Stock Yards Bancorp, Inc. is a financial holding company headquartered in Louisville, Kentucky.
The Bank, chartered in 1904, is a state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio MSAs through 42 full service banking center locations.
As a result of its acquisition of KSB on May 1, 2019, Bancorp became the 100% successor owner of KBST, an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the TPS at the par amount of approximately $4 million on June 17, 2019.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part 1 Item 1 “Financial Statements.”
This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although Bancorp believes assumptions underlying forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to the following: economic conditions both generally and more specifically in markets in which Bancorp and the Bank operate; competition for Bancorp’s customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of Bancorp’s customers; and other risks detailed in Bancorp’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.
On May 1, 2019, Bancorp completed its acquisition of KSB, for $28 million in cash. The acquisition expands the Company’s market area into nearby Nelson County, Kentucky, while expanding the customer base in Louisville, Kentucky. At May 1, 2019, KSB reported approximately $192 million in total assets, approximately $164 million in loans, and approximately $126 million in deposits. As a result of the acquisition, goodwill totaling $12 million was recorded during the second quarter of 2019 with nominal recast adjustments posted during the third quarter.
As a result of the completion of the acquisition, Bancorp incurred pre-tax transaction charges totaling $1.3 million during the second quarter of 2019. Net income from the KSB acquisition is expected to be accretive to Bancorp’s overall operating results on a quarterly basis going forward.
For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the Footnote titled “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
Bancorp is divided into two reportable segments: Commercial Banking and WM&T:
Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses through commercial lending, retail lending, deposit services, treasury management services, private banking, online banking, mobile banking, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer.
WM&T provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.
Overview - Three and Nine Months Ended September 30, 2019 Compared to the Same Periods in the Prior Year
|
Three months ended September 30, (In thousands, except per share data)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,234
|
|
|
$
|
13,876
|
|
|
$
|
3,358
|
|
|
|
24
|
%
|
Diluted earnings per share
|
|
$
|
0.76
|
|
|
$
|
0.60
|
|
|
$
|
0.16
|
|
|
|
27
|
%
|
Annualized return on average assets
|
|
|
1.95
|
%
|
|
|
1.75
|
%
|
|
|
20 bps
|
|
|
|
11
|
%
|
Annualized return on average equity
|
|
|
17.41
|
%
|
|
|
15.67
|
%
|
|
|
174 bps
|
|
|
|
11
|
%
|
General highlights for the quarter ended September 30, 2019 compared to the same period in 2018:
●
|
NIM improved 7 bps to 3.86% for the three months ended September 30, 2019 compared to the same period in 2018.
|
●
|
The FRB lowered the FFTR 25 bps on two separate occasions effective August 1st and September 19th with Prime ending the period at 5.00%.
|
●
|
Net interest income increased $3.5 million, or 12%, for the three months ended September 30, 2019.
|
●
|
Consistent with the lowering of Prime, Bancorp lowered the stated rate of most interest-bearing deposit account types during the third quarter of 2019.
|
●
|
Average loans increased $260 million, or 10%, for the three months ended September 30, 2019 compared to the same period in 2018. The benefit of the first full quarter from the May 1st KSB acquisition was complemented by strong organic loan production and net loan growth.
|
●
|
Average deposits increased $322 million, or 12%, for the three months ended September 30, 2019 compared to the same period in 2018.
|
●
|
Sustained sound credit metrics and minimal net charge-offs led to a low provision of $400,000 for the three months ended September 30, 2019 compared to $735,000 for the same period in 2018.
|
●
|
The allowance to total loans was 0.94% as of September 30, 2019 compared to 1.00% at both September 30, 2018 and December 31, 2018.
|
●
|
Non-interest income increased $1.9 million, or 16%, for the three months ended September 30, 2019 compared to 2018 based on the following:
|
|
o
|
Strong market returns, new business generation, and growth in corporate retirement plans led to higher WM&T income.
|
|
o
|
Debit and credit card revenue continues to benefit from increasing transaction volumes and incentives paid by card processors.
|
|
o
|
Other non-interest income benefited from non-recurring swap fees collected, gain on sale of Visa Class B common stock and proceeds received from a life insurance policy.
|
●
|
Non-interest expenses increased $2.2 million, or 10%, for the three months ended September 30, 2019 compared to 2018 based on the following:
|
|
o
|
Compensation reflects increases for both the KSB acquisition and full time equivalent employee additions.
|
|
o
|
In addition to the full time equivalent employee additions mentioned above, employee benefits expense also reflects higher health insurance claims experienced and increased 401(k) expense.
|
●
|
The ETR decreased from 20.39% for the three months ended September 30, 2018 to 18.00% for the same period in 2019.
|
Nine months ended September 30, (In thousands, except per share data)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49,418
|
|
|
$
|
40,859
|
|
|
$
|
8,559
|
|
|
|
21
|
%
|
Diluted earnings per share
|
|
$
|
2.16
|
|
|
$
|
1.78
|
|
|
$
|
0.38
|
|
|
|
21
|
%
|
Annualized return on average assets
|
|
|
1.94
|
%
|
|
|
1.75
|
%
|
|
|
19 bps
|
|
|
|
11
|
%
|
Annualized return on average equity
|
|
|
17.31
|
%
|
|
|
15.92
|
%
|
|
|
139 bps
|
|
|
|
9
|
%
|
General highlights for the nine months ended September 30, 2019 compared to the same period in 2018:
●
|
NIM improved 3 bps to 3.85% for the nine months ended September 30, 2019 compared to the same period in 2018.
|
●
|
The FRB lowered the FFTR on two separate occasions by 25 bps twice during with Prime ending the period at 5.00%.
|
●
|
Net interest income increased $8.0 million, or 9%, for the nine months ended September 30, 2019.
|
●
|
Consistent with the lowering of Prime, Bancorp lowered the stated rate of most interest-bearing deposit account types during 2019.
|
●
|
Average loans increased $164 million, or 7%, for the nine months ended September 30, 2019 compared to the same period in 2018. Bancorp benefited from the May 1st KSB acquisition in addition to strong organic loan production and net loan growth.
|
●
|
Average deposits increased $275 million, or 11%, for the nine months ended September 30, 2019 compared to same period in 2018.
|
●
|
Sustained sound credit metrics, including net loan loss recoveries for the first nine months of 2019, lead to reduced provision of $1.0 million compared with $2.7 million for the same period in 2018.
|
●
|
Non-interest income increased $2.9 million, or 8%, for the nine months ended September 30, 2019 compared to 2018 based on the following:
|
|
o
|
Strong market returns, new business generation, and growth in corporate retirement plans led to higher WM&T income.
|
|
o
|
Debit and credit card revenue continues to benefit from increasing transaction volumes and incentives paid by card processors.
|
|
o
|
Other non-interest income benefited from non-recurring swap fees collected, gain on sale of Visa Class B common stock and proceeds received from a life insurance policy.
|
●
|
Non-interest expenses increased $7.1 million, or 11%, for the nine months ended September 30, 2019 compared to 2018 based on the following:
|
|
o
|
Compensation reflects increases for both the KSB acquisition and full time equivalent employee additions.
|
|
o
|
In addition to the full time equivalent employee additions mentioned above, employee benefits expense also reflects higher health insurance claims experienced and increased 401(k) expense.
|
●
|
Bancorp's efficiency ratio, calculated on a FTE basis, in the first nine months of 2019 was 55.7% compared with 54.8% in the same period in 2018.
|
●
|
The ETR decreased from 19.29% for the nine months ended September 30, 2018 to 11.86% for the same period in 2019 primarily due to two Kentucky state tax law changes that occurred during the first six months of 2018.
|
Total stockholder’s equity to total assets was 11.21% as of September 30, 2019 compared to 11.10% at December 31, 2018 and 10.62% at September 30, 2018. Total equity increased $30 million in the first nine months of 2019, as net income of $49 million was offset by dividends declared of $17 million, stock repurchases totaling $9 million, changes in AOCI and various stock based compensation.
TCE is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. Bancorp’s ratio of TCE to total tangible assets was 10.83% as of September 30, 2019, compared with 11.05% at December 31, 2018, and 10.57% at September 30, 2018, with the decline attributable to the second quarter KSB acquisition. See the Non-GAAP Financial Measures section for details on reconcilement to GAAP measures.
The following sections provide more details on subjects presented in this overview.
Results of Operations - Three and Nine Months Ended September 30, 2019 Compared to September 30, 2018
|
Net Interest Income
As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. New business volume is influenced by economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.
