Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SYBT > SEC Filings for SYBT > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for S Y BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for S Y BANCORP INC


5-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This item discusses the results of operations for S.Y. Bancorp, Inc. ("Bancorp" or "Company"), and its subsidiary, Stock Yards Bank & Trust Company ("Bank") for the three and six months ended June 30, 2013 and compares these periods with the same periods of the previous year. Unless otherwise indicated, all references in this discussion to the Bank include Bancorp. In addition, the discussion describes the significant changes in the financial condition of Bancorp and the Bank that have occurred during the first six months of 2013 compared to the year ended December 31, 2012. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes presented in Part 1, Item 1 of this report.

This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although Bancorp believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to the following:
economic conditions both generally and more specifically in the markets in which Bancorp and the Bank operate; competition for Bancorp's customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of Bancorp's customers; and other risks detailed in Bancorp's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.

Overview of 2013 through June 30

Bancorp completed the first six months of 2013 with net income of $13.2 million or 5% more than the comparable period of 2012. The increase is due primarily to a lower provision for loan losses, higher non-interest income and higher net interest income, partially offset by higher non-interest expenses and higher income tax expense. Diluted earnings per share for the first six months of 2013 were $0.94, compared to the first six months of 2012 at $0.91. Excluding acquisition costs and bargain purchase gain associated with the Oldham transaction, diluted earnings per share for the first six months would have been $0.98. See the Non-GAAP Financial Measures section for details on reconciliation to US GAAP measures.

On April 30, 2013, Bancorp completed the previously announced acquisition of 100% of the outstanding shares of THE BANCorp, Inc. ("Oldham"), parent company of THE BANK - Oldham County, Inc. As a result of the transaction, THE BANK - Oldham County merged into Stock Yards Bank & Trust Company. Since the acquisition date, results of operations acquired in the Oldham transaction have been included in Bancorp's financial results. The Oldham transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration transferred were recorded at estimated fair value on the acquisition date. The fair value adjustments resulted in net assets acquired in excess of the consideration paid. Accordingly, a non-taxable gain of $449,000 was recognized. In connection with the Oldham acquisition, Bancorp incurred expenses totaling $1,548,000 related to executing the transaction and integrating and conforming acquired operations with and into Bancorp.

As is the case with most banks, the primary source of Bancorp's revenue is net interest income and fees from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and the interest rates earned on those loans are critical to overall profitability. Similarly deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. Business volumes are influenced by overall economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.


Table of Contents

Net interest income increased $593,000, or 1.6%, for the first six months of 2013, compared to the same period in 2012. The net interest margin declined to 3.78% for the first six months of 2013, compared to 4.03% for the same period in 2012. Interest income decreased as the negative effect of declining interest rates earned offset the positive effect of increased volumes on earning assets. Interest expense decreased even further due to lower funding costs on deposits arising from lower interest rates, a more favorable deposit mix, and fewer outstanding FHLB borrowings.

Also favorably impacting 2013 results, Bancorp's provision for loan losses was $3.7 million for the first six months of 2013, compared to $6.6 million in the first six months of 2012. The provision for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysis of the risk in the loan portfolio. Bancorp's allowance for loan losses was 1.92% of total loans at June 30, 2013, compared to 2.01% of total loans at December 31, 2012, and 2.01% at June 30, 2012.

Total non-interest income in the first six months of 2013 increased $1.0 million compared to the same period in 2012, and remained consistent at 34% of total revenues, reflecting increases in investment management and trust services, gains on sales of mortgage loans, service charges on deposit accounts, and the gain on the Oldham acquisition. The first six months of 2012 results included $627,000 of income from Bancorp's investment in a domestic private investment fund, which it liquidated in 2012.

Total non-interest expense in the first six months of 2013 increased $3.2 million, or 10%, compared to the same period in 2012 due to one-time acquisition costs related to the Oldham transaction, increases in personnel costs, reflecting higher staffing levels and normal salary increases, higher data processing expenses, and higher other non-interest expense. These increases were partially offset by a decrease in net occupancy expense, due to a one-time rent refund, which lowered rent expense in 2013.

Tangible common equity (TCE), a non-GAAP measure, is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. The ratio of tangible common equity to total tangible assets was 9.63% as of June 30, 2013, compared to 9.52% at December 31, 2012. See the Non-GAAP Financial Measures section for details on reconciliation to US GAAP measures.

