Stock Yards Bancorp, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 26, 2021. The company is a Kentucky-based bank holding company operating Stock Yards Bank & Trust in Louisville, Indianapolis and Cincinnati, with Commercial Banking and Wealth Management & Trust (WM&T) segments. Figures below are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $135.9 | $125.3 |
| Non-interest income | $51.9 | $49.4 |
| Provision for credit losses | $16.9 | $1.0 |
| Non-interest expense | $103.2 | $98.1 |
| Net income | $58.9 | $66.1 |
| Diluted EPS | $2.59 | $2.89 |
| Net interest margin (FTE) | 3.39% | 3.82% |
| Efficiency ratio (FTE) | 54.86% | 56.07% |
Full-year revenue, defined by the company as FTE net interest income plus non-interest income, reached a record $187.8 million, up about 7%. Net income fell 11% and diluted EPS fell about 10%, principally reflecting higher credit provisioning and off-balance-sheet credit reserves. 2019 included $3.9 million of non-recurring Kentucky tax benefits and acquisition costs, which also affect comparisons. Return on average assets was 1.40% (1.90% in 2019); return on average equity was 14.01% (17.09%).
Cash flow from operating activities was $77.1 million, versus $58.4 million in 2019. Investing activities used $804.7 million, largely reflecting PPP lending and other loan growth; financing activities provided $795.8 million, led by $854.6 million of deposit growth. Cash and cash equivalents ended at $317.9 million, up from $249.7 million. The filing reports no consolidated cash-flow measure labeled “free cash flow.”
At year-end, assets were $4.61 billion, loans $3.53 billion (including $550 million net PPP loans), deposits $3.99 billion and stockholders’ equity $440.7 million. Deposits rose $854.7 million; loans rose $686.6 million, or 24%, but increased 5% excluding PPP. Non-interest-bearing deposits were $1.19 billion. Borrowings included $31.6 million of FHLB advances, $48.0 million of repurchase agreements and $11.5 million of federal funds purchased. Available FHLB credit was $804 million; management reported no significant pandemic-related funding issues. About 49% of deposits were in accounts with balances of $500,000 or more, a disclosed funding sensitivity.
Consolidated regulatory capital ratios were 13.36% total risk-based, 12.23% Common Equity Tier 1 and 9.57% leverage. The Bank was categorized as well-capitalized and exceeded applicable capital conservation buffer requirements. The allowance for credit losses was $51.9 million, or 1.47% of loans (1.74% excluding PPP), versus $26.8 million, or 0.94%, at year-end 2019. Non-performing loans were $13.2 million, 0.37% of loans; excluding PPP, the ratio was 0.44%. The annual dividend declared was $1.08 per share, with a 41% payout ratio.
Material changes and unusual items
- Adoption of CECL on January 1, 2020 reduced retained earnings by $8.8 million, net of tax, and increased the opening loan allowance by $8.2 million. Pandemic-related economic forecasts, loan growth and a specific CRE reserve contributed to 2020 provisioning.
- PPP drove substantial balance-sheet growth: the Bank originated about 3,400 loans totaling $657 million and recognized approximately $13.6 million of PPP interest and net fee income in 2020. The 1% stated loan rate and excess liquidity weighed on margin; PPP loans are SBA-guaranteed and were not reserved for.
- NIM declined 43 basis points as market rates fell, PPP and excess liquidity diluted yields, partly offset by lower deposit costs. Interest expense fell 47%, while FTE net interest income rose 8%.
- Fee income rose 5%. WM&T income increased 3% to $23.4 million and AUM reached $3.85 billion; mortgage banking income rose 110% to $6.2 million. Deposit service charges fell 20% to $4.2 million amid pandemic-related changes in customer activity.
- Non-interest expense rose 5%, including higher technology costs, tax-credit investment amortization and $1.5 million of off-balance-sheet credit loss expense. The efficiency ratio improved partly because 2019 included one-time acquisition expenses.
- COVID-19 payment deferrals outstanding at year-end were $37 million, or 1.24% of non-PPP loans, down from $120 million at September 30. These qualifying deferrals were not classified as TDRs or non-performing loans. Loans totaling $41 million were downgraded below pass during 2020; $38 million was OAEM and $3 million substandard.
Outlook, risks and contingencies
Management identified continued non-PPP loan growth as a 2021 goal, while warning that the pandemic, competition, utilization and loan prepayments could affect results. It expected low interest rates and PPP forgiveness timing to continue influencing NIM; the filing does not provide specific earnings or margin guidance. Management expected the AFS securities portfolio to grow as excess liquidity was invested and anticipated retaining approximately $5–$10 million per month of qualifying residential mortgage production early in 2021.
PPP forgiveness timing could materially affect 2021 results: approximately $10.5 million of net unrecognized PPP fees remained at year-end. The company projected approximately 1,300 second-draw PPP loans totaling $220 million. Management also highlighted uncertainty around borrower performance, unemployment forecasts and CECL estimates; concentration of large commercial deposits; sensitivity to market rates and WM&T asset values; cybersecurity and third-party technology risks; and the LIBOR transition. At year-end, about $443 million of variable-rate loans were LIBOR-linked, including approximately $330 million maturing after 2021, and LIBOR-based swaps beyond 2021 had $120 million notional value.
On January 27, 2021, the company agreed to acquire Kentucky Bancshares for approximately $190 million in a stock-and-cash transaction, funded in part from existing resources. Closing was expected in the second quarter of 2021, subject to approvals and customary conditions. The target reported approximately $1.2 billion in assets. Integration, closing conditions, dilution and realization of expected benefits are identified risks. The company repurchased no shares in 2020 and said it did not intend to resume repurchases in the near term. Management reported no pending legal matter expected to materially affect consolidated financial position or results. The auditor issued unqualified opinions on the financial statements and internal control; the allowance for credit losses was identified as a critical audit matter.
Important facts for investors to verify
- Track credit quality as deferrals expire or borrowers face continuing stress, especially the CRE relationship with a $3 million specific reserve, and assess whether CECL allowances remain adequate.
- Reconcile PPP forgiveness and fee recognition with the reported $10.5 million of unrecognized fees and the company’s projected second-draw activity.
- Monitor deposit stability and funding concentration, liquidity deployment, and the effect of low rates and balance-sheet growth on NIM and capital ratios.
- Confirm the Kentucky Bancshares transaction’s closing, final consideration, funding mix, integration costs and realized benefits.
- Review LIBOR fallback arrangements, tax-credit investment returns, and the sustainability of WM&T fees, mortgage income and other pandemic-affected fee streams.