Total Company Average Balance Sheets and Interest Rates - Three Month Comparison
|
|
Three months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
balance
|
|
|
Interest
|
|
|
rate
|
|
|
balance
|
|
|
Interest
|
|
|
rate
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest bearing due from banks
|
|
$
|
98,569
|
|
|
$
|
566
|
|
|
|
2.28
|
%
|
|
$
|
73,196
|
|
|
$
|
373
|
|
|
|
2.02
|
%
|
Mortgage loans held for sale
|
|
|
3,887
|
|
|
|
41
|
|
|
|
4.18
|
|
|
|
2,980
|
|
|
|
42
|
|
|
|
5.59
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
376,186
|
|
|
|
2,113
|
|
|
|
2.23
|
|
|
|
337,707
|
|
|
|
1,922
|
|
|
|
2.26
|
|
Tax-exempt
|
|
|
20,500
|
|
|
|
125
|
|
|
|
2.42
|
|
|
|
34,544
|
|
|
|
230
|
|
|
|
2.64
|
|
Federal Home Loan Bank stock
|
|
|
11,317
|
|
|
|
126
|
|
|
|
4.42
|
|
|
|
10,370
|
|
|
|
133
|
|
|
|
5.09
|
|
Loans, net of unearned income
|
|
|
2,791,389
|
|
|
|
35,063
|
|
|
|
4.98
|
|
|
|
2,531,604
|
|
|
|
30,390
|
|
|
|
4.76
|
|
Total interest earning assets
|
|
|
3,301,848
|
|
|
|
38,034
|
|
|
|
4.57
|
|
|
|
2,990,401
|
|
|
|
33,090
|
|
|
|
4.39
|
|
Less allowance for loan losses
|
|
|
27,168
|
|
|
|
|
|
|
|
|
|
|
|
25,124
|
|
|
|
|
|
|
|
|
|
|
|
|
3,274,680
|
|
|
|
|
|
|
|
|
|
|
|
2,965,277
|
|
|
|
|
|
|
|
|
|
Non-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
45,343
|
|
|
|
|
|
|
|
|
|
|
|
43,599
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
64,573
|
|
|
|
|
|
|
|
|
|
|
|
43,137
|
|
|
|
|
|
|
|
|
|
Bank Owned Life Insurance
|
|
|
32,697
|
|
|
|
|
|
|
|
|
|
|
|
32,492
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable and other assets
|
|
|
84,974
|
|
|
|
|
|
|
|
|
|
|
|
68,901
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,502,267
|
|
|
|
|
|
|
|
|
|
|
$
|
3,153,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
$
|
837,796
|
|
|
$
|
1,207
|
|
|
|
0.57
|
%
|
|
$
|
776,770
|
|
|
$
|
1,168
|
|
|
|
0.60
|
%
|
Savings deposits
|
|
|
170,300
|
|
|
|
65
|
|
|
|
0.15
|
|
|
|
156,471
|
|
|
|
98
|
|
|
|
0.25
|
|
Money market deposits
|
|
|
687,794
|
|
|
|
1,763
|
|
|
|
1.02
|
|
|
|
642,013
|
|
|
|
1,612
|
|
|
|
1.00
|
|
Time deposits
|
|
|
431,879
|
|
|
|
2,281
|
|
|
|
2.10
|
|
|
|
299,599
|
|
|
|
1,094
|
|
|
|
1.45
|
|
Total interest bearing deposits
|
|
|
2,127,769
|
|
|
|
5,316
|
|
|
|
0.99
|
|
|
|
1,874,853
|
|
|
|
3,972
|
|
|
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
37,705
|
|
|
|
26
|
|
|
|
0.27
|
|
|
|
67,381
|
|
|
|
55
|
|
|
|
0.32
|
|
Federal funds purchased
|
|
|
10,671
|
|
|
|
52
|
|
|
|
1.93
|
|
|
|
48,906
|
|
|
|
245
|
|
|
|
1.99
|
|
Federal Home Loan Bank advances
|
|
|
83,386
|
|
|
|
509
|
|
|
|
2.42
|
|
|
|
48,612
|
|
|
|
228
|
|
|
|
1.86
|
|
Subordinated debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
2,259,531
|
|
|
|
5,903
|
|
|
|
1.04
|
|
|
|
2,039,752
|
|
|
|
4,500
|
|
|
|
0.88
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
|
784,862
|
|
|
|
|
|
|
|
|
|
|
|
715,303
|
|
|
|
|
|
|
|
|
|
Accrued interest payable and other liabilities
|
|
|
65,034
|
|
|
|
|
|
|
|
|
|
|
|
46,975
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,109,427
|
|
|
|
|
|
|
|
|
|
|
|
2,802,030
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
392,840
|
|
|
|
|
|
|
|
|
|
|
|
351,376
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholder's equity
|
|
$
|
3,502,267
|
|
|
|
|
|
|
|
|
|
|
$
|
3,153,406
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
32,131
|
|
|
|
|
|
|
|
|
|
|
$
|
28,590
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.51
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.86
|
%
|
|
|
|
|
|
|
|
|
|
|
3.79
|
%
|
Total Company Average Balance Sheets and Interest Rates - Nine Month Comparison
|
|
Nine months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
balance
|
|
|
Interest
|
|
|
rate
|
|
|
balance
|
|
|
Interest
|
|
|
rate
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest bearing due from banks
|
|
$
|
119,210
|
|
|
$
|
2,129
|
|
|
|
2.39
|
%
|
|
$
|
60,463
|
|
|
$
|
804
|
|
|
|
1.78
|
%
|
Mortgage loans held for sale
|
|
|
3,144
|
|
|
|
121
|
|
|
|
5.15
|
|
|
|
2,687
|
|
|
|
121
|
|
|
|
6.02
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
398,617
|
|
|
|
6,919
|
|
|
|
2.32
|
|
|
|
356,423
|
|
|
|
5,946
|
|
|
|
2.23
|
|
Tax-exempt
|
|
|
24,465
|
|
|
|
462
|
|
|
|
2.52
|
|
|
|
40,520
|
|
|
|
813
|
|
|
|
2.68
|
|
Federal Home Loan Bank stock
|
|
|
10,704
|
|
|
|
434
|
|
|
|
5.42
|
|
|
|
9,004
|
|
|
|
352
|
|
|
|
5.23
|
|
Loans, net of unearned income
|
|
|
2,660,328
|
|
|
|
100,077
|
|
|
|
5.03
|
|
|
|
2,496,267
|
|
|
|
86,980
|
|
|
|
4.66
|
|
Total interest earning assets
|
|
|
3,216,468
|
|
|
|
110,142
|
|
|
|
4.58
|
|
|
|
2,965,364
|
|
|
|
95,016
|
|
|
|
4.28
|
|
Less allowance for loan losses
|
|
|
26,832
|
|
|
|
|
|
|
|
|
|
|
|
24,874
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189,636
|
|
|
|
|
|
|
|
|
|
|
|
2,940,490
|
|
|
|
|
|
|
|
|
|
Non-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
43,664
|
|
|
|
|
|
|
|
|
|
|
|
41,410
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
63,586
|
|
|
|
|
|
|
|
|
|
|
|
42,347
|
|
|
|
|
|
|
|
|
|
Bank Owned Life Insurance
|
|
|
32,690
|
|
|
|
|
|
|
|
|
|
|
|
32,303
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable and other assets
|
|
|
74,504
|
|
|
|
|
|
|
|
|
|
|
|
69,275
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,404,080
|
|
|
|
|
|
|
|
|
|
|
$
|
3,125,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
$
|
847,443
|
|
|
$
|
4,019
|
|
|
|
0.63
|
%
|
|
$
|
795,361
|
|
|
$
|
2,630
|
|
|
|
0.44
|
%
|
Savings deposits
|
|
|
165,794
|
|
|
|
270
|
|
|
|
0.22
|
|
|
|
156,553
|
|
|
|
214
|
|
|
|
0.18
|
|
Money market deposits
|
|
|
685,124
|
|
|
|
5,816
|
|
|
|
1.13
|
|
|
|
661,817
|
|
|
|
3,772
|
|
|
|
0.76
|
|
Time deposits
|
|
|
398,384
|
|
|
|
5,929
|
|
|
|
1.99
|
|
|
|
257,815
|
|
|
|
2,107
|
|
|
|
1.09
|
|
Total interest bearing deposits
|
|
|
2,096,745
|
|
|
|
16,034
|
|
|
|
1.02
|
|
|
|
1,871,546
|
|
|
|
8,723
|
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
38,402
|
|
|
|
79
|
|
|
|
0.28
|
|
|
|
66,869
|
|
|
|
122
|
|
|
|
0.24
|
|
Federal funds purchased
|
|
|
11,288
|
|
|
|
176
|
|
|
|
2.08
|
|
|
|
54,531
|
|
|
|
728
|
|
|
|
1.78
|
|
Federal Home Loan Bank advances
|
|
|
68,075
|
|
|
|
1,154
|
|
|
|
2.27
|
|
|
|
48,927
|
|
|
|
692
|
|
|
|
1.89
|
|
Subordinated debt
|
|
|
643
|
|
|
|
26
|
|
|
|
5.41
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
2,215,153
|
|
|
|
17,469
|
|
|
|
1.05
|
|
|
|
2,041,873
|
|
|
|
10,265
|
|
|
|
0.67
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
|
745,105
|
|
|
|
|
|
|
|
|
|
|
|
695,791
|
|
|
|
|
|
|
|
|
|
Accrued interest payable and other liabilities
|
|
|
62,079
|
|
|
|
|
|
|
|
|
|
|
|
44,913
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,022,337
|
|
|
|
|
|
|
|
|
|
|
|
2,782,577
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
381,743
|
|
|
|
|
|
|
|
|
|
|
|
343,248
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholder's equity
|
|
$
|
3,404,080
|
|
|
|
|
|
|
|
|
|
|
$
|
3,125,825
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
92,673
|
|
|
|
|
|
|
|
|
|
|
$
|
84,751
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.61
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.85
|
%
|
|
|
|
|
|
|
|
|
|
|
3.82
|
%
|
Total Company Average Balance Sheets and Interest Rates - Supplemental Information
|
●
|
Average loan balances include the principal balance of non-accrual loans, as well as all loan premiums, discounts, fees and costs, and exclude participation loans accounted for as secured borrowings. Participation loans averaged $9 million and $16 million for the three month periods ended September 30, 2019 and 2018, and $10 million and $17 million for the nine month periods ended September 30, 2019 and 2018.
