Stock Yards Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Although the request metadata identifies 2019 Q4, this filing reports full-year results and provides unaudited quarterly results. The Company is a Kentucky-based bank holding company operating through Stock Yards Bank & Trust, with Commercial Banking and Wealth Management & Trust (WM&T) segments and 42 banking locations across Louisville, Indianapolis and Cincinnati.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net interest income | $125.2 million | $114.4 million | +9% |
| Net interest income, fully tax-equivalent (FTE) | $125.4 million | $114.7 million | +9% |
| Non-interest income | $49.8 million | $45.3 million | +10% |
| Net income | $66.1 million | $55.5 million | +19% |
| Diluted earnings per share | $2.89 | $2.42 | +19% |
| Net interest margin, FTE | 3.81% | 3.83% | -2 basis points |
| Return on average assets / equity | 1.90% / 17.09% | 1.76% / 16.00% | Improved |
| Efficiency ratio, FTE | 56.13% | 55.92% | Worsened 21 basis points |
- Balance sheet: Total assets grew 13% to $3.72 billion. Loans increased 12% to $2.85 billion, while deposits grew 12% to $3.13 billion. Stockholders’ equity was $406.3 million, up from $366.5 million.
- Cash flow: Operating activities provided $58.4 million, investing activities used $163.2 million and financing activities provided $155.5 million. Cash and cash equivalents rose $50.8 million to $249.7 million. Investing outflows included $131.7 million of net loan growth and $24.7 million of net cash used in the KSB acquisition.
- Funding and liquidity: Year-end borrowings included $80.0 million of FHLB advances, $10.9 million of federal funds purchased and $31.9 million of repurchase agreements. The Company reported $599 million of available FHLB credit and $105 million of correspondent-bank federal funds lines. Core customer deposits were approximately 96% of deposits; management also noted that about 44% of deposits were in accounts of $500,000 or more.
- Capital: Consolidated Tier 1 risk-based capital was 12.02%, total risk-based capital 12.85% and leverage 10.60%. The Bank was categorized as well-capitalized. Tangible common equity to tangible assets was 10.55%, down from 11.05%, with management attributing the decline primarily to the KSB acquisition.
Material changes versus the prior year
- On May 1, 2019, the Company acquired King Bancorp and King Southern Bank for $28 million in cash. The transaction added approximately $164 million of loans and $126 million of deposits at closing and approximately $12 million of goodwill. KSB contributed $4.0 million of 2019 revenue; its income was accretive in the third and fourth quarters.
- Loan growth was $297 million, including approximately $134 million acquired and $163 million of legacy growth. Average loans rose 8%; average earning assets increased 10%.
- Interest expense rose 47% to $22.5 million, primarily as deposit costs increased and higher-cost time deposits expanded. Net interest margin edged down despite lower policy rates and reductions in deposit rates.
- Non-interest expenses increased 10% to $98.4 million, reflecting acquisition and integration costs, higher compensation and staffing, technology and card-processing expenses, and increased community support. The efficiency ratio increased slightly.
- Provision for loan losses declined to $1.0 million from $2.7 million, and the Company recorded net recoveries of $257,000 versus net charge-offs of $2.1 million in 2018. However, non-performing loans rose to $12.1 million, or 0.42% of loans, from $3.4 million, or 0.13%, mainly because one large C&I relationship moved to non-accrual.
- WM&T assets under management rose 20% to $3.32 billion and related income increased 5% to a record $22.6 million. Non-interest income also benefited from higher card and mortgage revenue.
Outlook, risks and unusual items
- Management’s 2020 goal was net loan growth at a pace similar to 2019 excluding the acquisition. It identified margin compression as a concern after three 2019 Federal Reserve rate cuts; a flat or inverted yield curve, deposit pricing and deposit outflows could pressure net interest income and liquidity.
- Management expected elevated seasonal and corporate deposits at year-end to normalize early in 2020; excess short-term liquidity was expected to weigh on margin in the near term. Management also warned that strong credit metrics could normalize over the credit cycle.
- CECL adoption on January 1, 2020 was expected to increase the allowance by approximately $7.5–$8.5 million. The final amount could differ; management did not expect a significant effect on regulatory capital ratios.
- Approximately $404 million of variable-rate loans and $99 million of swap notional were tied to LIBOR-related arrangements extending beyond 2021. The Company identified contract, systems, pricing and operational risks in transitioning to a replacement benchmark.
- 2019 results included non-recurring or unusually favorable items, including $3.9 million of Kentucky tax benefits, elevated loan prepayment and swap fees (including $788,000 of swap fees), life-insurance proceeds and a $212,000 gain on Visa Class B stock. These items support reported earnings but may not recur. A Kentucky tax-law change was expected to add approximately $200,000 of annual expense beginning in 2021.
- Other disclosed risks include local economic and real estate conditions, loan-loss estimation, market-sensitive WM&T fees, competition, dependence on large commercial deposits, cyber and third-party service risks, regulation and fiduciary litigation. Management said pending legal matters were not expected to have a material adverse effect. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; the allowance for loan losses was identified as a critical audit matter.
Most important facts for investors to verify
- Whether the increase in non-performing loans, including the large C&I exposure, leads to further deterioration, charge-offs or higher provisions.
- Whether acquired and organic loan growth can continue while deposit costs, rate changes and the yield curve affect margin and funding.
- How much 2019 earnings growth came from recurring operations versus tax benefits, prepayment and swap fees, insurance proceeds and other unusual items.
- The final CECL transition adjustment and its effect on allowance coverage, retained earnings and capital.
- Deposit concentration, seasonal balance normalization and the Company’s execution of the LIBOR transition for affected loans and derivatives.
- Acquisition integration, goodwill and branch-related assumptions, along with the sustainability of WM&T AUM and fee growth.