Stock Yards Bancorp, Inc. annual report, FY2015

Full document

Stock Yards Bancorp, Inc. — 2015 Form 10-K

Business context and reporting period. The filing covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. Stock Yards Bancorp is a bank holding company whose principal subsidiary, Stock Yards Bank & Trust, provides commercial and personal banking, investment management and trust, mortgage, and brokerage services. It operated 37 full-service offices in the Louisville, Indianapolis, and Cincinnati markets.

Financial performance and position

  • Earnings: Net income was $37.2 million, up 6.8% from $34.8 million in 2014. Diluted EPS was $2.48, versus $2.36; management reported a fifth consecutive year of record diluted EPS. Fourth-quarter net income was $9.6 million and diluted EPS was $0.64.
  • Revenue and expenses: GAAP net interest income was $88.3 million, up $4.6 million (5.4%). Non-interest income was $40.0 million, up $0.8 million (2.0%); non-interest expense was $73.4 million, up $0.2 million (0.3%). Income before tax was $54.1 million; income tax expense was $16.9 million and the effective tax rate was 31.3%.
  • Margins and efficiency: Fully tax-equivalent net interest margin declined to 3.67% from 3.75%; net interest spread was 3.59%, down 8 basis points. The efficiency ratio improved to 56.8% from 59.1%.
  • Loans and credit: Year-end loans rose 9% to $2.03 billion. Non-performing loans fell to $8.9 million from $11.9 million; non-performing assets were $13.5 million, down from $17.9 million. Net charge-offs were 0.17% of average loans, compared with 0.18%. The allowance was $22.4 million, or 1.10% of loans, versus $24.9 million, or 1.33%, in 2014. The company recorded a $0.75 million provision, compared with a $0.40 million provision credit in 2014.
  • Liquidity and funding: Deposits increased to $2.37 billion from $2.12 billion; 98% were core deposits. Cash and cash equivalents were $103.8 million, and available-for-sale securities were $565.9 million. The company reported $393.0 million of available FHLB credit and $80 million of correspondent-bank federal funds lines. Seasonal excess deposits of about $100 million were expected to normalize in the first half of 2016.
  • Debt and capital: FHLB advances were $43.5 million, up from $36.8 million; federal funds purchased were $22.5 million, down from $47.4 million. No subordinated debentures remained outstanding. Stockholders’ equity was $286.5 million. Regulatory capital ratios were 12.32% Tier 1 risk-based, 13.31% total risk-based, and 10.53% leverage; management said the company and Bank met well-capitalized requirements under Basel III. Tangible common equity to tangible assets was 10.10%.
  • Cash flow: Operating activities provided $43.2 million; investing activities used $227.1 million, including $168.8 million of net loan growth; financing activities provided $213.5 million, principally from deposit growth. Cash and cash equivalents increased $29.6 million to $103.8 million.

Material changes versus 2014

  • Loan growth and higher securities balances drove interest income higher, while lower funding costs reduced interest expense. Declining asset yields nevertheless compressed net interest margin.
  • Mortgage banking revenue increased 31.5% to $3.5 million, reflecting greater refinancing and purchase activity. Investment management and trust revenue decreased 1.0% to $18.0 million; assets under management were $2.24 billion versus $2.27 billion.
  • Non-interest expense was broadly stable, but included a $432,000 reserve for estimated losses on unfunded credit commitments, a $103,000 impairment charge on an equity security, and $147,000 of net losses on OREO sales, compared with $271,000 of net gains in 2014.
  • Non-performing loans decreased, mainly as a lending relationship moved from TDR status to performing. Non-accrual loans, however, rose to $7.7 million from $5.2 million. The allowance-to-loan ratio declined.
  • Assets grew 9.9% to $2.82 billion and deposits increased 11.7%. The annual dividend rose to $0.96 per share from $0.88; the basic-EPS payout ratio was 37.9%.

Outlook, risks, and contingencies

  • Management expected net interest margin to decline somewhat in 2016, citing competitive loan pricing, weaker expected prepayments, deposit-rate competition, and the possible effect of lower long-term rates. It targeted loan growth at a pace comparable to 2015.
  • Management anticipated growth in trust revenue but noted sensitivity to market performance; it expected a modest decrease in mortgage-sale gains and higher personnel, data-processing, occupancy, and tax-credit-partnership amortization expenses.
  • The interest-rate simulation estimated net interest income declines of 1.85% for an immediate 100-basis-point increase, 2.38% for a 200-basis-point increase, and 3.11% for a 100-basis-point decrease over the modeled year. Management cautioned that these are model estimates, not forecasts; loan-rate floors may delay benefits from rising rates.
  • Key risks include local economic and real-estate exposure, borrower credit quality and collateral values, interest-rate sensitivity, competition, market-sensitive trust fees, cyber and operational disruptions, regulatory burden, and the possibility that loan-loss estimates prove inadequate. Management also described the expected future adoption of the CECL credit-loss model as potentially requiring significant data, process, and systems changes.
  • Off-balance-sheet commitments included $624.2 million of unused loan commitments and $12.8 million of standby letters of credit; not all commitments are expected to be drawn. The company had $10.1 million of future operating lease payments. Management said pending legal proceedings were not expected to materially adversely affect financial position or results.
  • Unusual items included the $750,000 loan-loss provision in the fourth quarter and the $103,000 equity-security impairment. The 2013 Oldham acquisition gain and related integration costs did not recur in 2015.

Most important facts for investors to verify

  • Whether loan growth can continue without weakening credit quality or requiring a materially higher provision, especially given the lower allowance ratio and increased non-accrual loans.
  • Whether margin pressure and the effects of rate changes align with management’s 2016 expectations and the sensitivity-model assumptions.
  • How deposit balances, seasonal excess funds, and deposit-rate competition affect funding costs and liquidity as balances normalize.
  • Whether trust-fee performance, mortgage banking revenue, and expected expense increases support earnings growth in 2016.
  • Capital and dividend capacity under Basel III as loan growth continues; the filing states that the Bank’s dividend capacity to Bancorp without regulatory approval was $57.2 million, subject to capital requirements.
  • The allowance methodology’s sensitivity to estimates: Bancorp extended its historical loss look-back period from 12 to 24 quarters in 2015.

KPMG issued unqualified opinions on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2015. Management reported no unresolved SEC staff comments.