|
|
●
|
Interest income on a FTE basis includes additional amounts of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and tax-exempt loans has been calculated on a FTE basis using a federal income tax rate of 21% for 2019 and 2018. Approximate tax equivalent adjustments to interest income were $61,000 and $69,000 for the three month periods ended September 30, 2019 and 2018, and $172,000 and $247,000 for the nine month periods ended September 30, 2019 and 2018.
|
|
●
|
Interest income includes loan fees of $481,000 and $184,000 for the three months ended September 30, 2019, and 2018 and $1.3 million and $722,000 for the nine month periods ended September 30, 2019 and 2018.
|
|
●
|
Net interest income, the most significant component of the Bank's earnings represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.
|
|
●
|
Net interest spread is the difference between taxable equivalent rates earned on interest earning assets less the cost of interest bearing liabilities.
|
|
●
|
NIM represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. NIM is impacted by both interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity.
|
______________________________
Net Interest Income – Overview
During the third quarter of 2019, the FRB lowered the FFTR 25 bps twice; effective on August 1st and later during the quarter effective September 19th. At September 30, 2019, Prime was 5.00% compared to 5.50% at December 31, 2018 and 5.25% at September 30, 2018. In response to the August FFTR reduction, Bancorp immediately lowered the stated rate of most interest-bearing deposit account types, in addition to lowering all CD offering rates. With regard to the September FFTR reduction, Bancorp immediately lowered stated rates on most personal money market and larger sweep customers in addition to CD offering rates. Bancorp was able to fully offset the loss in revenue, with the first FFTR move not impacting overall NIM. As discussed throughout, future FFTR declines would likely result in margin compression, as additional reductions in deposit rates may not be sufficient to offset the potential loss in revenue.
Beginning in the second quarter of 2019, with the flattening/inverting of the treasury curve, Bancorp began to experience loan pricing pressure. In addition to continued intense loan pricing competition, protracted yield curve inversion is a concern, with recent fixed rate loan production at yields closer to 4.50%, while the overall portfolio yielded 4.98% for the three months ended September 30, 2019.
In the first half of 2018, Bancorp raised stated rates paid on money market accounts in addition to launching a targeted CD marketing campaign within its Louisville market to support loan growth in addition to increasing liquidity. The campaign generated over $100 million in CD growth in 2018. In addition, the deposit portfolio assumed from KSB in the second quarter was and remains concentrated in higher costing time deposits. While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, deposit balances have continued to migrate from non-interest bearing accounts to interest bearing accounts during the period.
In general, net interest income and NIM have been favorably impacted by elevated loan prepayment fees collected in 2019 with a much lighter impact experienced in the prior year. Also, the KSB portfolio mix of earning assets and interest bearing liabilities added during 2019 has slightly impacted NIM in a negative manner.
Net Interest Income – Three months ended September 30, 2019 compared to September 30, 2018
Net interest spread and NIM increased to 3.53% and 3.86%, for the three months ended September 30, 2019 compared to 3.51% and 3.79% for the same periods in 2018. Net interest income (FTE) of $32.1 million for the three months ended September 30, 2019 increased $3.5 million, or 12%, from $28.6 million for the same period in 2018 led by earning asset growth, primarily loans. Total average earning assets increased $311 million, or 10%, to $3.3 billion for the three month period ended September 30, 2019, as compared with the same period in 2018, with the average rate earned on earnings assets increasing 18 bps to 4.57%. Average loans increased $260 million, or 10%, for the three months ended September 30, 2019 compared to the same period in 2018, with the KSB acquisition contributing $156 million, or 60% of the total increase. The remaining increase stemmed from strong organic loan production experienced across all markets. Average balances of FFS and interest bearing due from banks and taxable securities increased $64 million in total for the third quarter of 2019, as compared with 2018, as excess liquidity was deployed into short-term investments earning higher period over period yields.
Total interest income (FTE) increased $4.9 million, or 15%, for the third quarter of 2019, as compared with the third quarter of 2018, to $38.0 million. Approximately $4.7 million of the total increase related to the increased interest income on loans (FTE), with changes in volume driving most of the increase.
Total average interest bearing liabilities increased $220 million, or 11%, to $2.3 billion for the three month period ended September 30, 2019, as compared with the same period in 2018, with the average cost increasing 16 bps to 1.04%. Interest bearing liabilities assumed in the KSB acquisition (deposits and FHLB advances) represented $122 million, or 56%, of the total increase. Average interest bearing deposits increased $253 million, or 13%, for the three months ended September 30, 2019 compared to the same period in 2018, with time deposits representing 52% of the increase. KSB assumed interest bearing liabilities represented $86 million of the third quarter 2019 average interest bearing deposit balance and concentrated in the time deposit category.
Total interest expense increased $1.4 million, or 31%, for the three months ended September 30, 2019 compared to 2018 with the vast majority of the increase associated with total interest bearing deposits – predominantly time deposits. The cost of time deposits increased from 1.45% for the three months ended September 30, 2018 to 2.10% for the same period in 2019, while the average balance increased $132 million, or 44%. The change in time deposits was impacted equally by both changes in rates and volume. The average balance of SSUAR decreased $30 million, or 44%, for the three months ended September 30, 2019 as compared to the same period in 2018, as a significant number of commercial customers migrated from lower yielding collateralized products to higher yielding non-collateralized deposits. Average FHLB advances increased $35 million, or 72%, for the three months ended September 30, 2019 compared to 2018 based on advances assumed from the KSB acquisition. These advances were retained by Bancorp based upon favorable rates and terms in the overall execution of the Company’s asset liability management strategy.
Net Interest Income – Nine months ended September 30, 2019 compared to September 30, 2018
Net interest spread and NIM were 3.53% and 3.85%, for the nine months ended September 30, 2019 compared to 3.61% and 3.82% for the same periods in 2018. Net interest income (FTE) of $92.7 million for the nine months ended September 30, 2019 increased $7.9 million, or 9%, from $84.8 million for the same period in 2018, led by growth in average interest earning assets, primarily loans. Total average earning assets increased $251 million, or 8%, to $3.2 billion for the nine month period ended September 30, 2019, as compared with the same period in 2018, with the average rate earned on earnings assets increasing 30 bps to 4.58%. Average loans increased $164 million, or 7%, for the nine months ended September 30, 2019 compared to the same period in 2018, with the KSB acquisition contributing $89 million, or 54% of the total average increase. The remaining increase stemmed from record year to date organic loan production experienced across all markets. Average balances of FFS, interest bearing due from banks and taxable securities increased $101 million in total for the nine month period ended September 30, 2019, as compared with 2018, as excess liquidity was deployed into short-term investments earning higher period over period yields.
Total interest income (FTE) increased $15.1 million, or 16%, for the nine months ended September 30, 2019, as compared with the same period in 2018, to $110.1 million. Approximately $100.1 million of the total increase related to loans (FTE), with changes in rate driving just over half of the increase.
Total average interest bearing liabilities increased $173 million, or 8%, to $2.2 billion for the nine month period ended September 30, 2019, as compared with the same period in 2018, with the average cost increasing 38 bps to 1.05%. Interest bearing liabilities assumed in the KSB acquisition (deposits and FHLB advances) represented $71 million, or 41%, of the total increase. Average interest bearing deposits increased $225 million, or 12%, for the nine months ended September 30, 2019 compared to the same period in 2018, with approximately $50 million attributable to the KSB acquisition and concentrated in the time deposits category.
Total interest expense increased $7.2 million, or 70%, for the nine months ended September 30, 2019 compared to the same period in 2018 and was concentrated within interest bearing deposits. Approximately 75% of the combined time deposits, money market accounts and demand deposits change was attributable to rate with fluctuations as follows:
|
●
|
The cost of time deposits increased from 1.09% to 1.99%, while the average balance increased $141 million, or 55%
|
|
●
|
The cost of money markets increased from 0.76% to 1.13%, while the average balance increased $23 million, or 4%
|
|
●
|
The cost of demand deposits increased from 0.44% 0.63%, while the average balance increased $52 million, or 7%.
|
The average balance of SSUAR decreased $28 million, or 43%, for the nine months ended September 30, 2019 compared to the same period in 2018, as a significant number of commercial customers migrated from lower yielding collateralized products to higher yielding non-collateralized deposits. Average FHLB advances increased $19 million, or 39%, for nine months ended September 30, 2019 compared to 2018 based on advances assumed from the KSB acquisition. These advances were retained by Bancorp based upon favorable rates and terms in the overall execution of the Company’s asset liability management strategy. As a result of the KSB acquisition, Bancorp assumed a $4 million subordinated note that was redeemed at par prior to the end of the second quarter of 2019.
