Business context and reporting period
Stock Yards Bancorp, Inc. (NASDAQ: SYBT), a Louisville-based bank holding company operating through Stock Yards Bank & Trust, filed this Form 10-K for the year ended December 31, 2022. It serves Kentucky, Indianapolis and Cincinnati markets through 73 banking locations, with Commercial Banking and Wealth Management & Trust (WM&T) as its reportable segments.
Results include approximately ten months of Commonwealth Bancshares (CB) activity following its March 7, 2022 acquisition. CB added approximately $1.34 billion in assets, including $632 million of loans, $247 million of securities and $1.12 billion of deposits. The company paid $168 million in combined cash and stock consideration. Management identifies relationship banking, diversified fee income, organic growth and selective acquisitions as strategic priorities.
Financial performance and condition
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net income available to stockholders | $93.0 million | $74.6 million | +25% |
| Diluted EPS | $3.21 | $2.97 | +8% |
| Total revenue, FTE | $323.4 million | $237.4 million | +36% |
| Net interest income, FTE | $234.3 million | $171.5 million | +37% |
| Net interest margin, FTE | 3.35% | 3.22% | +13 bps |
| Non-interest income | $89.1 million | $65.9 million | +35% |
| Non-interest expense | $191.8 million | $142.3 million | +35% |
| ROA / ROE | 1.25% / 12.58% | 1.33% / 13.02% | Lower |
Growth reflected the CB acquisition, organic lending, higher rates and fee-income expansion. Interest expense rose as deposit costs repriced upward; PPP-related income fell substantially. The reported efficiency ratio was 59.30% versus 59.94%; the adjusted ratio, a non-GAAP measure, increased to 53.62% from 51.77%.
- Balance sheet: Total assets were $7.50 billion, up 13%. Loans were $5.21 billion, up 25%; excluding CB and PPP effects, management reported $529 million, or 13%, of loan growth. Deposits were $6.39 billion, up 10% including CB, but down $517 million, or 9%, excluding the acquisition.
- Credit: The loan allowance was $73.5 million, or 1.41% of loans, compared with $53.9 million and 1.29% a year earlier. Provision for credit losses totaled $10.3 million, versus a $753,000 net benefit in 2021. Net charge-offs were negligible, but non-performing loans rose to $15.1 million (0.29% of loans) from $7.4 million (0.18%), largely due to one CRE relationship.
- Liquidity and funding: Cash and cash equivalents fell to $167 million from $961 million as liquidity was deployed into loans and securities and deposits ran off. The company reported $1.36 billion of available FHLB capacity, $80 million of correspondent-bank lines and $20 million of holding-company borrowing capacity. Core deposits were 88% of deposits; management also disclosed that approximately 47% of total deposits were in accounts with balances of $500,000 or more.
- Debt and capital: Year-end liabilities included $26.3 million of subordinated debentures and a $50 million, one-week FHLB advance that matured in early January 2023. The Bank remained well-capitalized. Consolidated total risk-based capital was 12.54%; the tangible common equity ratio, a non-GAAP measure, declined to 7.44% from 8.22%.
- Cash flow: Net cash from operating activities was $108.7 million, versus $102.1 million in 2021. Investing activities used $384.4 million and financing activities used $518.1 million; cash and cash equivalents decreased $793.8 million.
- Shareholder returns: The annual dividend was $1.14 per share, up from $1.10. The Board declared a $0.29 quarterly dividend in February 2023.
Material changes versus 2021
- CB added scale and fee-generating wealth-management operations; year-end WM&T assets under management were $6.59 billion, up from $4.80 billion, with acquisition-related and organic growth partly offset by market declines.
- Net interest margin improved as rates rose, but management warned that higher deposit pricing and a potentially inverted yield curve could pressure future margins.
- Equity accumulated other comprehensive loss worsened by approximately $108 million, primarily reflecting unrealized declines in available-for-sale securities as rates increased. The securities portfolio included $1.14 billion of available-for-sale securities and $473 million of held-to-maturity securities; held-to-maturity securities had $41.4 million of unrecognized losses.
- Non-interest expense included $19.5 million of CB merger costs. The company also recorded a $4.4 million gain on sales of acquired properties and an $870,000 pretax loss on disposition of its partial interest in Landmark Financial Advisors (LFA), which it sold at year-end because the business did not fit its strategy.
Outlook, risks and unusual items
Management expected further Federal Reserve rate increases into 2023, while acknowledging uncertainty in the economic outlook. It cited loan growth and development of the CB and Kentucky Bancshares acquisitions as priorities, but did not provide specific 2023 earnings, revenue or margin guidance.
Key risks include deposit outflows or repricing, liquidity needs, a recession and higher unemployment, credit deterioration and real-estate values, securities valuation changes, market declines affecting WM&T fees, competitive pressure, acquisition integration, cybersecurity and third-party service disruptions, and regulatory or tax changes. Management expects historically strong credit metrics to normalize. Its rate-sensitivity model estimated that an immediate 100, 200 and 300 basis-point rate increase would reduce one-year net interest income by 1.71%, 3.44% and 5.17%, respectively, under stated assumptions.
About 47% of deposits were in accounts of at least $500,000, making customer behavior a notable funding risk despite management’s characterization of many large balances as long-standing relationships. The filing also disclosed $2.03 billion of unused loan commitments and $34.7 million of standby letters of credit. Management reported no pending or threatened legal proceeding expected to materially affect the company. The independent auditor gave unqualified opinions on the financial statements and internal control; management excluded CB, representing 18% of year-end assets, from its internal-control assessment.
Important facts for investors to verify
- Deposit trends, rates paid, large-account concentration and the availability and cost of backup funding.
- Loan-credit migration, especially CRE exposure, non-performing loans, delinquency trends, and whether the $73.5 million allowance remains adequate under weaker economic scenarios.
- The scale and duration of unrealized securities losses, potential effects on capital and liquidity, and the company’s ability to avoid selling securities at a loss.
- Underlying earnings after merger costs, property-sale gains, LFA disposition effects and other acquisition-related items; also assess continuing expense growth and adjusted efficiency.
- Progress integrating CB, the sustainability of organic loan growth and WM&T fee growth, and actual results against management’s qualitative outlook.
- The effect of rising rates and deposit repricing relative to the filing’s modeled rate scenarios, including the model’s deposit-beta assumptions.