Stock Yards Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless noted. The company is a bank holding company operating through Stock Yards Bank & Trust in the Louisville, Indianapolis and Cincinnati markets, with Commercial Banking and Wealth Management & Trust (WM&T) segments.
Financial performance
| Metric | Q1 2020 | Comparison |
|---|---|---|
| Net interest income | $32.4 million | Up $2.8 million (9%) year over year; FTE net interest income was $32.5 million |
| Net interest margin | 3.71% | Down 18 basis points from 3.89% year over year |
| Provision for credit losses | $5.6 million | Up from $0.6 million |
| Non-interest income | $12.5 million | Up $1.5 million (14%) |
| Non-interest expense | $24.0 million | Up $1.3 million (6%) |
| Net income / diluted EPS | $13.2 million / $0.58 | Down 15% / $0.10 year over year |
| Efficiency ratio (FTE) | 53.19% | Improved from 55.49% |
| Return on average assets / equity | 1.43% / 13.18% | Down from 1.94% / 17.09% |
Net income fell despite growth in net interest and fee income, primarily reflecting the sharply higher credit-loss provision and increased expenses. The 2019 comparison included a $1.3 million Kentucky tax benefit, equal to about $0.06 per diluted share. Q1 2020 also benefited from a $350,000 recovery of previously unrecognized interest when a large non-accrual commercial loan paid off. A large, non-recurring estate fee supported WM&T revenue.
Financial position, funding and cash flow
- Total assets were $3.785 billion, up $60 million (2%) from year-end. Loans were $2.937 billion, up $92 million (3%); deposits were $3.199 billion, up $65 million (2%).
- Cash and cash equivalents totaled $254.5 million. Net loans were $2.895 billion after a $42.1 million allowance for credit losses. The allowance was 1.43% of loans, versus 0.94% at year-end.
- Stockholders’ equity was $409.7 million. Tangible common equity to tangible assets, a non-GAAP measure, was 10.48%, compared with 10.55% at year-end. The Bank remained above regulatory “well-capitalized” thresholds; its total risk-based capital ratio was 12.14% and leverage ratio 10.22%.
- Period-end borrowings included $69.2 million of FHLB advances, $32.4 million of repurchase agreements and $9.7 million of federal funds purchased. Available FHLB credit was $616 million, with a further $105 million in correspondent-bank federal-funds lines.
- Operating cash flow was $12.7 million; investing activities used $53.7 million, largely reflecting net loan growth; financing activities provided $45.8 million, mainly from deposit growth. Cash increased $4.8 million during the quarter.
Material changes and operating developments
- Loan growth was concentrated in commercial real estate and commercial and industrial lending. Average loans increased 14% year over year, reflecting organic growth and the May 2019 King Southern Bank acquisition.
- Deposit funding grew, including $48 million growth in non-interest-bearing deposits. Interest expense declined 17% year over year as deposit pricing was reduced, but falling asset yields outpaced funding-cost reductions and compressed margin.
- Non-interest income growth included WM&T (+14%), mortgage banking (+88%), card income (+14%) and treasury management fees (+11%). Trust assets under management declined 11% from year-end to $2.96 billion amid market declines.
- The company adopted CECL on January 1, 2020. The adoption increased the opening loan allowance by $8.2 million and off-balance-sheet credit reserves by $3.5 million; the after-tax retained-earnings reduction was $8.8 million. These transition amounts did not reduce Q1 earnings.
- Q1 provision included approximately $4.2 million related to the unemployment forecast and qualitative adjustments, and $1.3 million attributed to loan mix and growth. Net loan charge-offs were modest at $54,000.
- Non-performing loans declined to $6.0 million from $12.1 million at year-end, largely after repayment of a large C&I relationship. This improvement predates the full effects of the pandemic and payment deferrals.
Outlook, risks and contingencies
- Management provided no specific earnings or full-year financial guidance. It cautioned that Q1 results are not necessarily indicative of full-year results and that COVID-19’s duration and economic effects were highly uncertain.
- At March 31, the CECL model used a one-quarter forecast period, with a significant increase in unemployment based on the highest rate in the company’s observed history, reverting toward the long-term average in Q3 2020. Management warned that a worse outlook could require additional provision expense and that asset-quality measures could deteriorate.
- As of April 30, after quarter-end, the company reported 974 loan deferrals covering $413 million in balances, predominantly for 90 days. Under interagency guidance, qualifying short-term COVID-related deferrals were not treated as troubled debt restructurings.
- Also as of April 30, the company reported 3,039 SBA-authorized PPP loans totaling $665 million, with an estimated average SBA fee of about 3%. PPP funding and forgiveness are subject to program terms; the filing said funds from the initial program round were exhausted April 16.
- Management identified exposure to pandemic-affected sectors, including shopping centers ($58 million), lodging/hotels ($57 million), nursing/residential care ($45 million), recreation/entertainment ($40 million), bars/restaurants ($27 million) and travel-related businesses ($23 million). It warned that stress could affect repayment, collateral values, credit-line draws and liquidity.
- Management reported no goodwill impairment from its interim test, but noted that persistent market or economic deterioration could trigger further impairment testing. It also cited interest-rate risk, LIBOR transition uncertainty, market-sensitive WM&T fees, operational and cybersecurity risks, and possible changes in customer behavior.
- Off-balance-sheet commitments to extend credit totaled $1.116 billion. Management believed pending legal matters would not materially adversely affect the company; it reported no material legal proceeding. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- How subsequent unemployment, borrower performance and deferral outcomes affect the allowance, provisions, delinquencies and charge-offs.
- Whether PPP balances remain at the Bank, the timing and amount of SBA fees and loan forgiveness, and resulting funding or liquidity effects.
- Whether margin compression persists as low rates affect loan yields, deposit costs and variable-rate loans with floors.
- How market changes affect WM&T assets under management and recurring fees, and whether the estate-fee contribution recurs.
- Regulatory capital and liquidity after CECL transition relief phases out, including any use of substantial undrawn credit commitments.