Stock Yards Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Stock Yards Bancorp is a Kentucky-based bank holding company with Commercial Banking and Wealth Management and Trust (WM&T) segments, operating in Kentucky and the Indianapolis and Cincinnati markets. Results include Kentucky Bancshares (KB) from its May 31, 2021 acquisition, so year-over-year comparisons are affected by the addition of the acquired business.
Financial performance and position
Unless otherwise noted, amounts are in millions. Income-statement comparisons are year over year; balance-sheet comparisons are with December 31, 2020.
| Metric | Q3 2021 | Nine months 2021 |
|---|---|---|
| Net interest income | $45.5, up 35% | $124.9, up 25% |
| Net interest margin (FTE) | 3.14%, versus 3.26% | 3.29%, versus 3.40% |
| Non-interest income | $17.6, up 35% | $47.2, up 24% |
| Non-interest expense | $34.6, up 35% | $107.7, up 48% |
| Net income | $23.2, up 59% | $50.1, up 22% |
| Diluted EPS | $0.87, versus $0.64 | $2.03, versus $1.81 |
| ROA / ROE | 1.50% / 13.92% | 1.25% / 12.37% |
- Q3 provision for credit losses was a net benefit of $1.5 million, versus $5.0 million of expense in Q3 2020. For the first nine months, provision expense was $1.1 million, including $7.4 million of acquisition-related expense for KB’s non-PCD loans; improving credit-model factors otherwise reduced reserves.
- At September 30, assets were $6.18 billion, loans $4.19 billion, deposits $5.34 billion, and stockholders’ equity $663.5 million. Total assets rose 34% and deposits rose 34% from year-end, substantially reflecting KB. Cash and cash equivalents were $584.9 million; available-for-sale securities were $1.07 billion.
- Cash from operating activities was $63.1 million for the nine months. Cash increased $267.0 million to $584.9 million; financing activities provided $192.0 million and investing activities provided $11.8 million.
- Borrowings at quarter-end included $74.4 million of repurchase agreements, $10.9 million of federal funds purchased and $10.0 million of FHLB advances. The Bank had $892 million of available FHLB credit and $80 million of correspondent-bank federal-funds lines.
- The loan allowance was $56.5 million, or 1.35% of total loans and 1.43% excluding PPP loans. Non-performing loans were $5.0 million (0.12% of loans), down from $13.2 million at year-end; non-performing assets were $12.3 million, including $7.2 million of foreclosed real estate.
- The Bank was categorized as well-capitalized. At September 30, its total risk-based capital ratio was 12.26%, common equity Tier 1 ratio 11.34%, and leverage ratio 8.69%. Tangible common equity to tangible assets, a non-GAAP measure, was 8.64%, compared with 9.28% at year-end.
Material changes and notable items
- KB added 19 branches and approximately $1.3 billion in assets at acquisition. Total consideration was $232.9 million, including $204.7 million in stock and $28.3 million in cash. The company recorded approximately $123 million of goodwill; purchase accounting remained provisional. KB contributed $11.3 million of revenue in Q3 and $15.7 million for the nine-month period.
- Nine-month non-interest expense included $19.0 million of merger costs, including $525,000 related to the pending Commonwealth transaction. The Q3 expense increase also reflected KB’s first full quarter of operations, staffing and other integration-related costs.
- Loan growth included acquired balances and organic growth, while outstanding PPP loans declined to $231 million from $550 million at year-end as forgiveness accelerated. The company reported $8 million of unrecognized net PPP fees at quarter-end.
- Net interest margin narrowed despite higher net interest income: excess liquidity, lower asset yields and the low-rate environment weighed on margin. PPP forgiveness-related fee recognition provided a 14-basis-point benefit to Q3 margin and a 20-basis-point benefit for the nine months.
- Q3 other comprehensive loss was $4.4 million; nine-month other comprehensive loss was $11.4 million, largely reflecting lower fair values of available-for-sale securities as interest rates changed.
Outlook, risks and contingencies
- Management said KB is expected to be accretive to overall operating results beginning in 2022. The filing gives no specific earnings or margin guidance.
- The company agreed to acquire Commonwealth Bancshares for estimated consideration of approximately $188 million, funded from existing resources. Closing was expected in Q4 2021, subject to regulatory approval and customary conditions. The filing cites integration costs, execution, dilution and failure-to-close risks.
- Management described excess liquidity and sustained low rates as sources of margin pressure. Its interest-rate simulation estimated net interest income declines of 2.54% and 1.76% in +100- and +200-basis-point scenarios, respectively, and 3.36% in a -100-basis-point scenario; the -200-basis-point scenario was not available. The filing cautions that these are model estimates, not forecasts.
- PPP forgiveness timing may affect earnings into early-to-mid 2022. Mortgage banking income was lower as refinancing activity slowed; management expected mortgage volumes to continue normalizing, while noting it could not predict when deposit service-charge revenue might return to pre-pandemic levels.
- Risks include COVID-19 and economic conditions, credit-loss estimate uncertainty, interest-rate and liquidity changes, acquisition integration, competition, regulation, cybersecurity and operational disruptions. Management said pending ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Final KB purchase-accounting values, goodwill and realized integration costs, and whether the anticipated 2022 accretion is achieved.
- Commonwealth transaction approval, closing, funding, share dilution and integration economics.
- PPP forgiveness pace and recognition of the remaining $8 million in deferred net fees.
- Loan performance, charge-offs, reserve adequacy and whether pandemic-related deferrals or economic deterioration affect credit quality.
- Whether deposit balances remain elevated and how liquidity deployment, funding costs and interest-rate changes affect net interest margin.
- Changes in securities-related AOCI and tangible capital, including the impact of further rate movements.