Stock Yards Bancorp, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results include Stock Yards Bank & Trust Company. Comparisons are with the corresponding 2012 periods unless otherwise noted. Dollar amounts below are in millions unless stated.
Business context and key financial results
The company operates commercial banking and investment management and trust businesses. It completed its acquisition of THE BANCorp, Inc. (“Oldham”) on April 30, 2013; acquired operations are included from that date.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $19.0 | $18.3 | $37.4 | $36.8 |
| Provision for loan losses | $1.3 | $2.5 | $3.7 | $6.6 |
| Non-interest income | $10.3 | $9.3 | $19.5 | $18.5 |
| Non-interest expense | $18.8 | $16.5 | $34.4 | $31.2 |
| Net income | $6.4 | $6.1 | $13.2 | $12.6 |
| Diluted EPS | $0.45 | $0.44 | $0.94 | $0.91 |
| Net interest margin (tax-equivalent) | 3.72% | 3.98% | 3.78% | 4.03% |
- For the six months, net income rose 4.5%; reported diluted EPS increased to $0.94. Excluding acquisition costs and the acquisition gain, management reported adjusted diluted EPS of $0.98.
- Q2 annualized return on average assets was 1.16% and return on average equity was 11.69%, versus 1.20% and 12.59% a year earlier.
- Q2 reported efficiency ratio was 63.72%; adjusted for Oldham acquisition costs and gain, it was 59.38%. Six-month reported and adjusted ratios were 59.85% and 57.61%.
Financial position, cash flow and capital
- Total assets were $2.259 billion at June 30, up 5.1% from year-end 2012. Loans were $1.667 billion, up $82.4 million; deposits were $1.865 billion, up $83.2 million. Oldham contributed approximately $38.8 million in loans and $120.4 million in deposits at acquisition-date fair value.
- Cash and cash equivalents were $77.7 million. For the first six months, operating cash flow was $28.8 million, investing activities provided $17.0 million, and financing activities used $35.8 million; cash increased $10.0 million.
- Total liabilities were $2.038 billion. Borrowings included $56.6 million of repurchase agreements, $28.8 million of federal funds purchased, $31.9 million of FHLB advances and $30.9 million of subordinated debentures. FHLB advances were essentially unchanged from year-end.
- Stockholders’ equity was $220.4 million. The tangible common equity ratio was 9.63%, versus 9.52% at year-end. The Bank reported regulatory capital ratios of 12.39% total risk-based, 11.14% Tier 1 risk-based and 9.11% leverage; it met applicable capital requirements.
- Available-for-sale securities were $402.8 million, with a $437,000 net unrealized gain at quarter-end. Accumulated other comprehensive income moved from a $5.4 million gain at year-end to a $182,000 loss, largely reflecting interest-rate-related valuation changes.
Material changes and asset quality
- Oldham’s acquisition produced a $449,000 non-taxable bargain purchase gain and $1.548 million of acquisition costs, primarily data conversion and integration. Management’s adjusted earnings measures exclude these items.
- Six-month net interest income increased 1.6%, while net interest margin fell to 3.78% from 4.03%. Lower asset yields were partly offset by lower deposit and borrowing costs and balance-sheet growth.
- Provision expense declined to $3.7 million from $6.6 million. Allowance for loan losses was $32.0 million, or 1.92% of loans, versus 2.01% at year-end. Six-month net charge-offs were $3.6 million, down from $4.5 million, although construction and development charge-offs included a significant borrower relationship.
- Non-performing loans were $31.5 million, or 1.89% of loans, compared with $30.0 million, or 1.90%, at year-end. Non-accrual loans rose to $20.9 million; loans over 90 days past due and still accruing increased to $2.0 million from $719,000. Troubled debt restructurings declined to $8.6 million from $11.0 million.
- Non-interest income increased, supported by trust and investment management fees, mortgage loan-sale gains and the acquisition gain. Trust assets under management were $2.05 billion, up from $1.85 billion a year earlier. Non-interest expense rose 10.1% for the first six months, reflecting acquisition costs, staffing, data processing and amortization costs.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management said it expected to maintain the allowance at recently high levels at least in the near term, pending further improvement in credit metrics, and to maintain capital at historically high levels until economic improvement is sustained.
- Management cited a continuing low-rate environment, competitive loan pricing and excess liquidity as pressures on net interest margin. Its simulation estimated net interest income would decline 3.14% with an immediate 100-basis-point rate increase and 2.93% with a 100-basis-point decrease; a 200-basis-point increase was estimated to reduce it 3.93%. These are model estimates, not forecasts.
- Liquidity resources included $36.2 million of federal funds sold, $258.6 million of unpledged securities, $336.1 million of additional FHLB borrowing capacity and $77.7 million of correspondent-bank federal funds lines. Core deposits were $1.49 billion, or 80% of deposits. Management noted customer balances were historically high and could decline as business confidence improves.
- Off-balance-sheet commitments to extend credit totaled $419.8 million, including $15.0 million of standby letters of credit. Management did not anticipate significant losses. Pending legal proceedings were not expected by management, after consultation with counsel, to have a material adverse effect.
- Forward-looking results are subject to economic, competitive, regulatory, interest-rate, customer-liquidity and credit risks. Loan-loss estimates depend on management assumptions; the filing identifies loan-loss and income-tax accounting as critical estimates.
Important facts for investors to verify
- Whether Oldham integration costs, the bargain purchase gain and acquired-loan accounting affect future earnings or asset quality differently than management expects.
- Whether margin pressure persists as rates, loan pricing and deposit mix change, including the sensitivity of variable-rate loans with contractual floors.
- Whether rising past-due accruing loans and higher non-accrual balances develop into additional charge-offs, particularly in construction and development lending.
- Whether deposit balances remain stable and available liquidity and capital remain adequate as loan demand and funding needs evolve.
- Whether adjusted EPS and efficiency measures reconcile to reported GAAP results as disclosed; these are non-GAAP measures.