The following sections provide more details on subjects presented in this overview.

a) Results Of Operations

Net income of $6,407,000 for the three months ended June 30, 2013 increased $304,000, or 5.0%, from $6,103,000 for the comparable 2012 period. Basic net income per share was $0.45 for the second quarter of 2013, an increase of 2.3% from the $0.44 for the second quarter of 2012. Net income per share on a diluted basis was $0.45 for the second quarter of 2013, compared to $0.44 for the second quarter of 2012, a 2.3% increase. Excluding acquisition costs and bargain purchase gain associated with the Oldham transaction, diluted earnings per share for the second quarter would have been $0.49. See the Non-GAAP Financial Measures section for details on reconciliation to US GAAP measures. Annualized return on average assets and annualized return on average stockholders' equity were 1.16% and 11.69%, respectively, for the second quarter of 2013, compared to 1.20% and 12.59%, respectively, for the same period in 2012.

Net income of $13,175,000 for the six months ended June 30, 2013 increased $570,000, or 4.5%, from $12,605,000 for the comparable 2012 period. Basic net income per share was $0.94 for the first six months of 2013, an increase of 3.3% from the $0.91 for the first six months of 2012. Net income per share on a diluted basis was also $0.94 for the first six months of 2013 compared to $0.91 for the same period of 2012. Excluding acquisition costs and bargain purchase gain associated with the Oldham transaction, diluted earnings per share for the first six months would have been $0.98. See the Non-GAAP Financial


Table of Contents

Measures section for details on reconciliation to US GAAP measures. Annualized return on average assets and annualized return on average stockholders' equity were 1.23% and 12.41%, respectively, for the first six months of 2013, compared to 1.25% and 13.14%, respectively, for the same period in 2012.

Net Interest Income

The following tables present the average balance sheets for the three and six month periods ended June 30, 2013 and 2012 along with the related calculation of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. See the notes following the tables for further explanation.


Table of Contents

Average Balances and Interest Rates - Taxable Equivalent Basis



                                                Three months ended June 30
                                        2013                                  2012
                           Average                  Average      Average                  Average
(Dollars in thousands)     Balances     Interest      Rate       Balances     Interest      Rate

Earning assets:
Federal funds sold       $     95,029   $      72       0.30 % $     84,957   $      62       0.29 %
Mortgage loans held
for sale                        6,471          56       3.47 %        5,718          56       3.94 %
Securities:
Taxable                       275,727       1,328       1.93 %      213,235       1,398       2.64 %
Tax-exempt                     55,521         419       3.03 %       52,158         456       3.52 %
FHLB stock and other
securities                      6,772          64       3.79 %        6,157          55       3.59 %
Loans, net of unearned
income                      1,633,895      19,608       4.81 %    1,523,502      19,709       5.20 %
Total earning assets        2,073,415      21,547       4.17 %    1,885,727      21,736       4.64 %
Less allowance for
loan losses                    33,248                                32,214
                            2,040,167                             1,853,513
Non-earning assets:
Cash and due from
banks                          33,876                                31,056
Premises and equipment         38,383                                38,156
Accrued interest
receivable and other
assets                         94,051                               115,196
Total assets             $  2,206,477                          $  2,037,921

Interest bearing
liabilities:
Deposits:
Interest bearing
demand deposits          $    385,426   $     101       0.11 % $    318,521   $     130       0.16 %
Savings deposits               97,437           9       0.04 %       78,026          16       0.08 %
Money market deposits         572,249         299       0.21 %      518,534         464       0.36 %
Time deposits                 372,357         876       0.94 %      385,226       1,271       1.33 %
Securities sold under
agreements to
repurchase                     54,576          33       0.24 %       57,930          43       0.30 %
Fed funds purchased
and other short term
borrowings                     21,839           9       0.17 %       21,863           8       0.15 %
FHLB advances                  31,864         219       2.76 %       60,426         364       2.42 %
Long-term debt                 30,900         772      10.02 %       30,900         772      10.05 %

Total interest bearing
liabilities                 1,566,648       2,318       0.59 %    1,471,426       3,068       0.84 %
Non-interest bearing
liabilities:
Non-interest bearing
demand deposits               394,202                               325,717
Accrued interest
payable and other
liabilities                    25,756                                45,831
Total liabilities           1,986,606                             1,842,974
Stockholders' equity          219,871                               194,947
Total liabilities and
stockholders' equity     $  2,206,477                          $  2,037,921
Net interest income                     $  19,229                             $  18,668
Net interest spread                                     3.58 %                                3.80 %
Net interest margin                                     3.72 %                                3.98 %


Table of Contents

                                                 Six months ended June 30
                                        2013                                  2012
                           Average                  Average      Average                  Average
(Dollars in thousands)     Balances     Interest      Rate       Balances     Interest      Rate

