S.Y. Bancorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. S.Y. Bancorp is the parent of Stock Yards Bank & Trust Company. Financial statement amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net interest income | $18.46 | $18.55; down 0.5% |
| Net interest margin | 3.83% | 4.07% |
| Provision for loan losses | $2.33 | $4.08 |
| Non-interest income | $9.23 | $9.25 |
| Non-interest expense | $15.58 | $14.74; up 5.7% |
| Net income | $6.77 | $6.50; up 4.1% |
| Diluted earnings per share | $0.49 | $0.47 |
| Efficiency ratio | 55.76% | 52.32% |
Annualized return on average assets was 1.30% (1.29% in Q1 2012); annualized return on average equity was 13.18% (13.70%). The effective tax rate rose to 30.8% from 27.6%. Management attributed higher earnings primarily to the lower loan-loss provision; expense growth and higher taxes partly offset the benefit.
Financial position, cash flow and liquidity
- Total assets were $2.121 billion, down 1.3% from year-end; loans were $1.601 billion, up $16.4 million, while available-for-sale securities declined $23.5 million to $362.9 million.
- Deposits were $1.737 billion, down $44.8 million (2.5%), largely reflecting expected seasonal withdrawals and maturities. Federal funds purchased rose $20.3 million to $36.8 million to meet short-term funding needs.
- Cash and cash equivalents ended the quarter at $59.5 million, down $8.2 million. Operating cash flow was $22.2 million; investing cash flow was $5.2 million; financing cash outflow was $35.7 million, including the deposit decline and $2.8 million of dividends paid.
- Total liabilities were $1.912 billion. Borrowings included $50.9 million in repurchase agreements, $36.8 million in federal funds purchased, $31.9 million in FHLB advances and $30.9 million in subordinated debentures.
- Management cited $27.7 million of federal funds sold, $241.9 million of unpledged securities, $145.5 million of additional FHLB borrowing capacity and $68.9 million of correspondent-bank federal funds lines. Core deposits were $1.367 billion, or 79% of deposits; brokered deposits were $10.1 million.
- Stockholders’ equity was $208.9 million. The tangible common equity ratio was 9.82%, versus 9.52% at year-end. The Bank’s total risk-based capital, Tier 1 risk-based capital and leverage ratios were 13.02%, 11.76% and 9.60%, respectively; the filing states the company and Bank met applicable capital requirements.
Material changes and credit quality
- Average earning assets increased 5.8% year over year, but lower yields reduced the net interest margin. Interest expense fell as deposit funding costs declined and average FHLB borrowings were lower.
- Trust and investment management revenue increased 11.3% to $3.89 million; assets under management rose to $2.01 billion from $1.84 billion a year earlier. Mortgage loan sale gains rose 17.3% to $0.87 million.
- Q1 2012 included a $0.63 million gain in value from a private investment fund, liquidated in 2012; this contributed to lower year-over-year “other” non-interest income in 2013. Q1 2013 occupancy expense benefited from a one-time $0.15 million rent refund.
- Non-performing loans increased to $33.5 million, or 2.09% of loans, from $30.0 million, or 1.90%, at year-end. Non-performing assets were $39.2 million, or 1.85% of assets. Management attributed the rise primarily to one construction and development credit moving to non-accrual; six borrowers represented 77% of non-accrual loans, with management estimating minimal loss exposure after collateral.
- The allowance for loan losses was $32.0 million, 2.00% of period-end loans. Net charge-offs were $2.18 million, including $1.84 million in construction and development, largely associated with one borrower relationship. Past-due loans over 90 days and still accruing increased to $1.95 million from $0.72 million.
Outlook, risks and other notable items
- Management said it intended to maintain the allowance at recently high levels at least in the near term, pending further improvement in credit metrics. It also noted that low rates, excess liquidity and competitive loan pricing could continue to pressure margins.
- Interest-rate simulation estimated that a 100–200 basis-point increase or a 100-basis-point decrease would each reduce one-year net interest income by roughly 2.6%; a 200-basis-point decrease was considered not reasonably possible. These are model estimates, not forecasts.
- Management planned to maintain historically high capital ratios until economic improvement was sustained and proposed Basel III rules became definitive. No specific earnings or revenue guidance was provided.
- The merger with THE BANCorp, Inc. closed April 30, 2013, after the reporting date. Its bank had approximately $137 million in assets; consideration was approximately $8.2 million cash and 535,000 S.Y. Bancorp shares. Management expected the transaction to be slightly accretive to 2013 EPS, excluding transaction costs, and more accretive thereafter.
- Commitments to extend credit and standby letters of credit totaled $408.2 million, including $14.5 million of standby letters. Management did not anticipate significant losses from these normal-course commitments. Pending legal proceedings were not expected by management to have a material adverse effect.
- Unrealized securities losses were $0.65 million; management attributed them mainly to interest-rate changes and did not consider the securities other-than-temporarily impaired. Forward-looking results remain subject to economic, competitive, regulatory, interest-rate, liquidity and customer-credit risks.
Important facts for investors to verify
- Whether the increase in non-performing loans, particularly the construction and development exposure, leads to additional charge-offs or provision expense.
- Whether net interest margin stabilizes amid low rates, competitive loan pricing and the Bank’s interest-rate sensitivity.
- Whether deposit outflows are seasonal as management expects, and how increased short-term borrowing affects funding costs and liquidity.
- The merger’s final integration costs, realized earnings contribution and effect on capital and share count.
- Whether expense growth, the one-time rent refund and the nonrecurring Q1 2012 private-fund gain materially affect comparisons in subsequent quarters.