S.Y. Bancorp (SYBT) in Louisville, Ky., posted record earnings in the first quarter even as its loan portfolio is beginning to show some cracks.

The $2 billion-asset parent of StockYards Bank & Trust said Wednesday that its first-quarter profit rose 18% from the prior year, to $6.5 million, as modest loan growth helped fuel an increase in interest income. Its earnings per share also climbed 18%, to 47 cents, beating consensus analysts' estimates by four cents, according to Thomson Reuters.

Future results, however, could be threatened by weakening asset quality. Nonperforming assets at March 31 totaled $37.6 million, up 55% from a year earlier and 21% from the fourth quarter. S.Y. attributed the quarterly increase to a single loan that was restructured in bankruptcy, but it warned that with "several significant loans" on its credit watch list, there could be further deterioration in the loan portfolio.

"Despite some recent signs of an improving business conditions, the company remains uncertain as to when the economic climate will begin to strengthen on a consistent basis," S.Y. said in a press release. "The business downturn continues to create credit fatigue among traditionally solid and stable borrowers, and presents a risk of spreading to additional customers until the real estate market and overall business conditions show sustained improvement."

John Rodis, an analyst with Fig Partners, said the recent uptick in problem loans is a concern because it comes at a time when many of its peers are reporting improvements in asset quality. Still, he said that S.Y.'s ultimate level of nonperforming assets "is still very manageable.

"Is it concerning? Yes. Am I overly worried? No," Rodis said in an interview.

Compared to its peers, S.Y. Bancorp's credit issues are relatively small. Its total nonperforming assets made up 1.84% at the end of the second quarter. The company pointed out in the release that its public-traded peers, defined as those with $1 billion to $2.5 billion in assets, had an average of 4.35% of nonperforming assets to total assets at the end of 2011.

It also has an ample capital; its tangible common equity ratio was 9.37% at the end of the quarter and analysts typically consider a ratio above 6% to be healthy. S.Y.'s shares were down 3% in late trading Wednesday, to $22.30.

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