Asset/Liability Management and Interest Rate Risk
Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.
Interest Rate Simulation Sensitivity Analysis
Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results.
The September 30, 2019 simulation analysis, which shows interest rate sensitivity, indicates that increases in interest rates of 100 to 200 BPs would have a positive effect on net interest income, and decreases of 100 to 200 BPs in interest rates would have a negative effect on net interest income. The mix of assets and liabilities acquired in the KSB transaction slightly increased Bancorp’s exposure to falling rates. The overall increase in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing more quickly than deposits and short-term borrowings. Asset balances subject to immediate repricing cause an estimated decline in net interest income in down 100 and 200 BP rate scenarios, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates are summarized below.
|
|
Change in Rates
|
|
|
|
-200
|
|
|
-100
|
|
|
+100
|
|
|
+200
|
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Basis Points
|
|
% Change from base net interest income at September 30, 2019
|
|
|
-8.45
|
%
|
|
|
-3.27
|
%
|
|
|
2.56
|
%
|
|
|
5.19
|
%
|
Approximately 60% of Bancorp’s loan portfolio has fixed rates with 40% priced at variable rates. Bancorp’s variable rate loans are above their floors and will reprice as rates change.
Undesignated derivative instruments, as described in the Footnote titled “Disclosure of Financial Instruments Not Reported at Fair Value,” are recognized on the consolidated balance sheet at fair value, with changes in fair value recorded in other non-interest income as interest rates fluctuate. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above.
Derivatives designated as cash flow hedges as described in the Footnote titled “Derivative Financial Instruments,” are recognized on the consolidated balance sheet at fair value, with changes in fair value due to changes in prevailing interest rates, recorded net of tax in OCI.
Provision for Loan and Lease Losses
The provision reflects results of an allowance methodology that is driven by risk ratings, historical losses, specific loan loss allocations, and qualitative factors. The provision represents a charge to earnings necessary to maintain an allowance that, in management’s evaluation, is adequate to provide coverage for the inherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors.
Bancorp recorded provision of $400,000 and $1.0 million for the three and nine month periods ended September 30, 2019, as compared with $735,000 and $2.7 million for the same periods in 2018. Continued strong credit metrics and net recoveries of $61,000 and $343,000 for the three and nine months ended September 30, 2019 resulted in an allowance to total loans of 0.94% as of September 30, 2019, compared with 1.00% as of both December 31, 2018 and September 30, 2018. The loans acquired in the KSB acquisition were marked to market on the acquisition date and as such did not receive an allowance.
Key indicators of loan quality remained consistent with the prior year with the exception of increased classified balances, defined as OAEM, Substandard, and non-performing loans, which increased $11 million as of September 30, 2019, as compared with December 31, 2018. While classified loan levels remained historically low, Substandard loans increased approximately $15 million in 2019 primarily due to the downgrade of three commercial relationships.
Consistent with Bancorp’s methodology, the historical look-back period was extended from 32 to 36 quarters in the first quarter of 2019 to all classes and segments of the portfolio. Management believes the expansion of the look-back period more accurately represents the current level of risk in the loan portfolio, and captures the effects of a full economic cycle. Based on the look-back period extension, the allowance level increased approximately $2.0 million during the first quarter of 2019. Additional information regarding Bancorp’s methodology for evaluating the adequacy of the allowance can be read in the Company’s Annual Report on Form 10-K.
Non-performing loans, consisting of TDRs, non-accrual loans, and loans over 90 days past due still accruing, declined to $3.2 million at September 30, 2019 from $3.4 million at December 31, 2018 and $5.0 million at September 30, 2018. Bancorp considers the present asset quality metrics to be exceptional; however, recognizing the cyclical nature of local economies, this trend is expected to normalize over the long-term.
Bancorp’s loan portfolio is diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in the MSAs of Louisville, Indianapolis and Cincinnati. The adequacy of the allowance is monitored on an ongoing basis and it is the opinion of management that the balance of the allowance at September 30, 2019 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.
An analysis of the changes in the allowance and selected ratios follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
(Dollars in thousands)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
26,416
|
|
|
$
|
24,873
|
|
|
$
|
25,534
|
|
|
$
|
24,885
|
|
Provision
|
|
|
400
|
|
|
|
735
|
|
|
|
1,000
|
|
|
|
2,705
|
|
Total charge-offs
|
|
|
(230
|
)
|
|
|
(561
|
)
|
|
|
(490
|
)
|
|
|
(2,736
|
)
|
Total recoveries
|
|
|
291
|
|
|
|
175
|
|
|
|
833
|
|
|
|
368
|
|
Total net loan charge-offs (recoveries)
|
|
|
61
|
|
|
|
(386
|
)
|
|
|
343
|
|
|
|
(2,368
|
)
|
Balance at the end of the period
|
|
$
|
26,877
|
|
|
$
|
25,222
|
|
|
$
|
26,877
|
|
|
$
|
25,222
|
|
Average loans, net of unearned income
|
|
$
|
2,791,389
|
|
|
$
|
2,531,604
|
|
|
$
|
2,660,328
|
|
|
$
|
2,496,267
|
|
Provision to average loans (1)
|
|
|
0.01
|
%
|
|
|
0.03
|
%
|
|
|
0.04
|
%
|
|
|
0.11
|
%
|
Net loan charge-offs (recoveries) to average loans (1)
|
|
|
0.00
|
%
|
|
|
-0.02
|
%
|
|
|
0.01
|
%
|
|
|
-0.09
|
%
|
Allowance to average loans
|
|
|
0.96
|
%
|
|
|
1.00
|
%
|
|
|
1.01
|
%
|
|
|
1.01
|
%
|
Allowance to total loans
|
|
|
0.94
|
%
|
|
|
1.00
|
%
|
|
|
0.94
|
%
|
|
|
1.00
|
%
|
(1) Amounts not annualized
|
Loans are charged off when deemed uncollectible and a loss is identified or after underlying collateral has been liquidated; however, collection efforts may continue and future recoveries may occur. Periodically, loans are partially charged off to net realizable value based upon collateral analysis and collection status. One significant C&I loan relationship totaling $1.3 million was charged off to its net realizable value in the first quarter of 2018, which resulted in increased net charge offs for the nine month period ending September 30, 2018.
