Stock Yards Bancorp, Inc. annual report, FY2011

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Stock Yards Bancorp, Inc. — FY 2011 Form 10-K

Reporting period: Year ended December 31, 2011; comparisons are primarily with FY 2010. The company is a Kentucky bank holding company whose business is conducted mainly through Stock Yards Bank & Trust, serving Louisville, Indianapolis and Cincinnati.

Financial performance

  • Profit: Net income was $23.6 million, up 2.8% from $23.0 million. Diluted EPS was $1.71 versus $1.67. Return on average assets was 1.20% (1.24% in 2010), and return on average equity was 13.14% (14.03%).
  • Revenue and margins: Net interest income rose 5.8% to $70.7 million; tax-equivalent net interest income rose 5.9% to $72.3 million. Net interest margin was 3.99%, unchanged, while net interest spread increased to 3.79% from 3.74%. Non-interest income declined 1.5% to $33.2 million. The efficiency ratio edged up to 56.47% from 56.01%.
  • Credit costs and asset quality: Provision for loan losses increased 9.9% to $12.6 million. Net charge-offs were 0.55% of average loans versus 0.40%; non-performing loans rose to $23.3 million from $19.3 million, and non-performing assets to $31.1 million from $24.8 million. The allowance was $29.7 million, or 1.93% of loans, versus $25.5 million, or 1.69%.
  • Balance sheet and funding: Total assets increased 7.9% to $2.05 billion; loans grew 2.4% to $1.545 billion and deposits grew 8.3% to $1.618 billion. Equity was $187.7 million. Tangible common equity was 9.11% of tangible assets. Regulatory capital ratios remained above well-capitalized thresholds.
  • Liquidity and debt: Cash and cash equivalents were $54.9 million; available-for-sale securities were $352.2 million, including $226.8 million unpledged. Core deposits were $1.209 billion, or 75% of deposits. FHLB advances were $60.4 million; subordinated debentures totaled $40.9 million, including $30.9 million of trust-preferred-related debt. The Bank had $95.9 million of available FHLB credit and $65 million of correspondent-bank fed-funds lines.
  • Cash flow: Operating activities provided $44.4 million, investing activities used $161.9 million, and financing activities provided $130.8 million. Cash and cash equivalents increased $13.3 million to $54.9 million.

Changes versus FY 2010

  • Net income improved modestly, supported by lower funding costs and a lower tax expense; the higher loan-loss provision, increased operating expenses and slightly lower non-interest income offset part of the benefit.
  • Net interest income increased as loan and deposit volumes grew and deposit costs declined, despite lower yields on loans and investments. Average earning assets rose 5.7%.
  • Credit indicators weakened: non-performing loans, net charge-offs and the allowance-to-loans ratio all increased. Eight borrowers accounted for about 70% of non-accrual loans; management estimated minimal loss exposure after collateral review.
  • Non-interest expenses increased 4.3% to $59.6 million. This included $1.7 million of losses on other real estate owned, compared with an $11,000 gain in 2010.
  • Trust and investment-management revenue increased 4.4% to $13.8 million; assets under management rose to $1.74 billion from $1.70 billion. Other non-interest income fell, partly because the private investment fund’s value declined.

Outlook, risks and unusual items

  • Management expected 2012 net interest margin to be broadly consistent with the fourth-quarter 2011 level, assuming rates remained largely unchanged. It anticipated lower mortgage-sale gains as refinancing activity eased, higher personnel and occupancy costs, and further regulatory-compliance expenses.
  • Management identified credit quality, loan growth and increasing regulatory requirements as key 2012 challenges. It said continued recession could increase problem loans and reduce loan demand. About 72% of variable-rate loans had reached contractual floors of 4% or higher, potentially delaying benefit from rising rates; the filing’s simulation estimated a 0.51% decrease in net interest income under a 200-basis-point rate increase and a 0.01% increase under a 100-basis-point decrease.
  • The effective tax rate fell to 25.8% from 28.3%, including an approximately $700,000 deferred-tax-asset adjustment related to tax-advantaged investments and a reduction in uncertain-tax-position reserves.
  • The company recorded $1.7 million of OREO losses and impairment-related charges in 2011. It planned to liquidate its domestic private investment fund by March 31, 2012. In the first quarter of 2012, it prepaid $10 million of subordinated debt without penalty.
  • Risks include local and national economic weakness, real-estate collateral deterioration, loan-loss-estimate uncertainty, interest-rate and deposit competition, regulatory change, and operational or cybersecurity disruptions. Management reported no material cyber incident during the years discussed.
  • KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of December 31, 2011. Management said pending legal matters were not expected to have a material adverse effect.

Important facts for investors to verify

  • Whether rising non-performing loans, potential problem loans ($46.1 million at year-end) and foreclosed property continue to pressure credit costs and collateral recoveries.
  • Whether loan growth can accelerate while underwriting standards and capital strength are maintained.
  • Whether the 2012 margin outlook holds amid rate floors, deposit competition and persistently low interest rates.
  • Whether trust-fee growth and mortgage-related income offset anticipated declines in mortgage refinance gains and higher operating and regulatory costs.
  • The effects of the $700,000 tax-related adjustment on the comparability of 2011 earnings, and the outcome of the planned fund liquidation and 2012 debt prepayment.