Business context and reporting period
Stock Yards Bancorp, Inc. (NASDAQ: SYBT) filed this unaudited Form 10-Q for the quarter ended September 30, 2022. The bank provides commercial banking and wealth management and trust services across Kentucky and the Indianapolis and Cincinnati markets. Comparisons are affected by the March 2022 acquisition of Commonwealth Bancshares (CB); the quarter included a second full quarter of CB operations.
Financial performance and position
Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts below are in millions.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $62.4 | $45.5 | $168.1 | $124.9 |
| Non-interest income | $24.9 | $17.6 | $66.0 | $47.2 |
| Net income available to stockholders | $28.5 | $23.2 | $63.2 | $50.1 |
| Diluted EPS | $0.97 | $0.87 | $2.20 | $2.03 |
| Net interest margin (FTE) | 3.46% | 3.14% | 3.25% | 3.29% |
| ROA / ROE | 1.47% / 14.85% | 1.50% / 13.92% | 1.14% / 11.44% | 1.25% / 12.37% |
- Q3 total non-interest expense was $44.9 million, up 30% year over year; nine-month expense was $145.8 million, up 35%. Q3 efficiency ratio was 51.30% (53.06% adjusted); nine-month ratio was 62.11% (54.41% adjusted).
- At September 30, total assets were $7.55 billion, loans $5.07 billion, deposits $6.50 billion, and total equity $730.7 million. Since December 31, 2021, assets grew 14%, loans 22%, and deposits 12%, including CB acquisition effects.
- Cash and cash equivalents were $329.9 million, down from $961.2 million at year-end 2021. For the first nine months, operating cash flow was $71.1 million, investing cash outflow $245.0 million, and financing cash outflow $457.4 million; cash declined $631.3 million.
- Debt included $26.2 million of subordinated debentures assumed with CB; period-end repurchase-agreement funding was $124.6 million and federal funds purchased $9.0 million. Available borrowing capacity included $1.36 billion from the FHLB, $90 million in correspondent-bank lines, and a $20 million holding-company line.
- The loan allowance was $70.1 million, or 1.38% of loans, versus $53.9 million, or 1.29%, at year-end. Non-performing loans were $10.6 million (0.21% of loans); non-performing assets were $11.6 million (0.15% of assets). Management considered the allowance adequate.
- Available-for-sale securities had fair value of $1.15 billion and pretax unrealized losses of $168.4 million. AOCI was a loss of $127.9 million, versus a loss of $7.9 million at year-end. Tangible common equity to tangible assets fell to 6.78% from 8.22%.
- The Bank’s regulatory capital ratios remained above well-capitalized thresholds: common equity tier 1 10.64%, tier 1 10.64%, total risk-based capital 11.67%, and leverage 8.45%.
Material changes versus comparable periods
- Q3 net income available to stockholders rose 23% and diluted EPS rose 11%; nine-month net income rose 26% and diluted EPS rose 8%. Growth reflects CB and organic expansion, as well as higher interest income. Share issuance for the acquisition increased the weighted-average share count.
- Q3 net interest margin improved 32 basis points year over year as rates rose. The nine-month margin declined 4 basis points, partly because the prior-year period benefited from PPP fees. Deposit expense increased as the company began raising deposit rates.
- Non-interest income increased 41% in Q3 and 40% for nine months, with acquisition contributions and growth in wealth management, card, deposit and treasury fees. Mortgage banking income declined amid higher rates and lower mortgage volume.
- Credit-loss provision was $4.8 million in Q3 versus a $1.5 million release in Q3 2021; nine-month provision was $6.9 million versus $1.1 million. Current-period provision reflected loan growth, acquisition activity and a less favorable unemployment forecast.
- CB added approximately $1.34 billion of assets, including $632 million of loans and $1.12 billion of deposits at acquisition. Nine-month 2022 results included $19.5 million of merger expense and $4.4 million of acquired-loan credit-loss expense. Q3 also included a non-recurring $3.1 million gain on sale of acquired properties.
Outlook, risks and unusual items
- Management expected further net interest income and margin benefit from recent and anticipated rate increases, but noted that higher deposit pricing, loan competition, liquidity changes and a potentially flatter yield curve could constrain margins. Its rate-sensitivity model estimated modest net-interest-income declines in the 100-, 200- and 300-basis-point rising-rate scenarios; results depend on assumptions, including deposit betas.
- Management cited inflation and recession concerns as drivers of a higher unemployment forecast in its credit model. Other stated risks include borrower credit deterioration, deposit runoff, market and interest-rate volatility, acquisition integration, liquidity and capital management, and operational and cybersecurity risks.
- Deposits excluding CB-acquired balances declined $407 million, or 7%, during the first nine months, primarily due to seasonal public-fund runoff and time-deposit attrition. The company reported $2.15 billion in off-balance-sheet commitments to extend credit; actual funding needs may be lower because some commitments expire undrawn.
- About 60% of the securities portfolio was pledged, leaving approximately $656 million unpledged. Management stated that security unrealized losses reflected interest rates, not credit factors, and reported no securities credit-loss allowance.
- No formal earnings guidance is provided in the supplied filing text. Management said operating results for the interim periods are not necessarily indicative of full-year results. It reported no legal matters expected to have a material adverse effect and no material change in internal controls.
Important facts for investors to verify
- Separate acquisition-driven growth from organic loan and deposit growth, and assess continued deposit runoff and deposit-pricing costs.
- Track NIM and net interest income as rates and deposit betas evolve; compare management’s rate-sensitivity assumptions with actual results.
- Review credit trends, especially the allowance, non-performing loans, delinquencies, and commitments in commercial and construction lending.
- Assess the capital effect of unrealized securities losses and the extent to which AOCI, tangible equity, or securities classification changes affect reported capital measures.
- Monitor CB integration, remaining merger costs, provisional purchase-accounting adjustments, and the sustainability of the one-time property-sale gain and other fee growth.