sybt20171231_10k.htm
 

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

Form 10-K/A

Amendment No. 1

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

 

For the Fiscal Year Ended

 

Commission File Number

December 31, 2017

 

1-13661

 

STOCK YARDS BANCORP, INC.

1040 East Main Street
Louisville, Kentucky 40206
(502) 582-2571

Incorporated in Kentucky

 

I.R.S. No. 61-1137529

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

Name of each exchange on which registered:

Common Stock, no par value

NASDAQ

 


Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).

Yes ☐          No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐          No

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
    Emerging growth company

          

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

Yes ☐          No

 

The aggregate market value of registrant’s voting stock (Common Stock, no par value) held by non-affiliates of the registrant as of June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was $802,453,551.

 

The number of shares of the registrant’s Common Stock, no par value, outstanding as of February 23, 2018, was 22,715,321.

 

Documents Incorporated By Reference

 

Portions of Registrant’s definitive proxy statement related to Registrant’s Annual Meeting of Shareholders to be held on April 26, 2018 (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Form 10-K.

 

 

 

EXPLANATORY NOTE

 

Stock Yards Bancorp, Inc. (the “Company”) files this Amendment No. 1 (“Amendment No. 1”) to its Annual Report on Form 10-K filed on March 13, 2018 for the fiscal year ended December 31, 2017 (the “Original 10-K”) to provide an amended report of its independent registered public accounting firm on the consolidated financial statements that correctly identifies the city and state to be Louisville, Kentucky.

 

In accordance with applicable Securities and Exchange Commission (“SEC”) rules and as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Amendment No. 1 includes new certifications from the Company’s Principal Executive Officer and Principal Financial Officer dated as of the date of filing of Amendment No. 1.

 

This Amendment No. 1 consists solely of the preceding cover page, this explanatory note, Part II., Item 8., “Financial Statements and Supplementary Data,” in its entirety, Part IV., Item 15., “Exhibits and Financial Statement Schedules”, the signature page, a new Consent of Independent Registered Public Accounting Firm, and the new certifications from the Company’s Principal Executive Officer and Principal Financial Officer.

 

Amendment No. 1 speaks as of the date of the Original 10-K, does not reflect events that may have occurred after the date of the Original 10-K and does not modify or update in any way the disclosures made in the Original 10-K, except as described above. Amendment No. 1 should be read in conjunction with the Original 10-K and with the Company’s subsequent filings with the SEC.

 

 

STOCK YARDS BANCORP, INC.
Form 10-K/A
Index

 

Part II:

 

 

     

Item 8.

Financial Statements and Supplementary Data

4

     

Part IV:

 

 

     

Item 15.

Exhibits and Financial Statement Schedules

54

     

Signatures

 

58

 

 

Item 8. Financial Statements and Supplementary Data

 

The following consolidated financial statements of Bancorp, and reports of independent registered public accounting firm and management are included below:

 

Consolidated Balance Sheets - December 31, 2017 and 2016

Consolidated Statements of Income - years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Comprehensive Income - years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Changes in Stockholders’ Equity - years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Cash Flows - years ended December 31, 2017, 2016 and 2015

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Management’s Report on Consolidated Financial Statements

 

4

 

 

Consolidated Balance Sheets

               
   

December 31,

 

(Dollars in thousands)

 

2017

   

2016

 
                 

Assets

               

Cash and due from banks

  $ 41,982     $ 39,709  

Federal funds sold and interest bearing due from banks

    97,266       8,264  

Cash and cash equivalents

    139,248       47,973  

Mortgage loans held for sale

    2,964       3,213  

Securities available-for-sale (amortized cost of $577,406 in 2017 and $571,936 in 2016)

    574,524       570,074  

Federal Home Loan Bank stock and other securities

    7,646       6,347  
                 

Loans

    2,409,570       2,305,375  

Less allowance for loan losses

    24,885       24,007  

Net loans

    2,384,685       2,281,368  
                 

Premises and equipment, net

    41,655       42,384  

Bank owned life insurance

    32,049       31,867  

Accrued interest receivable

    8,369       6,878  

Other assets

    48,506       49,377  

Total assets

  $ 3,239,646     $ 3,039,481  
                 

Liabilities

               

Deposits

               

Non-interest bearing

  $ 674,697     $ 680,156  

Interest bearing

    1,903,598       1,840,392  

Total deposits

    2,578,295       2,520,548  
                 

Securities sold under agreements to repurchase

    70,473       67,595  

Federal funds purchased

    161,352       47,374  

Accrued interest payable

    232       144  

Other liabilities

    46,192       38,873  

Federal Home Loan Bank advances

    49,458       51,075  

Total liabilities

    2,906,002       2,725,609  
                 

Stockholders equity

               

Preferred stock, no par value; 1,000,000 shares authorized; no shares issued or outstanding

           

Common stock, no par value; 40,000,000 shares authorized; 22,679,362 and 22,617,098 shares issued and outstanding in 2017 and 2016, respectively

    36,457       36,250  

Additional paid-in capital

    31,924       26,682  

Retained earnings

    267,193       252,439  

Accumulated other comprehensive (loss)

    (1,930 )     (1,499 )

Total stockholders equity

    333,644       313,872  

Total liabilities and stockholders equity

  $ 3,239,646     $ 3,039,481  

 

See accompanying notes to consolidated financial statements.

 

5

 

 

Consolidated Statements of Income

                       
   

Years ended December 31,

 

(In thousands, except per share data)

 

2017

   

2016

   

2015

 
                         

Interest income

                       

Loans

  $ 99,874     $ 91,798     $ 83,371  

Federal funds sold and interest bearing deposits

    1,330       491       263  

Mortgage loans held for sale

    191       237       249  

Securities

                       

Taxable

    8,365       8,451       8,120  

Tax-exempt

    1,089       1,195       1,167  
                         

Total interest income

    110,849       102,172       93,170  
                         

Interest expense

                       

Deposits

    5,975       3,943       3,739  

Securities sold under agreements to repurchase and other short term borrowing

    316       212       174  

Long term debt

    955       763       939  
                         

Total interest expense

    7,246       4,918       4,852  

Net interest income

    103,603       97,254       88,318  
                         

Provision for loan losses

    2,550       3,000       750  

Net interest income after provision for loan losses

    101,053       94,254       87,568  
                         

Non-interest income

                       

Wealth management and trust services

    20,505       19,155       18,026  

Deposit service charges

    6,461       6,253       6,010  

Debit and credit cards

    5,979       5,655       4,876  

Treasury management

    4,008       3,651       3,404  

Mortgage banking

    3,221       3,897       3,488  

(Loss) on sale of securities available-for-sale

    (232 )            

Investment product sales commissions and fees

    2,200       2,145       1,994  

Bank owned life insurance

    1,159       871       889  

Other

    1,819       1,910       1,263  
                         

Total non-interest income

    45,120       43,537       39,950  
                         

Non-interest expenses

                       

Compensation

    42,584       40,817       36,597  

Employee benefits

    9,987       8,368       8,112  

Net occupancy and equipment

    7,393       7,422       6,986  

Technology and communication

    8,525       7,619       6,891  

Marketing and business development

    2,716       2,464       2,579  

Postage, printing and supplies

    1,475       1,521       1,436  

Legal and professional

    2,393       1,869       1,832  

FDIC insurance

    960       1,181       1,258  

Amortization/impairment of investments in tax credit partnerships

    7,124       4,458       634  

Capital and deposit based taxes

    3,440       2,800       2,413  

Other

    4,394       3,001       4,660  
                         

Total non-interest expenses

    90,991       81,520       73,398  
                         

Income before income taxes

    55,182       56,271       54,120  

Income tax expense

    17,139       15,244       16,933  

Net income

  $ 38,043     $ 41,027     $ 37,187  

Net income per share, basic

  $ 1.69     $ 1.84     $ 1.68  

Net income per share, diluted

  $ 1.66     $ 1.80     $ 1.65  

Average common shares:

                       

Basic

    22,532       22,356       22,088  

Diluted

    22,983       22,792       22,459  

 

See accompanying notes to consolidated financial statements.

 

6

 

 

Consolidated Statements of Comprehensive Income

                       
   

Years ended December 31,

 

(In thousands)

 

2017

   

2016

   

2015

 
                         

Net income

  $ 38,043     $ 41,027     $ 37,187  

Other comprehensive income (loss), net of tax:

                       

Unrealized (losses) gains on securities available-for-sale:

                       

Unrealized (losses) gains arising during the period (net of tax of ($531), ($1,171), and ($839), respectively)

    (721 )     (2,176 )     (1,558 )

Unrealized (losses) gains on hedging instruments:

                       

Unrealized (losses) gains arising during the period (net of tax of $112, $24, and ($41), respectively)

    209       44       (76 )

Minimum pension liability adjustment (net of tax of ($9), $1, and $69, respectively)

    (70 )     1       114  

Reclassification adjustment for impairment of equity security realized in income (net of tax of $0, $0, and $36, respectively)

                67  

Reclassification adjustment for securities losses reclassified out of other comprehensive income into loss on sale of securities available-for-sale (net of tax of $81, $0, and $0, respectively)

    151              

Other comprehensive (loss) income

    (431 )     (2,131 )     (1,453 )

Comprehensive income

  $ 37,612     $ 38,896     $ 35,734  

 

See accompanying notes to consolidated financial statements.

 

7

 

 

Consolidated Statements of Changes in Stockholders Equity

 
   

For each of the years in the three year period ended December 31, 2017

 
                                   

Accumulated

         
   

Common stock

   

Additional

           

other

         

 

 

Number of

           

paid-in

   

Retained

   

comprehensive

         

(In thousands, except per share data)

 

shares

   

Amount

   

capital

   

earnings

   

income (loss)

   

Total

 
                                                 

Balance December 31, 2014

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

Net income

                      37,187             37,187  

Other comprehensive loss, net of tax

                            (1,453 )     (1,453 )

Stock compensation expense

                2,134                   2,134  

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

    179       596       3,972       (1,564 )           3,004  

Cash dividends declared, $0.64 per share

                      (14,248 )           (14,248 )

Shares repurchased or cancelled

    (5 )     (15 )     (117 )     132              

Balance December 31, 2015

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

Net income

                      41,027             41,027  

Other comprehensive loss, net of tax

                            (2,131 )     (2,131 )

Stock compensation expense

                2,473                   2,473  

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

    214       711       5,217       (3,804 )           2,124  

3 for 2 stock split (see note 14)

    7,494       24,956       (24,956 )                  

Cash dividends declared, $0.72 per share

                      (16,140 )           (16,140 )

Shares repurchased or cancelled

    (10 )     (33 )     (232 )     265              

Balance December 31, 2016

    22,617     $ 36,250     $ 26,682     $ 252,439     $ (1,499 )   $ 313,872  
                                                 

Net income

                      38,043             38,043  

Other comprehensive loss, net of tax

                            (431 )     (431 )

Stock compensation expense

                2,892                   2,892  

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

    69       231       2,500       (5,336 )           (2,605 )

Cash dividends declared, $0.80 per share

                      (18,127 )           (18,127 )

Shares repurchased or cancelled

    (7 )     (24 )     (150 )     174              

Balance December 31, 2017

    22,679     $ 36,457     $ 31,924     $ 267,193     $ (1,930 )   $ 333,644  

 

See accompanying notes to consolidated financial statements.

 

8

 

 

Consolidated Statements of Cash Flows

                       
                         
   

Years ended December 31,

 

(In thousands)

 

2017

   

2016

   

2015

 
                         

Operating activities

                       

Net income

  $ 38,043     $ 41,027     $ 37,187  

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

                       

Provision (credit) for loan losses

    2,550       3,000       750  

Depreciation, amortization and accretion, net

    13,640       11,142       6,902  

Deferred income tax expense (benefit)

    3,971       276       847  

Loss on sale of securities available-for-sale

    232              

Impairment loss on available-for-sale securities

                103  

Gains on sales of mortgage loans held for sale

    (1,989 )     (2,482 )     (2,167 )

Origination of mortgage loans held for sale

    (97,623 )     (123,347 )     (116,385 )

Proceeds from sale of mortgage loans held for sale

    99,861       129,416       115,499  

Bank owned life insurance income

    (1,159 )     (871 )     (889 )

Proceeds from liquidation of private investment fund

    (92 )            

(Gain) Loss on other real estate owned

    (39 )     (409 )     147  

Loss (gain) on the disposal of premises and equipment

          202       (51 )

Recovery of impairment loss on other assets held for investment

          (588 )      

Stock compensation expense

    2,892       2,473       2,134  

Excess tax benefits from share-based compensation arrangements

    (1,463 )     (1,705 )     (673 )

Increase in accrued interest receivable and other assets

    (13,848 )     (7,438 )     (2,540 )

Increase in accrued interest payable and other liabilities

    8,700       12,566       2,307  

Net cash provided by operating activities

    53,676       63,262       43,171  
                         

Investing activities

                       

Purchases of securities available-for-sale

    (661,086 )     (478,798 )     (384,260 )

Proceeds from sale of securities available-for-sale

    421             5,934  

Proceeds from maturities of securities available-for-sale

    652,411       468,271       320,952  

Purchase of Federal Home Loan Bank Stock

    (2,254 )            

Proceeds from sale of Federal Home Loan Bank stock

    955              

Proceeds from liquidation of private investment fund

    92              

Net increase in loans

    (105,867 )     (275,718 )     (168,832 )

Purchases of premises and equipment

    (2,786 )     (6,327 )     (3,459 )

Proceeds from disposal of equipment

          66        

Proceeds from mortality benefit of bank owned life insurance

    977              

Proceeds from sale of other real estate owned

    2,432       1,826       2,541  

Proceeds from the sale of other assets held for investment

          1,108        

Net cash used in investing activities

    (114,705 )     (289,572 )     (227,124 )
                         

Financing activities

                       

Net increase in deposits

    57,747       148,846       248,075  

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

    116,856       27,966       (29,946 )

Proceeds from Federal Home Loan Bank advances

    120,000       289,000       108,200  

Repayments of Federal Home Loan Bank advances

    (121,617 )     (281,393 )     (101,564 )

Proceeds (used for) and received from settlement of stock awards

    (216 )     2,337       3,249  

Excess tax benefits from share-based compensation arrangements

          1,705       673  

Common stock repurchases

    (2,389 )     (1,918 )     (918 )

Cash dividends paid

    (18,077 )     (16,093 )     (14,224 )

Net cash provided by financing activities

    152,304       170,450       213,545  
                         

Net increase (decrease) in cash and cash equivalents

    91,275       (55,860 )     29,592  
                         

Cash and cash equivalents at beginning of year

    47,973       103,833       74,241  
                         

Cash and cash equivalents at end of period

  $ 139,248     $ 47,973     $ 103,833  

 

See accompanying notes to consolidated financial statements.

