Stock Yards Bancorp, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are primarily with 2017. The company is a Kentucky-based bank holding company operating Stock Yards Bank & Trust, with 38 offices in the Louisville, Indianapolis and Cincinnati markets. Services include commercial and consumer banking, wealth management and trust, and residential mortgage origination.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue, fully tax-equivalent | $160.1 million | $149.2 million |
| Net interest income (GAAP) | $114.4 million | $103.7 million |
| Net income | $55.5 million | $38.0 million |
| Diluted EPS | $2.42 | $1.66 |
| Net interest margin, fully tax-equivalent | 3.83% | 3.64% |
| Efficiency ratio, fully tax-equivalent | 55.92% | 60.61% |
| Provision for loan losses | $2.7 million | $2.6 million |
| Effective tax rate | 17.8% | 31.1% |
Interest income rose 17%, reflecting loan growth and higher yields, while interest expense more than doubled to $15.4 million as deposit and borrowing costs increased. Non-interest income grew 1.9% to $45.3 million; wealth management and trust fees rose 5% to $21.5 million, while mortgage banking revenue declined 20.3% to $2.6 million. Non-interest expenses edged down 1.0% to $89.5 million, principally because tax-credit partnership amortization and impairment expense fell by $5.9 million; compensation and technology costs increased.
The lower 2018 tax rate reflects the federal corporate rate reduction from 35% to 21%. FY2017 included a non-cash $5.9 million deferred-tax-asset remeasurement charge. Thus, the net-income comparison includes a significant tax-related benefit in 2018 and a one-time charge in 2017.
Balance sheet, cash flow and capital
- Total assets were $3.30 billion, up 2.0%; loans were $2.55 billion, up 5.8%; and deposits were $2.79 billion, up 8.4% year over year.
- Cash and cash equivalents were $198.9 million, compared with $139.2 million a year earlier. FY2018 operating cash flow was $65.9 million; investing cash outflow was $11.6 million and financing cash inflow was $5.4 million.
- At year-end, FHLB advances were $48.2 million, federal funds purchased were $10.2 million, and repurchase-agreement funding was $36.1 million. The filing reports $537 million of available FHLB credit and $105 million of correspondent-bank federal-funds lines.
- Stockholders’ equity was $366.5 million. Consolidated common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios were 13.00%, 13.00% and 13.91%, respectively; management said the company met well-capitalized requirements applicable to the bank.
- Cash dividends declared increased to $0.96 per share from $0.80; the payout ratio was 39.18% of basic EPS. The company reported no active share repurchase program.
Credit quality and material changes
- Non-performing loans fell to $3.4 million, or 0.13% of loans, from $7.4 million, or 0.31%. Non-performing assets were $4.4 million, or 0.13% of assets, versus $10.0 million, or 0.31%.
- Net charge-offs were 0.08% of average loans, up slightly from 0.07%; the allowance was $25.5 million, or 1.00% of loans, versus 1.03% in 2017. Management described credit metrics as historically strong but expected them to normalize over time.
- Management extended its historical loan-loss lookback from 28 to 32 quarters in 2018; the change increased the allowance by approximately $1.3 million at March 31, 2018 compared with the prior lookback method.
- The 2018 cash flow statement shows a $137.8 million net increase in loans and $216.1 million net deposit growth. The company also purchased $30 million of brokered deposits during the year.
Outlook, risks and unusual items
- Management’s 2019 expectations were net loan growth at a pace similar to 2018, net interest margin broadly comparable with 2018, and an effective tax rate of approximately 18%. These are expectations, not guarantees.
- The company signed an agreement in December 2018 to acquire King Bancorp for approximately $28 million in cash, funded from existing resources. Closing was expected in the second quarter of 2019, subject to regulatory approval and other conditions. King had approximately $195 million in assets, $168 million in loans and $126 million in deposits as of September 30, 2018.
- Interest-rate exposure is material: the filing’s simulation estimated net interest income would rise 5.58% with an immediate 200-basis-point increase and fall 12.89% with an immediate 200-basis-point decrease. Management cautioned that a flattening or inverted yield curve and deposit competition could pressure margins and funding costs.
- Approximately 40% of deposits were in accounts with balances of $500,000 or more, which the company identifies as a funding concentration risk. Wealth-management fees, approximately 47% of non-interest income, are exposed to market declines through assets-under-management values.
- Other key risks include local economic and real-estate conditions, loan-loss estimates, acquisition integration, cybersecurity and third-party service providers, competition, and the transition from LIBOR. At year-end, about $400 million of variable-rate loans were LIBOR-indexed, including about $200 million maturing after 2021; LIBOR was expected to cease publication after 2021.
- CECL adoption was scheduled for the first quarter of 2020. The company could not quantify the impact and expected a one-time cumulative adjustment to the allowance and equity. The 2019 lease-accounting adoption was expected to add a $16.6 million right-of-use asset and a $17.9 million lease liability.
- Management said pending legal actions were not expected to have a material adverse effect. The 2018 financial statements and internal controls received unqualified auditor opinions.
Important facts for investors to verify
- How much 2018 earnings growth reflects recurring operating improvement versus the lower tax rate and the unusual 2017 deferred-tax charge.
- Whether loan growth, deposit gathering and funding costs support the stated 2019 margin and growth expectations, particularly given large-balance deposit concentration and brokered deposits.
- King Bancorp’s final purchase terms, regulatory approval, integration costs, asset quality and realized benefits after closing.
- Whether strong reported credit metrics remain sustainable; monitor potential problem loans, collateral values, charge-offs and the allowance methodology.
- The effects of market performance on wealth-management fees, and progress in preparing LIBOR-linked contracts and systems for benchmark replacement.