Stock Yards Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2020; comparisons are generally with Q3 and the first nine months of 2019. The Louisville-based bank operates in the Louisville, Indianapolis and Cincinnati markets, with Commercial Banking and Wealth Management and Trust (WM&T) segments. Results were materially affected by COVID-19, the Paycheck Protection Program (PPP), lower interest rates and adoption of CECL credit-loss accounting.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $33.7 million | $32.1 million | $99.7 million | $92.6 million |
| Non-interest income | $13.0 million | $13.2 million | $38.2 million | $36.4 million |
| Provision for credit losses | $4.4 million | $0.4 million | $15.5 million | $1.0 million |
| Net income | $14.5 million | $17.2 million | $41.1 million | $49.4 million |
| Diluted EPS | $0.64 | $0.76 | $1.81 | $2.16 |
| Net interest margin (FTE) | 3.26% | 3.87% | 3.40% | 3.86% |
- Q3 net income declined 16%; nine-month net income declined 17%. Q3 annualized ROA was 1.34% and ROE 13.57%, versus 1.95% and 17.41%, respectively, a year earlier. Nine-month ROA was 1.33% versus 1.94%; ROE was 13.22% versus 17.31%.
- Q3 efficiency ratio was 55.96% versus 52.67%; nine-month ratio was 54.36% versus 55.70%. The nine-month comparison benefited from acquisition costs included in 2019.
- At September 30, total assets were $4.37 billion, up 17% from year-end 2019. Loans were $3.47 billion, up $627 million, largely due to $642 million of PPP loans; excluding PPP, loans declined $15 million from year-end. Deposits were $3.75 billion, up $621 million, or 20%.
- Cash and cash equivalents were $291 million. Cash provided by operations was $37.8 million for the first nine months, compared with $39.7 million in 2019; investing used $579.4 million and financing provided $582.9 million. Cash increased $41.3 million during the period.
- Borrowings at quarter-end included $56.5 million of FHLB advances, $40.4 million of repurchase agreements and $9.2 million of federal funds purchased. The Bank reported $846 million of available FHLB credit and $80 million of correspondent-bank lines. Core deposits were 98% of deposits.
- Stockholders’ equity was $428.6 million. Consolidated total risk-based capital was 13.79%, common equity tier 1 was 12.61%, and leverage was 9.70%; the Bank remained well-capitalized. The leverage ratio declined from year-end as PPP-driven asset growth expanded the balance sheet.
Material changes versus comparable periods
- Net interest income increased despite margin compression, as sharply lower deposit costs and PPP fee income partly offset lower asset yields. Q3 interest expense fell 59% year over year; the average cost of interest-bearing liabilities fell to 0.37% from 1.04%.
- Lower rates, low-yielding PPP loans and excess liquidity reduced NIM. Management attributed approximately 12 basis points of Q3 margin pressure to PPP loans and 13 basis points to excess liquidity.
- Credit-loss provisioning rose substantially under CECL and in response to weaker economic forecasts. The loan allowance was $50.5 million, or 1.45% of total loans and 1.78% excluding PPP, versus 0.94% at year-end 2019. CECL adoption reduced opening retained earnings by $8.8 million, net of tax effects.
- Mortgage banking income increased 149% in Q3 to $2.0 million and 122% for the first nine months to $4.4 million, reflecting strong refinancing activity. Deposit service charges declined 26% in Q3 and 19% year to date, reflecting pandemic-related changes in customer activity.
- Non-interest expenses increased 10% in Q3, including higher compensation, technology costs, normalized FDIC insurance expense and $550,000 of off-balance-sheet credit-loss expense. Nine-month expenses rose 4%, including $2.4 million of such credit-loss expense.
- 2019 comparisons included $3.9 million of non-recurring Kentucky tax benefits and acquisition costs. Q3 2019 also included non-recurring income, including swap fees and gains; these affect period-to-period comparisons.
Outlook, commentary, risks and unusual items
- The filing provides no formal earnings or margin guidance. Management said prolonged pandemic effects or a worse economic forecast could increase the allowance and provision, and asset quality could deteriorate as deferrals expire.
- At September 30, $120 million of loans, excluding PPP, had full-payment deferrals, equal to 4% of non-PPP loans; by October 31 this had fallen to $65 million, or 2%. Deferrals were not classified as troubled debt restructurings or included in past-due and non-performing statistics under applicable relief. Management noted that some affected borrowers, particularly in challenged industries, may face continuing pressure.
- Non-performing loans were $13.5 million, or 0.39% of loans (0.48% excluding PPP), versus 0.42% at year-end. A large commercial real estate relationship placed on non-accrual in Q2 had a $2 million specific reserve; it was current at classification and subsequent quarter-ends. Management reported no pandemic-related charge-offs to date, but the allowance is sensitive to forecasts and judgments.
- The Bank originated 3,364 PPP loans totaling $657 million gross. It had nearly $15 million of net unrecognized PPP fees at quarter-end; forgiveness or repayment would accelerate income recognition and could materially affect Q4 2020 and early 2021 results. As of October 31, 71 forgiveness applications totaling $52 million had been submitted and five borrowers had received SBA payment.
- Management planned to retain approximately $10 million monthly of qualifying residential mortgage production on balance sheet, rather than sell it, to deploy excess liquidity. Approximately $7 million was retained in September at an indicated yield of about 2.65%.
- Interest-rate sensitivity analysis estimated net interest income would change by -3.47% under a 100-basis-point decline, -0.52% under a 100-basis-point increase and +2.20% under a 200-basis-point increase. Management cautioned that simulations are estimates, not forecasts; many variable-rate loans have floors.
- Other risks include COVID-19-related credit, market, liquidity and operational impacts; possible impairment of goodwill or other assets; interest-rate volatility; and LIBOR transition uncertainty. Goodwill testing at September 30 found no impairment. Management said pending legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether PPP forgiveness proceeds as expected, the timing of the nearly $15 million in unrecognized fees, and the related effect on earnings and liquidity.
- How borrowers perform after deferrals end, particularly in lodging, retail, events and other exposed sectors, and whether non-performing loans or charge-offs rise.
- Whether the CECL allowance adequately reflects economic conditions, including the assumptions behind unemployment forecasts, qualitative adjustments and the large CRE reserve.
- Whether deposit balances remain stable as PPP funds and other elevated customer liquidity are used or withdrawn, and how margin responds to low rates and excess liquidity.
- Whether management’s planned mortgage-loan retention affects yields, liquidity and mortgage banking revenue as intended, and whether capital ratios remain comfortably above regulatory requirements.