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S.Y. Bancorp Reports Solid Fourth Quarter and Full-Year Results against a Backdrop of Turbulent Economic Conditions
Posted by: gurufocus (IP Logged)
Date: January 23, 2009 08:03AM
LOUISVILLE, Ky.--(BUSINESS WIRE)--S.Y. Bancorp, Inc. (NASDAQ:SYBT), parent company of Stock Yards Bank & Trust Company, with offices in the Louisville metropolitan area, Indianapolis and Cincinnati, today reported Press Release: S.Y. Bancorp Reports Solid Fourth Quarter and Full-Year Results against a Backdrop of Turbulent Economic Conditions
LOUISVILLE, Ky.--(BUSINESS WIRE)--S.Y. Bancorp, Inc. (NASDAQ:SYBT), parent company of Stock Yards Bank & Trust Company, with offices in the Louisville metropolitan area, Indianapolis and Cincinnati, today reported financial results for the fourth quarter and year ended December 31, 2008. Despite recessionary trends in 2008, the Company reported a solid year-over-year performance in its business, highlighted by a 12% increase in the Company's loan portfolio and a 15% increase in its deposit base for the year. This growth, combined with a continuation of strong credit quality trends, helped offset the impact that a declining interest rate environment had on its net interest margin. A summary of results for the fourth quarter and year-to-date period follows:
The Company's net income for the fourth quarter of 2008 included impairment and equity-method charges, recorded in non-interest expenses, totaling $866,000 ($563,000 or $0.04 per diluted share after tax) on a 2004 investment in a bank located in one of the Company's expansion markets. The impairment of this asset, the only such investment of its kind made by the Company and carried in other assets as an equity-method investment, was directly attributable to the recent decline in the market value of bank stocks and reflected the impact of accounting rules with respect to measurement of fair value. From a business and strategic point of view, the Company continues to see the benefit of this investment, in terms of its ongoing expansion in this new market, and it remains a source of new business development for the Company. After these charges, this asset is now carried at $520,000.
S.Y. Bancorp's total assets increased 10% to $1.629 billion at December 31, 2008, from $1.482 billion at December 31, 2007. The year-over-year change in total assets was driven by strong growth in the Company's loan portfolio, which rose 12% to $1.350 billion at December 31, 2008, from $1.202 billion at December 31, 2007. Deposits increased 15% to $1.271 billion at December 31, 2008, compared with $1.107 billion a year ago, with the increase reflecting higher deposits of all types. Stockholders' equity increased 9% to $144.5 million at December 31, 2008, from $133.0 million at December 31, 2007, and the Company remained "well-capitalized" under regulatory standards – the highest capital rating a financial institution can earn. The Company's Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio at December 31, 2008, were 10.65%, 12.10% and 13.90%, respectively, all exceeding the required minimums of 5%, 6% and 10%, respectively, to be deemed a well-capitalized institution.
Commenting on the Company's progress, David Heintzman, Chairman and Chief Executive Officer, said, "We are pleased to report the ongoing growth of the Company in the fourth quarter and throughout 2008, a feat made even more noteworthy given the events of the past year and the many shocks sustained by the nation's economy. Despite significant headwinds, we reported strong growth in loans and deposits for the year, underscoring the strength of our business overall and the solid presence we enjoy in our principal market of Louisville, which has not been as hard hit as other regions around the country. Our growing reach to new markets in Indianapolis and Cincinnati also contributed to the Company's steady progress.
"Concurrent with this growth, and mindful of the times, we have maintained a keen focus on credit quality," Heintzman continued. "We are gratified to note the metrics that describe our effectiveness in this area remain strong – an accomplishment that sets S.Y. Bancorp apart from many peer financial institutions. Capping the achievements of 2008 was our ability to maintain a strong and growing capital position, which should reassure our customers and depositors, while positioning us for continued growth in the future. Considering the recent consolidation and customer dislocation occurring in our industry, marked by bank failures and takeovers, we believe there will be attractive opportunities for us to gain market share and attract new, productive bankers to our company in the year ahead, both in our home market of Louisville as well as in our newer markets of Indianapolis and Cincinnati.
