- Small banks with assets less than $100 million are merging with slightly bigger banks, creating growth opportunities for slightly bigger banks.
- Second quarter earnings growth.
- Disadvantage in Variable interest rate - advantage in non interest income.
Stock Yards Bancorp, Inc. (NASDAQ:SYBT) is the holding company for Stock Yards Bank & Trust Company (Bank), the Bank provides commercial and personal banking services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets through 34 full service-banking offices. In addition to personal and commercial banking activities, the bank also provides various other services (Read second paragraph of the Annual report).
While the small banks with less than $100 million in total assets face tough conditions to survive due to increased Regulatory expenses taking a toll on their profits, slightly bigger banks (with Total assets less than $5 billion) that are leaner at costs and are in a good position to absorb smaller banks are benefiting from the problems that the smaller banks are facing. As the small banks are not able to survive the regulatory burden, they are merging with bigger banks, therefore, more inorganic growth opportunities for slightly larger banks than usual. The total number of banks in U.S. has declined from approximately 20,000 in 1985 to 6,812 at the end of 2013; most of that decline was due to consolidation (especially from 2010) of small banks with assets less than $100 million. The situation is expected to continue in the next few years as well, creating inorganic growth opportunities for banks for which buying small banks make sense. Stock Yards bought The Bancorp, Inc., in the previous year. Given the kind of inorganic growth opportunities the current environment is offering, I expect that Stock Yards Bancorp will acquire another bank in the next one-year period to boost its growth prospects.
The company reported net income of $8.03 million for the second quarter of 2014, an increase of 25% compared with the same quarter previous year. Earnings Per Share (Diluted) increased by 22% from $0.45 in the second quarter of 2013 to $0.55 in the second quarter of 2014. Earnings growth was primarily driven by significant decline in expenses; the company redeemed $30 million of subordinated debentures in the fourth quarter of 2013, which resulted in high cost savings that boosted the earnings growth of Stock Yards Bancorp tremendously. The first six months of 2013 results also included acquisition costs of $1.55 million related to one acquisition that the company made. Net interest margin of the bank improved from 3.72% in the second quarter of 2013 to 3.77% in the second quarter of 2014. Efficiency ratio of the bank was at 57.18% in the second quarter 2014.
Variable and fixed interest rates
Out of the total Commercial and Industrial loans $510,739 (in thousands in this whole paragraph) that the bank had at the end of 2013, $316,042 worth of loans were due after one year, out of which 76% of the loans were fixed interest rate loans.
The following paragraph presented assuming that the manner in which the bank generated loans in the past six months has not changed much.
The banks whose majority of the loan book covered with variable interest rate will have some advantage over the banks whose portfolio is highly covered with fixed interest rate loans. In the growing interest rate environment, portfolios with high variable interest rate loans deliver better earnings than the opposite. Interest rates are soon going to rise in the U.S. as per the indications, which will change the way the banks have performed in the past four years or so. The Stock Yards Bank has one advantage to offset this disadvantage, in addition to commercial and personal banking services that many banks offer; the bank has an investment management and trust department offering various services and the bank also offers securities brokerage services. A good portion of 31% of the income came to the bank from non-interest sources out of the total income it generated in the second quarter of 2013. While it is not highly diversified, it is diversified to the extent that gives it some edge over traditional banks who are highly occupied with interest income.
The company is trading at 14.61 [ttm] times of earnings, 12.81 times of forward earnings and 1.81 times of book value. Considering the valuation, growth opportunities, and the advantages and disadvantages the company has, it is a buy to me.