Stock Yards Bancorp, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; figures are unaudited. Stock Yards Bancorp is a Kentucky-based financial holding company operating commercial banking and wealth management and trust (WM&T) businesses in Kentucky and nearby markets. Its second-quarter results include Kentucky Bancshares (KB), acquired on May 31, 2021, for only one month of operating activity.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $41.6m | $33.5m | $79.4m | $66.0m |
| Non-interest income | $15.8m | $12.6m | $29.6m | $25.2m |
| Net income | $4.2m | $13.4m | $26.9m | $26.6m |
| Diluted EPS | $0.17 | $0.59 | $1.13 | $1.17 |
| Net interest margin (FTE) | 3.36% | 3.27% | 3.38% | 3.47% |
Q2 total revenue, defined as net interest income plus non-interest income, was $57.4m versus $46.2m; first-half total revenue was $109.0m versus $91.1m. Q2 net income fell primarily amid $18.1m of merger costs and acquisition-related credit provisioning. For the first half, $18.5m of merger expenses and $7.4m of provision expense on acquired non-PCD loans were recorded. Excluding merger costs, management reported a Q2 adjusted efficiency ratio of 51.95%, versus 50.56% a year earlier; this is a company-defined non-GAAP measure.
- Balance sheet at June 30: assets $6.09bn, loans $4.21bn, deposits $5.26bn, cash and cash equivalents $540m, AFS securities $1.01bn, and shareholders’ equity $651m. Asset growth from year-end was 32%, substantially reflecting KB.
- Liquidity and funding: deposits rose 32% from December 31, including $1.0bn assumed from KB. Cash and cash equivalents increased $222m in the first half. The company reported $875m of available FHLB capacity and $80m of correspondent-bank federal-funds lines. Total FHLB advances were $10m at quarter-end.
- Cash flow: first-half operating cash flow was $47.2m; investing cash flow was $68.0m provided; financing cash flow was $107.1m provided. Cash and cash equivalents increased from $317.9m to $540.2m.
- Credit: allowance for credit losses on loans was $59.4m, or 1.41% of loans (1.55% excluding PPP loans). Non-performing loans were $13.9m, 0.33% of loans; non-performing assets were 0.24% of assets. The bank was categorized as well-capitalized; its CET1, total risk-based capital and leverage ratios were 11.44%, 12.46% and 9.95%, respectively.
Material changes versus comparable periods
- Q2 net interest income rose 24%, and net interest margin increased 9 basis points year over year, helped by PPP forgiveness-related fee recognition and lower deposit costs. First-half NIM declined 9 basis points, to 3.38%, despite higher net interest income.
- Non-interest income rose 25% in Q2 and 18% in the first half. WM&T, card income and treasury-management fees were notable contributors; WM&T assets under management were $4.44bn at June 30, versus $3.85bn at year-end.
- Q2 non-interest expense more than doubled to $48.2m, principally due to merger costs, acquisition-related operating expenses, higher staffing and technology costs, and a $474,000 early-termination penalty on FHLB advances.
- Loans increased 19% from year-end to $4.21bn, including acquired balances. PPP loans declined to $377m from $550m as forgiveness progressed. Deposits rose 32%, including acquired deposits.
Outlook, commentary, risks and unusual items
- No specific company-wide full-year earnings or revenue guidance is provided. Management expected KB to become accretive to operating results beginning in 2022. Purchase accounting valuations remained preliminary, with a measurement period of up to 12 months.
- PPP loans generated $13.9m of interest and fee income in the first half; $11.6m of net deferred fees remained unrecognized at June 30. Forgiveness timing could materially affect results through the remainder of 2021 and into 2022.
- Management cited excess liquidity and a sustained low-rate environment as sources of margin pressure. Its rate-sensitivity model estimated net interest income declines of 1.19% and 1.01% under immediate +100 and +200 basis-point scenarios, respectively, and a 3.86% decline under -100 basis points. Management also noted that loan floors could delay the benefit of rising rates.
- COVID-19-related uncertainty, borrower credit quality, economic forecasts used in the credit-loss allowance, interest rates, deposit levels, acquisition integration, and regulatory approvals are identified risks. Outstanding COVID-related payment deferrals were $8m at June 30, down from $37m at year-end.
- A proposed Commonwealth Bancshares acquisition was announced August 3, 2021, with a projected fourth-quarter 2021 close subject to approvals and other conditions. The filing describes consideration as approximately $153m in one section and approximately $151m in another.
- Two shareholder lawsuits challenging the KB merger were voluntarily dismissed; management said other ordinary-course legal matters were not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the stated Commonwealth transaction consideration ($151m versus $153m) and assess approval, closing and integration risks.
- Track KB purchase-accounting adjustments, the $124m preliminary goodwill balance, merger costs and the timing of expected acquisition accretion.
- Assess underlying earnings excluding merger and acquisition-related items, and the extent to which PPP fee recognition supports reported interest income and margin.
- Monitor deposit retention and mix, liquidity deployment, margin sensitivity, and the effect of loan-rate floors if market rates change.
- Review credit quality, allowance assumptions, non-performing loans and remaining deferrals as pandemic-related support winds down.