Business context and reporting period
S.Y. Bancorp, Inc. is a Louisville-based bank holding company whose principal subsidiary, Stock Yards Bank & Trust, provides commercial and personal banking, mortgage, brokerage, and investment management and trust services in the Louisville, Indianapolis, and Cincinnati markets. This Form 10-K covers the fiscal year ended December 31, 2013; fourth-quarter figures are unaudited.
On April 30, 2013, the company acquired THE BANCorp, Inc. (Oldham), adding approximately $146.0 million of assets and $120.4 million of deposits at acquisition. The transaction included $12.2 million of Bancorp stock and $8.3 million cash consideration; it generated a $449,000 non-taxable gain and $1.548 million in acquisition costs.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income | $77.3 million | $74.0 million |
| Provision for loan losses | $6.6 million | $11.5 million |
| Non-interest income | $39.0 million | $38.5 million |
| Non-interest expense | $71.4 million | $65.5 million |
| Net income | $27.2 million | $25.8 million |
| Diluted EPS | $1.89 | $1.85 |
| Total assets at year-end | $2.389 billion | $2.148 billion |
| Loans at year-end | $1.721 billion | $1.585 billion |
| Deposits at year-end | $1.981 billion | $1.782 billion |
- Net income rose 5%, the fourth consecutive annual increase. Management’s adjusted, non-GAAP net income was $28.3 million, or $1.97 per diluted share, excluding specified items.
- Tax-equivalent net interest margin declined to 3.74% from 3.94%; normalized margin, excluding prepayment fees and late charges, fell to 3.66% from 3.88%. The efficiency ratio worsened to 60.82% from 57.38%.
- Loan balances grew 9%, including acquired loans; management reported 6% core growth excluding Oldham. Record loan production of about $489 million was partly offset by repayments and competition.
- Trust and investment management revenue increased 14% to $16.3 million; assets under management reached $2.23 billion. Mortgage banking revenue declined 31% as refinancing activity fell.
- Operating cash flow was $58.3 million, investing cash flow was negative $135.9 million, and financing cash flow was $80.6 million. Cash and cash equivalents ended the year at $70.8 million.
- Stockholders’ equity was $229.4 million. Regulatory capital ratios remained above well-capitalized thresholds: consolidated Tier 1 risk-based capital was 12.29%, and total risk-based capital was 13.54%. Tangible common equity ratio was 9.50%.
- The company redeemed its $30 million, 10% trust preferred securities on December 31, 2013; it expensed $1.306 million of remaining issuance costs. Year-end FHLB advances were $34.3 million, federal funds purchased were $55.3 million, and repurchase-agreement funding was $62.6 million.
Material changes versus the prior comparable period
Net interest income rose 5%, helped by asset and loan growth and lower funding costs, but falling asset yields compressed margins. The loan-loss provision fell 43%, while net charge-offs remained 0.60% of average loans. Non-performing loans declined to $22.9 million, or 1.33% of loans, from $30.0 million, or 1.90%; non-performing assets declined to $28.5 million, or 1.19% of assets, from $37.4 million, or 1.74%.
Expenses increased 9%, reflecting acquisition costs, higher salaries and data-processing costs, and the trust preferred debt issuance-cost write-off. The allowance for loan losses declined to $28.5 million, or 1.66% of loans, from $31.9 million, or 2.01%. The company changed its allowance methodology in the third quarter, allocating amounts previously reported as unallocated; management cautions that the 2013 allocation is not directly comparable with prior years.
Other comprehensive income turned to a $7.6 million loss, primarily from unrealized declines in available-for-sale securities as rates changed; accumulated other comprehensive income was a $2.2 million loss at year-end. The annual dividend increased to $0.81 per share from $0.77.
In the fourth quarter, net income was $6.3 million and diluted EPS was $0.43, compared with $6.5 million and $0.47 in fourth-quarter 2012. Fourth-quarter 2013 non-interest expense was $19.4 million versus $17.2 million a year earlier; net interest income was $19.8 million versus $18.3 million.
Outlook, risks, contingencies, and unusual items
- Management’s 2014 objectives included core loan growth at a pace similar to 2013 and a stable-to-improving net interest margin. It expected the elimination of interest expense on the redeemed trust preferred securities to help margin, while low rates and competition could offset the benefit. These are expectations, not assured results.
- Management anticipated lower mortgage-sale gains as refinancing activity subsided, partly offset by home-purchase lending, and expected higher personnel, data-processing, occupancy, and regulatory-compliance expenses.
- Interest-rate modeling estimated net interest income would decline 3.84% with an immediate 100-basis-point increase and 2.08% with a 100-basis-point decrease over the modeled year. Management noted that loan-rate floors could delay benefit from rising rates.
- Credit risks include local economic and real-estate weakness, borrower repayment capacity, collateral values, and concentrations in real-estate-secured lending. Two relationships represented 52% of non-accrual loans; management estimated minimal loss exposure after collateral. Potential problem loans totaled about $22.3 million.
- Liquidity resources included $36.3 million of federal funds sold, $246.6 million of unpledged available-for-sale securities, $361.4 million of available FHLB credit, and $45 million of correspondent-bank federal funds lines. Core deposits were 82% of deposits, but management warned unusually high balances could decline as market conditions improve.
- Unused loan commitments were $454.3 million and standby letters of credit were $15.2 million. Management did not expect these commitments to result in significant losses. Pending legal matters were not expected to have a material adverse effect. The company disclosed regulatory, competitive, cybersecurity, economic, and interest-rate risks.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective at year-end.
Most important facts an investor should verify
- How much of reported loan, deposit, and earnings growth came from Oldham, and whether acquired operations deliver expected integration benefits.
- Whether margin trends, core loan growth, and deposit pricing meet management’s 2014 expectations; monitor the sensitivity assumptions and loan floors.
- Whether the lower allowance remains adequate given $9.9 million of 2013 net charge-offs, the decline in reserve coverage, and the changed allowance methodology.
- Whether non-performing and potential problem loans, especially real-estate-secured exposures and the two large non-accrual relationships, continue to improve without material additional losses.
- Whether expense growth, mortgage banking revenue, and capital and liquidity measures develop as anticipated after the debt redemption and acquisition.