 

9

 

Notes to Consolidated Financial Statements

 

 

(1) Summary of Significant Accounting Policies

 

Principles of Consolidation and Nature of Operations

 

The consolidated financial statements include accounts of Stock Yards Bancorp, Inc. (“Bancorp”) and its wholly owned subsidiary, Stock Yards Bank & Trust Company (“the Bank”). Significant intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to 2017 presentation. Bancorp has evaluated subsequent events for recognition or disclosure up to the date on which financial statements were issued and determined there were none.

 

In addition to traditional commercial and personal banking activities, Bancorp has a wealth management and trust department offering a wide range of investment management, retirement planning, trust and estate administration and financial planning services. Bancorp’s primary market area is Louisville, Kentucky and surrounding communities including southern Indiana.  Other markets include Indianapolis, Indiana and Cincinnati, Ohio.   

 

Basis of Financial Statement Presentation and Use of Estimates

 

The consolidated financial statements of Bancorp and its subsidiary have been prepared in conformity with U.S. generally accepted accounting principles (“US GAAP”) and conform to predominant practices within the banking industry. In preparing the 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 particularly susceptible to significant change relate to determination of the allowance for loan losses, and income tax assets, liabilities and expense.

 

Cash Equivalents and Cash Flows

 

Cash and cash equivalents include cash and due from banks, federal funds sold and interest bearing due from banks as segregated in the accompanying consolidated balance sheets. The following supplemental cash flow information addresses certain cash payments and noncash transactions for each of the years in the three-year period ended December 31, 2017 as follows:

 

(In thousands)

 

Years ended December 31,

 
   

2017

   

2016

   

2015

 

Cash payments:

                       

Income tax payments

  $ 15,838     $ 12,860     $ 13,831  

Cash paid for interest

    7,158       4,901       4,856  

Non-cash transactions:

                       

Transfers from loans to other real estate owned

  $     $ 1,916     $ 1,146  

 

 

Securities

 

All of Bancorp’s investments are available-for-sale. Securities available-for-sale include securities that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and prepayment risk changes. Securities available-for-sale are carried at fair value with unrealized gains or losses, net of tax effect, included in stockholders’ equity. Amortization of premiums and accretion of discounts are recorded using the interest method over the expected life of the security. Gains or losses on sales of securities are computed on a specific identification basis.  Declines in fair value of investment securities available-for-sale (with certain exceptions for debt securities noted below) that are deemed to be other-than-temporary are charged to earnings as a realized loss, and a new cost basis for the securities is established. In evaluating other-than-temporary impairment, management considers the length of time and extent to which fair value has been less than cost, financial condition and near-term prospects of the issuer, and the intent and ability of Bancorp to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Declines in fair value of debt securities below amortized cost are deemed to be other-than-temporary in circumstances where: (1) Bancorp has the intent to sell a security; (2) it is more likely than not that Bancorp will be required to sell the security before recovery of its amortized cost basis; or (3) Bancorp does not expect to recover the entire amortized cost basis of the security. If Bancorp intends to sell a security or if it is more likely than not that Bancorp will be required to sell the security before recovery, an other-than-temporary impairment write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value. If Bancorp does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income. Declines in value judged to be other-than-temporary are included in other non-interest expense in the consolidated statements of income. See Note 4 to Bancorp’s consolidated financial statements for additional information on investment securities.

 

 

Mortgage Loans Held for Sale

 

Mortgage loans held for sale are initially recorded at the lower of cost or market value on an individual loan basis. The sales prices of all of these loans are covered by investor commitments.

 

Loans

 

Loans are stated at the unpaid principal balance plus deferred loan origination fees, net of deferred loan costs. Loan fees, net of any costs, are deferred and amortized over the life of the related loan on an effective yield basis.  Interest income on loans is recorded on the accrual basis except for those loans in a non-accrual income status. Loans are placed in a non-accrual income 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 unless such loan is well secured and in the process of collection. When a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. No interest income is recorded while a loan is on non-accrual until principal has been fully collected. Non-accrual loans may be returned to accrual status once prospects for recovering both principal and accrued interest are reasonably assured. Loans are accounted for as troubled debt restructurings (TDRs) when Bancorp, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. If a loan is restructured at a market rate for a new loan with comparable risk, no principal forgiveness has been granted, and the loan is not impaired based on the terms specified by the restructuring agreement, it shall be removed from TDR status generally after six months of performance.

 

Loans are classified as impaired when it is probable Bancorp will be unable to collect interest and principal according to the terms of the loan agreement. These loans are measured based on the present value of future cash flows discounted at the loans’ effective interest rate or at the estimated fair value of the loans’ collateral, if applicable. Impaired loans consist of loans in non-accrual status and loans accounted for as troubled debt restructuring.

 

Allowance for Loan Losses

 

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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

Bancorp’s allowance methodology is driven by risk ratings, historical losses, and qualitative factors. Assumptions include many factors such as changes in borrowers’ financial condition or historical loss ratios related to certain loan portfolios which may or may not be indicative of future losses. 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. In the first quarter of 2017, Bancorp extended the historical period used to capture Bancorp’s historical loss ratios from 24 quarters to 28 quarters. This extension of the historical period used to capture Bancorp’s historical loss ratios was applied to all classes and segments of our loan portfolio. The expansion of the look-back period for the quantitative historical loss rate caused us to review the overall methodology for the qualitative factors to ensure we were appropriately capturing the risk not addressed in the quantitative historical loss rate. The effect of the extension of the look-back period to 28 quarters resulted in a net decrease to the calculated quantitative portion of the allowance, but this was more than offset by an increase to the qualitative factors. The net impact of the extension of the look-back period was an increase in the allowance during the first quarter of 2017 of approximately $474 thousand. The change in methodology was consistent with management’s judgment regarding the risk in the loan portfolio and consistent with internal analysis showing continued strong asset quality not only in the Company’s loan portfolio, but the Bank’s peer group as well, validating the continuation of the current economic cycle and thus the reasoning to extend the look-back period. Management believes the extension of the look-back period is appropriate to capture the impact of a full economic cycle and provides sufficient loss observations to develop a reliable estimate. Management will continue to evaluate the appropriateness of the look-back period based on the status of the economic cycle.

 

 

Bancorp’s allowance calculation includes allocations to loan portfolio segments for qualitative factors including, among other factors, local economic and business conditions, 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, trends in the value of underlying collateral for collateral-dependent loans, effect of other external factors such as the national economic and business trends, and the quality and depth of the loan review function. Bancorp utilizes 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.

 

Based on this quantitative and qualitative analysis, provisions (reductions) are made to the allowance for loan losses.  Such provisions (reductions) are reflected as a charge against (benefit to) current earnings in Bancorp’s consolidated statements of income.

 

The adequacy of the allowance for loan losses is monitored by executive management and reported quarterly to the Audit Committee of the Board of Directors. This committee has approved the overall methodology. Various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of Bancorp’s allowance for loan losses. Such agencies may require Bancorp to make additional provisions to the allowance based upon their judgments about information available to them at the time of their examinations.

 

The accounting policy related to the allowance for loan losses is applicable to the commercial banking segment of Bancorp. 

 

Acquired loans

 

Bancorp acquired loans in 2013 as part of the acquisition referenced in Note 3 to the consolidated financial statements. Acquired loans were initially recorded at their acquisition date fair values. Credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans were based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, prepayment risk, and liquidity risk at the time of acquisition.

 

Acquired loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that Bancorp would be unable to collect all contractually required payments were specifically identified and analyzed. The excess of cash flows expected at acquisition over the estimated fair value is referred to as accretable discount and is recognized as interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as non-accretable discount. Subsequent decreases to the expected cash flows require Bancorp to evaluate the need for an allowance for loan losses on these loans. Charge-offs of the principal amount on credit-impaired acquired loans would be first applied to non-accretable discount. Periodically the loans are re-evaluated to determine if subsequent credit deterioration has occurred or if cash flow expectations have improved. Based upon the evaluation loans may be reclassified between the accretable and non-accretable categories.

 

For acquired loans that are not deemed impaired at acquisition, the methods used to estimate the required allowance for loan losses for acquired loans is the same for originated loans except that any initial fair value adjustment is taken into consideration when calculating any required allowance.

 

Premises and Equipment

 

Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of premises and equipment is computed using straight-line methods over the estimated useful lives of the assets ranging from 3 to 40 years. Leasehold improvements are amortized on the straight-line method over the terms of the related leases, including expected renewals, or over the useful lives of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

 

 

Other Assets

 

Bank-owned life insurance (“BOLI”) is carried at net realizable value, which considers any applicable surrender charges. Also, Bancorp maintains life insurance policies in conjunction with its non-qualified defined benefit and non-qualified compensation plans.

 

Other real estate is carried at the lower of cost or estimated fair value minus estimated selling costs. Any write downs to fair value at the date of acquisition are charged to the allowance for loan losses. In certain situations, improvements to prepare assets for sale are capitalized if those costs increase the estimated fair value of the asset. Expenses incurred in maintaining assets, write downs to reflect subsequent declines in value, and realized gains or losses are reflected in operations and are included in non-interest income and expense.

 

Mortgage servicing rights (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 the carrying value to fair value.

 

Goodwill is measured and evaluated at least annually for impairment. No impairment charges have been deemed necessary or recorded to date, as the fair value is substantially in excess of the carrying value.

 

Securities Sold Under Agreements to Repurchase

 

Bancorp enters into sales of securities under agreement to repurchase. Such repurchase agreements are considered financing agreements, and mature within one business day from the transaction date. Accordingly, the obligation to repurchase assets sold is reflected as a liability in the consolidated balance sheets of Bancorp.  Repurchase agreements are collateralized by debt securities which are owned and under the control of Bancorp. These agreements are used in conjunction with collateralized corporate customer cash management accounts.

 

Income Taxes

 

Bancorp accounts for income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for temporary differences between the financial reporting and the tax bases of Bancorp’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of income in the period that includes the enactment date. These balances were previously recorded using a 35% Federal marginal tax rate. The Tax Cuts and Jobs Act was enacted on December 22, 2017 requiring an immediate recalculation of Bancorp’s net deferred tax asset. The remeasurement was made using the 21% Federal marginal tax rate which became effective January 1, 2018, and resulted in $5.9 million of additional income tax expense in the fourth quarter of 2017.

 

Bancorp periodically invests in certain partnerships with customers that yield historic tax credits, which are accounted for using the flow through method, which approximates the equity method, and/or low-income housing tax credits as well as tax deductible losses, which are accounted for using the effective yield method for older transactions or proportional amortization method for more recent transactions. The tax benefit of these investments exceeds amortization/impairment expense associated with them, resulting in a positive impact on net income.

 

Realization of deferred tax assets associated with the investment in partnerships is dependent upon generating sufficient taxable capital gain income prior to their expiration. A valuation allowance to reflect management’s estimate of the temporary deductible differences that may expire prior to their utilization has been recorded at year-end 2017 and 2016.

 

To the extent unrecognized income tax benefits become realized or the related accrued interest is no longer necessary, Bancorp’s provision for income taxes would be favorably impacted. As of December 31, 2017 and 2016, the gross amount of unrecognized tax benefits was $40 thousand, details of which are included in Note 8 to these consolidated financials. If recognized, the 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 tax year 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 the addition or elimination of uncertain tax positions. Stock Yards Bancorp, Inc. and its wholly-owned subsidiary file consolidated income tax returns in applicable jurisdictions.

 

Bancorp’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of December 31, 2017 and 2016, the amount accrued for the potential payment of interest and penalties was immaterial.

 

 

Net Income Per Share

 

Basic net income per common share is determined by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is determined by dividing net income by the weighted average number of shares of common stock outstanding plus the weighted average number of shares that would be issued upon exercise of dilutive options and stock appreciation rights, assuming proceeds are used to repurchase shares under the treasury stock method.

 

Comprehensive Income

 

Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  For Bancorp, this includes net income, changes in unrealized gains and losses on available-for-sale investment securities and cash flow hedging instruments, net of reclassification adjustments and taxes, and minimum pension liability adjustments, net of taxes.

 

Segment Information

 

Bancorp provides a broad range of financial services to individuals, corporations and others through its 37 full service banking locations as of December 31, 2017.  These services include loan and deposit services, cash management services, securities brokerage activities, mortgage origination and wealth management and trust activities.  Bancorp’s operations are considered by management to be aggregated in two reportable operating segments: commercial banking and wealth management and trust.

 

Stock-Based Compensation

 

For all awards, stock-based compensation expense is recognized over the period in which it is earned based on the grant-date fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for estimated forfeitures. US GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Derivatives

 

Bancorp uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. US GAAP establishes accounting and reporting standards for derivative instruments and hedging activities. As required by US GAAP, Bancorp’s interest rate swaps are recognized as other assets and liabilities in the consolidated balance sheet at fair value. Accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. To qualify for hedge accounting, Bancorp must comply with detailed rules and documentation requirements at inception of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of each hedging relationship. Hedge ineffectiveness, if any, is measured periodically throughout the life of the hedging relationship.

 

For derivatives designated as cash flow hedges, the effective portion of changes in fair value of the derivative is initially reported in other comprehensive income and subsequently reclassified to interest income or expense when the hedged transaction affects earnings, while the ineffective portion of changes in fair value of derivative, if any, is recognized immediately in other noninterest income. Bancorp assesses effectiveness of each hedging relationship by comparing the cumulative changes in cash flows of the derivative hedging instrument with the cumulative changes in cash flows of the designated hedged item or transaction. No component of the change in the fair value of the hedging instrument is excluded from the assessment of hedge effectiveness.

 

Periodically, Bancorp enters into an interest rate swap transaction with a borrower, who desires to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. Because of matching terms of offsetting contracts and the collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings. Because these derivative instruments have not been designated as hedging instruments, the derivative instruments 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 noninterest income.

 

 

Bancorp had no fair value hedging relationships at December 31, 2017 or 2016. Bancorp does not use derivatives for trading or speculative purposes. See Note 22 to the consolidated financial statements for more information regarding derivatives.

 

 

(2) Restrictions on Cash and Due from Banks

 

Bancorp is required to maintain an average reserve balance in cash or with the Federal Reserve Bank relating to customer deposits. The amount of those required reserve balances was approximately $8,071,000 and $6,338,000 at December 31, 2017 and 2016, respectively, and is included in federal funds sold and interest bearing due from banks in the consolidated balance sheet.

 

 

(3) Acquisition

 

In 2013, Bancorp completed the acquisition of 100% of the outstanding shares of THE BANCorp, Inc. (“Oldham”), parent company of THE BANK – Oldham County, Inc. The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration transferred were recorded at estimated fair value on the acquisition date. Bancorp recorded a core deposit intangible of $2.5 million which is being amortized using methods that anticipate the life of the underlying deposits to which the intangible is attributable. At December 31, 2017, the unamortized core deposit intangible was $1.2 million. See Note 7 for details on the core deposit intangible.