Earning assets:
Federal funds sold       $    102,707   $     152       0.30 % $     89,341   $     134       0.30 %
Mortgage loans held
for sale                        7,157         120       3.38 %        5,747         119       4.16 %
Securities:
Taxable                       252,959       2,639       2.10 %      206,370       2,815       2.74 %
Tax-exempt                     51,430         808       3.17 %       52,184         914       3.52 %
FHLB stock and other
securities                      6,478         123       3.83 %        6,053         115       3.82 %
Loans, net of unearned
income                      1,605,811      38,788       4.87 %    1,518,328      39,822       5.27 %
Total earning assets        2,026,542      42,630       4.24 %    1,878,023      43,919       4.70 %
Less allowance for
loan losses                    33,834                                31,390
                            1,992,708                             1,846,633
Non-earning assets:
Cash and due from
banks                          32,787                                30,561
Premises and equipment         37,414                                37,812
Accrued interest
receivable and other
assets                         93,605                               114,975
Total assets             $  2,156,514                          $  2,029,981

Interest bearing
liabilities:
Deposits:
Interest bearing
demand deposits          $    361,766   $     186       0.10 % $    310,012   $     279       0.18 %
Savings deposits               91,897          18       0.04 %       75,626          32       0.09 %
Money market deposits         566,907         598       0.21 %      519,435         929       0.36 %
Time deposits                 374,021       1,822       0.98 %      391,923       2,687       1.38 %
Securities sold under
agreements to
repurchase                     55,948          68       0.25 %       60,330          92       0.31 %
Fed funds purchased
and other short term
borrowings                     20,747          17       0.17 %       20,447          16       0.16 %
FHLB advances                  31,870         436       2.76 %       60,428         727       2.42 %
Long-term debt                 30,900       1,545      10.08 %       32,054       1,568       9.84 %

Total interest bearing
liabilities                 1,534,056       4,690       0.62 %    1,470,255       6,330       0.87 %
Non-interest bearing
liabilities:
Non-interest bearing
demand deposits               382,963                               320,921
Accrued interest
payable and other
liabilities                    25,426                                45,887
Total liabilities           1,942,445                             1,837,063
Stockholders' equity          214,069                               192,918
Total liabilities and
stockholders' equity     $  2,156,514                          $  2,029,981
Net interest income                     $  37,940                             $  37,589
Net interest spread                                     3.62 %                                3.83 %
Net interest margin                                     3.78 %                                4.03 %


Table of Contents

Notes to the average balance and interest rate tables:

Net interest income, the most significant component of the Bank's earnings is total interest income less total interest expense. The level of net interest income is determined by the mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.

Net interest spread is the difference between the taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.

Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders' equity.

Interest income on a fully tax equivalent basis includes the additional amount of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and loans have been calculated on a fully tax equivalent basis using a federal income tax rate of 35%. The approximate tax equivalent adjustments to interest income were $254,000 and $373,000, respectively, for the three month periods ended June 30, 2013 and 2012 and $502,000 and $744,000, respectively, for the six month periods ended June 30, 2013 and 2012.

Average balances for loans include the principal balance of non-accrual loans and exclude participation loans accounted for as secured borrowings.

Fully taxable equivalent net interest income of $19.2 million for the three months ended June 30, 2013 increased $561,000, or 3.0%, from $18.7 million when compared to the same period last year. Net interest spread and net interest margin were 3.58% and 3.72%, respectively, for the second quarter of 2013 and 3.80% and 3.98%, respectively, for the second quarter of 2012.

Fully taxable equivalent net interest income of $37.9 million for the six months ended June 30, 2013 increased $351,000, or 0.9%, from $37.6 million when compared to the same period last year. Net interest spread and net interest margin were 3.62% and 3.78%, respectively, for the first six months of 2013 and 3.83% and 4.03%, respectively, for the first six months of 2012.

The net interest margin for the first six months of 2013 and 2012 included the impact of penalties paid by customers due to the early repayment of loans; these prepayment penalties added an estimated six basis points to both the 2013 and 2012 margin. The net interest margin was negatively affected by an ongoing low interest rate environment, a competitive loan market, and the volume of Bancorp's excess liquidity, all of which are likely to continue in the foreseeable future. Increasing competitive loan pricing could negatively impact net interest margin in future quarters.

