Stock Yards Bancorp, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results include the company and its bank subsidiary. Financial statement amounts below are in millions unless noted.
Financial performance and material changes
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $22.1 | $21.4 | $65.5 | $62.2 |
| Non-interest income | $10.0 | $9.9 | $29.9 | $29.4 |
| Non-interest expense | $18.4 | $18.7 | $55.1 | $54.0 |
| Provision (credit) for loan losses | $0 | $(2.1) | $0 | $(0.4) |
| Net income | $9.3 | $9.9 | $27.5 | $26.1 |
| Diluted EPS | $0.62 | $0.67 | $1.84 | $1.77 |
| Net interest margin | 3.66% | 3.80% | 3.71% | 3.78% |
- Q3 net income declined 6.1%; management attributed the comparison in part to the prior-year $2.1 million reserve release, with no provision recorded in Q3 2015. Nine-month net income rose 5.5%, supported by higher net interest and non-interest income.
- Nine-month net interest income increased 5.2% as loan and earning-asset growth and lower time-deposit costs outweighed lower yields. Average earning assets rose 7.1%; declining asset yields compressed margin.
- Nine-month non-interest income grew 1.7%, led by mortgage banking revenue (+28.8%) and bankcard revenue (+3.6%); trust revenue fell 1.8%. Non-interest expense rose 2.1%, including higher other expenses and foreclosed-asset losses. The efficiency ratio improved to 57.3% from 58.4%.
- Annualized Q3 return on average assets/equity was 1.44%/13.32%, versus 1.64%/15.79%. Nine-month returns were 1.46%/13.59%, versus 1.47%/14.45%.
Financial position, cash flow and capital
- At September 30, total assets were $2.625 billion, up 2.4% from year-end 2014. Loans were $1.954 billion, up $85.9 million; deposits were $2.142 billion, up $18.0 million. Stockholders’ equity was $280.9 million, up $21.1 million.
- Cash and cash equivalents were $55.2 million, down $19.0 million from year-end. Nine-month operating cash flow was $34.3 million, investing cash outflow $81.8 million, and financing cash inflow $28.5 million.
- Borrowings included $67.6 million of repurchase agreements, $62.1 million of federal funds purchased, and $43.7 million of FHLB advances. FHLB advances increased $6.9 million from year-end; available FHLB credit was $408.1 million, with $24 million in correspondent-bank federal funds lines.
- Non-maturity deposits were $1.87 billion, or 87% of deposits; brokered deposits were $498,000. Management said historically high deposit balances could decline as market conditions improve, potentially pressuring liquidity. Available-for-sale securities totaled $504.4 million, of which $226.3 million were unpledged.
- Consolidated regulatory capital ratios were 13.68% total risk-based, 12.68% common equity Tier 1, and 10.82% leverage. The company and Bank met applicable capital requirements and management considered them well-capitalized. Tangible common equity to tangible assets, a non-GAAP measure, was 10.62%, versus 10.05% at year-end.
Credit quality, outlook, risks and unusual items
- The allowance for loan losses declined to $21.6 million from $24.9 million; allowance-to-loans was 1.11%, versus 1.52%. Nine-month net charge-offs increased to $3.3 million from $1.0 million, primarily reflecting commercial and industrial charge-offs. Management considered the allowance adequate and recorded no provision in 2015.
- Non-performing loans were $11.2 million, or 0.57% of loans, versus $11.9 million, or 0.64%, at year-end. Non-performing assets were $15.8 million, or 0.60% of assets, versus $17.9 million, or 0.70%. However, non-accrual loans increased to $9.6 million from $5.2 million, primarily after two commercial and industrial relationships moved to non-accrual; management said exposure was fully allocated in the allowance.
- Management expects net interest margin to remain under pressure for the rest of 2015 and said near-term rate increases would not immediately benefit results. Its simulation estimated net interest income declines of 2.38% and 2.60% for +100 and +200 basis-point shocks, and 2.78% for a −100 basis-point shock. Management cited fixed-rate loans and rate floors as factors delaying asset repricing.
- Management expected the trust business to resume growth in 2016. Trust assets under management were $2.19 billion, down from $2.23 billion a year earlier; the filing cites lost accounts and lower non-recurring fees, alongside net new business ahead of the prior-year pace.
- Unfunded credit commitments totaled $574.6 million, including $11.0 million of standby letters of credit; $372,000 was accrued for inherent risks. Management said pending legal proceedings were not expected to materially affect financial position or results.
- Other notable items: the company reclassified tax-credit investment amortization from income tax expense to non-interest expense in 2015, including $475,000 for the nine-month period; it also recorded $372,000 of unfunded-commitment reserve expense. In Q2 2015, it extended the historical loss lookback used in its allowance methodology from 12 to 24 quarters. Basel III capital rules became effective in 2015 and increased risk-weighted assets.
- No specific earnings or revenue guidance was provided. Forward-looking results are subject to economic and market conditions, competition, regulation, interest rates, customer liquidity and credit conditions. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the rise in non-accrual commercial loans and higher charge-offs persists, and whether the reduced allowance remains adequate as the loan book grows.
- How loan growth, deposit mix and competitive funding costs affect net interest margin, liquidity and borrowing needs.
- Whether trust and wealth-management fee revenue recovers, given lower assets under management and reduced non-recurring fees.
- The impact of the tax-credit expense reclassification and unfunded-commitment reserves on future expense comparisons.
- Capital and liquidity headroom under Basel III, including the availability and cost of FHLB and correspondent funding.