Stock Yards Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing compares results with the corresponding 2017 periods; balance-sheet changes are generally compared with December 31, 2017. Amounts are in U.S. dollars.
Business context and financial performance
The company is a bank holding company whose principal activities are commercial banking and wealth management and trust services.
- Q3: Net income was $13.9 million, up 18.8% year over year; diluted EPS was $0.60 versus $0.51. Net interest income was $28.5 million, non-interest income $11.4 million, and income before taxes $17.4 million.
- Nine months: Net income was $40.9 million, up 23.5%; diluted EPS was $1.78 versus $1.44. Net interest income was $84.5 million, non-interest income $33.8 million, and income before taxes $50.6 million.
- Margins and returns: Tax-equivalent net interest margin was 3.79% in Q3 versus 3.66% a year earlier, but down from 3.88% in Q2 2018. For the first nine months, it was 3.82% versus 3.63%. Q3 annualized return on assets and equity were 1.75% and 15.67%, respectively.
- Costs and taxes: Q3 non-interest expense rose 2.9% year over year to $21.8 million; nine-month expense rose 2.5% to $64.9 million. Effective tax rates were 20.4% for Q3 and 19.3% for nine months, down from 25.9% in both 2017 periods.
Financial position, liquidity, and capital
- Total assets were $3.32 billion, up from $3.24 billion at year-end 2017. Loans were $2.53 billion, up $124.9 million, or 5.2%, since year-end; management reported 9% year-over-year loan growth. Deposits were $2.60 billion, up 0.8% from year-end.
- Cash and cash equivalents were $120.5 million, down $18.8 million since year-end. Nine-month operating cash flow was $45.7 million; investing cash outflow was $118.5 million and financing cash inflow was $54.0 million.
- At September 30, total liabilities were $2.97 billion and stockholders’ equity was $353.0 million. Short-term borrowings were $231.3 million and repurchase agreements were $53.9 million; FHLB advances on the balance sheet were $48.5 million. Separately, $200 million of short-term FHLB cash-management advances matured in early October and were classified within federal funds purchased.
- Available-for-sale securities had a $550.1 million fair value and $11.5 million of unrealized losses. Management attributed the losses primarily to interest-rate movements and said it did not intend to sell, nor expect to be required to sell, the securities before recovery.
- The allowance for loan losses was $25.2 million, or 1.00% of loans. Non-performing loans were $5.0 million and non-performing assets $6.6 million; both were 0.20% of their respective loan and asset bases. Consolidated total risk-based capital was 13.50%, common equity tier 1 was 12.61%, and leverage was 11.40%; the company reported that it met applicable capital requirements.
Material changes and management commentary
- Higher loan balances and asset yields drove interest income and net interest income growth, while interest expense increased 98.3% for the first nine months as deposit and borrowing costs rose. Management expected deposit-rate pressure to continue through the rest of 2018 and into 2019, and cautioned that higher funding costs could offset benefits from further rate increases.
- Loan production slowed seasonally in Q3; loan balances declined 2% sequentially, which management attributed to seasonal production, several large payoffs, and lower line utilization.
- Wealth management and trust revenue rose 6.2% year to date; assets under management were $2.97 billion, up 8.1% year over year. Mortgage banking revenue fell 14.5% year to date, primarily due to lower refinancing activity as rates rose.
- The provision for loan losses was $2.7 million for nine months versus $1.7 million in 2017. Management extended the historical loss look-back period from 28 to 32 quarters, increasing the allowance by approximately $1.3 million compared with the prior period methodology at March 31, 2018. Management considered the allowance adequate, while noting that credit trends may normalize over time.
- The 2017 Tax Cuts and Jobs Act lowered the federal statutory rate from 35% to 21%, contributing to the lower 2018 effective tax rate. The company still had provisional tax-reform accounting items under review; management anticipated a $136,000 tax benefit measurement-period adjustment and expected to complete the accounting by December 22, 2018.
- Interest-rate simulation estimated net interest income would rise 3.98% with a 200-basis-point increase and fall 11.14% with a 200-basis-point decrease. These are model estimates, not forecasts; management cited deposit repricing limits and rate-sensitive funding as factors.
Risks, contingencies, and outlook
- There was no specific earnings or financial guidance in the provided filing text. Management described continued deposit competition and funding-cost pressure, and reported adding brokered deposits: $29.8 million at September 30, 2018, versus none at year-end 2017.
- Undrawn credit commitments totaled $722.4 million, including $18.8 million of standby letters of credit. The company recorded $350,000 in other liabilities for risks associated with unfunded commitments; actual draws and customer defaults could create credit losses.
- Management said pending legal actions were not expected to have a material adverse effect. The allowance for credit losses depends on estimates and assumptions that can change; the company also expected adoption of the current expected credit loss standard (CECL) to require a one-time allowance adjustment in Q1 2020, but could not quantify the impact.
- The company reported effective disclosure controls and no significant changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth can continue while deposit costs rise and Q3 net interest margin has declined sequentially.
- Trends in commercial loan charge-offs, criticized and non-performing loans, and the adequacy of the allowance after the look-back-period change.
- The funding mix and liquidity implications of brokered deposits, short-term borrowings, and the $200 million FHLB cash-management advances that matured in October.
- Final tax-reform measurement-period adjustments and the effect of interest-rate changes on available-for-sale securities and reported equity.
- The eventual CECL adoption impact and the scale and drawdown risk of off-balance-sheet credit commitments.