Stock Yards Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021 unless noted. Stock Yards Bancorp is a Kentucky-based bank holding company with Commercial Banking and Wealth Management & Trust (WM&T) segments.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Net interest income | $48.8 million | Up 29% from $37.8 million in Q1 2021 |
| Non-interest income | $19.2 million | Up 39% from $13.8 million |
| Net income available to stockholders | $7.9 million; diluted EPS $0.29 | Down from $22.7 million and $0.99 diluted EPS |
| Net interest margin (FTE) | 3.11% | Down 28 basis points from 3.39% |
| Efficiency ratio (FTE) | 82.61%; adjusted non-GAAP ratio 53.87% | 48.29% reported and 47.45% adjusted in Q1 2021 |
| Total assets | $7.78 billion | Up 17% from $6.65 billion |
| Loans / deposits | $4.85 billion / $6.75 billion | Loans up 16% and deposits up 17% |
| Cash and cash equivalents | $751.7 million | Down from $961.2 million |
| Allowance for credit losses on loans | $67.1 million; 1.38% of loans | $53.9 million; 1.29% at year-end |
| Stockholders’ equity | $758.1 million | Tangible common equity to tangible assets was 6.94%, down from 8.22% |
Operating cash flow was $3.5 million, versus $27.2 million in Q1 2021. Investing activities used $35.3 million, including securities purchases and acquisition-related cash; financing activities used $177.7 million. The quarter ended with $751.7 million of cash and cash equivalents.
The Bank was reported as well-capitalized. At March 31, the Bank’s total risk-based capital ratio was 11.34%, common equity Tier 1 ratio 10.31%, Tier 1 ratio 10.31%, and leverage ratio 8.65%. The company reported $26.0 million of subordinated debentures assumed in the Commonwealth acquisition.
Material changes and drivers
- On March 7, 2022, the Company completed its Commonwealth Bancshares acquisition for total consideration of approximately $168 million. It added 15 branches and, at acquisition, approximately $1.34 billion of assets, $632 million of loans, $247 million of securities, $1.12 billion of deposits, and $2.93 billion of WM&T assets under management. Purchase-accounting values remain provisional.
- Reported earnings included $19.5 million of merger expenses and $4.4 million of credit-loss expense for acquired loans. These items substantially affected the year-over-year decline in net income and the reported efficiency ratio.
- Net interest income grew with acquisition-related and organic loan and securities growth, despite a $4.2 million decline in PPP-related interest and fee income. PPP loans fell 88% year over year.
- Non-interest income growth included higher WM&T, card, deposit-service and treasury-management revenue, partly offset by mortgage banking income, down 31% as refinancing and home-purchase activity slowed.
- Unrealized losses on available-for-sale securities increased as interest rates rose. AOCI declined by $49.7 million after tax during the quarter; management attributed the securities losses to rates and reported no underlying credit-related factors.
- Non-performing loans increased to $12.8 million, or 0.26% of loans, from $7.4 million, or 0.18%, at year-end; the filing attributes $6 million of non-accrual loans to the Commonwealth acquisition. Delinquencies totaled $11.2 million, little changed from year-end.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue or margin guidance. Management said rising rates may help asset yields over time but warned that loan floors, competitive pricing, excess liquidity and a potentially flattening yield curve could pressure net interest margin. The first-quarter rate increase did not provide a full-period benefit.
- The Company’s interest-rate simulation showed modeled net interest income declines of 2.44% under a 100-basis-point increase, 2.96% under a 200-basis-point increase, and 3.15% under a 100-basis-point decrease. Management cautioned that the model is scenario-based and may not represent actual results.
- Liquidity resources included $1.02 billion of available FHLB credit, $100 million of unsecured correspondent-bank federal-funds lines, and a $20 million holding-company line. About 87% of deposits were classified as core deposits; management noted that unusually high customer balances could be more rate-sensitive. Total off-balance-sheet commitments to extend credit were $2.05 billion.
- Approximately $456 million of loans and $150 million of interest-rate derivative notional referenced LIBOR at quarter-end. The Company was preparing for the benchmark transition, with SOFR-indexed loans also reported. Interest-rate, credit, economic, acquisition-integration, liquidity, cyber and operational risks are among the stated risk factors.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. It also concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of post-acquisition revenue and expense growth is recurring, and how quickly Commonwealth integration costs and systems-conversion costs subside.
- Final Commonwealth purchase-accounting valuations, including acquired loan marks, goodwill, and the acquired WM&T business; the filing allows adjustments through March 7, 2023.
- Whether loan growth, credit quality and the allowance remain sound as the combined loan portfolio seasons; review acquired-loan performance and non-accrual trends.
- How deposit balances and funding costs respond to rate changes, runoff of elevated customer balances, and competition; assess actual rate sensitivity against management’s simulation.
- The effect of further rate movements on AFS securities, AOCI, tangible capital and the Company’s ability or willingness to sell securities if liquidity needs change.
- Whether WM&T assets and fee income remain resilient to market declines, and whether mortgage banking weakness continues as refinancing and housing activity change.
- Confirm the distinction between GAAP results and management’s adjusted efficiency ratio, which excludes merger expenses and tax-credit partnership amortization.