 

 

(4) Securities

 

All of Bancorp’s securities are available-for-sale. The amortized cost, unrealized gains and losses, and fair value of these securities follow:

 

(In thousands)

 

Amortized

   

Unrealized

   

Fair

 

December 31, 2017

  cost    

Gains

   

Losses

    value  
                                 

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

  $ 149,996     $     $ (12 )   $ 149,984  

Government sponsored enterprise obligations

    214,852       474       (1,482 )     213,844  

Mortgage-backed securities - government agencies

    163,571       383       (2,447 )     161,507  

Obligations of states and political subdivisions

    48,987       365       (163 )     49,189  
                                 

Total securities available-for-sale

  $ 577,406     $ 1,222     $ (4,104 )   $ 574,524  

 

(In thousands)

 

Amortized

   

Unrealized

   

Fair

 

December 31, 2016

  cost    

Gains

   

Losses

    value  

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

  $ 74,997     $ 1     $     $ 74,998  

Government sponsored enterprise obligations

    268,784       800       (1,494 )     268,090  

Mortgage-backed securities - government agencies

    170,344       735       (2,236 )     168,843  

Obligations of states and political subdivisions

    57,158       682       (396 )     57,444  

Corporate equity securities

    653       46             699  
                                 

Total securities available-for-sale

  $ 571,936     $ 2,264     $ (4,126 )   $ 570,074  

 

Corporate equity securities, included in the available-for-sale portfolio at December 31, 2016, consisted of common stock in a publicly-traded small business investment company. Bancorp sold this security in 2017 for a loss of $263 thousand. One security was called prior to maturity in the third quarter of 2017 resulting in the receipt of a $31 thousand pre-payment penalty. The penalty income was classified as a realized gain on the call of available for sale securities. In 2016, Bancorp did not sell any securities. In 2015 Bancorp sold securities with total fair market value of $5.9 million, generating no gain or loss. These securities consisted of agency and mortgage-backed securities with small remaining balances. 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.

 

 

A summary of the securities available-for-sale by maturity as of December 31, 2017 is shown below.

 

(In thousands)            

Securities available-for-sale

 

Amortized cost

   

Fair value

 
                 

Due within 1 year

  $ 187,792     $ 187,775  

Due after 1 but within 5 years

    97,119       96,441  

Due after 5 but within 10 years

    13,807       13,687  

Due after 10 years

    115,117       115,114  

Mortgage-backed securities - government agencies

    163,571       161,507  
                 

Total securities available for sale

  $ 577,406     $ 574,524  

 

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties. 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 $384.7 million and $380.4 million were pledged at December 31, 2017 and 2016, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits, and uninsured cash balances for wealth management and trust accounts.

 

At December 31, 2017 and 2016, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

Securities with unrealized losses 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

 

December 31, 2017

 

value

   

losses

   

value

   

losses

   

value

   

losses

 
                                                 

U.S. Treasury and U.S. obligations

  $ 149,984     $ (12 )   $     $     $ 149,984     $ (12 )

Government sponsored enterprise obligations

    95,139       (586 )     49,870       (896 )     145,009       (1,482 )

Mortgage-backed securities - government agencies

    69,290       (440 )     67,047       (2,007 )     136,337       (2,447 )

Obligations of states and political subdivisions

    22,366       (107 )     5,064       (56 )     27,430       (163 )
                                                 

Total temporarily impaired securities

  $ 336,779     $ (1,145 )   $ 121,981     $ (2,959 )   $ 458,760     $ (4,104 )
                                                 

December 31, 2016

                                               

Government sponsored enterprise obligations

  $ 154,951     $ (1,344 )   $ 3,485     $ (150 )   $ 158,436     $ (1,494 )

Mortgage-backed securities - government agencies

    115,374       (1,873 )     9,914       (363 )     125,288       (2,236 )

Obligations of states and political subdivisions

    29,893       (380 )     1,478       (16 )     31,371       (396 )
                                                 

Total temporarily impaired securities

  $ 300,218     $ (3,597 )   $ 14,877     $ (529 )   $ 315,095     $ (4,126 )

 

The applicable dates for determining when securities are in an unrealized loss position are December 31, 2017 and 2016. 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 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. 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 December 31, 2017.

 

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

 

 

(5) Loans

 

The composition of loans by primary loan portfolio class follows:

 

   

December 31,

 

(In thousands)

 

2017

   

2016

 

Commercial and industrial

  $ 779,014     $ 736,841  

Construction and development, excluding undeveloped land

    195,912       192,348  

Undeveloped land

    18,988       21,496  
                 

Real estate mortgage:

               

Commercial investment

    594,902       538,886  

Owner occupied commercial

    398,685       408,292  

1-4 family residential

    262,110       249,498  

Home equity - first lien

    57,110       55,325  

Home equity - junior lien

    63,981       67,519  
                 

Subtotal: Real estate mortgage

    1,376,788       1,319,520  
                 

Consumer

    38,868       35,170  
                 

Total loans

  $ 2,409,570     $ 2,305,375  

 

Fees and costs of originating loans are deferred at origination and amortized over the life of the loan. Loan balances reported herein include deferred loan origination fees, net of deferred loan costs. At December 31, 2017 and 2016, net deferred loan origination costs exceeded deferred loan origination fees, resulting in net negative balances of $600 thousand and $459 thousand, respectively. The higher net balance at December 31, 2017, as compared to the same point in 2016, is primarily due to a reduction in origination fees attributed to lower loan volume, as well as increased costs arising from increases in salaries and benefits expenses.

 

Bancorp’s credit exposure is diversified with secured and unsecured loans to individuals and businesses. No specific industry concentration exceeds ten percent of loans. While Bancorp has a diversified loan portfolio, a customer’s ability to honor contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within Bancorp’s current market areas, which encompass the Louisville, Indianapolis and Cincinnati metropolitan markets.

 

Bancorp occasionally enters into loan participation agreements with other banks in the ordinary course of business 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. The participated portions of these loans are included in the commercial and industrial loan (C&I) totals above, and a corresponding liability is reflected in other liabilities. At December 31, 2017 and 2016, the total participated portions of loans of this nature were $18.2 million and $15.8 million respectively.

 

 

Loans to directors and their associates, including loans to companies for which directors are principal owners and executive officers are presented in the following table.

 

(In thousands)

 

Year ended December 31,

 

Loans to directors and executive officers

 

2017

   

2016

 

Balance as of January 1

  $ 969     $ 866  

New loans

           

Repayment of term loans

    (175 )     (340 )

Changes in balances of revolving lines of credit

    (165 )     443  

Balance as of December 31

  $ 629     $ 969  

 

None of the loans to directors and executive officers were past due or considered potential problem loans during 2017 or 2016.

 

The following tables present balances in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of December 31, 2017, 2016 and 2015.

 

(In thousands)

 

Type of loan

         
           

Construction

                                 
           

and development

                                 
   

Commercial

   

excluding

                                 
   

and

   

undeveloped

   

Undeveloped

   

Real estate

                 

December 31, 2017

 

industrial

   

land

   

land

   

mortgage

   

Consumer

   

Total

 
                                                 

Loans

  $ 779,014     $ 195,912     $ 18,988     $ 1,376,788     $ 38,868     $ 2,409,570  
                                                 

Loans individually evaluated for impairment

  $ 1,176     $ 664     $ 474     $ 5,066     $     $ 7,380  
                                                 

Loans collectively evaluated for impairment

  $ 777,838     $ 195,248     $ 18,514     $ 1,371,246     $ 38,868     $ 2,401,714  
                                                 

Loans acquired with deteriorated credit quality

  $     $     $     $ 476     $     $ 476  

 

           

Construction

                                 
           

and development

                                 
   

Commercial

   

excluding

                                 
   

and

   

undeveloped

   

Undeveloped

   

Real estate

                 
   

industrial

   

land

   

land

   

mortgage

   

Consumer

   

Total

 

Allowance for loan losses

                                               

At December 31, 2016

  $ 10,483     $ 1,923     $ 684     $ 10,573     $ 344     $ 24,007  

Provision (credit)

    2,373       (199 )     (163 )     383       156       2,550  

Charge-offs

    (1,782 )                 (98 )     (549 )     (2,429 )

Recoveries

    202                   154       401       757  

At December 31, 2017

  $ 11,276     $ 1,724     $ 521     $ 11,012     $ 352     $ 24,885  
                                                 

Allowance for loans individually evaluated for impairment

  $ 34     $     $     $ 14     $     $ 48  
                                                 

Allowance for loans collectively evaluated for impairment

  $ 11,242     $ 1,724     $ 521     $ 10,998     $ 352     $ 24,837  
                                                 

Allowance for loans acquired with deteriorated credit quality

  $     $     $     $     $     $  

 

 

(In thousands)

 

Type of loan

         
           

Construction

                                 
           

and development

                                 
   

Commercial

   

excluding

                                 
   

and

   

undeveloped

   

Undeveloped

   

Real estate

                 

December 31, 2016

 

industrial

   

land

   

land

   

mortgage

   

Consumer

   

Total

 

Loans

  $ 736,841     $ 192,348     $ 21,496     $ 1,319,520     $ 35,170     $ 2,305,375  
                                                 

Loans individually evaluated for impairment

  $ 2,682     $ 538     $ 474     $ 2,516     $ 59     $ 6,269  
                                                 

Loans collectively evaluated for impairment

  $ 734,139     $ 191,810     $ 21,022     $ 1,316,400     $ 35,111     $ 2,298,482  
                                                 

Loans acquired with deteriorated credit quality

  $ 20     $     $     $ 604     $     $ 624  

 

           

Construction

                                 
           

and development

                                 
   

Commercial

   

excluding

                                 
   

and

   

undeveloped

   

Undeveloped

   

Real estate

                 
   

industrial

   

land

   

land

   

mortgage

   

Consumer

   

Total

 

Allowance for loan losses

                                               

At December 31, 2015

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

Provision (credit)

    2,775       275       (130 )     (68 )     148       3,000  

Charge-offs

    (1,216 )     (133 )           (576 )     (568 )     (2,493 )

Recoveries

    279       21             342       417       1,059  

At December 31, 2016

  $ 10,483     $ 1,923     $ 684     $ 10,573     $ 344     $ 24,007  
                                                 

Allowance for loans individually evaluated for impairment

  $ 1,207     $     $ 1     $     $ 59     $ 1,267  
                                                 

Allowance for loans collectively evaluated for impairment

  $ 9,276     $ 1,923     $ 683     $ 10,573     $ 285     $ 22,740  
                                                 

Allowance for loans acquired with deteriorated credit quality

  $     $     $     $     $     $  

 

 

(In thousands)

 

Type of loan

         
           

Construction

                                 
           

and development

                                 
   

Commercial

   

excluding

                                 
   

and

   

undeveloped

   

Undeveloped

   

Real estate

                 

December 31, 2015

 

industrial

   

land

   

land

   

mortgage

   

Consumer

   

Total

 

Loans

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

Loans individually evaluated for impairment

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

Loans collectively evaluated for impairment

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

Loans acquired with deteriorated credit quality

  $ 3     $ 322     $     $ 497     $     $ 822  

 

           

Construction

                                 
           

and development

                                 
   

Commercial

   

excluding

                                 
   

and

   

undeveloped

   

Undeveloped

   

Real estate

                 
   

industrial

   

land

   

land

   

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 individually evaluated for impairment

  $ 268     $     $     $ 208     $ 68     $ 544  
                                                 

Allowance for loans collectively evaluated for impairment

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

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 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 a negative effect on 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.

 

 

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 financial strength of the borrower, but can also be affected by market conditions and time to sell lots at an adequate price. Credit risk is also affected by availability of permanent financing, including to the end user, to the extent such permanent financing is not being provided by Bancorp.

 

 

 

Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential real estate, owner-occupied real estate used for business purposes, and income-producing investment properties. For owner-occupied residential and owner-occupied commercial real estate, repayment is dependent on financial strength of the borrower. For income-producing investment properties, repayment is dependent on financial strength of both the tenants and 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 reflected in increased vacancy rates, which in turn, will have an effect on credit quality and property values. Overall health of the economy, including unemployment rates and real estate prices, has an effect on credit quality in this loan category.

 

 

Consumer: Loans in this category may be either secured or unsecured and repayment is dependent on credit quality of the individual borrower and, if applicable, adequacy of collateral securing the loan. Therefore, overall health of the economy, including unemployment rates, as well as home and securities prices, will have a significant effect on credit quality in this loan category.

 

Bancorp had loans that were acquired in a 2013 acquisition, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. 15 of those 19 loans originally identified as such have subsequently paid off with full collection of all principal and interest owed. The remaining four loans were re-evaluated in 2017 and based upon performance to date and the expectation that all cash flow will be consistent with the contractual terms, the remaining loans were re-classified into the accretable category with the remaining credit discount to be amortized into income over the remaining lives of the loans. The carrying amount of those loans is included in the balance sheet amounts for total loans at December 31, 2017 and 2016. Changes in the interest component of the fair value adjustment for acquired impaired loans for the years ended December 31, 2016 and 2017 are shown in the following table:

 

(In thousands)

 

Accretable

discount

   

Non-

accretable

discount

 

Balance at December 31, 2015

  $ 3     $ 189  

Accretion

    (3 )     (41 )

Reclassifications from (to) non-accretable difference

           

Disposals

           

Balance at December 31, 2016

          148  
                 

Accretion

          (43 )

Reclassifications from (to) non-accretable difference

    105       (105 )

Disposals

               

Balance at December 31, 2017

  $ 105     $  

 

Accretion in the non-accretable discount column represents accretion recorded upon payoff of loans.

 

The following tables present loans individually evaluated for impairment as of December 31, 2017 and 2016.

