Stock Yards Bancorp, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the quarter and six months ended June 30, 2016, compared with the same 2015 periods; balance-sheet changes are compared with December 31, 2015. The company operates commercial banking and investment management and trust businesses.
Financial performance and condition
- Profit: Q2 net income was $10.1 million, up 12.3%; diluted EPS was $0.45 versus $0.40. First-half net income was $19.9 million, up 9.2%; diluted EPS was $0.88 versus $0.82. Results reflect the disclosed 3-for-2 stock split.
- Revenue and margins: First-half net interest income was $47.4 million, up 9.2%, and non-interest income was $20.9 million, up 4.9%. Tax-equivalent net interest margin declined to 3.58% from 3.73% for the first half; Q2 margin was 3.59% versus 3.75%. First-half efficiency ratio was 57.8% versus 57.5%; adjusted for tax-credit partnership amortization, it was 54.9% versus 57.0%.
- Expenses and taxes: First-half non-interest expense rose 8.4% to $39.7 million, including tax-credit partnership amortization of $2.0 million versus $0.3 million. The effective tax rate fell to 26.9% from 31.5%, primarily due to higher tax credits.
- Balance sheet and lending: Total assets increased 3.3% to $2.91 billion. Loans grew $142.5 million, or about 7%, to $2.18 billion, with management attributing growth to organic production across its markets. Deposits declined $21.8 million, or 0.9%, to $2.35 billion.
- Credit: The allowance for loan losses was $23.1 million, or 1.06% of loans, versus $22.4 million, or 1.10%, at year-end. The company recorded a $1.25 million first-half provision versus none in 2015; net charge-offs were $0.55 million versus $1.61 million. Non-performing assets fell to $11.5 million from $13.5 million, and non-performing loans to 0.29% of loans from 0.44%. Loans over 90 days past due and still accruing increased to $410,000 from $176,000.
- Cash flow: First-half operating cash flow was $34.1 million; investing activities used $142.8 million, principally reflecting $144.6 million of net loan growth; financing activities provided $55.1 million. Cash and cash equivalents fell $53.6 million to $50.2 million.
- Funding, liquidity and capital: Short-term borrowings were $171.6 million, up from $87.0 million at year-end; FHLB advances were $43.0 million and repurchase agreements $57.4 million. The company reported $306.9 million of available FHLB credit and $39 million of correspondent-bank federal funds lines. About 89% of deposits were non-maturity accounts. Total stockholders’ equity was $305.1 million. Consolidated total risk-based capital was 13.01%, common equity Tier 1 was 12.06%, and leverage was 10.46%; management said the company and Bank met applicable capital requirements.
Material changes, outlook and risks
- Growth in earning assets and lower time-deposit costs lifted net interest income, but declining loan yields reduced margin. Management expects margin pressure to continue through 2016 and said near-term rate increases would not immediately benefit the company. Its interest-rate simulation estimated net interest income declines of 2.00% with a 100-basis-point increase, 2.75% with a 200-basis-point increase, and 3.28% with a 100-basis-point decrease; these are model scenarios, not forecasts.
- Management highlighted strong organic loan growth, continued high credit quality, diverse fee income, and first-half returns on average assets and equity of 1.41% and 13.52%. The filing provides no formal earnings or revenue guidance.
- Investment management and trust revenue grew 2.3% in the first half; assets under management were $2.34 billion. Bankcard revenue rose 15.8%, including new business credit-card activity. Salary and benefit costs increased 7.5%, partly due to incentive compensation and staffing expansion.
- Liquidity considerations include a $60 million FHLB cash-management advance due in the first week of July, seasonal public-deposit balances expected to decline, and elevated customer deposit balances that management said could fall as market conditions improve. Securities pledged for deposits and other purposes were 56% of the available-for-sale portfolio.
- Off-balance-sheet commitments to extend credit, including standby letters of credit, totaled $628.6 million. Management said pending legal matters were not expected to have a material adverse effect. Key risks cited include economic conditions, competition, regulation, interest rates, customer liquidity and credit quality.
- Unrealized gains on available-for-sale securities increased accumulated other comprehensive income to $5.45 million from $0.63 million at year-end. The company declared a 3-for-2 stock split, paid as a 50% stock dividend in May 2016.
Important facts for investors to verify
- Whether loan growth can continue without deterioration in credit quality, particularly given the new provision and increase in past-due accruing loans.
- How funding needs, deposit seasonality and short-term borrowings evolve, including the July maturity of the $60 million FHLB cash-management advance.
- Whether net interest margin stabilizes or compresses further under competitive funding costs and the company’s fixed-rate loan exposure.
- The continuing effect of tax-credit partnership amortization and tax credits on reported expenses, effective tax rate and earnings.
- That per-share and share-count comparisons account for the stock split, and that non-GAAP adjusted efficiency and tangible-capital measures are assessed alongside GAAP results.