Approximately $623 million, or 37%, of the Bank's loans are variable rate; most of these loans are indexed to the prime rate and may reprice as that rate changes. However, approximately $345 million, or 55% of variable rate loans, have reached their contractual floor of 4% or higher. Approximately $103 million or 17% of variable rate loans have contractual floors below 4%. The remaining $175 million or 28% of variable rate loans have no contractual floor. The Bank intends to establish floors whenever possible upon acquisition of new customers. The Bank's variable rate loans are primarily comprised of commercial lines of credit and real estate loans. At inception, most of the Bank's fixed rate loans are priced in relation to the five year Treasury bond.


Table of Contents

Average earning assets increased $146.1 million or 7.9%, to $1.99 billion for the first six months of 2013 compared to 2012, reflecting growth in the loan portfolio and investment securities. Average interest bearing liabilities increased $63.8 million, or 4.3%, to $1.53 billion for the first six months of 2013 compared to 2012 primarily due to increases in interest bearing demand, savings and money market deposits, partially offset by decreases in certificates of deposits, securities sold under agreements to repurchase and FHLB advances.

Asset/Liability Management and Interest Rate Risk

Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity while attempting to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.

Interest Rate Simulation Sensitivity Analysis

Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one year forecast. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and does not indicate actual expected results.

The June 30, 2013 simulation analysis, which shows very little interest rate sensitivity, indicates that an increase in interest rates of 100 to 200 basis points would have a negative effect on net interest income, and a decrease of 100 basis points in interest rates would also have a negative impact. These estimates are summarized below.

Net interest
income change

Increase 200bp           (3.93 )%
Increase 100bp           (3.14 )
Decrease 100bp           (2.93 )
Decrease 200bp             N/A

Loans indexed to the prime rate, with floors of 4% or higher, comprise approximately 21% of total loans. Since the prime rate is currently 3.25%, rates would have to increase more than 75 bp before the rates on such loans will rise. This effect, captured in the simulation analysis above, negatively impacts the effect of rising rates. In a declining rate environment, the current level of rates on deposits allows little opportunity to further lower rates. The scenario of rates decreasing 200 bp is not reasonably possible given current low rates for short-term instruments and most deposits.

Undesignated derivative instruments described in Note 13 are recognized on the consolidated balance sheet at fair value, with changes in fair value, due to changes in prevailing interest rates, recorded in other noninterest income. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above.


Table of Contents

Provision for Loan Losses

The provision for loan losses was $1.3 million and $2.5 million for the second quarter of 2013 and 2012, respectively, and $3.7 million and $6.6 million for the first six months of 2013 and 2012, respectively. The provision for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysis of the risk in the loan portfolio. The provision reflects an allowance methodology that is driven by risk ratings. Bancorp continues to see improving economic conditions in its markets. These business indicators have not been uniformly positive or of a significance to signal that the economy has strengthened on a sustainable and consistent basis; however, credit quality metrics are showing marked improvement. Bancorp intends to remain cautious in assessing the potential risk in its loan portfolio and expects to maintain the allowance for loan losses at recently high levels, at least for the near term, until credit metrics improve further.

Management utilizes loan grading procedures which result in specific allowance allocations for the estimated inherent risk of loss for impaired loans. For all loans graded, but not individually reviewed for specific allowance allocations, a general allowance allocation is computed using factors typically developed over time based on actual loss experience. The specific and general allocations plus consideration of qualitative factors represent management's best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations the entire allowance is available to absorb any credit losses. Based on this detailed analysis of credit risk, management considers the allowance for loan losses adequate to cover probable losses inherent in the loan portfolio at June 30, 2013.

An analysis of the changes in the allowance for loan losses and selected ratios for the three and six month periods ended June 30, 2013 and 2012 follows:

                                    Three months ended June 30        Six months ended June 30
(Dollars in thousands)                 2013             2012             2013            2012

Balance at the beginning of
the period                        $        32,022    $    31,206    $       31,881    $    29,745
Provision for loan losses                   1,325          2,475             3,650          6,550
Loan charge-offs, net of
recoveries                                 (1,367 )       (1,908 )          (3,551 )       (4,522 )
Balance at the end of the
period                            $        31,980    $    31,773    $       31,980    $    31,773
Average loans, net of unearned
income                            $     1,644,886    $ 1,544,840    $    1,615,280    $ 1,549,309
Provision for loan losses to
average loans (1)                            0.08 %         0.16 %            0.23 %         0.42 %
Net loan charge-offs to
average loans (1)                            0.08 %         0.12 %            0.22 %         0.29 %
Allowance for loan losses to
average loans                                1.94 %         2.06 %            1.98 %         2.05 %
Allowance for loan losses to
period-end loans                             1.92 %         2.01 %            1.92 %         2.01 %



(1) Amounts not annualized

. . .

  Add SYBT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SYBT - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.