Stock Yards Bancorp, Inc. — Q1 2019 Form 10-Q
Business context and period. The filing reports the three months ended March 31, 2019, compared with Q1 2018. Stock Yards Bancorp is a Louisville-based bank holding company operating 38 banking centers in the Louisville, Indianapolis and Cincinnati metropolitan areas. Its reportable segments are commercial banking and Wealth Management & Trust (WM&T); WM&T managed and administered approximately $2.97 billion in assets at quarter-end.
Financial performance and condition
- Earnings: Net income was $15.6 million, up $2.2 million (16.7% as presented in the overview); diluted EPS was $0.68 versus $0.58. Return on average assets was 1.94% versus 1.76%, and return on average equity was 17.09% versus 16.15%.
- Revenue and margins: Net interest income increased 8.6% to $29.7 million. Net interest margin rose to 3.89% from 3.79%, while net interest spread declined to 3.57% from 3.65%. Interest income rose 17.8%, supported by average loan growth and higher asset yields; interest expense increased 120.6%, reflecting higher deposit costs and a shift toward time deposits. Non-interest income increased 1.4% to $11.1 million. Non-interest expense rose 7.7% to $22.6 million; the efficiency ratio worsened to 55.52% from 54.89%.
- Credit: Provision expense was $0.6 million versus $0.7 million. The allowance was $26.5 million, or 1.05% of period-end loans, versus $25.5 million at year-end 2018. The company recorded net recoveries of $0.33 million. Non-performing loans increased to $3.8 million from $3.4 million at year-end; non-performing assets were $4.6 million. Management said credit indicators remained generally strong but classified loan balances increased during the quarter.
- Cash flow: Operating cash flow was $11.1 million versus $11.3 million in Q1 2018. Investing activities used $49.3 million, compared with $133.0 million used in the prior-year quarter. Financing activities used $49.3 million, versus $39.3 million provided. Cash and cash equivalents declined $87.6 million during the quarter to $111.3 million.
- Balance sheet and liquidity: Total assets were $3.28 billion, down from $3.30 billion at December 31, 2018. Loans were $2.53 billion, down $22.5 million; securities available for sale increased $70.1 million to $507.1 million. Deposits declined $41.8 million to $2.75 billion. Available liquidity included $67.3 million in federal funds sold and interest-bearing bank balances, $151.5 million of unpledged securities, $523.7 million of available FHLB credit and $105 million in correspondent-bank federal-funds lines.
- Debt and capital: FHLB advances were $47.9 million; repurchase agreements were $34.6 million and federal funds purchased were $12.2 million. Stockholders’ equity was $378.0 million. Consolidated total risk-based capital was 14.04%, common equity tier 1 was 13.11%, and leverage was 11.57%; regulators categorized the Bank as well-capitalized.
Material changes, outlook and risks
- Average loans grew $96 million year over year, but strong production was offset by elevated commercial and commercial-real-estate loan payoffs. Average deposits grew 7.0% year over year, although quarter-end deposits declined from December.
- Results benefited from a $1.3 million, after-tax Kentucky deferred-tax benefit (about $0.06 per diluted share) following legislation changing the state tax regime. Management expects an unfavorable impact of about $0.2 million annually beginning in 2021. Separately, April 2019 legislation may produce an estimated additional state NOL tax benefit of about $2 million, or $0.09 per diluted share, in Q2; the company had not concluded whether to make the relevant filing election.
- The company had agreed to acquire all outstanding shares of King Bancorp for approximately $28 million in cash, funded from existing resources. Closing was scheduled for April 30, 2019, subject to closing conditions. King reported approximately $193 million in assets, $167 million in loans and $125 million in deposits as of March 31.
- WM&T revenue declined 1.1% year over year. Management expected low-single-digit WM&T growth in 2019 if positive market trends continued, while noting market volatility could affect near-term results. Management also expected treasury-management fee growth and continued card-volume growth; it anticipated deposit service-charge revenue would gradually decline.
- Interest-rate simulation showed estimated net interest income changes of -11.00% and -1.23% under rate declines of 200 and 100 basis points, and +3.03% and +6.08% under increases of 100 and 200 basis points. Management cautioned that an inverted yield curve could pressure earnings if loan yields reprice lower while funding costs remain stagnant or rise.
- The allowance increased partly because management extended its historical loss look-back period from 32 to 36 quarters; this change increased the allowance by approximately $2 million. The company expects to adopt CECL in 2020 and anticipates a one-time cumulative-effect adjustment, but the filing does not provide a clear amount.
- Off-balance-sheet commitments to extend credit totaled $1.03 billion, up from $834.6 million at year-end. Management said pending legal matters were not expected to have a material adverse effect. The filing also notes lease-standard adoption added right-of-use assets and lease liabilities to the balance sheet.
Most important facts for investors to verify
- How much earnings growth persists after excluding the $1.3 million Q1 tax benefit, and whether the estimated Q2 tax benefit is realized.
- Whether deposit pricing and funding costs continue to outpace loan-yield gains, particularly under changing interest-rate and yield-curve conditions.
- Whether the King Bancorp acquisition closed as scheduled, and its subsequent effect on capital, liquidity, expenses and loan growth.
- Whether the increase in classified loans and non-performing loans persists, and how the longer historical look-back period and CECL transition affect credit reserves.
- Whether quarter-end deposit outflows and the decline in cash balances continue, and how the company funds growth while meeting its substantial unfunded credit commitments.
- Whether WM&T assets and fee revenue recover with markets, given the sensitivity of managed assets to market values and volatility.