Stock Yards Bancorp, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010 unless noted. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
S.Y. Bancorp, Inc. and its subsidiary, Stock Yards Bank & Trust Company, operate commercial banking and investment management and trust businesses. The filing was signed November 4, 2011. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $17.790 | $17.214 | $52.716 | $49.555 |
| Provision for loan losses | $4.100 | $2.695 | $9.500 | $7.774 |
| Non-interest income | $7.858 | $8.262 | $24.015 | $24.161 |
| Non-interest expense | $13.302 | $13.909 | $42.854 | $42.048 |
| Net income | $5.774 | $6.365 | $17.262 | $16.902 |
| Diluted earnings per share | $0.42 | $0.46 | $1.25 | $1.23 |
For the first nine months, net income increased 2.1%, while Q3 net income fell 9.3%. Tax-equivalent net interest margin was 3.87% in Q3 versus 3.97% a year earlier, and 3.95% for the nine-month period versus 3.93%. Nine-month return on average assets was 1.19% (1.24% in 2010); return on average equity was 13.03% (14.01%).
Operating cash flow was $25.7 million for the first nine months, compared with $19.1 million in 2010. Investing used $85.1 million and financing provided $73.0 million; cash and cash equivalents ended at $55.3 million, up from $41.7 million at year-end 2010.
Financial position, liquidity and capital
- Total assets rose 4.5% to $1.988 billion. Loans were $1.539 billion, up $30.6 million from year-end; deposits rose 5.6% to $1.577 billion. Non-interest-bearing deposits were $285.3 million.
- Stockholders’ equity was $183.6 million. The tangible common equity ratio, a non-GAAP measure, was 9.20%, up from 8.89% at year-end.
- Federal Home Loan Bank advances were $60.4 million; subordinated debentures were $40.9 million. The Bank had $113.1 million of additional FHLB borrowing capacity and $85.0 million in correspondent federal-funds lines.
- Available-for-sale securities were $287.0 million, including $9.2 million of net unrealized gains; $165.2 million was unpledged. Core deposits totaled $1.159 billion, or 74% of deposits. Management noted that unusually high customer cash balances could decline as market conditions improve.
- The Bank reported capital ratios above regulatory well-capitalized thresholds: total risk-based capital 12.42%, Tier 1 risk-based capital 10.55%, and leverage 8.81%. Management said it intended to maintain capital ratios at historically high levels until sustained economic improvement.
Material changes and credit quality
- Loan-loss provision increased to $9.5 million for nine months; net charge-offs rose to $6.0 million from $3.3 million. The allowance was $29.1 million, or 1.89% of loans, versus 1.69% at year-end.
- Non-performing loans increased to $27.9 million from $19.3 million; non-performing assets rose to $36.1 million from $24.8 million. Non-performing loans were 1.81% of loans, and allowance coverage of non-performing loans declined to 104% from 132%.
- Management attributed much of the increase in non-accrual loans and Q3 charge-offs to a single owner-occupied commercial real estate credit, which it said was moving toward orderly liquidation. Eight borrowers represented 72% of non-accrual loans; the loans were secured by real estate or business assets.
- Investment management and trust revenue rose 10.6% for nine months, primarily from higher assets under management and growth in new accounts; assets under management were $1.72 billion versus $1.58 billion a year earlier. Deposit service charges declined 4.8%, while bankcard revenue rose 13.5%.
Management commentary, outlook and risks
Management cited loan growth and lower funding costs as supporting net interest income, while historically low rates, non-accrual loans and low-yielding excess liquidity pressured asset yields and margins. It expected the allowance for loan losses to remain high until economic conditions and borrowers’ finances show clearer improvement. No formal earnings or revenue guidance was provided.
Management’s rate-simulation model indicated slightly negative net-interest-income effects under the disclosed scenarios: up 100 basis points, down 100 basis points, and down 200 basis points; the model reported a 0.64% decline for rates up 200 basis points. Management said increases of 300 basis points or more could have a positive effect. These are model estimates, not forecasts; the filing also noted the 200-basis-point decrease scenario was not reasonably possible given prevailing low rates.
Unusual or notable expense items included a $400,000 write-down of a previously foreclosed property and a $312,000 write-down of fixed assets related to a building renovation. Q3 salary expense benefited from reversals of performance-bonus accruals because specified performance thresholds had not been achieved. Management also cited expansion, facility renovation and a new operations center as sources of expense pressure.
Risks include deterioration in borrower credit quality and real-estate collateral values; economic conditions in the Bank’s markets; interest-rate changes; competition and regulation; and potential reductions in elevated deposit balances. Commitments to extend credit totaled $329.2 million, including $7.8 million of standby letters of credit; management anticipated no significant losses from these ordinary-course commitments. The Bank also guaranteed customer contracts with approximately $2.6 million of potential payments in an all-default scenario. Management stated that the Bank and Bancorp met applicable capital requirements.
Most important facts for investors to verify
- Whether credit quality stabilizes, particularly the large owner-occupied commercial real estate exposure, non-accrual loans, charge-offs and allowance coverage.
- Whether deposit growth and unusually high customer balances persist, and how changes affect liquidity and funding costs.
- Whether net interest margin holds up as low rates continue and variable-rate loans with floors reprice; review the assumptions and sensitivity results in the interest-rate simulation.
- Whether trust-fee growth, expense trends and the one-time property and renovation write-downs affect subsequent earnings.
- Whether the reported capital cushion and available liquidity remain adequate as loan demand, commitments and credit losses change.