial measures comparable to these ratios. In addition to the efficiency ratio normally presented, Bancorp considers an adjusted efficiency ratio. Bancorp believes excluding amortization of investments in tax credit partnerships from non-interest expense in this ratio is important because it provides a meaningful comparison to both prior periods, since amortization expense can fluctuate widely between periods depending upon timing of tax credits, and to other companies who do not invest in these partnerships.

 

The following table reconciles Bancorp’s calculation of tangible common equity to amounts reported under US GAAP.

 

(in thousands, except per share data)

 

September 30, 2016

   

December 31, 2015

 

Total equity

  $ 311,570     $ 286,519  

Less core deposit intangible

    (1,453 )     (1,601 )

Less goodwill

    (682 )     (682 )

Tangible common equity

  $ 309,435     $ 284,236  
                 

Total assets

  $ 2,938,665     $ 2,816,801  

Less core deposit intangible

    (1,453 )     (1,601 )

Less goodwill

    (682 )     (682 )

Total tangible assets

  $ 2,936,530     $ 2,814,518  
                 

Total shareholders' equity to total assets

    10.60

%

    10.17

%

Tangible common equity ratio

    10.54       10.10  
                 

Number of outstanding shares

    22,563       22,379  
                 

Book value per share

  $ 13.81     $ 12.80  

Tangible common equity per share

    13.71       12.70  

 

 
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The following table reconciles Bancorp’s calculation of adjusted efficiency ratios to the ratio reported under US GAAP.

 

   

Three months ended

   

Nine months ended

 
   

September 30,

   

September 30,

 

(amounts in thousands)

 

2016

   

2015

   

2016

   

2015

 

Non-interest expense

  $ 20,518     $ 18,430     $ 60,251     $ 55,076  
                                 

Net interest income (tax-equivalent)

    24,963       22,312       72,816       66,196  

Non-interest income

    11,358       9,985       32,218       29,877  

Total revenue

  $ 36,321     $ 32,297     $ 105,034     $ 96,073  
                                 

Efficiency ratio

    56.5 %     57.1 %     57.4 %     57.3 %

 

(amounts in thousands)

 

2016

   

2015

   

2016

   

2015

 

Non-interest expense

  $ 20,518     $ 18,430     $ 60,251     $ 55,076  

Less: amortization of investments in tax credit partnerships

    (1,015 )     (158 )     (3,046 )     (475 )

Adjusted non-interest expense

    19,503       18,272       57,205       54,601  
                                 

Net interest income (tax-equivalent)

    24,963       22,312       72,816       66,196  

Non-interest income

    11,358       9,985       32,218       29,877  

Total revenue

  $ 36,321     $ 32,297     $ 105,034     $ 96,073  
                                 

Adjusted efficiency ratio

    53.7 %     56.6 %     54.5 %     56.8 %

 

 

f)

Recently Issued Accounting Pronouncements


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 delays the effective date. The effective date will be annual reporting periods beginning after December 15, 2017, and the interim periods within that year. Bancorp is evaluating the potential impact of adoption of ASU 2014-09.

 

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 is evaluating the potential impact of adoption of ASU 2016-02.

 

 
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In March 2016, FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new guidance simplifies certain aspects related to income taxes, statement of cash flows, and forfeitures when accounting for share-based payment transactions. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2016. Certain of the amendments related to timing of the recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to the presentation of the statement of cash flows should be applied retrospectively. All other provisions may be applied on a prospective or modified retrospective basis. After adoption of the ASU, Bancorp would record the excess tax benefits related to stock compensation as a component of income tax expense rather than additional paid-in capital. For the year ended December 31, 2015, the excess tax benefit recorded to additional paid-in capital was $673 thousand. Bancorp is considering the potential impact of early adoption of ASU 2016-09.

 

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. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Bancorp is evaluating the potential impact of adoption of ASU 2016-13.

 

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.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Information required by this item is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Item 4. Controls and Procedures

 

Bancorp maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in reports it files with the Securities and Exchange Commission (“SEC”), and to record, process, summarize and report this information within the time periods specified in the rules and forms of the SEC. Based on their evaluation of Bancorp’s disclosure controls and procedures as of the end of the quarterly period covered by this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that Bancorp is able to collect, process and disclose the information it is required to disclose in reports it files with the SEC within the required time periods.

 

Based on the evaluation of Bancorp’s disclosure controls and procedures by the Chief Executive and Chief Financial Officers, there were no significant changes during the quarter ended September 30, 2016 in Bancorp’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Bancorp’s internal control over financial reporting.

 

 
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PART II – OTHER INFORMATION

 

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, 2016.

 

   

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

    7,371     $ 29.45              

Aug 1 - Aug 31

                       

Sept 1 - Sept 30

    7,299       32.03              

Total

    14,670     $ 30.73              

 

(1)

Activity represents shares of stock withheld to pay taxes due upon exercise of stock appreciation rights and vesting of restricted stock.

 

Item 6. Exhibits

 

The following exhibits are filed or furnished as a part of this report:

 

Exhibit

 

Number

Description of exhibit

31.1

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act by David P. Heintzman

31.2

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act by Nancy B. Davis

32

Certifications pursuant to 18 U.S.C. Section 1350

 

 

101

The following financial statements from the Stock Yards Bancorp, Inc. September 30, 2016 Quarterly Report on Form 10-Q, filed on November 7, 2016, formatted in eXtensible Business Reporting Language (XBRL):

 

(1)  Consolidated Balance Sheets

  (2)  Consolidated Statements of Income
  (3)  Consolidated Statements of Comprehensive Income
  (4)  Consolidated Statements of Changes in Stockholders’ Equity

 

(5)  Consolidated Statements of Cash Flows

 

(6)  Notes to Consolidated Financial Statements

 

 
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Signatures

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

STOCK YARDS BANCORP, INC.

 
       
       

Date: November 7, 2016

By:

/s/ David P. Heintzman

 
    David P. Heintzman, Chairman  
    and Chief Executive Officer  
       

Date: November 7, 2016

By:

/s/ Nancy B. Davis

 
    Nancy B. Davis, Executive Vice President,  
    Treasurer and Chief Financial Officer  

 

 

 

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