 

 

(In thousands)

         

Unpaid

           

Average

 
   

Recorded

   

principal

   

Related

   

recorded

 

December 31, 2017

 

investment

   

balance

   

allowance

   

investment

 
                                 

Loans with no related allowance recorded:

                               

Commercial and industrial

  $ 1,142     $ 2,202     $     $ 411  

Construction and development, excluding undeveloped land

    664       834             559  

Undeveloped land

    474       506             425  
                                 

Real estate mortgage

                               

Commercial investment

    52       53             110  

Owner occupied commercial

    3,332       3,789             1,678  

1-4 family residential

    1,637       1,657             935  

Home equity - first lien

                       

Home equity - junior lien

    31       31             186  

Subtotal: Real estate mortgage

    5,052       5,530             2,909  
                                 

Consumer

                       

Subtotal

  $ 7,332     $ 9,072     $     $ 4,304  
                                 

Loans with an allowance recorded:

                               

Commercial and industrial

  $ 34     $ 34     $ 34     $ 1,882  

Construction and development, excluding undeveloped land

                             

Undeveloped land

                          48  
                                 

Real estate mortgage

                               

Commercial investment

                       

Owner occupied commercial

                       

1-4 family residential

    14       14       14       5  

Home equity - first lien

                       

Home equity - junior lien

                       

Subtotal: Real estate mortgage

    14       14       14       5  
                                 

Consumer

                      46  

Subtotal

  $ 48     $ 48     $ 48     $ 1,981  
                                 

Total:

                               

Commercial and industrial

  $ 1,176     $ 2,236     $ 34     $ 2,293  

Construction and development, excluding undeveloped land

    664       834             559  

Undeveloped land

    474       506             473  
                                 

Real estate mortgage

                               

Commercial investment

    52       53             110  

Owner occupied commercial

    3,332       3,789             1,678  

1-4 family residential

    1,651       1,671       14       940  

Home equity - first lien

                       

Home equity - junior lien

    31       31             186  

Subtotal: Real estate mortgage

    5,066       5,544       14       2,914  
                                 

Consumer

                      46  

Total

  $ 7,380     $ 9,120     $ 48     $ 6,285  

 

 

(In thousands)

         

Unpaid

           

Average

 
   

Recorded

   

principal

   

Related

   

recorded

 

December 31, 2016

 

investment

   

balance

   

allowance

   

investment

 
                                 

Loans with no related allowance recorded:

                               

Commercial and industrial

  $ 322     $ 465     $     $ 1,947  

Construction and development, excluding undeveloped land

    538       708             108  

Undeveloped land

    233       265             76  
                                 

Real estate mortgage

                               

Commercial investment

    107       107             193  

Owner occupied commercial

    1,042       1,479             1,356  

1-4 family residential

    984       985             980  

Home equity - first lien

                      3  

Home equity - junior lien

    383       383             315  

Subtotal: Real estate mortgage

    2,516       2,954             2,847  
                                 

Consumer

                      18  

Subtotal

  $ 3,609     $ 4,392     $     $ 4,996  
                                 

Loans with an allowance recorded:

                               

Commercial and industrial

  $ 2,360     $ 2,835     $ 1,207     $ 1,619  

Construction and development, excluding undeveloped land

                      182  

Undeveloped land

    241       241       1       149  
                                 

Real estate mortgage

                               

Commercial investment

                       

Owner occupied commercial

                      554  

1-4 family residential

                       

Home equity - first lien

                       

Home equity - junior lien

                       

Subtotal: Real estate mortgage

                      554  
                                 

Consumer

    59       59       59       63  

Subtotal

  $ 2,660     $ 3,135     $ 1,267     $ 2,567  
                                 

Total:

                               

Commercial and industrial

  $ 2,682     $ 3,300     $ 1,207     $ 3,566  

Construction and development, excluding undeveloped land

    538       708             290  

Undeveloped land

    474       506       1       225  
                                 

Real estate mortgage

                       

Commercial investment

    107       107             193  

Owner occupied commercial

    1,042       1,479             1,910  

1-4 family residential

    984       985             980  

Home equity - first lien

                      3  

Home equity - junior lien

    383       383             315  

Subtotal: Real estate mortgage

    2,516       2,954             3,401  
                                 

Consumer

    59       59       59       81  

Total

  $ 6,269     $ 7,527     $ 1,267     $ 7,563  

 

 

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

 

Interest paid on impaired or non-accrual loans that was used to reduce principal was $338 thousand, $307 thousand and $521 thousand in 2017, 2016 and 2015, respectively.  Interest income that would have been recorded if non-accrual loans were on a current basis in accordance with their original terms was $159 thousand, $149 thousand and $465 thousand in 2017, 2016 and 2015, respectively.

 

Impaired loans include non-accrual loans and loans accounted for as troubled debt restructurings (TDRs), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over 90 days past due and still accruing interest.  Loans past due more than 90 days or more and still accruing interest amounted to $2 thousand and $438 thousand at December 31, 2017 and 2016, respectively.

 

The following table presents the recorded investment in non-accrual loans as of December 31, 2017 and 2016.

 

   

December 31,

 

(In thousands)

 

2017

   

2016

 
                 

Commercial and industrial

  $ 321     $ 1,767  

Construction and development, excluding undeveloped land

    664       538  

Undeveloped land

    474       474  
                 

Real estate mortgage

               

Commercial investment

    52       107  

Owner occupied commercial

    3,332       1,042  

1-4 family residential

    1,637       984  

Home equity - first lien

           

Home equity - junior lien

    31       383  

Subtotal: Real estate mortgage

    5,052       2,516  
                 

Consumer

           
                 

Total

  $ 6,511     $ 5,295  

 

In the course of working with borrowers, Bancorp may elect to restructure the contractual terms of certain loans. A troubled debt restructuring (TDRs) occurs when, for economic or legal reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider. Bancorp had $869 thousand and $974 thousand of accruing loans classified as TDRs, at December 31, 2017 and 2016, respectively. Two loans were designated as TDRs during 2017. A commercial loan with a pre- and post-modification recorded investment of $39 thousand was given a payment concession so as to enable the borrower to fulfill the loan agreement. A 1-4 family residential loan with a pre-modification recorded investment of $12 thousand was renewed with interest capitalized resulting in a post-modification recorded investment of $14 thousand. Specific reserves for the full amounts of both loans were established. Two other commercial loans were considered TDRs as of December 31, 2017. Loans reported in 2016 as TDRs consisted of two commercial loans, to a single borrower, and one consumer loan. Bancorp did not identify and report any additional loans as TDRs during the years ended December 31, 2016 and 2015. No loans classified as TDRs in 2015, 2016 or 2017 subsequently defaulted within 12 months.

 

Loans accounted for as TDRs are individually evaluated for impairment. At December 31, 2017 loans reported as TDRs had a total allowance allocation of $48 thousand, compared to $207 thousand at December 31, 2016. At December 31, 2017 and 2016, Bancorp had no outstanding commitments to lend additional funds to borrowers whose loans have been classified as TDRs. As of December 31, 2017 formal foreclosure proceedings were in process on two loans with a total recorded investment of $62 thousand.

 

 

The following table presents the aging of the recorded investment in loans as of December 31, 2017 and 2016.

 

                                                   

Recorded

 

(In thousands)

                         

90 or more

                   

investment

 
                           

days past

                   

> 90 days

 
           

30-59 days

   

60-89 days

   

due (includes)

   

Total

   

Total

   

and

 

December 31, 2017

 

Current

   

past due

   

past due

   

non-accrual)

   

past due

   

loans

   

accruing

 
                                                         

Commercial and industrial

  $ 776,118     $ 2,571     $ 4     $ 321     $ 2,896     $ 779,014     $  

Construction and development, excluding undeveloped land

    194,936             312       664       976       195,912        

Undeveloped land

    18,514                   474       474       18,988        
                                                         

Real estate mortgage

                                                       

Commercial investment

    594,242       608             52       660       594,902        

Owner occupied Commercial

    394,623       455       275       3,332       4,062       398,685        

1-4 family residential

    259,994       172       307       1,637       2,116       262,110        

Home equity - first lien

    56,938       172                   172       57,110        

Home equity - junior lien

    63,667       87       194       33       314       63,981       2  

Subtotal: Real estate mortgage

    1,369,464       1,494       776       5,054       7,324       1,376,788       2  
                                                         

Consumer

    38,699       86       83             169       38,868        
                                                         

Total

  $ 2,397,731     $ 4,151     $ 1,175     $ 6,513     $ 11,839     $ 2,409,570     $ 2  
                                                         

December 31, 2016

                                                       

Commercial and industrial

  $ 734,682     $ 84     $ 290     $ 1,785     $ 2,159     $ 736,841     $ 18  

Construction and development, excluding undeveloped land

    191,810                   538       538       192,348        

Undeveloped land

    21,022                   474       474       21,496        
                                                         

Real estate mortgage

                                                       

Commercial investment

    537,998       631       64       193       888       538,886       86  

Owner occupied commercial

    406,726       342             1,224       1,566       408,292       182  

1-4 family residential

    246,730       1,174       576       1,018       2,768       249,498       34  

Home equity - first lien

    55,027       231       21       46       298       55,325       46  

Home equity - junior lien

    66,911       99       126       383       608       67,519       72  

Subtotal: Real estate mortgage

    1,313,392       2,477       787       2,864       6,128       1,319,520       420  
                                                         

Consumer

    34,965       28       105       72       205       35,170        
                                                         

Total

  $ 2,295,871     $ 2,589     $ 1,182     $ 5,733     $ 9,504     $ 2,305,375     $ 438  

 

 

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 include 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 a potential weakness that deserves 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 well-defined weaknesses that may 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 deteriorated beyond the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as troubled debt restructurings.

 

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

As of December 31, 2017 and 2016, internally assigned risk grades of loans by category were as follows:

 

(In thousands)

                         

Substandard

           

Total

 

December 31, 2017

 

Pass

   

OAEM

   

Substandard

   

non-performing

   

Doubtful

   

loans

 
                                                 

Commercial and industrial

  $ 751,628     $ 12,032     $ 14,178     $ 1,176     $     $ 779,014  

Construction and development, excluding undeveloped land

    195,248                   664             195,912  

Undeveloped land

    18,484             30       474             18,988  
                                                 

Real estate mortgage

                                               

Commercial investment

    591,232       3,599       19       52             594,902  

Owner occupied commercial

    383,455       8,683       3,215       3,332             398,685  

1-4 family residential

    256,968       2,477       1,014       1,651             262,110  

Home equity - first lien

    57,110                               57,110  

Home equity - junior lien

    63,471       247       230       33             63,981  

Subtotal: Real estate mortgage

    1,352,236       15,006       4,478       5,068             1,376,788  
                                                 

Consumer

    38,747       117       4                   38,868  
                                                 

Total

  $ 2,356,343     $ 27,155     $ 18,690     $ 7,382     $     $ 2,409,570  
                                                 

December 31, 2016

                                               

Commercial and industrial

  $ 714,025     $ 14,266     $ 5,850     $ 2,700     $     $ 736,841  

Construction and development, excluding undeveloped land

    191,455             355       538             192,348  

Undeveloped land

    21,022                   474             21,496  
                                                 

Real estate mortgage

                                               

Commercial investment

    538,688             5       193             538,886  

Owner occupied Commercial

    396,997       7,960       2,111       1,224             408,292  

1-4 family residential

    247,888             592       1,018             249,498  

Home equity - first lien

    55,279                   46             55,325  

Home equity - junior lien

    66,710             426       383             67,519  

Subtotal: Real estate mortgage

    1,305,562       7,960       3,134       2,864             1,319,520  
                                                 

Consumer

    35,039                   131             35,170  
                                                 

Total

  $ 2,267,103     $ 22,226     $ 9,339     $ 6,707     $     $ 2,305,375  

 

 

 

(6) Premises and Equipment

 

A summary of premises and equipment follows:

 

   

December 31,

 

(In thousands)

 

2017

   

2016

 
                 

Land

  $ 7,118     $ 7,118  

Buildings and improvements

    47,924       47,398  

Furniture and equipment

    18,511       20,758  

Construction in progress

    1,496       51  
                 
      75,049       75,325  
                 

Accumulated depreciation and amortization

    (33,394 )     (32,941 )
                 

Total premises and equipment

  $ 41,655     $ 42,384  

 

 

Depreciation expense related to premises and equipment was $3.5 million in 2017, $3.2 million in 2016 and $3.0 million in 2015.

 

 

(7) Other Assets

 

A summary of major components of other assets follows:

 

   

December 31,

 

(In thousands)

 

2017

   

2016

 
                 

Cash surrender value of life insurance other than BOLI

  $ 16,213     $ 13,543  

Net deferred tax asset

    9,206       12,896  

Investments in tax credit related ventures

    3,216       5,244  

Other real estate owned and other foreclosed property

    2,640       5,033  

Other short term receivables

    2,215       2,100  

Core deposit intangible

    1,225       1,405  

Mortgage servicing rights (MSRs)

    875       921  

Goodwill

    682       682  

Other

    12,234       7,553  
                 

Total

  $ 48,506     $ 49,377  

 

 

Bancorp maintains life insurance policies other than BOLI in conjunction with its non-qualified defined benefit retirement and non-qualified compensation plans.

 

Mortgage servicing rights (MSRs) are initially recognized at fair value when mortgage loans are sold and 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 December 31, 2017 and 2016 were $3.1 million and $2.7 million, respectively. Total outstanding principal balances of loans serviced by Bancorp were $344.5 million and $372.2 million at December 31, 2017, and 2016 respectively.

 

 

Changes in the net carrying amount of MSRs are shown in the following table.

 

(In thousands)

 

2017

   

2016

 
                 

Balance at January 1

  $ 921     $ 1,018  

Originations

    225       177  

Amortization

    (271 )     (274 )
                 

Balance at December 31

  $ 875     $ 921  

 

 

 

(8) Income Taxes

 

Components of income tax expense (benefit) from operations were as follows:

 

(In thousands)

 

2017

   

2016

   

2015

 
                         

Current tax expense

                       

Federal

  $ 12,622     $ 14,270     $ 15,478  

State

    546       698       608  

Total current tax expense

    13,168       14,968       16,086  
                         

Deferred tax expense (benefit)

                       

Federal

    3,783       192       748  

State

    (4 )     36       54  

Total deferred tax expense (benefit)

    3,779       228       802  

Change in valuation allowance

    192       48       45  

Total income tax expense

  $ 17,139     $ 15,244     $ 16,933  

 

 

Components of income tax (benefit) expense recorded directly to stockholders’ equity were as follows:

 

(In thousands)

 

2017

   

2016

   

2015

 

Unrealized (loss) gain on securities available for sale

  $ (531 )   $ (1,171 )   $ (839 )

Reclassification adjustment for securities losses realized in income

    81              

Reclassification adjustment for securities impairment realized in income

                36  

Unrealized (loss) gain on derivatives

    112       24       (41 )

Minimum pension liability adjustment

    (9 )     1       61  

Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes

          (1,705 )     (673 )

Total income tax (benefit) expense recorded directly to stockholders’ equity

  $ (347 )   $ (2,851 )   $ (1,456 )

 

 

An analysis of the difference between the statutory and effective tax rates from operations follows:

 

   

Year ended December 31,

 
   

2017

   

2016

   

2015

 

U.S. federal income tax rate

    35.0

%

    35.0

%

    35.0

%

Tax credits

    (14.4 )     (9.7 )     (2.5 )

Net deferred tax asset remeasurement

    10.8              

Amortization/impairment of investments in tax credit partnerships

    3.4       2.8       0.4  

Stock based compensation

    (2.6 )            

Cash surrender value of life insurance

    (1.5 )     (0.9 )     (0.8 )

Tax exempt interest income

    (1.2 )     (1.2 )     (1.4 )

Other, net

    0.9       0.3       (0.2 )

State income taxes

    0.7       0.8       0.8  

Effective tax rate

    31.1

%

    27.1

%

    31.3

%

 

 

The increase in effective tax rate from 2016 to 2017 was the result of the one-time, non-cash charge resulting from the remeasurement of deferred taxes as a result of tax reform somewhat offset by higher utilization of tax credits during the year. The Tax Cuts and Jobs Act was enacted in December 2017 requiring an immediate recalculation of Bancorp’s net deferred tax asset which resulted in $5.9 million of additional income tax expense in the fourth quarter of 2017. The effective tax rate in 2017 was also reduced by the adoption of ASU 2016-09 “Compensation – Stock Compensation Improvements to Employee Share-Based Payment Accounting”. The new standard requires excess tax benefits and deficiencies related to share-based payment awards to be reflected in the statement of operations as a component of the provision for income taxes. For 2017 Bancorp recorded a benefit of $1.5 million for such excess benefits against the provision for income tax expense. Prior to adoption of ASU 2016-09, these tax benefits were recorded directly to additional paid-in capital. Tax benefits recorded to capital for 2016 and 2015 were $1.7 million and $673 thousand, respectively.