"As encouraged as we are about the Company's progress in 2008, especially considering the backdrop of the year, we recognize the outlook for 2009 is both challenging and uncertain," Heintzman added. "Although thus far we have avoided the consequences of lending practices that have troubled other banks, we are not likely to completely escape the impact of declining real estate values and their effect on credit quality, even though our markets have fared reasonably well in the downturn so far. Clearly, the economy is in recession, the depth and duration of which cannot be predicted. In addition, the personal wealth of many of our borrowers and guarantors, which historically has added a source of financial strength to those loans, has been negatively affected by severe market declines. Considering these uncertainties, we expect our provision for loan losses to increase over at least the near term. Moreover, we anticipate additional pressure on net interest margin in the coming year due to the unprecedented low-rate environment that now exists as well as the impact of our trust preferred securities that we recently issued to bolster capital. These pressures, together with strong competition for deposits and the impact that has on pricing, are expected to result in significantly lower net interest margin for 2009. Also, while we believe non-interest income will rise slightly next year, it is not expected to offset the anticipated increase in non-interest expense. All of these factors point toward lower net income in 2009 compared with 2008, reflecting the continuation of tough economic conditions in our industry and across the nation.
"Still, far away from the problems on Wall Street, we remained focused on the main streets of the communities we serve and on our mission to provide a full range of financial products and a high level of service for our customers to meet and address their needs, requirements and challenges," Heintzman concluded. "Considering our performance in 2008, and the fundamental strength and diversity of our business and markets, we remain confident about our prospects for growth over the longer term."
In light of current pressures on the economy and uncertainties in the banking industry, S.Y. Bancorp further strengthened its balance sheet during the fourth quarter of 2008 by raising additional capital with the sale of $30,000,000 of 10% cumulative trust preferred securities in an over-subscribed public offering. The trust preferred securities will mature on December 31, 2038, but are callable by the Company on or after December 31, 2013. This capital offering resulted in net proceeds of approximately $28.5 million and helped to increase the Company's total risk-based capital ratio to 13.90% from 10.82% at December 31, 2007, and 11.26% at September 30, 2008, all of which exceeded the 10% level required to be considered a well-capitalized institution.
As a result of its successful trust preferred offering, the Company elected not to issue preferred stock under the Treasury Department's Capital Purchase Program (CPP), even though it was approved to participate. S.Y. Bancorp already was well capitalized before the trust preferred offering, and the additional capital raised in that offering qualifies as additional Tier 1 capital. Management believes the Company remains well positioned to support the banking and lending needs of its customers today, as well as the Company's growth over the longer term, without CPP funding. Moreover, management determined that the potential dilution and uncertainty surrounding the CPP represented unnecessary burdens and risks for the Company and its shareholders. Separately, the Company also issued $10 million of subordinated debentures during the third quarter of 2008, with a 10-year term and two-year call feature. These debentures qualify as Tier 2 capital for regulatory capital purposes.
Heintzman pointed out that the Company's capital management efforts in early 2008, primarily in the form of stock repurchases, helped mitigate the impact of lower net income on earnings per share. From October 2007 to March 2008, the Company repurchased a total of 639,000 common shares under its established stock repurchase plan. Since that time, however, S.Y. Bancorp has made no purchases of its common stock, choosing instead to preserve its capital in the face of uncertain economic times. Additionally, the Company has maintained a sound and consistent dividend payout, currently reflecting an indicated annual rate of $0.68 per share. In November 2008, S.Y. Bancorp's Board of Directors maintained the regular quarterly cash dividend of $0.17 per share, which was distributed on January 2, 2009, to shareholders of record as of December 5, 2008.
Heintzman noted that recent weakness in the securities market significantly affected one important area of non-interest income for the Company. Income from investment management and trust services, which constitutes the single largest component of non-interest income and is inherently linked to securities market performance, declined 10% in the fourth quarter and 5% for the year after having posted double-digit increases on average over the last several years. Also contributing to the decline was a reduction in non-recurring estate fees. Assets under management totaled $1.347 billion at December 31, 2008, reflecting growth during 2008 from net new accounts of approximately $110 million, or double that of 2007, which offset some of the impact of falling market values.
Driven primarily by loan growth, net interest income – the Company's largest source of revenue – increased $1,516,000 or 11% in the fourth quarter of 2008 compared with the year-earlier period. Reflecting a declining interest rate environment over the past year, net interest margin for the fourth quarter of 2008 fell seven basis points year over year to 3.92% from 3.99% in the fourth quarter of 2007, but was 13 basis points higher than in the third quarter of 2008. For 2008, net interest income increased $3,167,000 or 6% versus last year, primarily due to strong loan growth. For 2008, the Company's net interest margin declined 23 basis points to 3.93% compared with 4.16% in 2007. Management believes recent and significant rate reductions by the Federal Open Market Committee, coupled with ongoing heavy competition for deposits used to fund loan growth and the impact of newly issued trust preferred securities, will put significant pressure on margins in the upcoming year.
