Stock Yards Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Comparisons are with the corresponding 2016 periods unless otherwise noted. Amounts are in U.S. dollars; financial statement figures are unaudited.
Financial performance and condition
| Metric | Q3 2017 | Nine months 2017 |
|---|---|---|
| Net interest income | $26.2 million; +5.7% | $76.6 million; +6.1% |
| Net interest margin, taxable-equivalent | 3.66% vs. 3.65% | 3.63% vs. 3.60% |
| Non-interest income | $11.1 million; −2.2% | $33.6 million; +4.2% |
| Non-interest expense | $21.3 million; +3.9% | $63.8 million; +5.9% |
| Net income | $11.7 million; +11.8% | $33.1 million; +8.8% |
| Diluted EPS | $0.51 vs. $0.46 | $1.44 vs. $1.34 |
For the first nine months, the effective tax rate was 25.9% versus 27.0%. A new share-based compensation accounting standard contributed $1.4 million of tax benefit and increased year-to-date net income. The reported efficiency ratio was 57.6% versus 57.4%; the company’s non-GAAP adjusted ratio, excluding tax-credit partnership amortization, was 55.9% versus 54.5%.
At September 30, total assets were $3.16 billion, up 3.8% from December 31, 2016. Loans were $2.34 billion, up 1.3%; deposits were $2.48 billion, down 1.5%. The allowance for loan losses was $24.9 million, or 1.07% of period-end loans. Stockholders’ equity was $334.3 million, and the tangible common equity ratio was 10.54%.
Year-to-date operating cash flow was $49.6 million, investing cash outflow was $32.1 million, and financing cash inflow was $63.6 million. Cash and cash equivalents increased $81.1 million to $129.1 million.
Borrowings included $71.9 million of overnight repurchase agreements, $162.0 million of federal funds purchased and other short-term borrowings, and $50.1 million of FHLB advances. The short-term borrowing balance included a $150 million FHLB cash-management advance that matured in the first week of October 2017. The company reported that it and the Bank met regulatory well-capitalized requirements; the Bank’s total risk-based capital ratio was 13.20% and leverage ratio was 10.61%.
Material changes and management commentary
- Higher loan balances and rates lifted net interest income. Management noted that deposit costs were also rising and that pricing competition, liquidity effects, and a flatter yield curve pressured margins. The Federal Reserve raised rates twice during the first half of 2017; management said most variable-rate loans had moved to or above their rate floors.
- Wealth management and trust fees rose 7.4% year to date, with assets under management of $2.75 billion, up 12.5% year over year. Mortgage banking revenue fell 17.8% year to date, primarily due to lower transaction volume and limited housing inventory in Louisville.
- Loan quality indicators improved overall: non-performing loans were $6.1 million, or 0.26% of loans, versus $6.7 million and 0.29% at year-end 2016; non-performing assets declined to $8.7 million from $11.7 million. Net charge-offs were $709,000 year to date versus $572,000. Management cited a potential exposure in one pool of classified loans and increased the qualitative allowance allocation. The allowance methodology’s historical look-back period was extended from 24 to 28 quarters.
- Management anticipated continued loan-growth momentum in Q4, while warning that elevated loan payoffs could constrain net growth. The filing gives no numeric earnings or full-year guidance.
- Management’s interest-rate simulation estimated net interest income would rise 2.12% with rates up 200 basis points, but fall 4.27% with rates down 100 basis points and 11.10% with rates down 200 basis points. These are model estimates, not forecasts.
Risks, contingencies, and unusual items
- Disclosure controls and procedures were deemed ineffective at September 30, 2017 because of a material weakness previously reported in the 2016 Form 10-K. Remediation was underway, including increased internal loan-review staffing and third-party assistance; management said effectiveness still required sustained demonstration.
- The company recorded a $266,000 liability for estimated losses related to administrative proceedings. It also reported $709.7 million in commitments to extend credit, including $17.6 million in standby letters of credit, and a $350,000 liability for inherent risks in unfunded commitments. These commitments are not equivalent to expected cash outflows.
- Year-to-date BOLI income included $348,000 of death-benefit proceeds. Tax-credit partnership amortization declined $1.2 million year over year; management said associated tax benefits exceeded amortization expense.
- Interest-rate risk, deposit competition and declines, credit losses, and the timing of loan payoffs are key uncertainties. The filing also identifies the forthcoming expected-credit-loss standard (CECL) as likely to significantly affect loan-impairment accounting, with adoption required after December 15, 2019.
Important facts for investors to verify
- Progress and independent evidence of remediation of the disclosed material weakness in loan-review controls.
- Whether deposit trends and the October maturity of the $150 million FHLB advance led to replacement funding or changed liquidity and borrowing costs.
- Subsequent loan growth, payoffs, classified-credit trends, charge-offs, and adequacy of the allowance, particularly for the identified classified-loan pool.
- Sustainability of earnings growth after the $1.4 million year-to-date share-based tax benefit and the BOLI death-benefit proceeds.
- Actual margin sensitivity as rates and deposit pricing change; the interest-rate simulation is assumption-dependent.