Business context and reporting period
Stock Yards Bancorp, Inc. is a Louisville-based bank holding company operating in the Louisville, Indianapolis and Cincinnati markets, with Commercial Banking and Wealth Management and Trust (WM&T) segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless stated otherwise. The May 1, 2019 acquisition of King Bancorp and King Southern Bank (KSB) expanded the company into Nelson County, Kentucky.
Financial performance and condition
Amounts are in millions except per-share data and ratios.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $32.1 | $28.5 | $92.5 | $84.5 |
| Non-interest income | $13.3 | $11.4 | $36.6 | $33.8 |
| Net income | $17.2 | $13.9 | $49.4 | $40.9 |
| Diluted EPS | $0.76 | $0.60 | $2.16 | $1.78 |
| Provision for loan losses | $0.4 | $0.7 | $1.0 | $2.7 |
| Net interest margin | 3.86% | 3.79% | 3.85% | 3.82% |
- Q3 net income increased 24%; nine-month net income increased 21%. Reported revenue, defined as net interest income plus non-interest income, was $45.4 million for Q3 and $129.1 million for the first nine months.
- Q3 annualized ROA was 1.95% and ROE 17.41%; nine-month annualized ROA was 1.94% and ROE 17.31%. The nine-month efficiency ratio was 55.7%, versus 54.8%.
- At September 30, total assets were $3.534 billion, loans $2.857 billion, deposits $2.946 billion, and stockholders’ equity $396.1 million. Since year-end 2018, assets grew 7%, loans 12%, and deposits 5%. Loan growth included $152 million acquired from KSB and $156 million of legacy growth.
- Cash and cash equivalents were $136.2 million, down from $198.9 million at December 31, 2018. For the nine months, operating cash flow was $39.7 million, investing cash outflow $79.0 million and financing cash outflow $23.4 million.
- FHLB advances totaled $82.0 million, compared with $48.2 million at year-end; federal funds purchased were $10.0 million and repurchase agreements $33.2 million. Available FHLB credit was $511 million and correspondent-bank lines $105 million. The filing reports the Bank as well-capitalized; consolidated total risk-based capital was 12.53% and leverage ratio 10.90%.
- The allowance was $26.9 million, or 0.94% of loans, compared with 1.00% at year-end. Non-performing loans were $3.2 million (0.11% of loans), versus $3.4 million; non-performing assets were $3.8 million, versus $4.4 million.
- Trust assets under management reached $3.12 billion, up 13% from year-end. Tangible common equity to tangible assets was 10.83%, compared with 11.05% at year-end; GAAP equity to assets was 11.21%.
Material changes versus comparable periods
- Growth in loans, aided by KSB and organic production, drove higher interest income and net interest income. Q3 average loans rose 10% year over year; nine-month average loans rose 7%.
- Interest expense rose 31% in Q3 and 70% year to date, mainly as deposit costs increased. Nine-month interest-bearing deposit cost rose to 1.02% from 0.62%, with time-deposit cost rising to 1.99% from 1.09%.
- Non-interest income increased 16% in Q3 and 8% year to date, supported by WM&T, card income and certain unusual or non-recurring items. Non-interest expense increased 10% and 11%, respectively, reflecting acquisition-related costs, staffing, employee benefits and technology spending.
- Credit provision declined year over year; net loan recoveries were $343,000 for the first nine months of 2019, compared with net charge-offs of $2.4 million in 2018. Management nevertheless reported an $11 million increase in classified loans since year-end, primarily from downgrades of three commercial relationships.
Outlook, commentary, risks and unusual items
- No specific earnings, growth or margin guidance is provided. Management said KSB is expected to be accretive to operating results on a quarterly basis going forward.
- The Federal Reserve cut rates twice in Q3. Management said further rate reductions could compress margins if deposit rates cannot fall enough to offset lower asset yields. The company’s simulation estimated net interest income changes of -3.27% and -8.45% under immediate 100- and 200-basis-point rate declines, and +2.56% and +5.19% under equivalent increases.
- KSB was acquired for $28 million cash; preliminary purchase accounting recorded approximately $11.9 million of goodwill, subject to further adjustment. The acquisition added about $192 million of assets at closing. Three acquired branches were closed during Q3; two buildings had been sold by quarter-end.
- Kentucky tax-law changes generated state tax benefits of $1.3 million in Q1 and $2.4 million in Q2. Management anticipates an unfavorable impact of approximately $200,000 annually beginning in 2021 from the franchise-tax transition.
- Q3 other income included $374,000 of swap fees and about $212,000 from selling Visa Class B shares; life-insurance proceeds also contributed. Nine-month acquisition costs included nearly $900,000 of legal and professional fees and $487,000 of severance and retention expense in Q2. The company also recorded a $2.0 million increase in its allowance methodology from extending the historical loss look-back period.
- CECL becomes effective for the company in 2020. Management expects an increase in the allowance and plans to quantify the January 1, 2020 impact in its 2019 annual report; the filing gives no clear estimate of that impact.
- Off-balance-sheet commitments to extend credit totaled $1.082 billion. Management stated pending legal matters are not expected to have a material adverse effect. The filing identifies general risks including local economic conditions, competition, regulation, interest rates, customer liquidity and credit quality.
Important facts for investors to verify
- Track post-acquisition KSB integration, realized accretion, purchase-accounting adjustments and branch consolidation effects.
- Assess deposit pricing, loan yields, funding mix and margin sensitivity if interest rates decline further.
- Review the future CECL allowance and capital impact when quantified, and monitor classified commercial loans and allowance coverage.
- Separate recurring operating performance from tax benefits and other non-recurring income and acquisition expenses.
- Monitor liquidity and funding needs alongside loan growth, pledged securities, large credit commitments and capital ratios.