Stock Yards Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company is a regional bank and wealth-management provider operating in Kentucky and the Indianapolis and Cincinnati markets. Results include Commonwealth Bancshares (CB), acquired March 7, 2022; comparisons are affected by this acquisition and by the prior-year Kentucky Bancshares (KB) acquisition.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net interest income | $57.0 million | $41.6 million | $105.7 million | $79.4 million |
| Non-interest income | $21.9 million | $15.8 million | $41.1 million | $29.6 million |
| Net income available to stockholders | $26.8 million | $4.2 million | $34.7 million | $26.9 million |
| Diluted EPS | $0.91 | $0.17 | $1.22 | $1.13 |
| Net interest margin (FTE) | 3.20% | 3.36% | 3.14% | 3.38% |
Q2 net income available to stockholders rose 540% year over year, but comparison is heavily distorted by $18.1 million of KB merger expense and $7.4 million of acquisition-related credit-loss expense in Q2 2021. Q2 2022 had no merger expense. First-half 2022 included $19.5 million of CB merger expense and $4.4 million of acquired-loan credit-loss expense. First-half reported net income increased 29%; diluted EPS increased 8%.
- Margins and revenue: Q2 net interest income increased 37%, and non-interest income increased 39%, reflecting acquisition contributions and organic growth. NIM declined 16 basis points in Q2 and 24 basis points for the first half. PPP-related income fell as loans were forgiven; mortgage banking income was weaker year to date as higher rates slowed activity.
- Credit costs: Q2 provision for credit losses was a $0.2 million benefit, including release of specific reserves on acquired loans that paid off. First-half provision expense was $2.1 million, including $4.4 million recorded at CB acquisition. Management cited a worsening unemployment forecast and qualitative adjustments, partly offset by reserve releases.
- Cash flow: First-half operating cash flow was $21.8 million, compared with $47.2 million in 2021; investing cash flow was a $45.4 million use, versus $68.0 million provided; financing cash flow was a $363.7 million use, versus $107.1 million provided. Cash and cash equivalents declined from $961.2 million at year-end to $573.9 million at June 30, 2022.
Financial position, debt and liquidity
- Total assets were $7.58 billion, up 14% from December 31, 2021; loans were $4.88 billion, up 17%; deposits were $6.55 billion, up 13%. These changes include CB’s acquired assets, $632 million in loans and $1.12 billion in deposits.
- Non-acquisition, non-PPP loan growth was $182 million, or 5%, in the first half. Non-interest-bearing deposits were $2.12 billion. Excluding CB, deposits declined $358 million during the first half, mainly from seasonal public-fund and tax-related outflows and time-deposit maturities.
- Borrowings included $26.1 million of subordinated debentures assumed in the CB acquisition, $161.5 million of overnight repurchase agreements and $8.8 million of federal funds purchased. The company reported no FHLB advances outstanding.
- Available funding included $1.22 billion of FHLB capacity, $100 million of correspondent-bank federal-funds lines and a $20 million holding-company line. Management said liquidity was supported by cash, available-for-sale securities, core deposits and borrowing capacity. Core deposits represented 88% of total deposits.
- Bank regulatory capital ratios remained above well-capitalized minimums: total risk-based capital 11.63%, common equity tier 1 10.62%, Tier 1 10.62% and leverage 8.06%. The bank was categorized as well-capitalized.
Material changes, outlook and risks
- CB acquisition: Completed March 7 for total consideration of approximately $168 million; added 15 branches, wealth-management assets and a 60% interest in Landmark Financial Advisors. The company recorded $66.7 million of goodwill, still subject to acquisition-date fair-value adjustments through the measurement period ending March 2023.
- Interest-rate exposure: Management said rate increases should benefit net interest income and NIM as variable-rate loans reprice, but warned that deposit pricing competition, excess system liquidity and possible yield-curve flattening could pressure margins. Its June 30 simulation estimated net interest income changes of -0.48%, -0.96% and -1.42% for parallel increases of 100, 200 and 300 basis points, respectively, and -5.13% for a 100-basis-point decrease. Management cautioned that the model is not a forecast and expects actual deposit betas to be below its long-term assumption.
- Securities and capital: Rising rates produced $115.5 million of pre-tax unrealized losses on available-for-sale securities and $24.6 million of unrecognized losses on held-to-maturity securities. AOCI was a loss of $87.3 million, versus a $7.9 million loss at year-end. Tangible common equity to tangible assets fell to 7.00% from 8.22%, and tangible book value per share to $17.59 from $20.09. Management attributed the valuation declines to rates, not credit concerns; it classified some securities as held to maturity partly to reduce AOCI volatility.
- Credit quality and commitments: Non-performing loans were $9.0 million, or 0.18% of loans, unchanged as a proportion from year-end. Delinquent loans of 30 days or more rose to $18.0 million, or 0.37%, from $11.0 million, or 0.26%. Off-balance-sheet credit commitments totaled $2.16 billion; these are not equivalent to expected cash needs because some may expire undrawn. The filing identifies economic slowdown, inflation, interest-rate changes, borrower credit quality and acquisition integration among key risks.
- Other matters: Management reported no material legal proceedings or outstanding claims expected to materially affect the company. No numerical earnings or margin guidance was provided; management’s outlook was that further rate hikes could support income, subject to the risks above. Disclosure controls were assessed as effective.
Key facts investors should verify
- How much of reported growth and earnings reflects CB and KB acquisitions versus organic performance, and how CB fair-value adjustments and integration progress develop.
- Whether deposit outflows continue and how deposit pricing affects funding costs and NIM as rates change.
- Whether credit quality, delinquency trends and the allowance remain adequate as the economic forecast weakens.
- How unrealized securities losses, AOCI and tangible capital change, including the implications of the held-to-maturity classification.
- How much of the $2.16 billion in commitments is drawn, and whether available liquidity and capital remain sufficient under stress.