 

The decrease in the effective tax rate from 2015 to 2016 was largely the result of higher utilization of tax credits in 2016. Bancorp invests in certain partnerships that yield federal income tax credits. The tax benefit of these investments exceeds the amortization and impairment expense associated with them, resulting in a positive impact on income.

 

In December 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of tax reform in situations where a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allows a measurement period not to extend beyond one year from the tax reform’s enactment date to complete the necessary accounting.

 

In two areas, Bancorp recorded provisional amounts of deferred taxes where the information was not available to complete the accounting: 1) the Company’s deferred tax assets of $565 thousand for temporary differences in certain tax credit investments is awaiting receipt of Schedule K-1s from outside preparers. 2) Bancorp estimated that no reductions are required to deferred tax assets included in the $19 thousand of future deductions for compensation that might be subject to new limitations under Code Sec. 162(m) which, generally, limits to $1 million annual deductions for certain compensation paid to certain executives. There is uncertainty in applying new rules to existing contracts, and Bancorp is seeking clarification before finalizing its analysis. In a third area, the Company recorded no provisional amounts to its deferred tax liability for temporary differences between the tax and financial reporting bases of certain property and equipment items. These cannot be reasonably estimated. Bancorp’s deferred tax liability of $541 thousand for temporary differences between the tax and financial reporting bases of fixed assets is awaiting completion of a cost segregation study to take advantage of additional depreciation deductions available through tax reform. Bancorp will complete and record income tax effects of tax reform during the period the necessary information becomes available. This measurement period will not extend beyond December 22, 2018.

 

 

The effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities follows:

 

   

December 31,

 

(In thousands)

 

2017

   

2016

 

Allowance for loan loss

  $ 5,422     $ 8,581  

Deferred compensation

    4,148       5,589  

Accrued expenses

    798       1,360  

Investments in partnerships

    565       905  

Write-downs and costs associated with other real estate owned

    39       29  

Loans

    442       685  

Other-than-temporary impairment

          37  

Securities

    121        

Other assets

    186       185  

Total deferred tax assets

    11,721       17,371  
                 

Securities

          438  

Property and equipment

    764       1,409  

Loan costs

    588       923  

Mortgage servicing rights

    161       280  

Leases

    149       381  

Core deposit intangible

    267       502  

Other liabilities

    260       408  

Total deferred tax liabilities

    2,189       4,341  

Valuation allowance

    (326 )     (134 )
                 

Net deferred tax asset

  $ 9,206     $ 12,896  

 

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion of the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projection for future taxable income over the periods which the temporary differences resulting in the remaining deferred tax assets are deductible, management believes it is more-likely-than-not that Bancorp will realize the benefits of these deductible differences, net of the valuation allowance, at December 31, 2017.

 

Realization of deferred tax assets associated with the investment in tax credit partnerships is dependent upon generating sufficient taxable capital gain income prior to their expiration. A valuation allowance of $326 thousand and $134 thousand to reflect management’s estimate of the temporary deductible differences that may expire prior to their utilization has been recorded as of December 31, 2017 and 2016, respectively.

 

US GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. As December 31, 2017 and 2016, the gross amount of unrecognized tax benefits, including penalties and interest, was $40 thousand. 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. Federal and state income tax returns are subject to examination for the years after 2013.

 

 

A reconciliation of the amount of unrecognized tax benefits follows:

 

(In thousands)

 

2017

   

2016

 

Balance as of January 1

  $ 40     $ 40  

Increases - current year tax positions

    11       11  

Increases - prior year tax positions

           

Settlements

           

Lapse of statute of limitations

    (11 )     (11 )

Balance as of December 31

  $ 40     $ 40  

 

 

 

(9) Deposits

 

The composition of interest bearing deposits follows:

 

   

December 31,

 

(In thousands)

 

2017

   

2016

 

Interest bearing demand

  $ 833,450     $ 768,139  

Savings

    152,348       140,030  

Money market

    682,226       682,421  

Time deposits of more than $250,000

    38,439       40,427  

Other time deposits

    197,135       209,375  
                 

Total interest bearing deposits

  $ 1,903,598     $ 1,840,392  

 

 

Interest expense related to certificates of deposit and other time deposits in denominations of $250 thousand or more was $161 thousand, $231 thousand and $313 thousand, respectively, for the years ended December 31, 2017, 2016 and 2015.

 

At December 31, 2017, the scheduled maturities of time deposits were as follows (in thousands):

 

2018

  $ 166,219  

2019

    42,857  

2020

    13,100  

2021

    7,646  

2022 and thereafter

    5,752  
         

Total time deposits

  $ 235,574  

 

Deposits of directors and their associates, including deposits of companies for which directors are principal owners, and executive officers were $28.5 million and $30.5 million at December 31, 2017 and 2016, respectively.

 

At December 31, 2017 and 2016, Bancorp had $614 thousand and $449 thousand, respectively, of deposits accounts in overdraft status and thus have been reclassified to loans on the accompanying consolidated balance sheets.

 

 

 

(10) Securities Sold Under Agreements to Repurchase

 

Securities sold under agreements to repurchase are a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At December 31, 2017, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities which were owned and controlled by Bancorp.

 

Information concerning securities sold under agreements to repurchase is summarized as follows:

 

(Dollars in thousands)

 

2017

   

2016

 
                 

Average balance during the year

  $ 70,187     $ 62,670  

Average interest rate during the year

    0.19 %     0.22 %

Maximum month-end balance during the year

  $ 75,365     $ 72,029  

 

 

(11) Advances from the Federal Home Loan Bank

 

Bancorp had outstanding borrowings of $49.5 million at December 31, 2017, via fourteen 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 $19.5 million, principal and interest payments are due monthly based on an amortization schedule.

 

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

 

(In thousands)

 

December 31, 2017

   

December 31, 2016

 

Year

 

Advance

   

Fixed Rate

   

Advance

   

Fixed Rate

 

2018

  $ 30,000       1.48 %   $ 30,000       0.70 %

2020

    1,741       2.23       1,790       2.23  

2021

    288       2.12       359       2.12  

2024

    2,454       2.36       2,661       2.36  

2025

    5,149       2.42       6,025       2.43  

2026

    8,564       1.99       8,936       1.99  

2028

    1,262       1.49       1,304       1.48  
                                 

Total

  $ 49,458       1.74

%

  $ 51,075       1.30

%

 

 

In addition to fixed-rate advances listed above, at December 31, 2017, Bancorp had a $150 million cash management advance from the FHLB. This advance matured in the first week of January 2018 and was used to manage Bancorp’s overall cash position. Due to the short-term nature of the advance, it was recorded on the consolidated balance sheet within federal funds purchased.

 

Advances from the FHLB are collateralized by certain commercial and residential real estate mortgage loans under a blanket mortgage collateral agreement and FHLB stock. Bancorp views the borrowings as an effective alternative to brokered deposits to fund loan growth. At December 31, 2017, the amount of available credit from the FHLB totaled $333 million.

 

 

 

(12) Other Comprehensive Income (Loss)

 

The following table illustrates activity within the balances in accumulated other comprehensive income (loss) by component, and is shown for the years ended December 31, 2017, 2016, and 2015.

 

   

Net unrealized

   

Net unrealized

   

Minimum

         
   

gains (losses)

   

gains (losses)

   

pension

         
   

on securities

   

on cash

   

liability

         

(In thousands)

 

available-for-sale

   

flow hedges

   

adjustment

   

Total

 
                                 

Balance at December 31, 2014

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

Other comprehensive (loss) income before reclassifications

    (1,558 )     (76 )     114       (1,520 )

Amounts reclassified from accumulated other comprehensive income

    67                   67  
                                 

Net current period other comprehensive (loss) income

    (1,491 )     (76 )     114       (1,453 )

Balance at December 31, 2015

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

Other comprehensive (loss) income before reclassifications

    (2,176 )     44       1       (2,131 )

Amounts reclassified from accumulated other comprehensive income

                       

Net current period other comprehensive (loss) income

    (2,176 )     44       1       (2,131 )

Balance at December 31, 2016

  $ (1,211 )   $ (16 )   $ (272 )   $ (1,499 )
                                 

Other comprehensive income (loss) before reclassifications

    (721 )     209       (70 )     (582 )

Amounts reclassified from accumulated other comprehensive income

    151                   151  

Net current period other comprehensive income (loss)

    (1,067 )     250       (120 )     (431 )

Balance at December 31, 2017

  $ (2,278 )   $ 234     $ (392 )   $ (1,930 )

 

2017 other comprehensive income includes a total of $506 thousand income from remeasurement of deferred tax assets and liabilities. ASU 2018-02, issued in February 2018, provides for the reclassification into retained earnings of tax effects stranded in other comprehensive income as a result of tax reform. Bancorp is evaluating timing of adopting ASU 2018-02 guidance, which will result in $506 thousand being reclassified into retained earnings.

 

 

The following table illustrates activity within the reclassifications out of accumulated other comprehensive income (loss), for the years ended December 31, 2017, 2016 and 2015.

 

Details of accumulated

                       

Affected line item in

other comprehensive

 

Amount reclassified from Accumulated

 

the consolidated

income (loss) components

 

other comprehensive income (loss)

 

statements of income

                           
   

For the years ended December 31,

   

(In thousands)

 

2017

   

2016

   

2015

   

Unrealized gains (losses) on securities available-for-sale:

                         

Realized loss on sale of available-for-sale securities

  $ (232 )   $     $  

Loss on sale of securities

OTTI impairment of equity security

                (103 )

Other non-interest expense

Effect of income taxes

    81             36  

Income tax expense

Reclassifications, net of income taxes

  $ (151 )   $     $ (67 )  

 

 

 

(13) Preferred Stock and Common Stock

 

Bancorp has a class of preferred stock (no par value; 1,000,000 shares authorized); the relative rights, preferences and other terms of the class 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.

 

At Bancorp’s 2015 Annual Meeting of Shareholders, shareholders approved increasing the number of authorized common shares from 20,000,000 to 40,000,000.

 

 

(14) 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, paid May 27, 2016 in the form of a 50% stock dividend. Share and per share information has been adjusted as necessary to reflect this split.

 

 

 

(15) Net Income per Share and Common Stock Dividends

 

The following table reflects the numerators (net income) and denominators (average shares outstanding) for the basic and diluted net income per share computations:

 

(In thousands, except per share data)

 

2017

   

2016

   

2015

 
                         

Net income, basic and diluted

  $ 38,043     $ 41,027     $ 37,187  
                         

Average shares outstanding, basic

    22,532       22,356       22,088  

Effect of dilutive securities

    451       436       371  
                         

Average shares outstanding including dilutive securities

    22,983       22,792       22,459  
                         

Net income per share, basic

  $ 1.69     $ 1.84     $ 1.68  
                         

Net income per share, diluted

  $ 1.66     $ 1.80     $ 1.65  

 

 

 

(16) Employee Benefit Plans

 

Bancorp has a combined employee stock ownership and profit sharing plan (“KSOP”). The plan is a defined contribution plan and is available to all employees meeting certain eligibility requirements. In general, for employees who work more than 1,000 hours per year, Bancorp matches employee contributions up to 6% of the employee’s salary, and contributes an amount of Bancorp stock equal to 2% of the employee’s salary. Employer matching expenses related to contributions to the plan for 2017, 2016, and 2015 were $2.0 million, $1.9 million and $1.8 million, respectively, and are recorded on the consolidated statements of income within employee benefits. Employee and employer contributions are made in accordance with the terms of the plan. As of December 31, 2017 and 2016, the KSOP held 577 thousand and 567 thousand shares of Bancorp stock, respectively.

 

In addition Bancorp has non-qualified plans into which directors and certain senior officers may defer director fees or salary/incentives. Bancorp matched certain executives’ deferrals into the senior officers’ plan amounting to approximately $232 thousand, $293 thousand and $171 thousand in 2017, 2016 and 2015 respectively. At December 31, 2017 and 2016, the amounts included in other liabilities in the consolidated financial statements for this plan were $8.2 million and $5.6 million, were comprised primarily of participants’ contributions, and represented the fair value of mutual fund investments directed by participants.

 

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 the benefits to participants. Benefits vest based on 25 years of service. Participants are fully vested. Bancorp uses a December 31 measurement date for this plan. The accumulated benefit obligation for the plan included in other liabilities in the consolidated financial statements was $2.2 million and $2.1 million as of December 31, 2017 and December 31, 2016, respectively. Discount rates of 3.59% and 4.10% were used in 2017 and 2016, respectively, in determining the actuarial present value of the projected benefit obligation. Actuarially determined pension costs are expensed and accrued over the service period, and benefits are paid from Bancorp’s assets. Bancorp maintains life insurance policies, for which it is the ultimate beneficiary, on participants and certain former executives. Income from these policies helps offset the cost of benefits. The liability for Bancorp’s plan met the benefit obligation as of December 31, 2017 and 2016.

 

Information about the components of the net periodic benefit cost of the defined benefit plan, recorded in salaries and employee benefits, is as follows:

 

   

Year ended December 31,

 

(In thousands)

 

2017

   

2016

   

2015

 
                         

Components of net periodic benefit cost:

                       

Service cost

  $     $     $  

Interest cost

    79       87       83  

Expected return on plan assets

                 

Amortization of prior service cost

                 

Amortization of net losses

    71       47       59  
                         

Net periodic benefit cost

  $ 150     $ 134     $ 142  

 

 

Benefits expected to be paid in each year from 2018 to 2020 and beyond are listed in the table below.