An analysis of net charge-offs (recoveries) by loan portfolio segment follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
(In thousands)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
(63
|
)
|
|
$
|
389
|
|
|
$
|
(166
|
)
|
|
$
|
2,316
|
|
Construction and development, excluding undeveloped land
|
|
|
—
|
|
|
|
—
|
|
|
|
(203
|
)
|
|
|
—
|
|
Undeveloped land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Real estate mortgage - commercial investment
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
Real estate mortgage - owner occupied commercial
|
|
|
—
|
|
|
|
14
|
|
|
|
(20
|
)
|
|
|
14
|
|
Real estate mortgage - 1-4 family residential
|
|
|
(42
|
)
|
|
|
—
|
|
|
|
(59
|
)
|
|
|
—
|
|
Home equity
|
|
|
(1
|
)
|
|
|
(50
|
)
|
|
|
(2
|
)
|
|
|
(54
|
)
|
Consumer
|
|
|
48
|
|
|
|
34
|
|
|
|
111
|
|
|
|
95
|
|
Total net loan charge-offs (recoveries)
|
|
$
|
(61
|
)
|
|
$
|
386
|
|
|
$
|
(343
|
)
|
|
$
|
2,368
|
|
Non-interest Income and Non-interest Expenses
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(Dollars in thousands)
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth management and trust services
|
|
$
|
5,738
|
|
|
$
|
5,380
|
|
|
$
|
358
|
|
|
|
7
|
%
|
|
$
|
16,839
|
|
|
$
|
16,224
|
|
|
$
|
615
|
|
|
|
4
|
%
|
Deposit service charges
|
|
|
1,444
|
|
|
|
1,482
|
|
|
|
(38
|
)
|
|
|
(3
|
)
|
|
|
4,027
|
|
|
|
4,340
|
|
|
|
(313
|
)
|
|
|
(7
|
)
|
Debit and credit card income
|
|
|
2,102
|
|
|
|
1,759
|
|
|
|
343
|
|
|
|
19
|
|
|
|
6,014
|
|
|
|
4,956
|
|
|
|
1,058
|
|
|
|
21
|
|
Treasury management fees
|
|
|
1,264
|
|
|
|
1,151
|
|
|
|
113
|
|
|
|
10
|
|
|
|
3,623
|
|
|
|
3,311
|
|
|
|
312
|
|
|
|
9
|
|
Mortgage banking income
|
|
|
834
|
|
|
|
712
|
|
|
|
122
|
|
|
|
17
|
|
|
|
2,112
|
|
|
|
2,034
|
|
|
|
78
|
|
|
|
4
|
|
Net investment product sales commissions and fees
|
|
|
400
|
|
|
|
444
|
|
|
|
(44
|
)
|
|
|
(10
|
)
|
|
|
1,120
|
|
|
|
1,245
|
|
|
|
(125
|
)
|
|
|
(10
|
)
|
Bank owned life insurance
|
|
|
487
|
|
|
|
186
|
|
|
|
301
|
|
|
|
162
|
|
|
|
849
|
|
|
|
564
|
|
|
|
285
|
|
|
|
51
|
|
Other
|
|
|
1,035
|
|
|
|
312
|
|
|
|
723
|
|
|
|
232
|
|
|
|
2,045
|
|
|
|
1,096
|
|
|
|
949
|
|
|
|
87
|
|
Total non-interest income
|
|
$
|
13,304
|
|
|
$
|
11,426
|
|
|
$
|
1,878
|
|
|
|
16
|
%
|
|
$
|
36,629
|
|
|
$
|
33,770
|
|
|
$
|
2,859
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
$
|
12,330
|
|
|
$
|
11,607
|
|
|
$
|
723
|
|
|
|
6
|
%
|
|
$
|
36,846
|
|
|
$
|
34,280
|
|
|
$
|
2,566
|
|
|
|
7
|
%
|
Employee benefits
|
|
|
2,908
|
|
|
|
2,501
|
|
|
|
407
|
|
|
|
16
|
|
|
|
8,458
|
|
|
|
7,646
|
|
|
|
812
|
|
|
|
11
|
|
Net occupancy and equipment
|
|
|
2,199
|
|
|
|
1,914
|
|
|
|
285
|
|
|
|
15
|
|
|
|
6,033
|
|
|
|
5,543
|
|
|
|
490
|
|
|
|
9
|
|
Technology and communication
|
|
|
1,841
|
|
|
|
1,595
|
|
|
|
246
|
|
|
|
15
|
|
|
|
5,462
|
|
|
|
4,910
|
|
|
|
552
|
|
|
|
11
|
|
Debit and credit card processing
|
|
|
662
|
|
|
|
588
|
|
|
|
74
|
|
|
|
13
|
|
|
|
1,880
|
|
|
|
1,733
|
|
|
|
147
|
|
|
|
8
|
|
Marketing and business development
|
|
|
732
|
|
|
|
740
|
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
2,260
|
|
|
|
2,191
|
|
|
|
69
|
|
|
|
3
|
|
Postage, printing, and supplies
|
|
|
402
|
|
|
|
370
|
|
|
|
32
|
|
|
|
9
|
|
|
|
1,218
|
|
|
|
1,161
|
|
|
|
57
|
|
|
|
5
|
|
Legal and professional
|
|
|
524
|
|
|
|
501
|
|
|
|
23
|
|
|
|
5
|
|
|
|
2,581
|
|
|
|
1,498
|
|
|
|
1,083
|
|
|
|
72
|
|
FDIC insurance
|
|
|
—
|
|
|
|
238
|
|
|
|
(238
|
)
|
|
|
(100
|
)
|
|
|
486
|
|
|
|
718
|
|
|
|
(232
|
)
|
|
|
(32
|
)
|
Amortization/impairment of investment in tax credit partnerships
|
|
|
137
|
|
|
|
—
|
|
|
|
137
|
|
|
|
100
|
|
|
|
241
|
|
|
|
58
|
|
|
|
183
|
|
|
|
316
|
|
Capital and deposit based taxes
|
|
|
993
|
|
|
|
738
|
|
|
|
255
|
|
|
|
35
|
|
|
|
2,864
|
|
|
|
2,452
|
|
|
|
412
|
|
|
|
17
|
|
Other
|
|
|
1,229
|
|
|
|
989
|
|
|
|
240
|
|
|
|
24
|
|
|
|
3,731
|
|
|
|
2,754
|
|
|
|
977
|
|
|
|
35
|
|
Total non-interest expenses
|
|
$
|
23,957
|
|
|
$
|
21,781
|
|
|
$
|
2,176
|
|
|
|
10
|
%
|
|
$
|
72,060
|
|
|
$
|
64,944
|
|
|
$
|
7,116
|
|
|
|
11
|
%
|
Non-interest Income
Total non-interest income increased $1.9 million, or 16%, and $2.9 million, or 8%, for the three and nine month periods ended September 30, 2019 compared to the same periods in 2018. Non-interest income comprised 29.3% and 28.3% of total revenues, defined as net interest income and non-interest income, for the three and nine month periods ended September 30, 2019 compared to 28.6% and 28.5% for the same periods in 2018. WM&T services comprised 43.1% and 46.0% of Bancorp’s total non-interest income for the three and nine month periods ended September 30, 2019 compared to 47.1% and 48.0% for the same periods in 2018. Debit and credit card income comprised 15.8% and 16.4% of Bancorp’s non-interest income for the three and nine month periods ended September 30, 2019 compared to 15.4% and 14.7% for the same periods in 2018.
The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. Trust AUM, stated at market value, totaled $3.12 billion at September 30, 2019, a 5% increase compared with $2.97 billion at September 30, 2018, and a 13% increase from $2.77 billion at December 31, 2018. WM&T revenue increased $358,000, or 7%, and $615,000, or 4% for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018 consistent with increased new business generation, the second consecutive quarter of strong market returns and growth in corporate retirement plans.
Recurring fees earned for managing trust accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise over 97% of the WM&T revenue, increased $263,000, or 5%, and $432,000, or 3% for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. A portion of the WM&T revenue, most notably executor, insurance, and some employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues corresponds with the related administrative activities, and is also based on the market value of AUM. Total non-recurring fees increased $95,000, or 72%, and $182,000, or 52%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. Contracts between WM&T and their clients do not permit performance based fees and accordingly, none of the fees earned by WM&T are performance based. Management believes the WM&T department will continue to factor significantly in Bancorp’s financial results and provide strategic diversity to revenue streams.
Detail of WM&T Service Income by Account Type:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory
|
|
$
|
2,319
|
|
|
$
|
2,121
|
|
|
$
|
6,696
|
|
|
$
|
6,270
|
|
Personal trust
|
|
|
1,701
|
|
|
|
1,730
|
|
|
|
5,399
|
|
|
|
5,512
|
|
Personal individual retirement
|
|
|
978
|
|
|
|
903
|
|
|
|
2,799
|
|
|
|
2,645
|
|
Corporate retirement
|
|
|
517
|
|
|
|
353
|
|
|
|
1,160
|
|
|
|
1,093
|
|
Foundation and endowment
|
|
|
143
|
|
|
|
134
|
|
|
|
416
|
|
|
|
419
|
|
Custody and safekeeping
|
|
|
32
|
|
|
|
42
|
|
|
|
93
|
|
|
|
128
|
|
Brokerage and insurance services
|
|
|
11
|
|
|
|
12
|
|
|
|
49
|
|
|
|
42
|
|
Other
|
|
|
37
|
|
|
|
85
|
|
|
|
227
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total WM&T services income
|
|
$
|
5,738
|
|
|
$
|
5,380
|
|
|
$
|
16,839
|
|
|
$
|
16,224
|
|
The table above demonstrates that WM&T fee revenue is concentrated within investment advisory and personal trust accounts. WM&T fees are based on AUM and tailored for individual accounts and/or relationships with fee structures customized based on account type and other factors with larger relationships paying a lower percentage of AUM in fees. For example, fee structures are in place for investment management, irrevocable trusts, revocable trusts, individual IRAs, and accounts holding only fixed income securities. There are also fee structures for estate settlements, which are non-recurring, and retirement plan services which typically consist of a one-time conversion fee with recurring AUM fees to follow. Fees are agreed upon at the time the account is opened and any subsequent revisions are communicated via writing to the customer. Fees earned are not performance based nor are they based on investment strategy or transactions.
Deposit service charges decreased $38,000, or 3%, and $313,000, or 7%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. Deposit service charge income is primarily driven by changes in customers and transaction volume which can fluctuate from period to period. Both the quarterly and year-to-date decreases are consistent with the general decline in fees earned on overdrawn checking accounts. While management expects this source of revenue to continue its slow decline due to anticipated changes in customer behavior, including reduced check volume, and ongoing regulatory restrictions, the decline is anticipated to be less significant than what was experienced in the first part of 2019.
Debit and credit card income consists of interchange income, ancillary fees and incentives received from card processors. Debit and credit card revenue increased $343,000, or 19%, and $1.1 million, or 21%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. The increases in both comparisons reflected increased volume resulting from continued growth in the customer bases. Total debit card income increased $86,000, or 6%, and $467,000, or 12% for the three and nine month periods ended September 30, 2019, while credit card income increased $257,000, or 64%, and $591,000, or 55%, for the same periods. Third quarter 2019 credit card income included a $47,000 non-recurring fee from its card processor for reaching activity incentive thresholds. This was the first such payment received since the Bank launched this product in mid-2015. Second quarter 2019 debit card revenue included a similar non-recurring fee of $174,000. No similar non-recurring debit or credit card incentives were received in 2018. Both debit and credit card volume, which is dependent on customer behavior and new accounts, is expected to continue to increase.
