Stock Yards Bancorp, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Stock Yards Bancorp is a Kentucky bank holding company operating through Stock Yards Bank & Trust in the Louisville, Indianapolis and Cincinnati markets. Its businesses are Commercial Banking and Wealth Management & Trust (WM&T). This unaudited filing covers the quarter and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019.
Financial performance and condition
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Net interest income | $33.5 million, up 9% year over year | $66.0 million, up 9% year over year |
| Net income | $13.4 million, down 19% | $26.6 million, down 17% |
| Diluted EPS | $0.59, versus $0.72 | $1.17, versus $1.40 |
| Net interest margin (FTE) | 3.27%, down 54 basis points | 3.47%, down 38 basis points |
| Efficiency ratio (FTE) | 53.87%, versus 59.08% | 53.53%, versus 57.34% |
| Annualized return on average assets / equity | 1.25% / 12.90% | 1.33% / 13.04% |
- Revenue and expenses: Q2 non-interest income was $12.6 million, up 3%, with higher mortgage banking and WM&T income partly offset by lower deposit service charges and card income. Six-month non-interest income was $25.2 million, up 8%. Non-interest expense declined 2% in Q2 to $24.9 million and increased 2% for the first half to $48.8 million. Q2 included $1.5 million of expense for off-balance-sheet credit exposures.
- Credit costs: Provision for loan credit losses was $5.6 million in Q2 and $11.1 million for the first half, compared with none and $0.6 million, respectively, in 2019. The allowance for credit losses on loans was $47.7 million, or 1.38% of total loans and 1.68% excluding PPP loans. Net charge-offs remained minimal.
- Cash flow: For the first six months, operating activities provided $28.7 million; investing activities used $623.1 million, chiefly reflecting $630.1 million of net PPP lending; financing activities provided $569.1 million, including $593.2 million of deposit growth. Cash and cash equivalents ended at $224.4 million, down $25.3 million from year-end.
- Balance sheet and funding: Total assets grew 16% to $4.33 billion, primarily due to PPP lending. Gross loans were $3.46 billion, including $630.1 million of PPP loans net of deferred fees. Deposits rose 19% to $3.73 billion; non-interest-bearing deposits were $1.21 billion. Borrowings included $61.4 million of FHLB advances, $42.7 million of repurchase agreements and $8.4 million of federal funds purchased. Available FHLB credit was $806 million; available correspondent-bank federal funds lines were $80 million.
- Capital: Stockholders’ equity was $420.2 million. The consolidated total risk-based capital ratio was 13.50%, common equity Tier 1 was 12.39%, and leverage was 9.50%. Management reported the Bank remained well-capitalized. Tangible common equity to tangible assets, a non-GAAP measure, was 9.39%, down from 10.55% at year-end, reflecting asset growth, AOCI and CECL-related changes.
Material changes versus comparable periods
- Earnings and EPS declined year over year despite higher net interest income and non-interest income. The 2019 comparisons included $2.4 million of Q2 Kentucky tax benefits and $1.3 million of acquisition costs; the six-month 2019 period included $3.8 million of tax benefits and acquisition costs.
- Sharp Federal Reserve rate reductions and low-yield PPP balances, together with excess liquidity, compressed margins. Lower deposit costs and PPP fee income helped lift net interest income, but did not prevent the margin decline.
- CECL adoption on January 1, 2020 increased the opening loan allowance by $8.2 million and off-balance-sheet allowance by $3.5 million, reducing retained earnings by $8.8 million net of tax. These adoption adjustments did not reduce current-period earnings.
- PPP activity materially expanded the balance sheet: the Bank originated 3,250 loans totaling $647 million during Q2 and received $20 million of SBA origination fees, of which $2.1 million was recognized in the first half. The PPP portfolio was 18% of loans at quarter-end and carried a 1% stated rate; fees increased reported loan yield, while the low rate and resulting liquidity weighed on NIM.
- Excluding PPP loans, loans contracted $11 million in the first half: a $67 million increase in commercial real estate was offset by a $74 million decrease in commercial and industrial loans. C&I line utilization declined to 29% at June 30 from 43% at year-end.
Outlook, commentary and risks
- Management said the pandemic’s impact on future periods remained highly uncertain and did not provide quantitative earnings or margin guidance. It warned that a worsening economic forecast could require additional loan-loss provisions and that prolonged disruption could weaken borrower performance and collateral values.
- As of June 30, 1,100 full-payment deferrals covered $502 million of loans, or 18% of the portfolio excluding PPP loans; these were not classified as TDRs or included in non-performing-loan statistics under applicable relief. By July 31, the company estimated 10% of non-PPP loans remained in full-payment deferral, and said a significant portion had returned to full payment after quarter-end.
- Non-performing loans were $14.4 million, or 0.41% of loans. A large CRE relationship placed on non-accrual in Q2 received a $2 million specific reserve; the loan was current when classified and had not received a payment deferral. Management noted that deferral data may mask later asset-quality deterioration.
- Management identified pandemic-sensitive exposures including lodging/hotels ($62 million), shopping centers ($58 million), recreation/entertainment ($56 million), nursing/residential care ($50 million), restaurants/bars ($30 million) and travel-related ($24 million), excluding PPP loans. It cited heightened risks to credit quality, interest income, WM&T assets under management, operations, technology and liquidity.
- Interest-rate simulation indicated net interest income would decline 3.31% under a 100-basis-point rate decrease and increase 2.54% under a 200-basis-point increase. Many variable-rate loans were near contractual floors, limiting the benefit from modest rate rises.
- Liquidity was supported by core deposits, cash, available-for-sale securities and borrowing capacity. Management reported no significant pandemic-related funding issues, but warned that unusually high customer deposit balances could be more rate-sensitive and could leave the Bank.
- The company suspended common-share repurchases in 2020 and did not expect to resume them in the near term. It declared quarterly dividends of $0.27 per share. Management reported no material operational or internal-control challenges from its pandemic response; disclosure controls were deemed effective. Pending legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether deferred borrowers resume regular payments and whether excluded deferrals later appear as delinquencies, non-accruals or losses.
- How CECL assumptions, unemployment forecasts, the specific CRE exposure and off-balance-sheet reserves change in subsequent filings.
- The pace of PPP forgiveness and early repayment, fee recognition, and the effect of PPP runoff on loan balances, deposits, liquidity and NIM.
- Whether margin pressure persists as rates remain low, and whether deposit costs can decline enough to offset asset-yield compression.
- Credit quality and collateral performance in pandemic-sensitive commercial real estate and business sectors, alongside capital and liquidity ratios as the balance sheet normalizes.