 

(In thousands)

       

2018

  $ 84  

2019

    84  

2020

    84  

Beyond 2020

    3,278  
         

Total future payments

  $ 3,530  

 

 

Expected benefits to be paid are based on the same assumptions used to measure Bancorp’s benefit obligation at December 31, 2017. There are no obligations for other post-retirement and post-employment benefits.

 

 

 

(17) Stock-Based Compensation

 

The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.

 

Bancorp currently has one stock-based compensation plan. At Bancorp’s 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. No additional shares were made available. As of December 31, 2017, there were 302,727 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015; however, SARs granted under this plan expire as late as 2025.

 

Bancorp no longer has stock options outstanding at December 31, 2017. Stock appreciation rights (“SARs”) granted have a vesting schedule of 20% per year and 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 forward, forfeitable dividends are deferred until shares are vested. Fair value of restricted shares is equal to the market value of the shares on the date of grant.

 

Grants of performance stock units (“PSUs”) vest based upon service, a single three-year performance period, and are based upon certain three-year performance criterion 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 market 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 and the fair value of such grants incorporates a liquidity discount related to the holding period of 5.1%, 4.5% and 3.6% for 2017, 2016 and 2015 grants, respectively.

 

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 market value of underlying shares on the date of grant.

 

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

 

(In thousands)

                       
   

2017

   

2016

   

2015

 

Stock-based compensation expense before income taxes

  $ 2,892     $ 2,473     $ 2,134  

Less: deferred tax benefit

    (607 )     (866 )     (747 )
                         

Reduction of net income

  $ 2,285     $ 1,607     $ 1,387  

 

 

Bancorp’s net income for 2017 reflected the implementation of ASU 2016-09 which changed the way excess tax benefits and deficiencies related to share-based compensation are recorded. Prior to 2017, these were recorded directly to additional paid-in capital and, thus did not affect earnings. Beginning in 2017, these are recorded as a tax expense or benefit in the income statement. These benefits resulted in a $1.5 million increase in net income for 2017. This tax benefit is not reflected in the table above.

 

As of December 31, 2017 Bancorp has $4.8 million of unrecognized stock-based compensation expense that will be recorded as compensation expense over the next five years as awards vest. In 2017 Bancorp used cash of $216 thousand for the purchase of shares related to RSUs. Bancorp received cash of $2.3 million and $3.3 million from the exercise of options during 2016 and 2015, respectively.

 

 

Fair values of Bancorp’s SARs are estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options and SARs. This model requires 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:

 

Assumptions

 

2017

   

2016

   

2015

 
                         

Dividend yield

    2.72

%

    2.94

%

    2.97

%

Expected volatility

    19.47

%

    19.31

%

    22.81

%

Risk free interest rate

    2.29

%

    1.70

%

    1.91

%

Expected life of SARs (in years)

    7.0       7.3       7.5  

 

Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of SARs granted. Expected volatility is the volatility of the underlying shares for the expected term on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the awards. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.

 

A summary of stock option and SARs activity and related information for the years ended December 31, 2016 and 2017 follows.

 

                                             

Weighted

 
                     

Weighted

   

Aggregate

   

Weighted

   

average

 
   

Options

             

average

   

intrinsic

   

average

   

remaining

 
   

and SARs

   

Exercise

   

exercise

   

value

   

fair

   

contractual

 
   

(In thousands)

   

price

   

price

   

(In thousands)

   

value

   

life (In years)

 
                                                   

At December 31, 2015

                                                 

Vested and exercisable

    656     $14.02 - 19.44     $ 15.75     $ 6,191     $ 3.39       3.7  

Unvested

    266      15.24 - 24.55       18.66       1,733       3.29       7.7  

Total outstanding

    922      14.02 - 24.55       16.59       7,924       3.36       4.8  
                                                   

Activity during 2016

                                                 

SARs granted

    88      25.76 - 33.08       25.84       1,866       3.56          

Exercised

    (272 )    14.02 - 17.89       16.38       4,155       3.73          

Forfeited

    (3 )    14.02 - 15.84       15.18       60       2.94          
                                                   

At December 31, 2016

                                                 

Vested and exercisable

    475      14.02 - 24.56       15.72       14,820       3.16       4.3  

Unvested

    260      15.24 - 33.08       21.53       6,623       3.43       7.8  

Total outstanding

    735      14.02 - 33.08       17.78       21,443       3.26       5.5  
                                                   

Activity during 2017

                                                 

SARs granted

    46      40.00 - 40.00       40.00             6.34          

Exercised

    (77 )    14.02 - 17.89       15.41       1,855       3.18          

Forfeited

                                       
                                                   

At December 31, 2017

                                                 

Vested and exercisable

    490      14.02 - 33.08       16.46       10,408       3.16       4.0  

Unvested

    214      15.26 - 40.00       26.46       2,515       4.17       7.7  

Total outstanding

    704      14.02 - 40.00       19.51       12,923       3.47       5.1  
                                                   
                                                   

Vested year-to-date

    93     $15.24 - 33.08     $ 19.37     $ 1,696     $ 3.18          

 

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. 

 

 

The aggregate intrinsic value of stock options and SARs exercised in 2017, 2016 and 2015 was $1.9 million, $4.2 million and $2.0 million, respectively. The aggregate intrinsic value of stock options and SARs exercised was calculated as the difference in the closing price of Bancorp’s common shares on the date of exercise and the exercise price, multiplied by the number of shares exercised.

 

The weighted average Black-Scholes fair values of SARs granted in 2017, 2016 and 2015 were $6.34, $3.56 and $5.95, respectively.

 

SARs outstanding, stated in thousands, at December 31, 2017 were as follows:

 

 

Expiration

 

Number of

SARs

outstanding

   

SARs

exercisable

   

Weighted average

exercise price of

SARs outstanding

 

2018

    17       17     $ 15.58  

2019

    40       40       14.76  

2020

    73       73       14.02  

2021

    74       74       15.86  

2022

    117       117       15.25  

2023

    80       66       15.26  

2024

    94       56       19.37  

2025

    76       30       22.99  

2026

    88       17       25.84  

2027

    45             40.00  
      704       490     $ 19.51  

 

A summary of Bancorp granted shares of restricted common stock, for the three year period ending December 31, 2017, follows.

 

 

           

Grant date

 
           

weighted-

 
   

Number

   

average cost

 

Unvested at December 31, 2014

    171,139     $ 16.63  

Shares awarded

    52,898       22.99  

Restrictions lapsed and shares released to employees/directors

    (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 to employees/directors

    (49,265 )     17.98  

Shares forfeited

    (12,480 )     20.69  

Unvested at December 31, 2016

    145,235     $ 21.57  

Shares awarded

    28,625       44.85  

Restrictions lapsed and shares released to employees/directors

    (46,797 )     19.79  

Shares forfeited

    (7,691 )     25.18  

Unvested at December 31, 2017

    119,372     $ 27.62  

 

 

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.

 

           

Fair

         
   

Vesting

   

value at

   

Expected

 

Grant

 

period

   

grant

   

shares to

 

year

 

in years

   

date

   

be awarded

 

2015

    3     $ 20.02       43,011  

2016

    3       22.61       69,161  

2017

    3       35.66       43,325  

 

 

In the first quarter of 2017, Bancorp awarded 4,680 RSUs to directors of Bancorp with a grant date fair value of $220 thousand.

 

Bancorp has no equity compensation plans which have not been approved by shareholders. The following table provides detail of the number of shares to be issued upon exercise of outstanding stock-based awards and remaining shares available for future issuance under all the Bancorp’s equity compensation plans as of December 31, 2017.

 

Plan category (Shares in thousands)

 

Number of shares to

be issued upon exercise/vesting

   

Weighted

average

exercise price

   

Shares

available for

future

issuance (a)

 
                         

Equity compensation plans approved by security holders:

                       

Stock appreciation rights (SARs)

     (b)        (b)       303  

Restricted common stock

    119       N/A        (a)  

Performance stock units

     (c)       N/A        (a)  

Restricted stock units

    5       N/A        (a)  

Total shares

    124               303  

 

 

(a)

Under the 2015 Omnibus Equity Compensation Plan, shares of stock are authorized for issuance as incentive and nonqualified stock options, SARs, restricted stock, and restricted stock units

 

(b)

At December 31, 2017, approximately 704,000 SARs were outstanding at a weighted average grant price of $19.51. The number of shares to be issued upon exercise will be determined based on the difference between the grant price and the market price at the date of exercise.

 

(c)

The number of shares to be issued is dependent upon Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 205,000 shares. As of December 31, 2017, the expected shares to be awarded are 155,497.

 

 

(18) Dividend  

 

Bancorp’s principal source of cash revenues is dividends paid to it as the sole shareholder of the Bank. At any balance sheet date, the Bank’s regulatory dividend restriction represents the Bank’s net income of the current year plus the prior two years less any dividends paid for the same time period. At December 31, 2017, the Bank may pay an amount equal to $70.4 million in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.

 

 

 

(19) Commitments and Contingent Liabilities

 

As of December 31, 2017, 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 $688.3 million including standby letters of credit of $14.8 million represent normal banking transactions. Commitments to extend credit were $628.3 million, including letters of credit of $15.6 million, as of December 31, 2016. Commitments to extend credit are agreements to lend to a customer contingent upon the availability of collateral and no existing 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 December 31, 2017, Bancorp accrued $350 thousand in other liabilities for unfunded credit commitments.

 

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

 

Bancorp leases certain facilities under non-cancelable operating leases. Future minimum lease commitments for these leases are outlined in the table below.

 

(In thousands)

 

Year

 

Total amount

 

2018

  $ 1,847  

2019

    1,880  

2020

    1,532  

2021

    1,391  

2022

    1,501  

Thereafter

    2,873  
         

Total

  $ 11,024  

 

Rent expense, net of sublease income, was $1.9 million in 2017, $1.8 million in 2016, and $1.7 million in 2015.

 

Certain commercial customers require confirmation of Bancorp’s letters of credit by other banks since Bancorp does not have a rating by a national rating agency. Terms of the agreements range from 1 to 19 months. If an event of default on all contracts had occurred at December 31, 2017, Bancorp would have been required to make payments of approximately $1.5 million. The maximum amount payable under those contracts was $1.5 million. No payments have ever been required as a result of default on these contracts. These agreements are normally secured by collateral acceptable to Bancorp, which limits credit risk associated with the agreements.

 

Also, as of December 31, 2017, 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.

 

 

(20) Assets and Liabilities Measured and Reported at Fair Value

 

Bancorp follows 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 markets in which the assets and liabilities trade and 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 our own 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 maximization of use of observable inputs and minimization of use of unobservable inputs in fair value measurements. Where there exists limited or no observable market data, Bancorp derives its own estimates by generally considering characteristics of the asset/liability, the current economic and competitive environment and other factors. For this reason, results cannot be determined with precision and may not be realized on an actual sale or immediate settlement of the asset or liability.

 

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 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.

 

Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements are based on benchmark forward yield curves and other relevant observable market data. For purposes of potential valuation adjustments to derivative positions, Bancorp evaluates the credit risk of its counterparties as well as its own credit risk. To date, Bancorp has not realized any losses due to counterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2017.

 

 

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

 

(In thousands)

 

Fair value at December 31, 2017

 

Assets

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Investment securities available-for-sale:

                               

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

  $ 149,984     $ 149,984     $     $  

Government sponsored enterprise obligations

    213,844             213,844        

Mortgage-backed securities - government agencies

    161,507             161,507        

Obligations of states and political subdivisions

    49,189             49,189        
                                 
                                 

Total investment securities available-for-sale

    574,524       149,984       424,540        
                                 

Interest rate swaps

    579             579        
                                 

Total assets

  $ 575,079     $ 149,984     $ 425,095     $  
                                 

Liabilities

                               
                                 

Interest rate swaps

  $ 259     $     $ 259     $  

 

 

(In thousands)

 

Fair value at December 31, 2016

 

Assets

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Investment securities available-for-sale:

                               

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

  $ 74,998     $ 74,998     $     $  

Government sponsored enterprise obligations

    268,090             268,090        

Mortgage-backed securities - government agencies

    168,843             168,843        

Obligations of states and political subdivisions

    57,444             57,444        

Corporate equity securities

    699       699              
                                 
                                 

Total investment securities available-for-sale

    570,074       75,697       494,377        
                                 

Interest rate swaps

    178             178        
                                 

Total assets

  $ 570,252     $ 75,697     $ 494,555     $  
                                 

Liabilities

                               
                                 

Interest rate swaps

  $ 203     $     $ 203     $  

 

 

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 December 31, 2017 or 2016.

 

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 December 31, 2017 and 2016 there was no valuation allowance for mortgage servicing rights, as fair value exceeded cost. Accordingly, MSRs are not included in either table below for December 31, 2017 or 2016. See Note 7 for more information regarding MSRs.

 

 

For impaired loans in the table below, fair value is calculated carrying value of loans with a specific valuation allowance, less the specific allowance, and the carrying value of collateral dependent loans that have been charged down to their fair value. Fair value of impaired loans was primarily measured based on the value of 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 December 31, 2017, total impaired collateral dependent loans charged down to their fair value and impaired loans with a valuation allowance were $2.6 million, and the specific allowance totaled $48 thousand, resulting in a fair value of $2.6 million, compared with total collateral dependent loans charged down to their fair value and impaired loans with a valuation allowance of $4.2 million, and the specific allowance allocation totaling $1.3 million, resulting in a fair value of $2.9 million at December 31, 2016. Losses represent charge offs and changes 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 December 31, 2017 and 2016, carrying value of all other real estate owned was $2.6 million and $5.0 million, respectively.

 

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

 

(In thousands)

 

Fair value at December 31, 2017

   

 

 
   

Total

   

Level 1

   

Level 2

   

Level 3

    Total losses  

Impaired loans

  $ 2,569     $     $     $ 2,569     $ (121 )

Other real estate owned

    2,640                   2,640       (171 )

Total

  $ 5,209     $     $     $ 5,209     $ (292 )

 

(In thousands)

 

Fair value at December 31, 2016

         
   

Total

   

Level 1

   

Level 2

   

Level 3

    Total losses  

Impaired loans

  $ 2,933     $     $     $ 2,933     $ (1,470 )

Other real estate owned

    4,488                   4,488       (62 )

Total

  $ 7,421     $     $     $ 7,421     $ (1,532 )

 

 

In the case of the securities portfolio, Bancorp monitors the valuation technique utilized by pricing agencies to ascertain when transfers between levels have occurred. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the years ended December 31, 2017, 2016 and 2015, 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 December 31, 2017, the significant unobservable inputs used in the fair value measurements are presented below.

