Stock Yards Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Balance-sheet comparisons are with December 31, 2020. Stock Yards Bancorp is a Kentucky-based bank holding company operating in the Louisville, Indianapolis and Cincinnati markets, with Commercial Banking and Wealth Management & Trust (WM&T) segments.
Financial results and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $37.8 million | $32.4 million, Q1 2020 |
| Non-interest income | $13.8 million | $12.5 million, Q1 2020 |
| Net income; diluted EPS | $22.7 million; $0.99 | $13.2 million; $0.58, Q1 2020 |
| Net interest margin (FTE) | 3.39% | 3.71%, Q1 2020 |
| Efficiency ratio | 48.29% | 52.35%, Q1 2020 |
| Total assets | $4.79 billion | $4.61 billion, Dec. 31, 2020 |
| Loans; allowance for credit losses | $3.64 billion; $50.7 million | $3.53 billion; $51.9 million, Dec. 31, 2020 |
| Deposits; cash and cash equivalents | $4.20 billion; $333.0 million | $3.99 billion; $317.9 million, Dec. 31, 2020 |
| Stockholders’ equity | $443.2 million | $440.7 million, Dec. 31, 2020 |
- Net income rose 72%; diluted EPS increased 71%. Net interest income grew 17%, while non-interest income rose 10%. Total non-interest expense increased 6% to $25.0 million. The effective tax rate increased to 19.4% from 14.5%.
- Net interest margin contracted 32 basis points year over year, reflecting the low-rate environment and excess liquidity. PPP loan forgiveness-related fee recognition provided a 21-basis-point benefit to Q1 2021 NIM; excess liquidity reduced it by approximately 14 basis points.
- Loan growth included $62.7 million of additional PPP loans and $61.7 million of commercial real estate growth. Total loans excluding PPP increased $40.9 million from year-end. Deposits rose $211.3 million, including $183.1 million in non-interest-bearing deposits.
- Q1 cash flows were $27.2 million provided by operations, $207.6 million used in investing and $195.4 million provided by financing; cash increased $15.0 million.
- Borrowings at quarter-end included $51.7 million of securities sold under repurchase agreements, $8.6 million federal funds purchased and $24.2 million of FHLB advances. After quarter-end, the company paid off $14 million of advances and incurred a $474,000 early-termination fee.
- The bank’s regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital 13.06%, CET1 11.99% and leverage 9.20%. Tangible common equity to tangible assets was 8.97%.
Material changes and credit quality
- Net provision for credit losses was a $1.5 million benefit in Q1 2021, versus $5.9 million of expense in Q1 2020. Management attributed the release primarily to improved unemployment forecasts and other CECL model factors; net loan charge-offs were minimal.
- Non-performing loans increased to $14.3 million from $13.2 million at year-end, or 0.39% of loans versus 0.37%. Delinquent loans of 30 days or more declined to $6.0 million from $16.9 million. Loan payment deferrals declined to $14 million from $37 million; CARES Act deferrals were excluded from delinquency and non-performing statistics.
- Unrealized losses on available-for-sale securities increased amid rising market rates. The portfolio’s fair value was $672.2 million, and Q1 other comprehensive loss was $11.8 million; AOCI moved from $8.7 million positive at year-end to $3.1 million negative. Management reported no credit-related factors underlying securities losses.
- Cash and deposits reached elevated levels amid PPP funding, government stimulus and customer liquidity preferences. The company invested $139.6 million in available-for-sale securities during the quarter, but elevated mortgage-backed security prepayments constrained portfolio growth.
Outlook, risks and unusual items
- The company agreed to acquire Kentucky Bancshares, Inc. in a cash-and-stock transaction. Estimated consideration was approximately $225 million based on Stock Yards’ share price on May 4, 2021; the cash portion was expected to be funded from existing resources. Closing was anticipated in Q2 2021, subject to regulatory approval and customary conditions. Kentucky Bancshares had approximately $1.3 billion in assets at March 31, 2021.
- Two shareholder lawsuits filed after quarter-end challenge the proposed acquisition and seek, among other relief, to block closing. The company and other defendants said they believe the claims are without merit. These proceedings and closing conditions create transaction risk.
- Management cited continuing uncertainty from COVID-19, possible deterioration in borrower credit, CECL estimate sensitivity, low interest rates and potential further NIM compression. The company noted that worsening economic forecasts could require increased credit-loss provisions.
- PPP activity is material: approximately $613 million in PPP loans remained outstanding at quarter-end, with $13.6 million of net deferred fees unrecognized. Forgiveness timing could materially affect results through the remainder of 2021 and early 2022. Management did not provide specific earnings or margin guidance.
- Interest-rate simulation estimated net interest income changes of -5.42% for a 100-basis-point decline, -0.82% for a 100-basis-point increase and +1.71% for a 200-basis-point increase; management cautioned that simulations are estimates, not forecasts.
- The company declared $0.27 per share in dividends. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms of the Kentucky Bancshares acquisition, including regulatory approvals, integration costs, share issuance and outcomes of the shareholder lawsuits.
- PPP forgiveness pace, deferred-fee recognition and remaining PPP balance, and their effects on reported earnings and NIM.
- Whether improved economic forecasts continue to support allowance releases, particularly as deferrals end; monitor non-performing loans, delinquencies and charge-offs.
- Deposit persistence and liquidity deployment, including effects on funding costs, securities valuation and net interest margin.
- Movement in AOCI and securities unrealized losses, and capital ratios following balance-sheet growth, dividends and acquisition funding.