Treasury management fees primarily consists of fees earned for cash management services provided to commercial customers. This category has been a growing source of revenue for Bancorp including increases in the third quarter of 2019 of $113,000, or 10%, and $312,000, or 9%, for the first nine months of 2019, as compared with the same periods in 2018. Bancorp anticipates this income category will continue to increase based upon continued customer base growth and the expanding suite of services offered.
Mortgage banking income primarily includes gains on sales of mortgage loans. Bancorp’s mortgage banking department originates residential mortgage loans to be sold in the secondary market, primarily to the FNMA. Interest rates on the loans sold to FNMA are locked with the borrower and investor prior to closing the loans, thus Bancorp bears no interest rate risk related to loans sold. The department offers conventional, VA and FHA financing, for purchases and refinances, as well as programs for first-time home buyers. Interest rates on mortgage loans directly impact the volume of business transacted by the mortgage banking department. Mortgage banking revenue increased $122,000, or 17%, and $78,000, or 4%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. Mortgage transaction volume began to increase in the second quarter and to a larger extent into the third quarter of 2019, as mortgage rates declined, spurring the increase in refinancing activity. During the third quarter, the ten year treasury rate/ yield curve began a steep decline leading to the lowest mortgage rates in several years. Bancorp anticipates refinancing activity to remain steady into the fourth quarter, provided mortgage rates continue to remain attractive.
Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as wrap fees on brokerage accounts. Wrap fees are charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management, and are based on a percentage of assets. Bancorp deploys its brokers primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced in the Bank’s WM&T department. Net investment product sales commissions and fees decreased $44,000, or 10%, and $125,000, or 10%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. Overall, brokerage volume has been impacted by advisor turnover and market volatility that has somewhat discouraged investment activity in 2019.
BOLI assets represent the cash surrender value of life insurance policies on certain key employees who have provided consent for Bancorp to be the beneficiary of a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. BOLI income increased $301,000 and $285,000 for the three and nine month periods ended September 30, 2019, as compared with the same time periods in 2018, as a result of life insurance proceeds received, offset slightly by lower crediting rates on investments.
Other non-interest income increased $723,000 and $949,000 for the three and nine months ended September 30, 2019, as compared with the same period in 2018 primarily due to the following non-recurring items:
|
●
|
Interest rate swap fees on loans of $374,000 and $483,000 were recognized during the three and nine months ended September 30, 2019 compared to $1,000 and $109,000 for the same periods in 2018.
|
|
●
|
Approximately $142,000 in life insurance proceeds (outside of the traditional BOLI program) were recognized in the third quarter of 2019. Similarly, $112,000 was recognized in the second quarter of 2018.
|
|
●
|
Approximately $212,000 was realized during the third quarter of 2019 when Bancorp sold a nominal amount of Visa Class B stock, an illiquid $0 basis investment that was acquired in the TBOC acquisition.
|
|
●
|
In the first quarter of 2019, Bancorp recognized $126,000 related to banking center re-location incentivization.
|
|
●
|
In the second quarter of 2019, $130,000 was received related to a historic tax-credit investment tax distribution.
|
|
●
|
The impact of KSB on non-interest income has been and is expected to continue to be nominal in 2019.
|
Non-interest Expenses
Total non-interest expenses increased $2.2 million, or 10%, and $7.1 million, or 11%, for the three and nine month periods ended September 30, 2019 compared to the same periods in 2018. Salaries and employee benefits comprised 63.6% and 62.9% of Bancorp’s non-interest expenses for the three and nine month periods ended September 30, 2019, compared to 64.8% and 64.6% for the same periods in 2018.
Compensation, which includes salaries, incentives, bonuses, and stock based compensation, increased $723,000, or 6%, and $2.6 million, or 7%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. The increase related to an overall increase in full time equivalent employee’s led by the Company’s efforts to add loan production talent to support strategic growth initiatives in addition to the May 2019 KSB acquisition. In addition, non-recurring severance and employee retention expense of $487,000 was recorded in the second quarter of 2019 as a result of the KSB acquisition. At September 30, 2019, Bancorp had 622 full time equivalent employees including 25 employees added from the KSB acquisition, as compared with 593 at September 30, 2018.
Employee benefits consists of all personnel related expense not included in compensation, with the most significant items being health insurance, payroll taxes, and retirement plan contributions. Employee benefits increased $407,000, or 16%, and $812,000, or 11%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. Growth in full time equivalent employees, increased 401(k) matching contributions, higher health insurance claims, increased FICA expense associated with the growth in compensation and higher employee recruiting costs resulted in the increases.
Net occupancy and equipment expense primarily includes depreciation, rent, property taxes, utilities and maintenance, variances for which were not individually significant. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy increased $285,000, or 15%, and $490,000, or 9%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018. Bancorp opened one branch location during the third quarter of 2019 in Mt. Washington, Kentucky and added five branch locations associated with the KSB acquisition during the second quarter. The KSB locations added $175,000 of additional expense for the nine month period ended September 30, 2019. Bancorp closed three of the acquired branch locations in Louisville during the third quarter of 2019 due to their proximity to existing Bancorp branches and two buildings were sold resulting in positive adjustments to goodwill.
Technology and communications expense include ongoing computer software amortization, equipment depreciation, and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security, and internal resources. Technology expense increased $246,000, or 15%, and $552,000, or 11%, for the three and nine month periods ended September 30, 2019, as compared with the same periods in 2018 due largely to increases in computer infrastructure upgrades and maintenance costs. KSB related one-time non-recurring expenses totaled $104,000 for the nine month period ended September 30, 2019.
Bancorp outsources processing for debit and credit card operations, which generate significant revenue for the Company. These expenses increase as transaction volume increases, offsetting a portion of corresponding revenue growth. Debit and credit card processing expense increased $74,000, or 13%, and $147,000, or 8%, for the three month and nine month periods ended September 30, 2019, as compared with the same periods in 2018, as a result of a growing customer base and increased transaction volume.
Marketing and business development expenses include all costs associated with promoting Bancorp, community support, retaining customers, and acquiring new business. Marketing and business development expenses decreased $8,000, or 1%, in the third quarter of 2019, as compared with the third quarter of 2018 while increasing $69,000, or 3%, for the nine months ended September 30, 2019. The increase for the nine months ended September 30, 2019 compared 2018 was largely due to increased community support expenses, which can fluctuate between periods due to the nature and timing of the expense, but is expected to trend to historical annual levels over the remainder of 2019.
Postage, printing and supplies expenses increased $32,000, or 9%, and $57,000, or 5%, for the three and nine month periods ended September 30, 2019, as compared with the same time periods in 2018, primarily due to the KSB acquisition.
Legal and professional fees increased $23,000, or 5%, and $1.1 million, or 72%, for the three and nine month periods ended September 30, 2019 compared to the same periods in 2018. One-time costs associated with the KSB acquisition totaled nearly $900,000 for the nine months ended September 30, 2019. Additional costs associated with consulting engagements also contributed to the period increases.
No FDIC insurance expense was recorded for the third quarter of 2019, as the national FDIC Reserve Ratio reached 1.38%, triggering the FDIC to release credits to small institutions (less than $10 billion in total consolidated assets). This change was announced in 2016 and it took approximately 3 years for the threshold to be met and the corresponding credits issued. It is also expected that no FDIC insurance expense will be recorded in the fourth quarter of 2019.
Tax credit partnerships generate federal income tax credits, and for each of Bancorp’s investments in tax credit partnerships, the tax benefit compared with related expenses results in a positive effect on net income. Amounts of credits and corresponding expenses can vary widely depending upon timing and magnitude of the investments.