 

             

Significant

 

Weighted

 
   

Carrying

 

Valuation

 

unobservable

 

average of

 

(Dollars in thousands)

 

amount

 

technique

 

input

 

input

 

Impaired loans - collateral dependent

  $ 2,569  

Appraisal

 

Appraisal discounts (%)

    11.5 %

Other real estate owned

    2,640  

Appraisal

 

Appraisal discounts (%)

    23.4  

 

 

(21) 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

                                 

December 31, 2017

 

amount

   

Fair value

   

Level 1

   

Level 2

   

Level 3

 
                                         

Financial assets

                                       

Cash and short-term investments

  $ 139,248     $ 139,248     $ 139,248     $     $  

Mortgage loans held for sale

    2,964       2,964             2,964        

Federal Home Loan Bank stock and other securities

    7,646       7,646             7,646        

Loans, net

    2,384,685       2,338,464                   2,338,464  

Accrued interest receivable

    8,369       8,369       8,369              
                                         

Financial liabilities

                                       

Deposits

    2,578,295       2,576,385                   2,576,385  

Securities sold under agreement to repurchase

    70,473       70,473             70,473        

Federal funds purchased

    161,352       161,352             161,352        

FHLB Advances

    49,458       48,642             48,642        

Accrued interest payable

    232       232       232              
                                         

December 31, 2016

                                       
                                         

Financial assets

                                       

Cash and short-term investments

  $ 47,973     $ 47,973     $ 47,973     $     $  

Mortgage loans held for sale

    3,213       3,481             3,481        

Federal Home Loan Bank stock and other securities

    6,347       6,347             6,347        

Loans, net

    2,281,368       2,284,569                   2,284,569  

Accrued interest receivable

    6,878       6,878       6,878              
                                         

Financial liabilities

                                       

Deposits

    2,520,548       2,519,725                   2,519,725  

Securities sold under agreement to repurchase

    67,595       67,595             67,595        

Federal funds purchased

    47,374       47,374             47,374        

FHLB Advances

    51,075       50,806             50,806        

Accrued interest payable

    144       144       144              

 

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 by the Bank 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 by the Bank 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 the creditworthiness of the customers. Fair values of standby letters of credit are based on fees currently charged for similar agreements or estimated cost to terminate them or otherwise settle obligations with counterparties at the reporting date.

 

Limitations

 

Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected losses, 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.

 

 

(22) Derivative Financial Instruments

 

Periodically, Bancorp enters into an interest rate swap transaction with a borrower, who desires to hedge their exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the consolidated balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition are expected to have an insignificant effect on earnings. Exchanges of cash flows related to the undesignated interest rate swap agreements for 2017 were offsetting and therefore had no net effect on Bancorp’s earnings or cash flows.

 

Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of nonperformance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, limits, collateral, and monitoring procedures, and does not expect any counterparties to fail their obligations.

 

 

At December 31, 2017 and 2016, Bancorp had outstanding undesignated interest rate swap contracts as follows:

 

(Dollar amounts in thousands)

 

Receiving

   

Paying

 
   

December 31,

   

December 31,

   

December 31,

   

December 31,

 
   

2017

   

2016

   

2017

   

2016

 

Notional amount

  $ 54,964     $ 43,986     $ 54,964     $ 43,986  

Weighted average maturity (years)

    8.7       9.9       8.7       9.9  

Fair value

  $ (259 )   $ (178 )   $ 283     $ 178  

 

 

In 2016, Bancorp entered into an interest rate swap to hedge cash flows of a $10 million rolling fixed-rate three-month FHLB borrowing. The swap began in December 2016 and ends in December 2021. In 2015, Bancorp entered into an interest rate swap to hedge cash flows of a $20 million rolling fixed-rate three-month FHLB borrowing. The swap began in December 2015 and matures in December 2020. For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities. 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 December 31, 2017 and 2016.

 

(Dollars in thousands)

                       
                                   

Notional

 

Maturity

 

Receive (variable)

 

Pay fixed

   

Fair value

   

Fair value

 

amount

 

date

 

index

 

swap rate

   

December 31, 2017

   

December 31, 2016

 
$ 10,000  

12/6/2021

 

US 3 Month LIBOR

    1.89

%

  $ 106     $ 16  
  20,000  

12/6/2020

 

US 3 Month LIBOR

    1.79       190       9  
                                   
$ 30,000             1.82

%

  $ 296     $ 25  

 

 

 

(23) 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 the regulations 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 the capital requirements can result in certain mandatory, and possibly discretionary, corrective actions prescribed by the regulations or determined to be necessary by the regulators, which could materially affect the unaudited consolidated financial statements.

 

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. For Bancorp, key differences under Basel III include risk weighting for loan commitments under one year and higher risk weighting for certain commercial real estate and construction loans. These differences resulted in higher risk-weighted assets, and therefore, somewhat lower risk-based capital ratios. Bancorp and the Bank met all capital requirements to which they were subject as of December 31, 2017 and 2016.

 

 

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios as of December 31, 2017 and 2016 follows:

 

(Dollars in thousands)

 

Actual

   

Minimum for adequately

capitalized

   

Minimum for well

capitalized

 

December 31, 2017

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

Total risk-based capital

                                               

Consolidated

  $ 359,866       13.52

%

  $ 213,012       8.0

%

     NA        NA  

Bank

    347,840       13.07       212,891       8.0     $ 266,114       10.0

%

                                                 

Common Equity Tier 1 risk-based capital

                                               

Consolidated

    334,631       12.57       119,820       4.5        NA        NA  

Bank

    322,605       12.12       212,891       4.5       172,974       6.5  
                                                 

Tier 1 risk-based capital

                                               

Consolidated

    334,631       12.57       159,760       6.0        NA        NA  

Bank

    322,605       12.12       159,668       6.0       212,891       8.0  
                                                 

Leverage (1)

                                               

Consolidated

    334,631       10.70       125,122       4.0        NA        NA  

Bank

    322,605       10.32       125,040       4.0       156,300       5.0  

 

   

Actual

   

Minimum for adequately

capitalized

   

Minimum for well

capitalized

 

December 31, 2016

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

Total risk-based capital

                                               

Consolidated

  $ 338,525       13.04

%

  $ 207,684       8.0

%

     NA        NA  

Bank

    325,630       12.57       207,243       8.0     $ 258,986       10.0

%

                                                 

Common Equity Tier 1 risk-based capital

                                               

Consolidated

    314,147       12.10       116,832       4.5        NA        NA  

Bank

    301,252       11.63       116,564       4.5       168,341       6.5  
                                                 

Tier 1 risk-based capital

                                               

Consolidated

    314,147       12.10       155,775       6.0        NA        NA  

Bank

    301,252       11.63       155,418       6.0       207,189       8.0  
                                                 

Leverage (1)

                                               

Consolidated

    314,147       10.54       119,221       4.0        NA        NA  

Bank

    301,252       10.11       119,190       4.0       148,927       5.0  

Ratio is computed in relation to risk-weighted assets. 

(1)     Ratio is computed in relation to average assets.     

NA Not applicable. Regulatory framework does not define well capitalized for holding companies.

 

 

 

(24) Stock Yards Bancorp, Inc. (parent company only)

 

Condensed Balance Sheets

               
   

December 31,

 

(In thousands)

 

2017

   

2016

 
                 

Assets

               

Cash on deposit with subsidiary bank

  $ 10,648     $ 6,972  

Investment in and receivable from subsidiaries

    321,617       300,977  

Other assets

    1,521       6,005  
                 

Total assets

  $ 333,786     $ 313,954  
                 

Liabilities and stockholders equity

               

Other liabilities

  $ 142     $ 82  
                 

Total stockholders’ equity

    333,644       313,872  
                 

Total liabilities and stockholders equity

  $ 333,786     $ 313,954  

 

 

Condensed Statements of Income

                       
                         
   

Years ended December 31,

 

(In thousands)

 

2017

   

2016

   

2015

 
                         
                         

Income - dividends and interest from subsidiaries

  $ 18,160     $ 16,147     $ 14,244  

Other income

    82       1       15  

Less expenses

    3,255       2,235       2,511  

Income before income taxes and equity in undistributed net income of subsidiary

    14,987       13,913       11,748  

Income tax benefit

    (1,985 )     (987 )     (1,016 )

Income before equity in undistributed net income of subsidiary

    16,972       14,900       12,764  

Equity in undistributed net income of subsidiary

    21,071       26,127       24,423  

Net income

  $ 38,043     $ 41,027     $ 37,187  

 

 

Condensed Statements of Cash Flows

                       
                         
   

Years ended December 31

 

(In thousands)

 

2017

   

2016

   

2015

 
                         

Operating activities

                       

Net income

  $ 38,043     $ 41,027     $ 37,187  

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

                       

Equity in undistributed net income of subsidiaries

    (21,071 )     (26,127 )     (24,423 )

(Increase) decrease in receivable from subsidiaries

                (842 )

Stock compensation expense

    2,892       2,473       2,134  

Excess tax benefits from share-based compensation arrangements

    (1,463 )     (1,705 )     (673 )

Recover of impairment loss on other assets held for investment

            (588 )      

Depreciation, amortization and accretion, net

    4       10       11  

Proceeds from liquidation of private investment fund

    (81 )            

Decrease (increase) in other assets

    5,943       (990 )     531  

Increase in other liabilities

    10       11       91  
                         

Net cash provided by operating activities

    24,277       14,111       14,016  
                         

Investing activities

                       

Proceeds from sale of other assets held for investment

          1,108        

Proceeds from liquidation of private investment fund

    81              
                         

Net cash provided by investing activities

    81       1,108        
                         

Financing activities

                       

Common stock repurchases

    (2,389 )     2,337       3,249  

Excess tax benefit from share-based compensation arrangements

          1,705       673  

Proceeds (used for) and received from settlement of stock awards

    (216 )     (1,918 )     (918 )

Cash dividends paid

    (18,077 )     (16,093 )     (14,224 )
                         

Net cash used in financing activities

    (20,682 )     (13,969 )     (11,220 )
                         

Net increase (decrease) in cash

    3,676       1,250       2,796  
                         

Cash at beginning of year

    6,972       5,722       2,926  
                         

Cash at end of year

  $ 10,648     $ 6,972     $ 5,722  

 

 

 

(25) Segments

 

Bancorp’s principal activities include commercial banking and wealth management and trust (WM&T). Commercial banking provides a full range of loan and deposit products to individual consumers and businesses, plus origination of consumer mortgages and investment product sales. WM&T provides 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 the performance of the business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.

 

Principally, all of the net assets of Stock Yards Bancorp, Inc. are involved in the commercial banking segment.  Bancorp has goodwill of $682,000 related to a bank acquisition in 1996 which has been assigned to the commercial banking segment. Assets assigned to WM&T consist of premises and equipment, net of accumulated depreciation.

 

Selected financial information by business segment follows:

 

           

Wealth

         
   

Commercial

   

management

         

(In thousands)

 

banking

   

and trust

   

Total

 
                         

Year ended December 31, 2017

                       

Net interest income

  $ 103,302     $ 301     $ 103,603  

Provision for loan losses

    2,550             2,550  

Investment management and trust services

          20,505       20,505  

All other non-interest income

    24,615             24,615  

Non-interest expense

    78,752       12,239       90,991  

Income before income taxes

    46,615       8,567       55,182  

Income tax expense

    14,080       3,059       17,139  

Net income

  $ 32,535     $ 5,508     $ 38,043  

Segment assets

  $ 3,237,656     $ 1,990     $ 3,239,646  
                         

Year ended December 31, 2016

                       

Net interest income

  $ 96,986     $ 268     $ 97,254  

Provision for loan losses

    3,000             3,000  

Investment management and trust services

          19,155       19,155  

All other non-interest income

    24,382             24,382  

Non-interest expense

    70,230       11,290       81,520  

Income before income taxes

    48,138       8,133       56,271  

Income tax expense

    12,340       2,904       15,244  

Net income

  $ 35,798     $ 5,229     $ 41,027  

Segment assets

  $ 3,037,394     $ 2,087     $ 3,039,481  

Year ended December 31, 2015

                       

Net interest income

  $ 88,124     $ 194     $ 88,318  

Credit for loan losses

    750             750  

Investment management and trust services

          18,026       18,026  

All other non-interest income

    21,924             21,924  

Non-interest expense

    62,748       10,650       73,398  

Income before income taxes

    46,550       7,570       54,120  

Income tax expense

    14,238       2,695       16,933  

Net income

  $ 32,312     $ 4,875     $ 37,187  

Segment assets

  $ 2,816,373     $ 428     $ 2,816,801  

 

 

 

(26) Quarterly Operating Results (unaudited)

 

Following is a summary of quarterly operating results for 2017, 2016 and 2015:

 

   

2017

 
   

4th quarter

   

3rd quarter

   

2nd quarter

   

1st quarter

 
                                 

Interest income

  $ 29,092     $ 28,111     $ 27,013     $ 26,633  

Interest expense

    2,069       1,947       1,781       1,449  

Net interest income

    27,023       26,164       25,232       25,184  

Provision for loan losses

    900       150       600       900  

Net interest income after provision

    26,123       26,014       24,632       24,284  

Non-interest income

    11,545       11,103       11,675       10,797  

Non-interest expenses

    27,180       21,317       21,346       21,148  

Income before income taxes

    10,488       15,800       14,961       13,933  

Income tax expense

    5,542       4,096       4,359       3,142  
                                 

Net income

  $ 4,946     $ 11,704     $ 10,602     $ 10,791  
                                 

Basic earnings per share

  $ 0.22     $ 0.52     $ 0.47     $ 0.48  

Diluted earnings per share

    0.22       0.51       0.46       0.47  

 

   

2016

 

(In thousands, except per share data)

 

4th quarter

   

3rd quarter

   

2nd quarter

   

1st quarter

 
                                 

Interest income

  $ 26,368     $ 25,942     $ 25,162     $ 24,700  

Interest expense

    1,293       1,182       1,212       1,231  

Net interest income

    25,075       24,760       23,950       23,469  

Provision for loan losses

    500       1,250       750       500  

Net interest income after provision

    24,575       23,510       23,200       22,969  

Non-interest income

    11,319       11,358       10,778       10,082  

Non-interest expenses

    21,269       20,518       20,193       19,540  

Income before income taxes

    14,625       14,350       13,785       13,511  

Income tax expense

    4,009       3,883       3,676       3,676  
                                 

Net income

  $ 10,616     $ 10,467     $ 10,109     $ 9,835  
                                 

Basic earnings per share

  $ 0.47     $ 0.47     $ 0.45     $ 0.44  

Diluted earnings per share

    0.46       0.46       0.45       0.44  

 

   

2015

 

(In thousands, except per share data)

 

4th quarter

   

3rd quarter

   

2nd quarter

   

1st quarter

 
                                 

Interest income

  $ 24,039     $ 23,284     $ 23,000     $ 22,847  

Interest expense

    1,217       1,203       1,199       1,233  

Net interest income

    22,822       22,081       21,801       21,614  

Provision for loan losses

    750                    

Net interest income after provision

    22,072       22,081       21,801       21,614  

Non-interest income

    10,073       9,985       10,219       9,673  

Non-interest expenses

    18,322       18,430       18,867       17,779  

Income before income taxes

    13,823       13,636       13,153       13,508  

Income tax expense

    4,177       4,352       4,151       4,253  
                                 

Net income

  $ 9,646     $ 9,284     $ 9,002     $ 9,255  
                                 

Basic earnings per share

  $ 0.43     $ 0.42     $ 0.41     $ 0.42  

Diluted earnings per share

    0.43       0.41       0.40       0.42  

 

Note:

The sum of earnings per share of each of the quarters in 2017, 2016 and 2015 may not add to the year-to-date amount reported in Bancorp’s consolidated financial statements due to rounding.