Non-performing loans for the fourth quarter of 2008 increased to $4,710,000 from $3,370,000 in the fourth quarter of 2007 and, on a linked-quarter basis, rose from $3,940,000 in the third quarter of 2008. However, relative to total end-of-period loans outstanding, the ratio of non-performing loans remained near historical lows at 0.35% in the fourth quarter of 2008 versus 0.28% in the fourth quarter of last year and 0.30% in the third quarter of 2008. At the current level of 0.35%, non-performing loans to total loans remain only seven basis points above the lowest point for the past five years, achieved in 2007, and 10 basis points below the five-year average. Trends in net charge-offs also continue to underscore the strength of the Company's loan quality, as net charge-offs totaled $354,000 in the fourth quarter of 2008 or 0.03% of average loans, compared with $535,000 or 0.05% in the year-earlier quarter, and $571,000, or 0.04% in the third quarter of 2008. Year to date charge-offs totaled $2,119,000 or 0.16% of average loans compared to $2,278,000 or 0.20% of average loans in 2007. Despite these favorable trends, the Company remains cautious about credit quality in the near future because of uncertainties in the economy and the unknown depth and duration of the current recession.
Even though many credit quality metrics continue to trend favorably, management considers the volatility and disruption experienced in credit markets over the past year and the possibility that these conditions can place additional pressure on credit quality in determining the provision and allowance for loan losses. For the fourth quarter of 2008, the loan loss provision totaled $950,000 versus $1,435,000 in the year-earlier period. For 2008, the loan loss provision totaled $4,050,000 versus $3,525,000 in 2007. The Company's allowance for loan losses was 1.14% of total loans at December 31, 2008, up slightly from 1.12% at both December 31, 2007, and September 30, 2008.
Non-interest income declined $1,522,000 or 19% in the fourth quarter compared with the same quarter last year. Aside from lower investment management and trust income, as noted earlier, service charges on deposit accounts were down $231,000 or 10%, and various components of other income decreased. These declines were partially offset by higher bankcard transaction revenue, which rose $40,000 or 6%, and higher brokerage fees and commissions, which rose $13,000 or 3% for the quarter. Non-interest income declined $2,523,000 or 8% in 2008 compared with 2007, primarily reflecting declines in investment management and trust income, service charge income, and brokerage fees and commissions, as well as a loss on the sale of securities and lower other income.
Non-interest expense rose $636,000 or 5% in the fourth quarter of 2008 versus the same period last year, primarily because of the previously discussed impairment charge. Higher net occupancy costs and other non-interest expense also contributed to the net increase in non-interest expense in the fourth quarter of 2008. Offsetting these factors somewhat was a decline of $530,000 or 8% in salaries and employee benefits due to favorable claims experience in the Company's self-insured heath care plan, lower pension costs, and reduced bonuses, as well as a decline of $160,000 or 16% in data processing expense. Non-interest expense rose $2,354,000 or 5% in 2008 compared with the year-earlier period primarily due to salaries and employee benefits and net occupancy costs, offset by lower data processing expense. The Company continues to absorb additional costs related to its expansion in Indianapolis, where the Company opened a second office in the fourth quarter of 2007, and in Cincinnati, a market the Company also entered in the fourth quarter of 2007. Expenses for those new offices were in the start-up phase in late 2007 in terms of personnel and office space, and those expenses only reached normalized operating levels beginning in 2008. While these expansion initiatives have contributed to the Company's loan growth in 2008, they still have represented a drag on earnings this year as they continue to ramp up to a breakeven level. The Company's fourth quarter efficiency ratio was 60.01% compared with 57.03% in the fourth quarter of 2007 and 55.97% in the third quarter of 2008. For the year, the efficiency ratio increased to 57.05% from 54.68% for 2007.
Louisville, Kentucky-based S.Y. Bancorp, Inc., with $1.629 billion in assets, was incorporated in 1988 as a bank holding company. It is the parent company of Stock Yards Bank & Trust Company, which was established in 1904. The Company's common shares trade on the NASDAQ Global Select Market under the symbol SYBT. The trust preferred securities of S.Y. Bancorp Capital Trust II also trade on the NASDAQ Global Select Market under the symbol SYBTP.
This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although the Company's management believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Therefore, there can be no assurance the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from those discussed in forward-looking statements include, but are not limited to: economic conditions both generally and more specifically in the markets in which the Company and its banking subsidiary operate; competition for the Company's customers from other providers of financial services; government legislation and regulation, which change from time to time and over which the Company has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.