Business context and reporting period
Stock Yards Bancorp, Inc. is a bank holding company operating through Stock Yards Bank & Trust, with commercial banking and wealth management and trust (WM&T) businesses across Kentucky, Indianapolis and Cincinnati. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022 unless noted. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $61.3 | $62.4 | $185.3 | $168.1 |
| Net interest margin, FTE | 3.34% | 3.46% | 3.44% | 3.25% |
| Non-interest income | $22.9 | $24.9 | $67.8 | $66.0 |
| Non-interest expense | $46.7 | $44.9 | $137.8 | $145.8 |
| Net income | $27.1 | $28.5 | $83.8 | $63.4 |
| Diluted EPS | $0.92 | $0.97 | $2.86 | $2.20 |
- Q3 return on average assets was 1.38% and return on average equity was 13.26%; nine-month figures were 1.46% and 14.07%, respectively. Q3 efficiency ratio was 55.38%; the adjusted ratio was 55.19%.
- Nine-month operating cash flow was $76.4 million, investing cash outflow was $317.4 million, and financing cash inflow was $266.7 million. Cash and cash equivalents ended at $193.0 million, versus $329.9 million at September 30, 2022.
- At September 30, total assets were $7.90 billion, loans $5.62 billion, deposits $6.40 billion, and stockholders’ equity $806.9 million. Loans grew 8% from year-end 2022; deposits were up less than 1%.
- FHLB advances were $350 million, up from $50 million at year-end 2022; securities sold under repurchase agreements were $113.9 million and subordinated debentures were $26.6 million. FHLB borrowing capacity was $1.06 billion, and unsecured correspondent-bank lines totaled $80 million.
- Loan allowance was $78.1 million, or 1.39% of loans. Nonperforming loans were $17.2 million, or 0.31% of loans, versus $15.1 million and 0.29% at year-end. Nine-month net charge-offs were $2.2 million.
- Regulatory capital remained above required levels: consolidated total risk-based capital was 12.71%, common equity Tier 1 was 11.17%, and Tier 1 leverage was 9.80%. The Bank was categorized as well-capitalized.
Material changes versus comparable periods
- Q3 net income fell 5% and diluted EPS declined from $0.97 to $0.92. Higher loan yields and loan growth were outweighed by increased deposit and borrowing costs; Q3 net interest margin fell 12 basis points year over year.
- For the first nine months, net income rose 33% and diluted EPS rose from $2.20 to $2.86. Comparison is affected by the March 2022 Commonwealth Bancshares acquisition: the 2022 period included about seven months of acquired operations, $19.5 million of merger expense and $4.4 million of acquired-loan credit expense.
- Loan growth was strong: non-PPP loans increased $559 million, or 11%, year over year. Deposit balances declined $98 million, or 2%, year over year as customers shifted toward higher-yielding accounts and public funds ran off.
- Non-interest income fell 8% in Q3, largely because the prior-year quarter included a $3.1 million gain on sale of acquired property. Nine-month non-interest income rose 3%, supported by WM&T, treasury management and BOLI income.
- Total securities declined $152 million from year-end 2022 to $1.47 billion, reflecting maturities, paydowns and lower market values. The AFS portfolio had $175.7 million of gross unrealized losses; HTM securities had $47.8 million of unrecognized losses. AOCI was a loss of $127.9 million.
- Other assets increased $112 million from year-end, principally reflecting $117.2 million of tax-credit partnership investments. Related contribution commitments of $100 million were recorded in other liabilities.
Outlook, risks and unusual items
- No specific earnings or financial guidance is provided. Management expects deposit pricing competition and higher funding costs to continue pressuring net interest margin through year-end 2023 and into early 2024. The filing describes an uncertain economic outlook and a severely inverted yield curve.
- Interest-rate simulation indicated net interest income declines under modeled rate changes: down 2.23% with rates up 100 basis points, down 4.48% with rates up 200 basis points, and down 1.75% and 3.95% with rates down 100 and 200 basis points, respectively. Outcomes depend on model assumptions, including deposit betas.
- Management attributed securities’ unrealized losses to interest-rate changes, reported no credit-related factors, and stated it expects to collect contractual cash flows. Approximately 99% of the debt securities portfolio was in a loss position at quarter-end. These market-value declines remain a significant capital and liquidity consideration.
- Credit risks include commercial real estate and C&I exposures, economic deterioration and uncertainty in credit-loss forecasts. Nonperforming loans increased, mainly after a large C&I relationship was placed on non-accrual. Management considers the allowance adequate, but estimates may change with economic conditions.
- Off-balance-sheet commitments to extend credit totaled $2.32 billion. Management notes some commitments may expire unused; if drawn and borrowers default, exposure could be material. The separate allowance for off-balance-sheet exposures was $5.6 million.
- The IRS proposed treating certain Section 831(b) captive insurance activity as a listed transaction, potentially disallowing tax benefits prospectively and retroactively. The Company stopped renewing its captive in August 2023, expects dissolution by year-end, and does not expect the related tax benefits to continue.
- The Company made no advance request under the Federal Reserve Bank Term Funding Program and stated it had not been directly affected by early-2023 bank failures. Management said it monitors liquidity and maintains contingency funding strategies. Pending legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Track deposit mix, deposit costs, public-funds runoff and further FHLB borrowing as loan growth continues; verify liquidity capacity and the availability and value of pledged versus unpledged collateral.
- Monitor quarterly net interest margin, funding-cost trends and actual performance against the filing’s modeled interest-rate sensitivity.
- Review credit migration, nonperforming C&I and CRE loans, charge-offs, utilization of credit lines and the adequacy of both loan and off-balance-sheet allowances.
- Assess the impact of AFS and HTM securities’ unrealized losses on tangible capital, liquidity choices and potential securities sales.
- Confirm whether the captive is dissolved and assess any finalized IRS rules, tax consequences and resulting effective tax rate.
- Distinguish underlying growth from acquisition-period differences and prior-year one-time gains and merger costs when evaluating earnings trends.