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

To the Board of Directors and Stockholders
Stock Yards Bancorp, Inc.:
   

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Stock Yards Bancorp, Inc. and subsidiary (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

(signed) KPMG LLP

 

We have served as the Company’s auditor since 1988.

 

Louisville, Kentucky

March 13, 2018

 

52

 

Management’s Report on Consolidated Financial Statements

 

The accompanying consolidated financial statements and other financial data were prepared by the management of Stock Yards Bancorp, Inc. (Bancorp), which has the responsibility for the integrity of the information presented. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and, as such, include amounts that are the best estimates and judgments of management with consideration given to materiality.

 

Management is further responsible for maintaining a system of internal controls designed to provide reasonable assurance that the books and records reflect the transactions of Bancorp and that its established policies and procedures are carefully followed. Management believes that Bancorp’s system, taken as a whole, provides reasonable assurance that transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles and to maintain accountability for assets; access to assets is permitted only in accordance with management’s general or specific authorization, and the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

Management also seeks to assure the objectivity and integrity of Bancorp’s financial data by the careful selection and training of qualified personnel, an internal audit function and organizational arrangements that provide an appropriate division of responsibility.

 

KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements of Bancorp included in this Annual Report on Form 10-K, has issued a report on Bancorp’s internal control over financial reporting as of December 31, 2017.  The report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.

 

The Board of Directors provides its oversight role for the consolidated financial statements through the Audit Committee. The Audit Committee meets periodically with management, the internal auditors, and the independent auditors, each on a private basis, to review matters relating to financial reporting, the internal control systems, and the scope and results of audit efforts. The internal and independent auditors have unrestricted access to the Audit Committee, with and without the presence of management, to discuss accounting, auditing, and financial reporting matters. The Audit Committee also recommends the appointment of the independent auditors to the Board of Directors, and ultimately has sole authority to appoint or replace the independent auditors.

 

 

 

/s/ David P. Heintzman

 

David P. Heintzman

Chairman and Chief Executive Officer

 

/s/ Nancy B. Davis

 

Nancy B. Davis

Executive Vice President and Chief Financial Officer

 

53

 

Part IV

 

Item 15.   Exhibits and Financial Statement Schedules

 

(a) 1.

The following financial statements are included in this Form 10-K:

 

Consolidated Balance Sheets – December 31, 2017 and 2016

Consolidated Statements of Income - years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Comprehensive Income - years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Changes in Stockholders’ Equity - years ended December 31, 2017, 2016 and 2015

Consolidated Statements of Cash Flows - years ended December 31, 2017, 2016 and 2015

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

 

(a) 2.

List of Financial Statement Schedules

 

Schedules to the consolidated financial statements of Bancorp are omitted since they are either not required under the related instructions, are inapplicable, or the required information is shown in the consolidated financial statements or notes thereto. 

 

(a) 3.

List of Exhibits

 

Exhibit Number

 

2.1

 

Agreement and Plan of Merger by and among THE BANCorp, Inc., S.Y. Bancorp, Inc. and Sanders Merger Sub, Inc. on December 19, 2012. Exhibit 2.1 to Form 8-K filed December 20, 2012, is incorporated by reference herein.

2.2

 

First Amendment to Agreement and Plan of Merger dated as of February 26, 2013 by and among S.Y. Bancorp, Inc., Sanders Merger Sub, LLC, and THE BANCorp, Inc. Exhibit 2.2 to form S-4 (File No. 333-186930) filed February 27, 2013, is incorporated by reference herein.

3.1

 

Second Amended and Restated Articles of Incorporation of S.Y. Bancorp, Inc., filed with the Secretary of State of Kentucky on April 25, 2013. Exhibit 3.1 to Form 8-K filed April 25, 2013, is incorporated by reference herein.

3.2

 

Articles of Amendment to the Second Amended and Restated Articles of Incorporation to change the name of the company to Stock Yards Bancorp, Inc., filed with the Secretary of State of Kentucky on April 23, 2014. Exhibit 3.1 to Form 8-K filed April 25, 2014, is incorporated by reference herein.

3.3

 

Articles of Amendment to the Second Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock and adopt majority voting in uncontested director elections, filed with the Secretary of State of Kentucky on April 23, 2015. Exhibit 3.1 to Form 8-K filed April 27, 2015, is incorporated by reference herein.

3.4

 

Bylaws of Bancorp as currently in effect. Exhibit 3.2 to Form 8-K filed April 27, 2015, is incorporated by reference herein.

10.1*

 

Stock Yards Bank & Trust Company Executive Nonqualified Deferred Compensation Plan (as Amended and Restated in 2009), as filed as Exhibit 10.4 to Form 8-K filed on December 19, 2008, is incorporated by reference herein.

 

54

 

10.2*

 

Stock Yards Bank & Trust Company Director Nonqualified Deferred Compensation Plan (as Amended and Restated in 2009), as filed as Exhibit 10.3 to Form 8-K filed on December 19, 2008, is incorporated by reference herein.

10.3*

 

Form of Stock Yards Bank & Trust Company Executive Nonqualified Deferred Compensation Plan Employer Contribution Agreement, as filed as Exhibit 10.3 to Form 8-K filed on October 23, 2006, is incorporated by reference herein.

10.4*

 

Stock Yards Bank & Trust Company 2009 Restated Senior Officers Security Plan Exhibit 10.1 to Form 8-K filed December 19, 2008, is incorporated by reference herein.

10.5*

 

Form of Change in Control Severance Agreement (Poindexter, Dishman, Stinnett and Croce), Exhibit 10.5 to Form 8-K filed January 28, 2010, is incorporated by reference herein.

10.6*

 

S.Y. Bancorp, Inc. 2005 Stock Incentive Plan. Exhibit 10.1 to Form 8-K filed May 2, 2005, is incorporated by reference herein.

10.7*

 

Amendment No. 1 to S. Y. Bancorp, Inc. 2005 Stock Incentive Plan, as filed as Exhibit 10.1 to Form 8-K filed on April 22, 2010, is incorporated by reference herein.

10.8*

 

Form of Employer Contribution Agreement, Nancy Davis, Participant, as filed as Exhibit 10.4 to Form 8-K filed on October 23, 2006, is incorporated by reference herein.

10.9*

 

Terms of Restricted Stock Program, as filed as Exhibit 10.1 to Form 8-K filed on February 26, 2007, is incorporated by reference herein.

10.10*

 

Form of Restricted Stock Agreement (3 year vesting), as filed as Exhibit 10.2 to Form 8-K filed on February 26, 2007, is incorporated by reference herein.

10.11*

 

Form of Stock Option Grant and Agreement (6 months vesting), as filed as Exhibit 10.1 to Form 8-K filed on January 19, 2006, is incorporated by reference herein.

10.12*

 

Form of Stock Option Grant and Agreement (5 year vesting), as filed as Exhibit 10.2 to Form 8-K filed on January 19, 2006, is incorporated by reference herein.

10.13*

 

Form of Stock Appreciation Right Grant Agreement (6 month vesting), as filed as Exhibit 10.1 to Form 8-K filed on February 22, 2008, is incorporated by reference herein.

10.14*

 

Form of Stock Appreciation Right Grant Agreement (5 year vesting), as filed as Exhibit 10.2 to Form 8-K filed on February 22, 2008, is incorporated by reference herein.

10.15*

 

Form of Indemnification Agreement between Stock Yards Bank & Trust Company, S.Y. Bancorp, Inc. and each member of the Board of Directors. Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.

10.16*

 

Form of Restricted Stock Award Agreement (5 year vesting) between S.Y. Bancorp, Inc. and each recipient of restricted stock. Exhibit 10.21 to Annual Report on Form 10-K for the year ended December 31, 2010, of Bancorp is incorporated by reference herein.

10.17*

 

Form of Director Restricted Stock Award Agreement (1 year vesting) between S.Y. Bancorp, Inc. and each member of the Board of Directors. Exhibit 10.22 to Annual Report on Form 10-K for the year ended December 31, 2010, of Bancorp is incorporated by reference herein.

10.18*

 

Amendment No. 2 to the S. Y. Bancorp, Inc. 2005 Stock Incentive Plan, as filed as Exhibit 10.1 to Form 8-K filed on April 22, 2011, is incorporated by reference herein.

10.19*

 

Form of S.Y. Bancorp, Inc. Restricted Stock Unit Grant Agreement for grants prior to 2014, as filed as Exhibit 10.2 to Form 8-K filed on April 22, 2011, is incorporated by reference herein.

10.20*

 

Form of Stock Appreciation Right Grant Agreement (5 year vesting) between S.Y. Bancorp, Inc. and each recipient of stock appreciation rights. Exhibit 10.25 to Annual Report on Form 10-K for the year ended December 31, 2012, of Bancorp is incorporated by reference herein.

10.21*

 

Form of S.Y. Bancorp, Inc. Restricted Stock Unit Grant Agreement 2012 and Amendment thereto, as filed as Exhibit 10.1 to Form 8-K filed on March 20, 2013, is incorporated by reference herein.

10.22*

 

Form of Annual Cash Incentive Plan, as filed as Exhibit 10.1 to Form 8-K filed on April 26, 2013, is incorporated by reference herein.

10.23*

 

Amendment No. 3 to the S. Y. Bancorp, Inc. 2005 Stock Incentive Plan, as filed as Exhibit 10.1 to Form 8-K filed on November 22, 2013, is incorporated by reference herein.

10.24*

 

Amendment No. 1 to the Director Nonqualified Deferred Compensation Plan, as filed as Exhibit 10.2 to Form 8-K filed on November 22, 2013, is incorporated by reference herein.

10.25*

 

Form of Director Restricted Stock Unit Award Agreement, as filed as Exhibit 10.3 to Form 8-K filed on November 22, 2013, is incorporated by reference herein.

10.26*

 

Form of Amended and Restated Change in Control Severance Agreement (for David Heintzman, Ja Hillebrand, Kathy Thompson and Nancy Davis), as filed as Exhibit 10.1 to Form 8-K filed on December 17, 2013, is incorporated by reference herein.

 

55

 

10.27*

 

Form of Annual Cash Bonus Plan (as amended December 16, 2013), as filed as Exhibit 10.2 to Form 8-K filed on December 17, 2013, is incorporated by reference herein.

10.28*

 

Form of Restricted Stock Unit Grant Agreement for grants awarded 2014 and later, as filed as Exhibit 10.3 to Form 8-K filed on December 17, 2013, is incorporated by reference herein.

10.29*

 

Form of Amendment No. 1 Stock Yards Bank & Trust Company Executive Nonqualified Deferred Compensation Plan, as filed as Exhibit 10.1 to Form 8-K filed on December 18, 2014, is incorporated by reference herein.

10.30*

 

Form of Amendment No. 2 Stock Yards Bank & Trust Company Director Nonqualified Deferred Compensation Plan, as filed as Exhibit 10.2 to Form 8-K filed on December 18, 2014, is incorporated by reference herein.

10.31*

 

Form of Restricted Stock Unit Grant Agreement as filed as Exhibit 10.1 to Form 8-K filed on March 19, 2015, is incorporated by reference herein.

10.32*

 

Amendment to Form of Restricted Stock Unit Grant Agreement as filed as Exhibit 10.1 to Form 8-K/A filed on March 19, 2015, is incorporated by reference herein.

10.33*

 

Stock Yards Bancorp, Inc. 2015 Omnibus Equity Compensation Plan, as filed as Exhibit 10.1 to Form 8K, on April 27, 2015 is incorporated by reference herein.

10.34*

 

Form of Performance-Vested Stock Units (PSU’s) Agreement, as filed as Exhibit 10.1 to Form 8-K filed on March 17, 2016, is incorporated by reference herein.

10.35*

 

Form of Stock Appreciation Rights (SARS) Agreement, as filed as Exhibit 10.2 to Form 8-K filed on March 17, 2016, is incorporated by reference herein.

10.36*

 

Form of Performance-Vested Stock Unit Grant Agreement, as filed as Exhibit 10.1 to Form 8-K filed on March 27, 2017, is incorporated by reference herein.

***10.37*   Amendment No. 1 to the Stock Yards Bancorp 2015 Omnibus Equity Compensation Plan.

***14

 

Code of Ethics for the Chief Executive Officer and Financial Executives.

***21

 

Subsidiary of the Registrant.

**23

 

Consent of Independent Registered Public Accounting Firm.

**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.

**32.1

 

Certifications pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by David P. Heintzman.

**32.2

 

Certifications pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Nancy B. Davis.

***101  

The following financial statements from the Stock Yards Bancorp, Inc. December 31, 2017

Annual Report on Form 10-K, filed on March 13, 2017, 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

 

* Indicates matters related to executive compensation or other management contracts.

  ** Contained herewith.

*** Previously filed.

 

Copies of the foregoing Exhibits will be furnished to others upon request and payment of Bancorp’s reasonable expenses in furnishing the exhibits.

 

 

(b)

Exhibits

The exhibits listed in response to Item 15(a) 3 are filed or furnished as a part of this report.

 

(c)

Financial Statement Schedules

None

 

56

 

Where You Can Find More Information

 

Bancorp is subject to the informational requirements of the Securities Exchange Act of 1934 and accordingly files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”).  The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  Please call the SEC at (800) SEC-0330 for further information on the Public Reference Room.  Bancorp’s public filings are also maintained on the SEC’s Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.  The address of that web site is http://www.sec.gov.  In addition, Bancorp’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act may be accessed free of charge through Bancorp’s web site after we have electronically filed such material with, or furnished it to, the SEC.  The address of that web site is http://www.syb.com.

 

57

 

Signatures 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment No.1 to its annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

April 4, 2018

STOCK YARDS BANCORP, INC.

 

 

 

 

BY:

/s/ David P. Heintzman

 

 

 

David P. Heintzman

 

 

Chairman and
Chief Executive Officer

 

58