Business context and reporting period
S.Y. Bancorp, Inc., through Stock Yards Bank & Trust Company, provides commercial banking, mortgage, brokerage, investment management and trust services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012; comparisons are with 2011 unless noted. Dollar amounts below are in millions unless otherwise indicated.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $18.3 | $17.6 | $36.8 | $34.9 |
| Provision for loan losses | $2.5 | $2.6 | $6.6 | $5.4 |
| Non-interest income | $9.3 | $8.2 | $18.5 | $16.2 |
| Non-interest expense | $16.5 | $14.7 | $31.2 | $29.6 |
| Net income | $6.1 | $6.0 | $12.6 | $11.5 |
| Diluted earnings per share | $0.44 | $0.43 | $0.91 | $0.83 |
- Growth and returns: First-half net income rose 9.7%; Q2 net income rose 1.8%. First-half diluted EPS increased 9.6%. Q2 annualized return on assets was 1.20% and return on equity was 12.59%, versus 1.24% and 13.62%, respectively, in Q2 2011.
- Interest income and margins: Tax-equivalent net interest income increased 3.7% in Q2 and 5.2% in the first half. Tax-equivalent net interest margin narrowed to 3.98% in Q2 from 4.06%, and to 4.03% for the first half from 4.07%. Management attributed margin pressure to asset yields declining more than funding costs.
- Revenue and costs: First-half non-interest income increased 14.7%, led by mortgage loan-sale gains, which nearly doubled, and growth in service charges, bankcard revenue and brokerage fees. Trust and investment management revenue was nearly flat. First-half non-interest expense increased 5.7%, reflecting staffing, expansion and technology costs. Q2 efficiency ratio was 59.05%, versus 56.29% a year earlier.
- Balance sheet and liquidity: At June 30, total assets were $2.084 billion, up 1.5% from year-end 2011. Loans were $1.578 billion, up $33.0 million, and deposits were $1.664 billion, up $46.6 million. Cash and cash equivalents were $70.3 million, versus $54.9 million at year-end. The bank reported $94.8 million of additional FHLB borrowing capacity and $54.8 million of correspondent federal-funds lines. Core deposits were 77% of total deposits.
- Debt and capital: The company repaid $10 million of subordinated debentures without penalty in Q1; $30.9 million remained at quarter-end. FHLB advances were $60.4 million. The bank met regulatory capital requirements: total risk-based capital was 12.70%, Tier 1 risk-based capital 11.44% and leverage 9.56%. Tangible common equity to tangible assets was 9.39%, up from 9.11% at year-end.
- Cash flow: For the first half, operating activities provided $20.9 million, investing activities used $21.1 million and financing activities provided $15.5 million. Cash and cash equivalents increased $15.4 million.
Material changes, outlook, risks and unusual items
- Credit quality: Non-performing loans rose to $35.6 million, or 2.25% of loans, from $23.3 million, or 1.51%, at year-end. Non-performing assets rose to $42.6 million, or 2.04% of assets. Non-accrual loans increased, including an $8.8 million development loan moved to non-accrual status; management said it had already been provided for under its allowance methodology. The allowance was 2.01% of loans, versus 1.93% at year-end. Management said downgrades were slowing and some upgrades were occurring, but problem-loan resolution challenges remained and it expected the allowance to stay elevated until sustained economic improvement.
- One borrower accounted for $1.9 million of TDR loans that subsequently defaulted; management’s estimated loss exposure on those credits was $493,000. The filing also identifies declining real estate collateral values as a credit risk.
- Unusual items: First-half earnings included a $637,000 increase in the value of a domestic private investment fund, contributing approximately $0.03 per diluted share after tax; the investment was liquidated effective March 31, 2012. Q2 other expenses included a $250,000 write-down on previously foreclosed properties.
- Interest-rate risk: Management’s one-year simulation estimated net interest income declines of 2.08% for a 100-basis-point increase, 1.35% for a 200-basis-point increase and 0.54% for a 100-basis-point decrease. The model indicated rates would need to rise more than 300 basis points before the effect became positive.
- Outlook and contingencies: No specific earnings or revenue guidance was provided. Management cited economic conditions, competition, interest rates, regulation, customer liquidity and credit conditions as risks. Commitments to extend credit, including standby letters of credit, totaled $345.3 million; management anticipated no significant losses. Pending legal proceedings were not expected by management to materially affect financial position or results.
Important facts for investors to verify
- Whether the rise in non-performing loans and TDRs stabilizes, and how the allowance and charge-offs develop.
- Whether loan growth and deposit funding can offset ongoing asset-yield and margin pressure.
- How much reported earnings depended on the private-fund gain and strong mortgage-sale activity, and whether expense growth moderates.
- Whether capital, liquidity lines and deposit stability remain adequate as credit conditions and interest rates change.