Stock Yards Bancorp, Inc. — 2023 Form 10-K
Business context and reporting period. The company is a bank holding company headquartered in Louisville, Kentucky, operating through Stock Yards Bank & Trust. It serves Kentucky, Indianapolis and Cincinnati through commercial banking and wealth management and trust (WM&T) businesses. This filing covers the fiscal year ended December 31, 2023; comparisons are primarily with 2022. The 2022 results include about ten months of activity from the Commonwealth Bancshares acquisition, completed in March 2022.
Financial performance and condition
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Net income available to stockholders | $107.7 million | $93.0 million | Up 16% |
| Diluted earnings per share | $3.67 | $3.21 | Up 14% |
| Total revenue, net interest income FTE plus non-interest income | $340.1 million | $323.4 million | Record; up about 5% |
| Net interest income FTE | $247.9 million | $234.3 million | Up 6% |
| Net interest margin FTE | 3.39% | 3.35% | Up 4 basis points |
| Net interest spread FTE | 2.78% | 3.21% | Down 43 basis points |
| Non-interest income | $92.2 million | $89.1 million | Up 3% |
| Non-interest expenses | $187.8 million | $191.8 million | Down 2%; 2022 included $19.5 million of merger costs |
| Efficiency ratio FTE | 55.23% | 59.30% | Improved; adjusted ratio rose to 54.84% from 53.61% |
| Return on average assets / equity | 1.39% / 13.44% | 1.25% / 12.58% | Both improved |
Balance sheet and liquidity. At year-end, assets were $8.17 billion, up 9%; loans were $5.77 billion, up 11%; and deposits were $6.67 billion, up 4%. Deposit growth masked a material mix shift: non-interest-bearing deposits fell $402 million, while interest-bearing deposits rose $681 million, including $511 million in time deposits. Average total deposits declined 1% year over year. Cash and cash equivalents were $266.0 million, up from $167.4 million.
Year-end borrowings included $200 million of FHLB advances, $153.0 million in repurchase agreements, $12.9 million of federal funds purchased and $26.7 million of subordinated debentures. The company reported $1.33 billion of available FHLB credit and $80 million of unsecured correspondent-bank lines. Core deposits were $5.78 billion, or 87% of deposits. Management reported the Bank was well-capitalized; its year-end common equity Tier 1 ratio was 11.07%, total risk-based capital ratio 12.21%, and leverage ratio 9.30%.
Credit and capital. The allowance for credit losses on loans was $79.4 million, or 1.38% of loans, versus $73.5 million, or 1.41%, in 2022. Provision for credit losses was $13.8 million in the income statement, including $12.5 million for loans and $1.3 million for off-balance-sheet exposures. Net loan charge-offs were $6.6 million, mainly from two isolated C&I relationships. Non-performing loans rose to $19.2 million, or 0.33% of loans, from $15.1 million, or 0.29%. Stockholders’ equity reached $858.1 million; tangible common equity to tangible assets improved to 8.09% from 7.44%. AOCI remained negative at $92.8 million.
Cash flow and shareholder returns. Operating cash flow was $106.7 million, compared with $108.7 million in 2022. Investing activities used $424.0 million and financing activities provided $415.9 million; cash increased $98.6 million to $266.0 million. Dividends declared were $1.18 per share for 2023, and the board declared a subsequent quarterly dividend of $0.30 per share in February 2024. No shares were repurchased in 2023 under the authorized program.
Material changes versus 2022
- Profit and revenue reached records, supported by loan growth, the full-year contribution from the Commonwealth acquisition, higher asset yields and stronger fee income.
- Higher deposit pricing and increased borrowing sharply raised funding costs: the cost of interest-bearing liabilities increased to 1.97% from 0.40%, and total interest expense rose $81.1 million. The net interest spread contracted despite a modest increase in reported NIM.
- WM&T income rose 10% to $39.8 million; year-end assets under management rose to $7.16 billion from $6.59 billion. Treasury management fees and card income also increased.
- Loan growth and charge-offs increased credit-loss provisioning. The prior-year provision included $4.4 million related to acquired non-PCD loans; the 2022 period also included $19.5 million of merger expenses and a $4.4 million gain on sales of acquired properties.
- AOCI improved by $22.7 million after a $107.6 million decline in 2022, primarily reflecting changes in the market value of available-for-sale securities.
Outlook, risks and unusual items
- Management identified no formal numerical earnings or growth guidance. It expects continued deposit and loan pricing competition, funding-cost pressure and net interest margin compression in the first part of 2024. The filing notes that market expectations at the time suggested rates could remain elevated early in 2024, with possible cuts later.
- Management’s 2024 priorities include funding loan growth cost-effectively, growing loans and developing newer markets. It cautioned that recession, unemployment and market volatility could weaken loan demand, increase credit provisions and reduce WM&T fees, which depend substantially on asset values.
- Commercial real estate was 43% of loans. Office exposure was $594 million, or 10% of loans; 55% was owner-occupied and about $206 million was medical-related. Management described portfolio performance as solid, but rising rates, vacancies and collateral values remain risk factors.
- Available-for-sale securities had $123.2 million of unrealized losses at year-end; held-to-maturity securities had a $31.3 million fair-value shortfall to carrying value. The company attributed the declines to interest rates, reported no credit-related impairment, and said it expected contractual cash flows. Around 67% of debt securities were pledged.
- The company invested $175.1 million in tax-credit partnerships during 2023, with $157.7 million of future contribution commitments recorded in other liabilities. These investments support CRA requirements and generate tax benefits, but realization depends on project and tax-credit conditions.
- The IRS proposed regulation affecting Section 831(b) captive insurance arrangements may disallow related tax benefits prospectively or retroactively. The company did not renew its captive and dissolved it in December 2023; its activity reduced the 2023 effective tax rate by 0.2 percentage points. No future captive tax benefit is expected.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter. Management reported no material pending legal proceeding, no material cybersecurity incident, and effective internal controls.
Important facts for investors to verify
- Track deposit mix, deposit betas, average deposit balances, use and cost of FHLB advances, and whether funding costs continue to outpace asset-yield increases.
- Review quarterly loan performance, particularly C&I charge-offs, non-performing and substandard loans, CRE office exposure, collateral values and the assumptions behind the allowance.
- Assess securities-related liquidity and capital sensitivity, including pledged assets, unrealized losses, and the effect of any need to sell securities before recovery or maturity.
- Monitor WM&T assets under management, market-driven fee sensitivity, organic client growth and continued integration benefits from the Commonwealth acquisition.
- Confirm the timing and amount of tax-credit partnership contributions and benefits, and any final IRS action on Section 831(b) captive arrangements.
- Distinguish GAAP net income from net income available to stockholders: 2023 was $107.7 million in both measures; in 2022, GAAP net income was $93.3 million and $0.3 million was attributed to non-controlling interests, leaving $93.0 million available to stockholders.