Stock Yards Bancorp, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing covers the consolidated company and Stock Yards Bank & Trust Company. Dollar amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and key financial results
The company provides commercial banking, mortgage banking, brokerage, and investment management and trust services. Net interest income and customer fees are its main revenue sources.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net interest income, reported | $17.6 | $16.5 | $34.9 | $32.3 |
| Net interest income, tax-equivalent | $18.0 | $16.9 | $35.7 | $32.9 |
| Provision for loan losses | $2.6 | $2.4 | $5.4 | $5.1 |
| Non-interest income | $8.2 | $7.9 | $16.2 | $15.9 |
| Non-interest expense | $14.7 | $14.4 | $29.6 | $28.1 |
| Net income | $6.0 | $5.6 | $11.5 | $10.5 |
| Diluted earnings per share | $0.43 | $0.40 | $0.83 | $0.77 |
Q2 net income increased 7.9%; first-half net income increased 9.0%. First-half return on average assets was 1.21% versus 1.18%, and return on average equity was 13.26% versus 13.35%. Tax-equivalent net interest margin was 3.98% in Q2 versus 3.97%, and 3.99% for the first half versus 3.91%. The Q2 efficiency ratio was 56.29%.
Financial position, cash flow, debt, and liquidity
- At June 30, total assets were $1.943 billion, up 2.1% from year-end 2010. Loans were $1.539 billion, up $30.5 million since year-end; deposits were $1.532 billion, up $38.9 million. Total stockholders’ equity was $178.8 million.
- First-half cash from operating activities was $18.7 million, compared with $25.5 million in 2010. Investing activities used $51.9 million; financing activities provided $35.8 million. Cash and cash equivalents ended the period at $44.2 million, versus $74.8 million at June 30, 2010.
- Borrowings included $60.4 million of Federal Home Loan Bank advances, $40.9 million of subordinated debentures, and $89.0 million of short-term borrowings. The Bank reported additional FHLB borrowing capacity of approximately $184.5 million and correspondent-bank federal funds lines totaling $111.6 million.
- Core deposits were $1.108 billion, or 72% of deposits; brokered deposits were $5.3 million. Management described its liquidity position as elevated and prudent. It cited $167.5 million of unpledged available-for-sale securities and $20.0 million of federal funds sold.
- The Bank’s capital ratios exceeded “well-capitalized” regulatory thresholds: total risk-based capital 11.95%, Tier 1 risk-based capital 10.09%, and leverage 8.66%. The company’s corresponding consolidated ratios were 14.12%, 12.26%, and 10.55%. Tangible common equity to tangible assets was 9.17%, compared with 8.89% at year-end 2010.
Material changes versus comparable periods
- Management attributed higher net interest income principally to loan growth and lower funding costs; liability rates fell more than asset yields, improving the first-half spread and margin. Average earning assets rose 6.1% year over year.
- First-half trust and investment management income rose 10.9%, primarily reflecting higher market values and growth in assets under management. Trust assets under management were $1.81 billion, versus $1.50 billion a year earlier.
- First-half non-interest expenses rose 5.0%, partly from market expansion and staffing costs. Other expense included a $400,000 write-down on a previously foreclosed property and a $312,000 write-down of fixed assets related to a building renovation.
- Loans increased 4% year over year, while non-performing loans declined to $17.5 million, or 1.14% of loans, from $19.3 million, or 1.28%, at December 31, 2010. Non-accrual loans nevertheless rose to $15.6 million from $14.4 million.
- The allowance for loan losses was $27.6 million, or 1.79% of loans, versus $25.5 million and 1.69% at year-end. First-half net charge-offs increased to $3.4 million from $2.1 million.
Outlook, commentary, and risks
- No specific earnings or revenue guidance was provided. Management said it expects the loan-loss allowance to remain high relative to historical levels until there are clearer signs of sustained economic recovery and reduced credit risk.
- Management cited ongoing economic weakness, slow recovery, possible further declines in real estate collateral values, and borrower stress as credit risks. Six borrowers accounted for $9.0 million, or 58%, of non-accrual loans; management estimated minimal loss exposure after considering collateral.
- Interest-rate simulations indicated slightly lower net interest income for a 100- or 200-basis-point increase, higher income for a 100-basis-point decrease, and lower income for a 200-basis-point decrease. Management noted that the 200-basis-point decline scenario was not reasonably possible at prevailing low short-term rates; increases of 300 basis points or more were estimated to have a positive effect.
- Other cited risks include competition, regulatory and legislative changes, customer liquidity needs, and changes in market interest rates. Management warned that changes to bankcard interchange regulation could indirectly affect revenue despite the company’s size.
- Commitments to extend credit totaled $335.6 million, including $10.3 million of standby letters of credit. Customer-contract guarantees had potential payments of approximately $2.8 million in an all-default scenario; the filing reports no prior payments under those guarantees.
- New guidance on identifying troubled debt restructurings could result in additional loans being classified as TDRs. Management also identified the allowance for loan losses and income-tax accounting as critical estimates subject to judgment.
Important facts for investors to verify
- Whether loan growth and lower funding costs can continue to support net interest income as rates and deposit competition change.
- Credit quality trends, including rising non-accrual loans and charge-offs, real-estate collateral values, and the adequacy of the allowance.
- The sustainability of trust-fee growth, which depends partly on market values, and the effect of regulatory or competitive changes on service-charge and bankcard revenue.
- The persistence of elevated liquidity and capital levels, alongside loan growth and the company’s stated intention to maintain historically high capital ratios.
- The effects of the property and building write-downs, the new TDR guidance, and the company’s off-balance-sheet credit commitments.