Stock Yards Bancorp, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021. Stock Yards Bancorp is a Kentucky-based financial holding company operating through Stock Yards Bank & Trust and an immaterial captive insurer. Its two reportable segments are Commercial Banking and Wealth Management & Trust (WM&T), serving markets in Kentucky, Indianapolis, Indiana, and Cincinnati, Ohio.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue (net interest income FTE plus non-interest income) | $237.4 million | $188.0 million |
| Net income | $74.6 million | $58.9 million |
| Diluted EPS | $2.97 | $2.59 |
| Net interest margin (FTE) | 3.22% | 3.39% |
| Non-interest income | $65.9 million | $51.9 million |
| Non-interest expense | $142.3 million | $101.7 million |
| Provision for credit losses | $0.8 million net benefit | $18.4 million expense |
| Operating cash flow | $102.1 million | $77.1 million |
- Revenue rose 26% and net income rose 27%. Net interest income (FTE) increased 26%, helped by loan growth, PPP fee recognition, the Kentucky Bancshares acquisition, and lower deposit costs; margin compression from low rates and excess liquidity partly offset those gains.
- Non-interest income increased 27%. WM&T fees reached $27.6 million, up 18%, while debit and credit card income rose 59% and treasury management fees rose 28%. Mortgage banking income declined 23% as refinancing activity normalized.
- Reported non-interest expense increased 40%, including $19.0 million of merger expenses. The reported efficiency ratio rose to 59.94% from 54.06%; management’s adjusted non-GAAP ratio was 51.77% versus 52.42%.
- Total assets were $6.65 billion, up 44%; loans were $4.17 billion, up 18%; and deposits were $5.79 billion, up 45%. Excluding PPP loans, year-end loans increased 35%, including acquired balances.
- Cash and cash equivalents were $961.2 million, versus $317.9 million. Investing cash flow was negative $78.9 million and financing cash flow was positive $620.0 million, producing a $643.2 million increase in cash.
- Year-end allowance for credit losses on loans was $53.9 million, or 1.29% of loans (1.34% excluding PPP). Non-performing loans fell to $7.4 million, or 0.18% of loans, from $13.2 million, or 0.37%. Net charge-offs were $6.2 million, including two CRE charge-offs totaling $4.4 million that had been fully reserved.
- Stockholders’ equity was $675.9 million; regulatory total risk-based capital was 12.79% consolidated and 12.42% at the Bank. Tangible common equity to tangible assets was 8.22%, down from 9.28%, principally reflecting acquisition goodwill.
- The company had no FHLB advances outstanding at year-end. It reported $75.5 million of securities sold under repurchase agreements and $10.4 million of federal funds purchased. Available FHLB credit was $1.00 billion; $80 million of correspondent-bank credit lines were also available.
- The annual dividend was $1.10 per share. The board declared a $0.28 quarterly dividend in February 2022.
Material changes and unusual items
- On May 31, 2021, the company acquired Kentucky Bancshares for approximately $232.9 million in cash and stock. The acquisition added 19 branches and approximately $1.27 billion in assets at acquisition. It contributed seven months of results and generated $123.3 million of goodwill; acquisition-related fair values remained provisional within the measurement period.
- The acquisition added $14.2 million to the loan allowance: $6.8 million for purchased credit-deteriorated loans, offset to goodwill, and $7.4 million of provision expense for other acquired loans.
- Unrealized losses on available-for-sale securities contributed to a $16.7 million net-of-tax decline in other comprehensive income; accumulated other comprehensive income moved from $8.7 million to a $7.9 million loss. Management attributed the securities valuation decline to rising market rates and reported no credit-related impairment.
- The effective tax rate rose to 21.75% from 13.10%, reflecting, among other factors, the prior-year historic tax-credit benefit and Kentucky’s change to corporate income taxation.
- The August 2021 agreement to acquire Commonwealth Bancshares remained pending at the filing date. Estimated consideration was approximately $171 million; closing was expected around March 7, 2022, subject to remaining conditions. Management anticipated five branch closures and a combined franchise of approximately $8.0 billion in assets.
Outlook, risks, and contingencies
- Management identified 2022 priorities and challenges including completing and integrating Commonwealth, growing non-PPP loans, developing the acquired Central Kentucky market, and investing prudently in technology. It cautioned that margin compression, deposit competition, inflation, loan demand, and market conditions could affect performance. The filing provides no numeric earnings or margin guidance.
- Management expected interest rates to rise and described interest-rate risk as generally neutral, potentially slightly asset-sensitive if deposit betas remain low. More than half of variable-rate loans were at or near floors, delaying repricing; the filing also notes potential pressure on securities values and funding costs.
- Approximately 51% of deposits were in accounts with balances of $500,000 or more. Management characterized these as relationship deposits but warned that withdrawals could affect liquidity and raise funding costs. About 75% of the AFS securities portfolio was pledged; approximately $301 million was unpledged.
- Unfunded loan commitments were approximately $1.69 billion and standby letters of credit were $30.8 million. The reserve for off-balance-sheet credit exposures was $3.5 million. Commitments may expire unused, but draws and borrower defaults could create funding or credit losses.
- COVID-19 effects, credit-loss estimate uncertainty under CECL, commercial real estate values, interest-rate and liquidity risk, cybersecurity and third-party systems, regulation, competition, and acquisition integration were highlighted risks. The company had approximately $425 million of LIBOR-linked loans and $124 million of LIBOR-linked swaps at year-end and was transitioning contracts to alternative reference rates.
- Management reported no pending or threatened legal proceeding expected to materially affect the company. Auditors issued unqualified opinions on the financial statements and internal control; management’s control assessment excluded the acquired Kentucky Bancshares operations, representing approximately 19% of year-end assets.
Most important facts for investors to verify
- Whether Commonwealth closed as expected, the final consideration and share dilution, integration costs, branch closures, and realized cost or revenue benefits.
- Whether organic loan growth continues after separating acquired and PPP-related balances, and how loan quality, delinquencies, charge-offs, and the allowance evolve as pandemic-related support recedes.
- How deposit balances and pricing respond to rate increases, particularly among large-balance accounts, and whether excess liquidity converts into profitable lending or investments.
- Whether NIM and earnings withstand deposit repricing, loan-rate floors, securities valuation changes, and the remaining recognition of PPP fees.
- Whether WM&T AUM and related fee income remain resilient to market declines, and whether the elevated reported expense ratio normalizes after merger costs.
- Progress on LIBOR contract remediation and whether acquisition accounting, including goodwill and purchase-price allocations, changes materially during the measurement period.