Other non-interest expenses increased $240,000, or 24%, for the three months ended September 30, 2019, as compared to 2018 primarily due to the following:
|
●
|
Director compensation increased $67,000.
|
|
●
|
Expense associated with Bancorp’s growing credit card program, mainly rebates/ rewards increased $117,000.
|
|
●
|
Core deposit intangible amortization increased $47,000 as a result of the KSB acquisition.
|
Other non-interest expenses increased $977,000, or 35%, for the nine months ended September 30, 2019, as compared to 2018 primarily due to the following:
|
●
|
Director compensation increased $290,000.
|
|
●
|
Expense associated with Bancorp’s growing credit card program, mainly rebates/ rewards increased $256,000.
|
|
●
|
Core deposit intangible amortization increased $75,000 as a result of the KSB acquisition.
|
|
●
|
Miscellaneous losses, most notably fraudulent check losses increased $153,000.
|
|
●
|
Gain on sales of OREO decreased $46,000.
|
Income Taxes
Bancorp recorded income tax expense of $3.8 million and $6.7 million for the three and nine month periods ended September 30, 2019, compared with $3.6 million and $9.8 million for the same periods in 2018. The ETR for the corresponding three and nine month periods in 2019 were 18.0% and 11.9% and 20.4% and 19.3% for the same periods in 2018. The decline in the ETR from 2018 to 2019 related primarily to the following two Kentucky state tax law changes:
|
●
|
In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Historically, the franchise tax, a component of non-interest expenses, was assessed at 1.1% of net capital and averaged $2.5 million annually over the prior two year-end periods. The Kentucky corporate income tax will be assessed at 5% of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, during the first quarter of 2019, Bancorp recorded a state tax benefit, net of federal impact of $1.3 million in the first quarter of 2019, or approximately $0.06 per diluted share for the first nine months of 2019. While this is favorable in the short-term, Bancorp anticipates an unfavorable impact of approximately $200,000 per year beginning in 2021.
|
|
●
|
In April 2019, the Kentucky Legislature passed HB458 allowing banks and their holding companies to be combined together for Kentucky tax return filings beginning in 2021. The combined filing will allow Bancorp’s Holding Company net operating losses to offset against net revenue generated by the Bank and reduce Bancorp’s tax liability. Bancorp recorded a state tax benefit, net of federal impact of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the first nine months of 2019.
|
Financial Condition – September 30, 2019 Compared to December 31, 2018
|
Balance Sheet
Total assets increased $231 million, or 7%, to $3.5 billion at September 30, 2019, from $3.3 billion at December 31, 2018. In the first nine months of 2019, increases in loans, premises and equipment, and other assets were offset by decreases in cash and cash equivalents, and AFS securities. Bancorp acquired total assets of approximately $192 million on May 1, 2019 in connection with the KSB acquisition and recognized goodwill of approximately $12 million.
Cash and cash equivalents decreased $63 million, or 32%, as excess liquidity was used to fund loan growth and the KSB acquisition. AFS securities decreased $61 million, or 14%, during the first nine months of 2019, as maturing security cash flows were not reinvested but held in the form of short-term liquidity. This decline was offset by $9 million of market value improvement in the portfolio, shifting to a $3 million net unrealized gain position at September 30, 2019 from a $6 million unrealized loss position at December 31, 2018.
Premises and equipment increased $18 million, or 39%, primarily the result of establishing a right of use lease asset upon adopting ASU 2016-02, Leases in the first quarter of 2019 and the addition of KSB branches.
Gross loans increased $308 million, or 12%, including $152 million in loans acquired from KSB. Strong loan production in the second and third quarters of 2019 contributed to non-acquisition, or legacy, loan growth of $156 million, or 6%, for the nine months ended September 30, 2019.
Total liabilities increased $201 million, or 7%, to $3.1 billion as of September 30, 2019, from $2.9 billion as of December 31, 2018. Bancorp assumed $177 million in liabilities in connection with the KSB acquisition as of May 1, 2019.
For the nine month period ending September 30, 2019, non-interest bearing demand deposits increased $85 million, or 12%, while interest bearing deposits increased $67 million, or 3%. SSUAR decreased $3 million, or 8%, as customers continued to migrate to higher-yielding, non-collateralized deposits. FHLB advances increased $34 million, or 70%, as Bancorp retained the fixed rate long term advances assumed from KSB. These advances were retained by Bancorp based upon favorable rates and terms in the overall execution of the Company’s asset liability management strategy. Other liabilities increased $19 million, or 40%, largely due to the adoption of ASU 2016-02, Leases, in the first quarter of 2019.
Trust Assets Under Management
Trust AUM (not included on balance sheet) grew from $2.77 billion at December 31, 2018 to $3.12 billion at September 30, 2019.
Trust Assets Under Management by Account Type
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
(In thousands)
|
|
Managed
|
|
|
Non-managed (1)
|
|
|
Managed
|
|
|
Non-managed (1)
|
|
Investment advisory
|
|
$
|
1,258,074
|
|
|
$
|
19,582
|
|
|
$
|
1,077,904
|
|
|
$
|
34,214
|
|
Personal trust
|
|
|
582,783
|
|
|
|
89,391
|
|
|
|
532,254
|
|
|
|
80,167
|
|
Personal individual retirement
|
|
|
409,791
|
|
|
|
2,714
|
|
|
|
344,900
|
|
|
|
2,363
|
|
Corporate retirement
|
|
|
43,625
|
|
|
|
402,457
|
|
|
|
47,884
|
|
|
|
390,619
|
|
Foundation and endowment
|
|
|
224,572
|
|
|
|
1,236
|
|
|
|
187,492
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts
|
|
$
|
2,518,845
|
|
|
$
|
515,380
|
|
|
$
|
2,190,434
|
|
|
$
|
508,383
|
|
Custody and safekeeping
|
|
|
—
|
|
|
|
81,348
|
|
|
|
—
|
|
|
|
66,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,518,845
|
|
|
$
|
596,728
|
|
|
$
|
2,190,434
|
|
|
$
|
574,441
|
|
Total managed and non-managed assets
|
|
$
|
3,115,573
|
|
|
|
|
|
|
$
|
2,764,875
|
|
|
|
|
|
(1) Non-managed assets represent those for which WM&T does not have investment discretion.
|
As of September 30, 2019, approximately 81% of AUM were actively managed. The majority of managed assets are in investment advisory, personal trust and agency accounts. Corporate retirement plan accounts primarily consist of participant directed asset and the amount of custody and safekeeping accounts are insignificant.
Managed Trust Assets Under Management by Class of Investment
(In thousands)
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
113,658
|
|
|
$
|
139,779
|
|
US Treasury and government agency obligations
|
|
|
48,720
|
|
|
|
53,513
|
|
State, county and municipal obligations
|
|
|
138,087
|
|
|
|
128,057
|
|
Money market mutual funds
|
|
|
5,755
|
|
|
|
8,627
|
|
Equity mutual funds
|
|
|
609,282
|
|
|
|
485,961
|
|
Other mutual funds - fixed, balanced, and municipal
|
|
|
326,375
|
|
|
|
290,352
|
|
Other notes and bonds
|
|
|
180,799
|
|
|
|
155,701
|
|
Common and preferred stocks
|
|
|
969,157
|
|
|
|
801,690
|
|
Real estate mortgages
|
|
|
328
|
|
|
|
352
|
|
Real estate
|
|
|
49,954
|
|
|
|
49,840
|
|
Other miscellaneous assets (1)
|
|
|
76,730
|
|
|
|
76,562
|
|
|
|
|
|
|
|
|
|
|
Total managed assets
|
|
$
|
2,518,845
|
|
|
$
|
2,190,434
|
|
(1) Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment trusts, and oil and gas rights.
|
Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations, and consist of approximately 63% in equities and 37% in fixed income securities. This composition is relatively consistent from period to period and WM&T has no proprietary mutual funds.
Loan Portfolio Composition
Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:
(In thousands)
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
876,127
|
|
|
$
|
833,524
|
|
Construction and development, excluding undeveloped land(1)
|
|
|
248,296
|
|
|
|
225,050
|
|
Undeveloped land
|
|
|
35,169
|
|
|
|
30,092
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
Commercial investment
|
|
|
727,531
|
|
|
|
588,610
|
|
Owner occupied commercial
|
|
|
470,678
|
|
|
|
426,373
|
|
1-4 family residential
|
|
|
331,747
|
|
|
|
276,017
|
|
Home equity - first lien
|
|
|
51,015
|
|
|
|
49,500
|
|
Home equity - junior lien
|
|
|
72,533
|
|
|
|
70,947
|
|
Subtotal: Real estate mortgage
|
|
|
1,653,504
|
|
|
|
1,411,447
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
43,568
|
|
|
|
48,058
|
|
Total loans(2)
|
|
$
|
2,856,664
|
|
|
$
|
2,548,171
|
|
(1) Consists of land acquired for development by the borrower, but for which no development has yet taken place.
|
(2) Total loans are presented inclusive of premiums, discounts, and net loan origination fees and costs.
|
Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership share of the loan without permission from Bancorp. GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the C&I, C&D and CRE mortgage loan portfolio segments with a corresponding liability recorded in other liabilities. At September 30, 2019 and December 31, 2018, the total participated portion of loans of this nature were $9 million and $11 million.
Allowance for Loan and Lease Losses
An allowance has been established to provide for probable losses on loans that may not be fully repaid. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries. Loans are typically charged off when management deems them uncollectible and after underlying collateral has been liquidated; however, collection efforts may continue and future recoveries could occur. Periodically, loans are partially charged off to the net realizable value based upon the evaluation of related underlying collateral, including Bancorp’s expectation of resolution.
The allowance methodology is driven by risk ratings, historical losses, and qualitative factors. The level of the September 30, 2019 allowance reflected a number of factors, including credit quality metrics which were generally consistent with those experienced in the preceding 12 months, and expansion of the historical look-back period from 32 quarters to 36 quarters. This expansion of the historical period was applied to all classes and segments of the portfolio. Expansion of the look-back period for historical loss rates used in the quantitative allocation caused review of the overall methodology for qualitative factors to ensure we were appropriately capturing risk not addressed in the quantitative historical loss rate. Management believes extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. Key indicators of loan quality continued to trend at levels consistent with prior periods, however management recognizes that due to the cyclical nature of local economies, these trends will likely normalize over the long term. Additional information regarding Bancorp’s methodology for evaluating the adequacy of the allowance can be read in Bancorp’s Annual Report on Form 10-K.
