Stock Yards Bancorp, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The filing reports unaudited consolidated results for the company and its wholly owned bank subsidiary. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net interest income | $20.7 | $19.0 | $40.9 | $37.4 |
| Provision for loan losses | $1.4 | $1.3 | $1.7 | $3.7 |
| Non-interest income | $10.1 | $10.3 | $19.5 | $19.5 |
| Non-interest expense | $17.7 | $18.8 | $35.2 | $34.4 |
| Net income | $8.0 | $6.4 | $16.2 | $13.2 |
| Diluted EPS | $0.55 | $0.45 | $1.10 | $0.94 |
- Management described first-half net income as a record, up 23.0%; second-quarter net income rose 25.4% year over year.
- First-half net interest margin was 3.77%, versus 3.78% a year earlier. Q2 margin was 3.77%, versus 3.72%. First-half taxable-equivalent net interest income increased 9.1%, primarily from loan growth and lower funding costs; the prior-year comparison also reflects redemption of $30 million of 10% subordinated debentures in Q4 2013.
- First-half non-interest income was essentially unchanged. Higher trust and bankcard revenue offset lower mortgage banking and brokerage income and the absence of the prior-year $0.45 million acquisition gain.
- First-half expenses increased 2.5%; the 2013 comparison included $1.55 million in Oldham acquisition costs. Salary and benefits rose 11.0%, partly reflecting staffing, compensation and health costs. The Q2 efficiency ratio improved to 57.18% from 63.72%; first-half ratio was 57.87% versus 59.85%.
Financial position, cash flow and credit
- At June 30, total assets were $2.411 billion, up 0.9% from year-end 2013. Loans rose $78.4 million to $1.800 billion; deposits increased $6.5 million to $1.987 billion. Available-for-sale securities declined $75.5 million to $414.5 million, mainly due to fewer short-term securities.
- Cash and cash equivalents were $95.3 million, compared with $70.8 million at year-end. For the first half, operating cash flow was $21.2 million (prior year $28.8 million), investing cash flow was $3.6 million (prior year $17.0 million), and financing cash flow was negative $0.3 million (prior year negative $35.8 million).
- Borrowings included $115.5 million of short-term borrowings and $36.1 million of FHLB advances. The company reported $417.1 million of available FHLB credit and $45 million in correspondent-bank federal funds lines. Core deposits were $1.658 billion, or 83% of deposits; brokered deposits were $1.5 million.
- Allowance for loan losses was $29.8 million, or 1.65% of loans, versus 1.66% at December 31, 2013 and 1.92% at June 30, 2013. Non-performing loans fell to $19.5 million (1.08% of loans) from $22.9 million (1.33%) at year-end; non-performing assets were $22.4 million, or 0.93% of assets.
- One commercial and industrial relationship was downgraded in Q2. A single relationship, predominantly secured by undeveloped land, represented $6.7 million, or 56%, of non-accrual loans; management estimated minimal additional loss exposure after considering collateral, but said the loan’s ultimate risk should become clearer by year-end.
- Stockholders’ equity was $243.6 million. The tangible common equity ratio was 10.00%, up from 9.50% at year-end. The Bank exceeded regulatory “well-capitalized” thresholds; its total risk-based capital, Tier 1 risk-based capital and leverage ratios were 13.04%, 11.79% and 9.75%, respectively.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it intended to maintain historically high capital ratios and pursue expansion opportunities while remaining cautious on credit quality.
- Management noted that many deposit balances were historically high and could decline as market conditions improve, potentially straining liquidity. It cited economic conditions, competition, regulation, interest rates and customers’ financial condition as factors that could cause results to differ from forward-looking statements.
- Interest-rate simulation estimated that a 100- or 200-basis-point increase would reduce one-year net interest income by 4.39% or 6.48%, respectively; a 100-basis-point decrease would reduce it by 1.91%. A 200-basis-point decrease was considered not reasonably possible in the prevailing low-rate environment.
- Credit commitments, including standby letters of credit, totaled $445.8 million; management did not anticipate significant losses. Pending legal matters were not expected by management, after consultation with counsel, to materially adversely affect financial position or results.
- Mortgage banking revenue fell 44.8% year over year for the first half, reflecting lower refinancing activity after mortgage rates rose and weaker purchase activity during severe winter weather. Trust revenue increased 16.3%, supported by higher assets under management and new business; trust assets under management were $2.36 billion, versus $2.05 billion a year earlier.
- Management prospectively revised the amortization method for certain acquired core deposit intangibles beginning Q2 2014, changing from accelerated amortization over ten years to straight-line amortization over 15 years. No quantified earnings effect is stated in the filing text.
Important facts for investors to verify
- Whether the downgraded commercial relationship’s risk, collateral value and potential loss exposure become clearer by year-end, and how this affects provision and allowance levels.
- Whether loan growth continues and can sustain net interest income if asset yields remain pressured or deposit balances normalize.
- Whether trust-fee growth offsets continued weakness in mortgage banking and brokerage revenue.
- Whether higher staffing and operating costs are controlled, and whether the improved efficiency ratio is maintained.
- Liquidity and rate sensitivity assumptions, including deposit behavior, available borrowing capacity and the reported interest-rate simulation.