Stock Yards Bancorp, Inc. quarterly report, Q1 FY2024

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Stock Yards Bancorp, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024; balance sheet comparisons are to December 31, 2023 unless noted. The interim financial statements are unaudited. The company operates Stock Yards Bank & Trust and reports Commercial Banking and Wealth Management & Trust (WM&T) segments.

Financial performance

  • Net income: $25.9 million, down 11% from $29.0 million in Q1 2023. Diluted EPS was $0.88 versus $0.99. Return on average assets was 1.28% and return on average equity was 12.09%.
  • Net interest income: $60.1 million GAAP ($60.2 million fully tax-equivalent, or FTE), down 5% year over year. FTE net interest margin fell 39 basis points to 3.20%; FTE net interest spread declined 64 basis points to 2.49%.
  • Revenue and expenses: Non-interest income increased 6% to $23.3 million, led by WM&T fees (+13% to $10.8 million) and treasury management fees. Non-interest expense rose 8% to $49.0 million, principally from compensation, benefits, technology and card processing. The FTE efficiency ratio increased to 58.68% from 53.13%.
  • Credit costs: Total provision for credit losses was $1.4 million, including $1.2 million for loans and $0.25 million for off-balance-sheet exposures. Net loan recoveries were $0.35 million. The loan allowance was $80.9 million, or 1.38% of loans, versus $79.4 million at year-end.
  • Cash flow: Operating activities provided $17.4 million. Investing activities used $57.6 million and financing activities used $65.5 million; cash and cash equivalents declined $105.7 million to $160.2 million.

Balance sheet, funding and capital

  • Total assets were $8.12 billion, down 0.6% from $8.17 billion at year-end. Loans grew $78.7 million to $5.85 billion; net loans were $5.77 billion. CRE represented $2.54 billion, or 43%, of loans.
  • Deposits were $6.61 billion, down $61.7 million from year-end, mainly from seasonal public-funds runoff. They were up 4% from March 31, 2023, supported by time deposits. Non-interest-bearing deposits were $1.48 billion, about 22% of period-end deposits.
  • Period-end borrowings included $200 million of FHLB advances, $162.5 million of repurchase agreements and $27 million of subordinated debentures. The FHLB advance was a rolling three-month facility maturing in May 2024. The company reported $1.33 billion of available FHLB credit and $80 million of unsecured correspondent-bank lines.
  • Core deposits were $5.76 billion, or 87% of deposits. Available liquidity also included $160.2 million of cash and approximately $430 million of unpledged debt securities. About 69% of the debt securities portfolio was pledged.
  • Stockholders’ equity was $874.7 million. The Bank was categorized as well-capitalized; its March 31 ratios included 11.17% common equity Tier 1, 11.17% Tier 1 risk-based capital, 12.37% total risk-based capital and 9.52% leverage. Tangible common equity to tangible assets was 8.36%, up from 8.09% at year-end.

Material changes and credit position

  • Interest income increased 21% year over year, but interest expense rose by approximately $20.1 million as deposit rates and borrowing costs increased. Management attributed margin pressure to deposit competition, customers shifting to higher-yielding accounts, and greater funding needs accompanying loan growth.
  • Average loans increased 11% year over year. Management described loan growth as organic; quarter-end growth from year-end was concentrated in CRE and residential real estate, while C&I contracted.
  • Non-performing loans declined to $14.1 million, or 0.24% of loans, from $19.2 million, or 0.33%, at year-end. Delinquent loans of 30 days or more were $18.1 million, compared with $17.3 million. Management attributed the lower non-accrual balance mainly to payoff and paydown of two larger CRE relationships.
  • Office-property exposure was $527 million, or 9% of loans; 53% was owner-occupied and $202 million was medical-related. Management said this portfolio was performing well, while acknowledging broader CRE concerns from higher rates and office vacancies.
  • Unrealized losses on AFS securities were $129.5 million; HTM securities had $33.5 million of unrecognized losses. Management attributed the declines to interest rates, reported no credit-related factors, and recorded no securities credit-loss allowance. AOCI loss was $95.1 million at quarter-end.

Outlook, risks and unusual items

  • Management expected deposit pricing pressure to continue to weigh on net interest margin through the first half of 2024, with pressure moderating and NIM expansion anticipated in the second half. This is management’s outlook, not formal numerical earnings guidance.
  • The filing describes an uncertain rate and economic environment, including an inverted but improving yield curve. Its sensitivity model estimated one-year net interest income changes of -2.3% and -1.3% for parallel rate declines of 200 and 100 basis points, and +1.8% and +3.4% for increases of 100 and 200 basis points, respectively; results depend on model assumptions, including deposit betas.
  • Key risks identified include funding-cost and deposit-mix changes, interest-rate and liquidity conditions, economic slowdown, credit deterioration, CRE exposure, forecast uncertainty in the allowance for credit losses, competition, technology and cybersecurity risks, and regulatory or tax changes. The filing specifically notes that credit-loss estimates depend on economic forecasts.
  • Effective January 1, 2024, adoption of ASU 2023-02 changed tax-credit investment accounting and presentation. It increased retained earnings/equity by $2.5 million and moved related amortization expense from non-interest expense to income tax expense. The insurance captive was dissolved at year-end 2023; related income and tax benefits will not recur.
  • Tax-credit partnership investments were $173.1 million, with $153.3 million of recorded future contribution commitments. Management said pending legal matters were not expected to have a material adverse effect. No material change in internal control over financial reporting was reported; disclosure controls were deemed effective.

Important facts for investors to verify

  • Whether deposit costs stabilize and the anticipated second-half NIM improvement materializes.
  • Deposit trends, uninsured and public-funds composition, borrowing use, and available liquidity as loan growth continues.
  • Developments in CRE and office credit quality, non-performing loans, delinquencies, and allowance coverage.
  • Market-rate effects on the securities portfolio, AOCI, liquidity and tangible capital; distinguish AFS fair-value losses from HTM unrecognized losses.
  • Whether elevated operating expenses and tax-credit partnership commitments affect future earnings and cash needs.