Stock Yards Bancorp, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; balance-sheet comparisons are against December 31, 2011. Figures are unaudited. The company’s principal business is commercial banking, including lending and deposit services, and investment management and trust services, primarily through Stock Yards Bank & Trust.
Financial performance and condition
| Metric | Q3 2012 / September 30, 2012 | Comparable period / prior date |
|---|---|---|
| Net income | $6.68 million; diluted EPS $0.48 | Q3 2011: $5.77 million; diluted EPS $0.42 |
| Nine-month net income and diluted EPS | $19.29 million; $1.38 | Nine months 2011: $17.26 million; $1.25 |
| Net interest income | Q3: $18.80 million; nine months: $55.64 million | Q3 2011: $17.79 million; nine months 2011: $52.72 million |
| Non-interest income | Q3: $9.80 million; nine months: $28.33 million | Q3 2011: $7.86 million; nine months 2011: $24.02 million |
| Non-interest expense | Q3: $17.05 million; nine months: $48.29 million | Q3 2011: $13.30 million; nine months 2011: $42.85 million |
| Net interest margin, taxable-equivalent basis | Q3: 3.92%; nine months: 3.99% | Q3 2011: 3.93%; nine months 2011: 4.02% |
| Total assets | $2.103 billion | $2.053 billion at December 31, 2011 |
| Total loans / allowance for loan losses | $1.578 billion / $31.25 million | Loans: $1.545 billion; allowance: $29.75 million at December 31, 2011 |
| Total deposits | $1.690 billion | $1.618 billion at December 31, 2011 |
| Stockholders’ equity | $201.42 million | $187.69 million at December 31, 2011 |
For the first nine months, operating cash flow was $27.24 million, investing cash outflow was $53.85 million, and financing cash inflow was $24.08 million. Cash and cash equivalents ended the period at $52.38 million, down from $54.92 million at year-end 2011. The company paid $7.91 million in dividends during the nine months.
At September 30, borrowings included $60.42 million of Federal Home Loan Bank advances, $54.13 million of repurchase agreements, $19.31 million of federal funds purchased, and $30.90 million of subordinated debentures. The bank reported $102.9 million of additional FHLB borrowing capacity and $83.7 million of available correspondent-bank federal funds lines. Regulatory capital ratios remained above the bank’s “well-capitalized” thresholds: total risk-based capital 12.73%, Tier 1 risk-based capital 11.47%, and leverage 9.42%. The company’s tangible common equity ratio was 9.55%.
Changes versus comparable periods
- Nine-month net income rose 11.7%; Q3 net income rose 15.7%. Management attributed the improvement mainly to higher net interest income and non-interest income, partly offset by higher operating expenses.
- Nine-month net interest income increased 5.6% on the reported statements (management’s taxable-equivalent comparison was up 5.3%). Lower funding costs and growth in earning assets supported results, while lower asset yields contributed to a modest decline in the nine-month net interest margin.
- Nine-month non-interest income increased 18.0%, including a 106% increase in mortgage-loan sale gains. Assets under management were $1.92 billion, versus $1.72 billion at September 30, 2011.
- Nine-month non-interest expense increased 12.7%, driven particularly by salaries and benefits, higher staffing and bonus accruals, technology-related costs, and expenses associated with foreclosed properties.
- Loans increased $33.4 million from year-end, with commercial and industrial loans up and construction and development loans down. Deposits increased $72.3 million; short-term borrowings declined. Subordinated debentures fell $10 million after the company exercised its call option and repaid that amount in Q1.
Outlook, risks and unusual items
- No specific earnings or financial guidance is provided. Management said it believed the economy was improving but that problem-loan resolution challenges remained. It expected the allowance for loan losses to remain high until there were clearer signs of sustained recovery and lower credit risk.
- Credit quality weakened on several measures: non-performing loans rose to $31.19 million (1.98% of loans) from $23.30 million (1.51%) at year-end; non-performing assets rose to $38.13 million (1.81% of assets) from $31.07 million (1.51%). Non-accrual loans included a $9.2 million development loan migrated to non-accrual status. Management identified six borrowers as 75% of non-accrual loans; collateral and specific allowance allocations were considered in estimating exposure.
- Nine-month net charge-offs increased to $7.53 million from $5.98 million, with increases in commercial and industrial and construction and development loans. The allowance was 1.98% of period-end loans versus 1.89% at September 30, 2011.
- Q3 other non-interest expense included $969,000 of write-downs on foreclosed properties, taken to facilitate faster disposition. The filing also reports a $1.177 million loss on sale of other real estate for the nine-month period.
- Results included a $637,000 increase in the value of a domestic private investment fund during the first nine months; the investment was liquidated effective March 31, 2012. Management estimated its net after-tax contribution at approximately $0.03 per diluted share, compared with an approximately $0.03 per-share negative impact in the prior-year period.
- FHLB advances were restructured in Q3 to extend terms and reduce future interest costs; $872,000 of prepayment penalties will be amortized over the new advances’ lives. In October, $14.9 million of tax-free loans prepaid, which management estimated would reduce annual net interest margin by approximately 0.07%.
- Interest-rate simulation indicated modest negative net-interest-income effects from both a 100-basis-point increase and a 100-basis-point decrease. Management also cited economic conditions, competition, regulation, interest rates, customer financial condition, and real-estate collateral values as risks.
- Commitments to extend credit, including standby letters of credit, totaled $404.5 million; management considered them ordinary-course banking commitments and anticipated no significant losses. Pending legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether elevated non-performing loans, charge-offs, and the allowance remain manageable, particularly concentrations in the identified borrowers and development lending.
- Whether expense growth—especially compensation and foreclosed-property costs—moderates relative to income growth.
- How loan prepayments, interest-rate movements, deposit mix, and the bank’s variable-rate loan floors affect future net interest margin.
- Whether deposit growth and available borrowing facilities continue to provide adequate liquidity as customers may deploy unusually high cash balances.
- The sustainability of mortgage banking gains, trust fees, and other non-interest income, including the effect of the now-liquidated private investment fund.
- The terms and accounting impact of the FHLB advance modifications and the reported $872,000 prepayment penalties.