Stock Yards Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. The company operates through commercial banking and wealth management and trust services (WM&T), primarily in Kentucky, Indiana, and Ohio.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $60.9 million | $57.0 million | $124.0 million | $105.7 million |
| Net interest income, FTE | $61.1 million | $57.2 million | $124.3 million | $106.2 million |
| Non-interest income | $22.9 million | $21.9 million | $44.9 million | $41.1 million |
| Net income available to stockholders | $27.7 million | $26.8 million | $56.7 million | $34.7 million |
| Diluted EPS | $0.94 | $0.91 | $1.93 | $1.22 |
| Net interest margin, FTE | 3.42% | 3.20% | 3.50% | 3.14% |
Q2 net income rose 3%; first-half net income rose 63%. First-half comparison is materially affected by the 2022 Commonwealth Bancshares acquisition: the prior-year period included $19.5 million of merger expenses and acquisition-related credit costs, and only about four months of acquired-company activity. Q2 total non-interest expenses increased 3% to $45.8 million; first-half expenses fell 10% to $91.1 million, largely because the prior-year period included those merger expenses. The Q2 efficiency ratio was 54.57%; the first-half ratio was 53.84% (68.52% in the prior-year period, including merger costs).
Q2 non-interest income increased 4%; WM&T fees and treasury management fees reached quarterly records, while mortgage banking income declined. First-half non-interest income increased 9%; WM&T revenue grew 11% and assets under management were $6.98 billion at June 30, 2023.
Financial position, liquidity, and credit
- Total assets were $7.73 billion at June 30, up 3% from December 31, 2022. Loans were $5.42 billion, up $213 million; net loans were $5.34 billion.
- Deposits were $6.21 billion, down $183 million (3%) from year-end. Non-interest-bearing deposits declined $184 million. Management attributed deposit movement to customers seeking higher yields and seasonal public-funds runoff.
- Cash and cash equivalents were $214 million, up $47 million from year-end. Cash from operating activities was $43.9 million for the first half; investing activities used $152.5 million and financing activities provided $155.6 million.
- FHLB advances were $400 million, versus $50 million at year-end, including a $300 million overnight advance and a $100 million three-month advance. The period-end weighted-average rate was 5.15%. Available FHLB credit was $1.08 billion; unsecured correspondent-bank federal-funds lines were $80 million.
- Available-for-sale securities had a carrying fair value of $1.09 billion against $1.24 billion amortized cost; held-to-maturity securities had a $450 million carrying value and $410 million fair value. Management attributed unrealized losses to interest rates, reported no credit-related impairment, and stated it expected contractual cash flows to be collected. Approximately 98% of the debt securities portfolio was in a loss position.
- Nonperforming loans were $17.8 million, or 0.33% of loans, versus $15.1 million and 0.29% at year-end. Nonaccrual loans increased primarily due to one large C&I relationship. Delinquent loans (30 days or more past due) declined to $8.8 million from $16.9 million.
- The loan allowance was $77.7 million, or 1.43% of loans, versus $73.5 million and 1.41% at year-end. First-half loan-loss provision was $4.4 million; management cited loan growth, a $1.4 million specific reserve for a large C&I relationship, and economic-factor adjustments. Net charge-offs were low.
- Stockholders’ equity was $808 million. The company reported a 7.87% tangible common equity-to-tangible assets ratio and $20.17 tangible book value per share. The Bank remained well-capitalized; its June 30 ratios included 11.26% common equity Tier 1, 11.26% Tier 1 risk-based capital, 12.43% total risk-based capital, and 9.51% leverage.
Changes, outlook, risks, and unusual items
- Management said strong organic loan growth and higher asset yields supported earnings, but deposit pricing competition, deposit contraction, and increased borrowing costs pressured funding costs and net interest margin. It expects deposit competition and margin pressure to continue through the rest of 2023.
- Management described the economic outlook as volatile and noted a potential slowdown, an inverted yield curve, and continued competition for loans and deposits. Its June discussion cited market projections for a possible additional 25-basis-point Federal Reserve rate increase in Q3; this was an outlook, not company guidance.
- The company’s interest-rate simulation estimated lower net interest income under both rising and falling rate scenarios: down 2.46% for +100 basis points and 4.95% for +200 basis points; down 1.78% for -100 basis points and 4.04% for -200 basis points. These are model scenarios, not forecasts.
- Liquidity risks include further deposit outflows and funding needs. Management said it had not been directly affected by early-2023 bank failures, had not borrowed through the Federal Reserve Bank Term Funding Program, and believed its contingency funding resources were adequate. Core deposits were 89% of total deposits; about $825 million of debt securities were unpledged.
- Off-balance-sheet commitments to extend credit totaled $2.30 billion, with a $5.1 million allowance for related credit exposures. Management said pending ordinary-course legal proceedings were not expected to materially adversely affect financial position or results.
- An IRS proposed regulation could classify certain Section 831(b) captive insurance activity as a listed transaction and potentially disallow related tax benefits prospectively and retroactively; the company said the impact was uncertain. The filing also said the company was not expected to owe the proposed FDIC special assessment.
- Q2 included a $225,000 loss on disposal of assets associated with the former operations center. No shares were repurchased under the public program in the first half, although shares withheld for employee tax obligations were reported. The board extended the authorization through May 2025.
Investor facts to verify
- Whether deposit outflows, migration to time deposits, and rising deposit costs continue, and how they affect net interest margin and use of FHLB funding.
- Whether loan growth is accompanied by deterioration in C&I or commercial real estate credit, particularly the large C&I relationship placed on nonaccrual status, and whether reserves remain adequate.
- How the substantial unrealized securities losses, pledged collateral, and rate sensitivity affect capital and available liquidity under changing rates.
- The final IRS treatment of captive insurance activity and any resulting tax or operating effects.
- The filing reports regulatory capital strength and available funding capacity; investors should verify current capital ratios, deposit composition, and borrowing availability in subsequent filings.