Stock Yards Bancorp, Inc. annual report, FY2014

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Stock Yards Bancorp, Inc. — 2014 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. Stock Yards Bancorp is a Kentucky bank holding company whose business is primarily conducted through Stock Yards Bank & Trust. The bank provides commercial and consumer banking, mortgage origination, brokerage, and investment management and trust services in the Louisville, Indianapolis, and Cincinnati markets.

Financial performance and position

  • Full-year earnings: Net income was $34.8 million, up 28% from $27.2 million in 2013. Diluted EPS was $2.36, up from $1.89. Return on average assets was 1.45%; return on average equity was 14.19%.
  • Revenue and margins: Net interest income was $83.8 million, up 8.4%; fully tax-equivalent net interest margin was 3.75%, versus 3.74%. Non-interest income was $39.2 million, essentially flat. Investment management and trust revenue increased 11.8% to $18.2 million, while mortgage banking revenue declined 33.3% to $2.7 million. Non-interest expense rose 2.6% to $73.2 million; the efficiency ratio improved to 59.09% from 60.82%.
  • Credit quality: Bancorp recorded a $0.4 million provision credit (reserve release), compared with a $6.6 million provision expense in 2013. Net charge-offs were 0.18% of average loans, down from 0.60%. Non-performing loans fell to $11.9 million from $22.9 million; the allowance was $24.9 million, or 1.33% of loans, versus $28.5 million, or 1.66%.
  • Balance sheet: Total assets were $2.56 billion, up 7.3%; loans were $1.87 billion, up 8.6%; deposits were $2.12 billion, up 7.2%. Available-for-sale securities were $513.1 million. Stockholders’ equity was $259.9 million, up from $229.4 million. Tangible common equity to tangible assets, a non-GAAP measure, was 10.05%, versus 9.50%.
  • Cash flow and liquidity: Operating activities provided $39.9 million; investing activities used $170.0 million and financing activities provided $133.5 million. Cash and cash equivalents ended the year at $74.2 million. Management cited $250 million of unpledged securities, $404.8 million of available FHLB credit, and $55 million in correspondent-bank federal funds lines. Core deposits represented 94% of deposits.
  • Funding and capital: The company had $36.8 million of FHLB advances and $47.4 million of federal funds purchased at year-end; subordinated debentures were zero following the December 2013 redemption of $30 million of 10% trust preferred securities. Bancorp’s total risk-based capital ratio was 13.86%, Tier 1 risk-based capital was 12.63%, and leverage ratio was 10.26%. The Bank exceeded applicable well-capitalized thresholds.
  • Shareholder returns: Cash dividends declared were $0.88 per share for 2014, up from $0.81. No active share buyback plan was in place.

Changes versus the prior comparable period

  • Earnings growth reflected higher net interest income, lower credit-loss provisions, and stronger trust revenue; higher expenses and income taxes partly offset those gains.
  • Net interest income benefited from asset growth, lower deposit and borrowing costs, and the full-year effect of redeeming the high-cost trust preferred securities. Loan yields nevertheless declined as market rates remained low.
  • Credit indicators improved substantially, supporting the reserve release. Non-performing assets declined to 0.70% of total assets from 1.19%.
  • Non-interest expense included $1.1 million of tax-credit investment amortization recorded in 2014 under a changed accounting presentation. 2013 included $1.5 million of Oldham acquisition costs and $1.3 million of remaining debt issuance costs written off upon the trust-preferred redemption.
  • Assets, loans, deposits, and equity grew. The 2013 comparison also includes the Oldham acquisition completed in April 2013, so some year-over-year comparisons reflect acquired operations.

Outlook, risks, and unusual items

  • Management outlook: Management expected a slight decline in net interest margin in 2015 and aimed for loan growth at a pace comparable to 2014. It anticipated slower trust-revenue growth, higher personnel, data-processing, occupancy, and regulatory expenses, and potentially higher mortgage-sale gains if purchase activity increased. These are management expectations, not quantified earnings guidance.
  • Rate sensitivity: The year-end simulation estimated net interest income would decline 3.24% with an immediate 100-basis-point rate increase, 4.28% with a 200-basis-point increase, and 1.31% with a 100-basis-point decrease over the modeled year. Management cautioned that the model is illustrative, not a forecast. Loan-rate floors and competitive deposit pricing were key sensitivities.
  • Principal risks: Local economic and real-estate conditions, borrower repayment and collateral values, interest-rate movements, competition, deposit behavior, regulatory changes and costs, cyber/security events, technology investment, and retaining skilled staff. Approximately half of loans were secured by real estate, much of it in the company’s markets.
  • Commitments and contingencies: Unused loan commitments and standby letters of credit totaled approximately $463 million, though not all are expected to be drawn. Management stated pending legal matters were not expected to have a material adverse effect. The filing reports no material cyber incident during the years covered.
  • Regulatory and reporting matters: Basel III capital rules became effective for the company and Bank on January 1, 2015; management believed the company met the new well-capitalized requirements at year-end 2014. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Whether the reserve release and lower credit-loss metrics are sustainable; review the allowance methodology, potential-problem loans, and real-estate concentrations.
  • Whether loan and deposit growth can continue without further margin compression, and how actual results compare with management’s 2015 expectations.
  • How much trust-fee growth recurs, given that some 2014 fees were non-recurring, and whether mortgage banking revenue stabilizes.
  • The sensitivity of liquidity to withdrawals from unusually high customer balances and to draws on the substantial off-balance-sheet commitments.
  • The effect of Basel III implementation, regulatory costs, and the company’s interest-rate exposure on capital, dividends, and earnings.
  • Reconcile cash-flow trends and the 2013 acquisition-related comparability effects against the audited statements and notes; the filing reports annual, not standalone fourth-quarter, cash flows.