Stock Yards Bancorp, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; balance-sheet comparisons are to December 31, 2014. Amounts are in U.S. dollars. The filing is unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $21.8 million | $20.7 million | $43.4 million | $40.9 million |
| Non-interest income | $10.2 million | $10.1 million | $19.9 million | $19.5 million |
| Non-interest expense | $18.9 million | $17.7 million | $36.6 million | $35.2 million |
| Net income | $9.0 million | $8.0 million | $18.3 million | $16.2 million |
| Diluted earnings per share | $0.60 | $0.55 | $1.23 | $1.10 |
| Net interest margin, taxable-equivalent basis | 3.75% | 3.77% | 3.73% | 3.77% |
- For the first half, net income rose 12.6%; management attributed growth mainly to higher net interest income, no loan-loss provision, and higher non-interest income. Higher expenses and taxes partly offset those gains.
- First-half return on average assets was 1.47% versus 1.39%; return on average equity was 13.73% versus 13.74%. The efficiency ratio improved to 57.5% from 57.9%.
- First-half revenue growth included mortgage banking revenue up 32.9% and bankcard revenue up 3.7%; investment management and trust revenue declined 1.3%.
Financial position, cash flow and credit
- Total assets were $2.483 billion, down 3.2% from year-end. Loans were $1.899 billion, up $30.8 million; available-for-sale securities were $412.9 million, down $100.2 million, largely reflecting maturities of short-term securities. Deposits were $2.072 billion, down $51.9 million.
- Cash and cash equivalents were $58.7 million, down $15.6 million. First-half operating cash flow was $14.8 million, investing cash flow was positive $64.7 million, and financing cash flow was negative $95.1 million.
- Stockholders’ equity increased to $272.4 million. Tangible common equity to tangible assets was 10.89%, up from 10.05% at year-end. The Bank’s June 30 regulatory capital ratios included 13.50% total risk-based capital, 12.39% common equity Tier 1, and 10.55% leverage; the filing states the Bank met applicable capital requirements.
- Funding included $38.9 million of FHLB advances and $77.7 million of short-term borrowings. Available FHLB credit was $405.7 million and correspondent federal-funds lines totaled $70 million. Core deposits were $1.79 billion, or 86% of deposits; brokered deposits were $498,000.
- The allowance for loan losses was $23.3 million, or 1.23% of loans, versus $24.9 million, or 1.33%, at year-end. No provision was recorded in the first half, while net charge-offs were $1.6 million, compared with $461,000 in the prior-year period.
- Nonperforming loans declined to $9.9 million from $11.9 million at year-end, and nonperforming assets to $14.2 million from $17.9 million. However, non-accrual loans increased to $8.8 million from $5.2 million. No loans were over 90 days past due and still accruing at June 30.
Material changes, outlook and risks
- Management expects net interest margin to remain under pressure for the rest of 2015. Its rate simulation estimated net interest income would decline 3.11% with rates up 100 basis points and 3.99% with rates up 200 basis points; a 100-basis-point decline was estimated to reduce it 2.72%. Management cautioned that near-term rate increases may not immediately benefit the Company, citing fixed-rate loans, rate floors, and funding competition.
- Management expects slower growth in investment management and trust revenue because some revenue that boosted 2014 results is not expected to recur at the same level. It also expects overdraft-related service-charge revenue to decline slightly and interchange revenue to remain broadly consistent with 2014 levels.
- First-half expenses rose 4.0%, including higher salaries and benefits, OREO losses, and other expenses. Other expenses included $317,000 of tax-credit investment amortization reclassified from income tax expense and a $202,000 reserve for estimated losses on unfunded credit commitments.
- Unfunded commitments to extend credit, including standby letters of credit, totaled $548.1 million. The filing says these are normal banking commitments and not all are expected to be drawn. Management believes pending legal proceedings will not materially adversely affect financial position or results.
- Interest-rate and credit outcomes depend on economic conditions, competition, borrower performance, funding costs, and regulatory changes. In Q2 the Company extended its historical loan-loss measurement look-back period from 12 to 24 quarters; management says this better captures a full economic cycle, but estimates and assumptions could materially affect future provisions.
Important facts for investors to verify
- Whether loan growth continues to exceed payoffs and reduced line-of-credit usage, and whether the rise in non-accrual loans signals renewed credit deterioration.
- Whether zero provision remains appropriate given first-half net charge-offs and the lower allowance ratio, including the effect of the revised loss-history period.
- Actual net interest margin and funding-cost trends against management’s rate-sensitivity estimates and margin-pressure outlook.
- Deposit trends, liquidity needs, and use of short-term funding and FHLB capacity as seasonal or historically high deposits change.
- Whether nonrecurring trust fees, mortgage activity, and expense items develop as management expects; interim results are not necessarily indicative of full-year results.