The allowance increased $1.3 million from December 31, 2018 to $27 million at September 30, 2019. The allowance as a percent of total loans declined to 0.94% at September 30, 2019 from 1.00% at December 31, 2018, primarily due to the KSB acquisition. The loans acquired in the KSB acquisition were marked to market on the acquisition date and as such did not receive an allowance. The allowance balance is reflective of continued strong credit metrics and net recoveries of $343,000 for the first nine months of 2019. As of September 30, 2019, and December 31, 2018, the allowance remained adequate to cover potential losses in the loan portfolio, in management’s opinion.
Non-performing Loans and Assets
Information summarizing non-performing assets, including non-accrual loans follows:
(Dollars in thousands)
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans
|
|
$
|
2,722
|
|
|
$
|
2,611
|
|
Troubled debt restructurings
|
|
|
35
|
|
|
|
42
|
|
Loans past due 90 days or more and still accruing
|
|
|
487
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
3,244
|
|
|
|
3,398
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
563
|
|
|
|
1,018
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
3,807
|
|
|
$
|
4,416
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.11
|
%
|
|
|
0.13
|
%
|
Non-performing assets to total assets
|
|
|
0.11
|
%
|
|
|
0.13
|
%
|
In total, non-performing assets as of September 30, 2019 were comprised of 22 loans, ranging in amount from $1,000 to $500,000, two accruing TDRs, and foreclosed real estate held for sale. Foreclosed real estate held at September 30, 2019 included a 1-4 family residential property and a CRE property.
The following table sets forth the major classifications of non-accrual loans:
(In thousands)
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
186
|
|
|
$
|
192
|
|
Construction and development, excluding undeveloped land
|
|
|
—
|
|
|
|
318
|
|
Undeveloped land
|
|
|
—
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
|
|
|
|
|
|
|
|
Commercial investment
|
|
|
741
|
|
|
|
138
|
|
Owner occupied commercial
|
|
|
1,409
|
|
|
|
586
|
|
1-4 family residential
|
|
|
137
|
|
|
|
760
|
|
Home equity - first lien
|
|
|
—
|
|
|
|
—
|
|
Home equity - junior lien
|
|
|
249
|
|
|
|
143
|
|
Subtotal: Real estate mortgage
|
|
|
2,536
|
|
|
|
1,627
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Total non-accrual loans
|
|
$
|
2,722
|
|
|
$
|
2,611
|
|
Commitments
Bancorp uses a variety of financial instruments in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Other commitments discussed in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018, have not materially changed since that report was filed, relative to qualitative and quantitative disclosures of fixed and determinable contractual obligations.
See the Footnote titled “Commitments and Contingent Liabilities” for additional detail.
Liquidity
The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of such funds. Liquidity is provided by short-term liquid assets that can be converted to cash, AFS securities, various lines of credit available to Bancorp, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than market rate.
Bancorp’s most liquid assets are comprised of cash and due from banks, AFS marketable investment securities, FFS and interest bearing due from accounts with banks. FFS and interest bearing due from bank accounts totaled $68 million at September 30, 2019. These investments normally have overnight maturities and are used for general daily liquidity purposes.
AFS securities totaled $376 million at September 30, 2019, with $100 million in securities expected to mature over the next 12 months. Combined with FFS and interest bearing due from bank accounts, these offer substantial resources to meet either new loan demand or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of the securities portfolio to secure public fund deposits, cash balances of certain WM&T accounts, and SSUAR. At September 30, 2019, total investment securities pledged for these purposes comprised 79% of the AFS securities portfolio, leaving approximately $80 million of unpledged AFS securities.
Bancorp has a significant base of non-maturity customer deposits, defined as demand, savings, money market deposit accounts and time deposits less than or equal to $250,000 (excluding brokered deposits). At September 30, 2019, such deposits totaled $2.8 billion and represented 97% of Bancorp’s total deposits, as compared with $2.7 billion, or 97% of total deposits at December 31, 2018. Because these deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they do not put significant pressure on liquidity. Bancorp began adding liquidity to the balance sheet in 2018 through targeted CD marketing campaigns. The campaigns generated over $100 million in CD growth in 2018.
As of September 30, 2019 and December 31, 2018, Bancorp had brokered deposits of $30 million.
Included in total deposit balances at September 30, 2019 is $140 million of public funds deposits generally comprised of accounts from local government agencies and public school districts in the markets Bancorp operates within. As a result of property tax collections in the latter part of each year, these accounts provide seasonal excess balances that originate with tax payments and decline leading into the subsequent tax season. While this excess liquidity is maintained in low-yielding short-term investments and consequently negatively impacts NIM, it has a positive impact on net interest income.
Other sources of funds available to meet daily needs include the sales of SSUAR and FHLB advances. As a member of the FHLB, Bancorp has access to credit products offered by the FHLB. Bancorp views these borrowings as a low cost alternative to brokered deposits. At September 30, 2019 and December 31, 2018, available credit from the FHLB totaled $511 million and $537 million. Additionally, Bancorp had unsecured available FFP lines with correspondent banks totaling $105 million at both September 30, 2019, and December 31, 2018.
Bancorp’s principal source of cash is dividends received from the Bank. The Bank paid the Holding Company an $18.5 million dividend during the third quarter of 2019 to support the share repurchase program. Also, during the second quarter of 2019, the Bank paid the Holding Company a $28 million dividend to consummate the KSB acquisition. At September 30, 2019, the Bank could pay up to $42 million in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.
Capital Resources
At September 30, 2019, stockholders’ equity totaled $396 million, an increase of $30 million, or 8%, since December 31, 2018. See the Consolidated Statement of Changes in Stockholders’ Equity for further detail of changes in equity since 2018. One component of equity is AOCI which, for Bancorp, consists of net unrealized gains or losses on AFS securities and hedging instruments, as well as a minimum pension liability, each net of income taxes. AOCI was $2 million at September 30, 2019 compared with a loss of $5 million on December 31, 2018. The fluctuation in OCI is reflective of the changing interest rate environment during 2019 and corresponding impact upon the valuation of Bancorp’s AFS securities portfolio.
The following table sets forth Bancorp’s and the Bank’s risk based capital ratios:
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September 30,
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December 31,
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2019
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2018
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Total risk-based capital(1)
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Consolidated
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12.53
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%
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13.91
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%
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Bank
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11.91
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13.56
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Common equity tier 1 risk-based capital(1)
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Consolidated
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11.69
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13.00
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Bank
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11.07
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12.65
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Tier 1 risk-based capital(1)
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Consolidated
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11.69
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13.00
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Bank
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11.07
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12.65
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Leverage(2)
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Consolidated
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10.90
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11.33
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Bank
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10.60
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11.02
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(1) Under banking agencies’ risk-based capital guidelines, assets and credit-equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. Weighted values are added together, resulting in Bancorp's total risk-weighted assets. These ratios are computed in relation to average assets.
(2) Ratio is computed in relation to average assets.
Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Holding Company and the Bank must meet specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.
Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 6.5% common equity tier 1 risk-based capital ratio, an 8.0% tier 1 risk-based capital ratio, a 10.0% total risk-based capital ratio and a 5.0% leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and Bank must hold a capital conservation buffer composed of common equity tier 1 risk-based capital above their minimum risk-based capital requirements. The capital conservation buffer phased in from 2016 to 2019 on the following schedule: 0.625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875% effective January 1, 2018; and a fully phased in capital conservation buffer of 2.5% on January 1, 2019.
Bancorp continues to exceed the regulatory requirements for total risk-based capital, common equity tier I risk-based capital, tier I risk-based capital and leverage capital. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.
Non-GAAP Financial Measures
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The following table provides a reconciliation of total stockholders’ equity in accordance with GAAP to tangible stockholders’ equity, a non-GAAP disclosure. Bancorp provides the tangible book value per share, a non-GAAP measure, in addition to those defined by banking regulators, because of its widespread use by investors as a means to evaluate capital adequacy.
(In thousands, except per share data)
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September 30, 2019
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December 31, 2018
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Total stockholders' equity - GAAP
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$
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396,111
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$
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366,500
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Less: Goodwill
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(12,593
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)
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(682
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)
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Less: Core deposit intangible
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(2,373
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)
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(1,057
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)
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Tangible common equity - Non-GAAP
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$
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381,145
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$
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364,761
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Total assets - GAAP
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$
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3,533,926
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$
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3,302,924
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Less: Goodwill
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(12,593
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)
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(682
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)
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Less: Core deposit intangible
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(2,373
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)
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(1,057
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)
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Tangible assets - Non-GAAP
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$
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3,518,960
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$
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3,301,185
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Total stockholders' equity to total assets - GAAP
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11.21
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%
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11.10
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%
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Tangible common equity to tangible assets - Non-GAAP
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10.83
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%
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11.05
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%
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Total shares outstanding
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22,597
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22,749
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Book value per share - GAAP
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$
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17.53
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$
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16.11
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Tangible common equity per share - Non-GAAP
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16.87
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|
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16.03
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