Stock Yards Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The consolidated interim financial statements are unaudited. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions unless noted.
Business context
Stock Yards Bancorp is a bank holding company whose principal activities are commercial banking and wealth management and trust services. Its markets include Louisville, Cincinnati, and Indianapolis. Management reported accelerated, organic loan growth and growth in fee income, while noting pressure on net interest margin and increased loan-loss provision expense.
Financial performance and condition
| Metric | Q3 2016 / September 30, 2016 | Comparison |
|---|---|---|
| Net income | $10.5 million | Up 12.7% from $9.3 million in Q3 2015 |
| Diluted earnings per share | $0.46 | Up from $0.41; per-share amounts reflect the 2016 3-for-2 stock split |
| Net interest income | $24.8 million for Q3; $72.2 million for nine months | Q3 up 12.1%; nine-month up 10.2% from 2015 |
| Net interest margin, taxable-equivalent basis | 3.65% Q3; 3.60% nine months | 3.66% and 3.71%, respectively, in comparable 2015 periods |
| Non-interest income | $11.4 million Q3; $32.2 million nine months | Up 13.8% and 7.8%, respectively |
| Non-interest expense | $20.5 million Q3; $60.3 million nine months | Up 11.3% and 9.4%, respectively |
| Loans | $2.223 billion | Up $189.7 million, or 9.3%, from December 31, 2015 |
| Total deposits | $2.391 billion | Up $18.9 million, or 0.8%, from December 31, 2015 |
| Allowance for loan losses | $24.4 million; 1.10% of period-end loans | Up from $22.4 million at year-end 2015; nine-month provision was $2.5 million versus none in 2015 |
| Stockholders’ equity | $311.6 million | Up $25.1 million from December 31, 2015 |
Nine-month earnings: Net income was $30.4 million, up 10.4% from $27.5 million; diluted EPS was $1.34 versus $1.23. Nine-month return on average assets and equity was 1.42% and 13.51%, respectively, compared with 1.46% and 13.59% in 2015. The reported efficiency ratio was 57.4% versus 57.3%; management’s adjusted ratio, excluding tax-credit partnership amortization, was 54.5% versus 56.8%.
Cash flow, nine months: Operating activities provided $49.4 million, investing activities used $168.0 million, and financing activities provided $72.7 million. Cash and cash equivalents decreased $45.9 million to $57.9 million. Investing outflows included $191.8 million of net loan growth; financing included $56.7 million of net increases in repurchase agreements and federal funds purchased.
Debt and liquidity: At September 30, short-term borrowings totaled $143.7 million, including $67.3 million of repurchase agreements; FHLB advances were $51.4 million. A separate $60 million FHLB cash-management advance was included in short-term borrowings and matured in early October 2016. The company reported $366.5 million of remaining FHLB credit availability and $80 million of correspondent-bank federal funds lines. Available-for-sale securities were $541.7 million, of which $323.3 million were pledged. Non-maturity deposits were $2.1 billion, or 89.7% of deposits.
Capital: Consolidated total risk-based capital was 13.05%, common equity Tier 1 was 12.07%, and leverage was 10.63%. The Bank’s respective ratios were 12.64%, 11.66%, and 10.26%. Management stated that Bancorp and the Bank met applicable regulatory capital requirements and that the company met the requirements to be considered well capitalized. Tangible common equity to tangible assets was 10.54%, a non-GAAP measure, versus 10.10% at year-end 2015.
Material changes and management commentary
- Loan growth was broad-based and organic, with increases in commercial and industrial, construction and development, and commercial investment real estate lending. Management said lending activity exceeded the prior year’s record pace.
- Fee income gains included wealth management and trust, bankcard, deposit service charges, and mortgage banking. Wealth management and trust assets under management were approximately $2.4 billion, versus $2.2 billion a year earlier.
- Expense growth reflected salaries and benefits, expansion in Cincinnati and Indianapolis, and a sharp increase in tax-credit partnership amortization. Management said the tax benefits from those investments, taken as a whole, exceeded their amortization expense.
- The effective tax rate for the first nine months fell to 27.0% from 31.7%, primarily due to higher tax-credit utilization.
- Credit indicators improved in some respects: nonperforming loans were $8.0 million, or 0.36% of loans, versus $8.9 million, or 0.44%, at year-end 2015. Net loan charge-offs for the first nine months were $0.6 million, compared with $3.3 million in 2015.
- Stockholders received a 3-for-2 stock split, effected as a 50% stock dividend in May 2016. The company paid $11.8 million in dividends in the first nine months.
Outlook, risks, and unusual items
- No specific earnings or financial guidance was provided. Management expected net interest margin to remain under pressure through 2016 because of competition. Its rate simulation indicated that an immediate 100–200 basis-point increase or a 100-basis-point decrease could reduce one-year net interest income; the modeled impact was greatest for a 100-basis-point decline.
- Management noted that about 64% of loans had fixed rates and 12% had variable rates with floors of 4% or higher. Since deposit rates could adjust before some loan yields, rising rates could initially pressure earnings.
- Key stated risks include economic conditions in the company’s markets, competition, interest-rate changes, regulation, and changes in customers’ liquidity or financial condition. The allowance for loan losses depends on management estimates and assumptions, which may change.
- Unfunded commitments to extend credit, including standby letters of credit, totaled $646.6 million; the filing says not all are expected to be drawn. A $317,000 liability was accrued for inherent risks in unfunded commitments. Management did not expect pending legal proceedings to have a material adverse effect.
- In October 2016, completion of the sale of Indiana Business Bancorp generated a $588,000 pretax recovery, to be recorded in fourth-quarter 2016 other income.
Important facts for investors to verify
- Whether rapid loan growth continues and how it affects credit quality, allowance needs, and funding costs.
- Whether net interest margin pressure persists, particularly if deposit costs reprice faster than loan yields.
- The sustainability of fee-income growth and the effect of expansion-related operating expenses.
- The net earnings impact and timing of tax-credit partnership amortization and tax benefits.
- Liquidity and refinancing implications of short-term borrowings, including the $60 million FHLB advance that matured in October 2016, and seasonal public-fund deposits.
- The October 2016 Indiana Business Bancorp recovery and its reported fourth-quarter treatment.