Stock Yards Bancorp, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are to December 31, 2015. The company operates commercial banking and investment management and trust businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $23.47 million | $21.61 million in Q1 2015; +8.6% |
| Net interest margin | 3.56% | 3.72% in Q1 2015 |
| Non-interest income | $10.08 million | $9.67 million in Q1 2015; +4.2% |
| Non-interest expense | $19.54 million | $17.78 million in Q1 2015; +9.9% |
| Net income / diluted EPS | $9.84 million / $0.65 | $9.26 million / $0.62 in Q1 2015 |
| Total assets | $2.824 billion | $2.817 billion at December 31, 2015 |
| Total loans | $2.094 billion | $2.033 billion at December 31, 2015; +$61.5 million |
| Total deposits | $2.366 billion | $2.372 billion at December 31, 2015 |
| Cash and cash equivalents | $48.0 million | $103.8 million at December 31, 2015 |
| Stockholders’ equity | $296.3 million | $286.5 million at December 31, 2015 |
- Q1 operating cash flow was $17.6 million, versus $6.6 million in Q1 2015. Investing activities used $61.6 million, mainly reflecting $62.7 million of net loan growth; financing activities used $11.8 million. Cash and cash equivalents declined $55.8 million during the quarter.
- At March 31, borrowings included $54.8 million of repurchase agreements, $30.1 million of federal funds purchased and $43.2 million of FHLB advances. The filing reports $355.6 million of available FHLB credit and $75 million of available correspondent-bank federal funds lines.
- Allowance for loan losses was $22.45 million, or 1.07% of period-end loans, versus $22.44 million and 1.10% at year-end. Q1 provision was $0.5 million, compared with none in Q1 2015; net charge-offs were $0.49 million.
- Nonperforming loans were $8.92 million, or 0.43% of loans, versus $8.93 million, or 0.44%, at year-end. Nonperforming assets were $13.97 million, or 0.49% of assets; foreclosed real estate rose to $5.05 million from $4.54 million.
- Consolidated total risk-based capital was 13.19%, common equity Tier 1 was 12.23%, and leverage was 10.35%. The company stated that Bancorp and the Bank met applicable capital requirements and that the Bank was well capitalized.
- The reported efficiency ratio was 57.9%, versus 56.4% in Q1 2015; excluding tax-credit partnership amortization, the company’s non-GAAP adjusted ratio was 54.9%, versus 55.9%. Return on average assets was 1.40% and return on average equity was 13.52%.
Material changes and management commentary
- Net income increased 6.3%, driven by higher net interest income and fee income and a lower effective tax rate, partly offset by the new loan-loss provision and higher expenses. Diluted EPS rose 4.8% to $0.65.
- Loan growth accelerated, with management describing it as organic and broad across the company’s markets. Average earning assets increased 12.2% year over year. Loan interest yield declined, and net interest margin contracted.
- Higher salaries and benefits (+$1.10 million) reflected incentive compensation and additional staff supporting market expansion. Tax-credit partnership amortization increased $0.86 million to $1.02 million, contributing to expense growth. The effective tax rate fell to 27.2% from 31.5%, mainly due to higher tax credits.
- Fee trends were mixed: bankcard revenue rose 16.8%, while mortgage banking revenue declined 4.1% and brokerage fees declined 3.9%. Investment management and trust revenue rose 1.3%; assets under management were $2.26 billion, compared with $2.29 billion a year earlier.
- Management expects net interest margin to remain under pressure through 2016 and says near-term rate increases may not immediately benefit earnings. Its simulation showed estimated net interest income declines of 1.83% for a 100-basis-point rate increase, 2.38% for a 200-basis-point increase, and 1.80% for a 100-basis-point decrease; a 200-basis-point decrease was deemed not reasonably possible.
- Liquidity resources include $569.0 million of available-for-sale securities, of which $231.2 million was unpledged. Non-maturity deposits were $2.11 billion, or 89% of deposits; management noted historically high deposit balances may decline as market conditions change. Seasonal public-fund balances were expected to fall over the following three to six months.
Risks, contingencies and unusual items
- Key risks cited include economic conditions in the company’s markets, competition, regulation, interest-rate changes, customer liquidity or financial deterioration, and credit quality. The allowance for loan losses depends on management estimates and assumptions that may change.
- Interest-rate sensitivity is complicated by a largely fixed-rate loan portfolio: management said approximately 65% of loans had fixed rates and 14% had variable rates with floors of 4% or higher.
- Commitments to extend credit, including standby letters of credit, totaled $613.8 million; the company accrued $387,000 for inherent risks in unfunded commitments. Management said pending legal proceedings were not expected to have a material adverse effect.
- The company reported $615,000 of unrealized losses on securities available-for-sale, attributing them to interest-rate changes rather than credit quality; management did not consider the securities other-than-temporarily impaired and said it intended and was able to hold them.
- On April 29, 2016, the Board approved a 3-for-2 stock split, payable as a 50% stock dividend on May 27 to shareholders of record May 13. The filing’s share and per-share amounts were not adjusted for the split.
- Management reported disclosure controls and procedures were effective and no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether accelerated loan growth continues and how it affects underwriting, allowance needs and net charge-offs.
- Whether net interest margin and deposit costs develop as management expects, particularly given rate floors, fixed-rate assets and potential deposit runoff.
- Whether rising operating costs—especially compensation and tax-credit partnership amortization—are offset by revenue growth; distinguish reported from adjusted efficiency results.
- How seasonal public deposits, pledged securities and cash use affect liquidity, and whether credit commitments are drawn.
- Confirm the effects and timing of the announced stock split when comparing share counts and per-share results across periods.