Stock Yards Bancorp, Inc. quarterly report, Q1 FY2023

Stock Yards Bancorp, Inc. — Q1 2023 Form 10-Q

Business context and reporting period. The unaudited quarter ended March 31, 2023. Stock Yards Bancorp operates through Stock Yards Bank & Trust and reports Commercial Banking and Wealth Management & Trust (WM&T) segments. Its results include the full quarter of Commonwealth Bancshares (CB), acquired March 7, 2022; Q1 2022 included only a partial month of CB activity and substantial acquisition costs, limiting year-over-year comparability.

Key financial results

Metric	Q1 2023	Comparable period / change
Net interest income	$63.1 million GAAP; $63.2 million FTE	Up 29% FTE from Q1 2022
Net interest margin	3.59% FTE	3.11% in Q1 2022
Non-interest income	$22.0 million	Up 15%
Non-interest expense	$45.3 million	Down 20%; Q1 2022 included $19.5 million of merger expenses
Net income available to stockholders	$29.0 million	$7.9 million in Q1 2022
Diluted EPS	$0.99	$0.29 in Q1 2022
Efficiency ratio / adjusted efficiency ratio	53.13% / 52.75%	82.61% / 53.87% in Q1 2022
Net cash from operating activities	$9.8 million	$3.5 million in Q1 2022

Q1 2023 income before tax was $37.2 million and income tax expense was $8.1 million, for a 21.9% effective tax rate. The reported earnings increase reflects higher rates, loan and balance-sheet growth, CB’s fuller contribution and the absence of prior-year merger costs; it should not be read as purely organic or recurring growth.

Financial position, liquidity and credit

• Balance sheet: Assets were $7.67 billion at March 31, up 2% from year-end 2022. Loans were $5.24 billion, up 1% from year-end; deposits were $6.36 billion, down $34 million. Stockholders’ equity was $794 million.
• Funding and liquidity: Cash and cash equivalents were $317 million, up $150 million from year-end, mainly reflecting increased FHLB borrowing. FHLB advances were $275 million at quarter-end, versus $50 million at year-end; the balance included a $175 million overnight advance and a $100 million three-month advance. The Bank reported $1.15 billion of available FHLB credit and $80 million of unsecured correspondent-bank federal funds lines. Core deposits were $5.59 billion, or 88% of deposits.
• Deposit costs: Interest-bearing deposits cost 1.22% in Q1, compared with 0.11% a year earlier; total deposit cost was 0.86%, versus 0.08%. Non-interest-bearing deposits fell $105 million from year-end, while interest-bearing deposits rose $71 million.
• Capital: The Bank was categorized as well-capitalized. At March 31, consolidated CET1, Tier 1 risk-based, total risk-based and leverage ratios were 11.30%, 11.73%, 12.91% and 9.56%, respectively. Tangible common equity to tangible assets was 7.74%, a non-GAAP measure.
• Credit quality: The allowance for credit losses on loans was $75.7 million, or 1.44% of total loans. Q1 loan provision was $2.25 million; net charge-offs were $108,000. Nonperforming loans rose to $18.3 million (0.35% of loans) from $15.1 million (0.29%) at year-end, mainly due to one large C&I relationship placed on non-accrual. Past-due loans of 30 days or more declined to $11.7 million from $16.9 million.
• Securities and accumulated losses: AFS securities had a $134.6 million net unrealized loss at March 31; HTM securities had $34.9 million of unrecognized losses. Management attributed the losses to interest rates, reported no credit-related impairment, and stated it expected contractual cash flows from the portfolios. AOCI improved by $14.6 million during the quarter.
• Cash flow: Investing activities used $17.3 million and financing activities provided $157.2 million, including net FHLB advance proceeds of $225 million. Cash and cash equivalents increased $149.6 million during the quarter.

Material changes versus prior period

• Interest income rose substantially with higher market rates and average balance-sheet growth, while interest expense increased to $16.4 million from $1.2 million, principally reflecting deposit repricing, borrowing costs and acquired subordinated debt.
• Loans excluding PPP were up 10% year over year; average non-PPP loans were up 22%. At quarter-end, total loans increased $37 million from December 31, 2022.
• Deposits were down 6% year over year, according to management, amid rate competition and customer shifts toward higher-yielding alternatives. The quarter’s decrease also reflected seasonal public-funds runoff.
• WM&T and treasury management fees reached quarterly records, according to management. WM&T revenue increased 16% year over year; assets under management were $6.76 billion, up from $6.59 billion at year-end but below $7.59 billion a year earlier.
• Q1 2022 included $19.5 million of CB merger costs and $4.4 million of acquisition-related credit loss expense. Q1 2023 had no merger expense and included a $1.4 million specific reserve for a large C&I relationship.

Outlook, commentary and risks

• No quantified earnings or revenue guidance is provided. Management expected deposit pricing competition and a higher cost of funds to pressure net interest margin through most of 2023, with loan pricing competition, liquidity changes and an inverted yield curve also cited as pressures.
• Interest-rate simulations showed net interest income declining in modeled scenarios of both rising rates (+100 to +300 basis points) and falling rates (-100 to -200 basis points). These are model results, not forecasts.
• Management said the Company had not been negatively affected by the 2023 bank failures, remained well-capitalized, and was monitoring liquidity. It had not requested an advance under the Federal Reserve Bank Term Funding Program. Potential FDIC special assessments related to bank failures could increase insurance expense; the impact was not yet determined.
• The filing identifies risks including economic slowdown, inflation, interest-rate and deposit behavior, credit deterioration, liquidity and capital management, cybersecurity and operational disruption, regulatory changes, and acquisition integration. Management considered the loan allowance adequate, but it depends on estimates and economic forecasts.
• After quarter-end, the IRS issued a proposed regulation that could classify certain captive-insurance activity as a listed transaction and affect related tax benefits prospectively and retroactively. The Company said the impact on future Captive operations was uncertain.
• Management reported pending ordinary-course legal matters and believed their outcome would not materially adversely affect the Company. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.

Important facts for investors to verify

• How quickly deposits stabilize, the mix between non-interest and interest-bearing deposits, and the resulting deposit cost and margin trends.
• Whether the increased FHLB borrowing is temporary or persists, and how available borrowing capacity and pledged collateral evolve.
• Developments in the large C&I relationship, nonperforming loans, criticized loan grades, and the allowance for credit losses.
• The composition and duration of unrealized securities losses, liquidity available from securities, and any change in management’s ability or intent to hold them.
• Recurring earnings and expense trends after adjusting for the prior-year acquisition timing and merger costs, alongside organic loan and fee growth.
• The outcome and tax implications of the proposed IRS captive-insurance regulation, and any FDIC special assessment.