S.Y. Bancorp Reports Record Second Quarter Net Income Totaling $6.4 Million or $0.45 Per Diluted Share

S.Y. Bancorp, Inc. (NASDAQ: SYBT), parent company of Stock Yards Bank & Trust Company, with offices in the Louisville, Indianapolis and Cincinnati metropolitan markets, today reported record results for the second quarter and first half of 2013, despite recording net acquisition costs of $0.04 per diluted share. The Company’s performance continued to demonstrate solid contributions from key areas of the Company, including:

• Solid loan production, net loan growth and encouraging pipeline;
• A further reduction in the quarterly loan loss provision based on increasing confidence as to credit risk in the Company’s loan portfolio;
• Increasing revenue from the investment management and trust services department; and
• A bargain purchase gain from the acquisition of THE BANCorp, INC. ("BANCorp"), the holding company for THE BANK – Oldham County, during the second quarter, which helped partially offset acquisition costs.

Second quarter results reflect two special items related to the BANCorp acquisition: a bargain purchase gain of $449 thousand and acquisition-related expenses totaling more than $1.5 million. Excluding these items, which reduced second quarter earnings by $0.04 per diluted share, adjusted net income per diluted share for the second quarter of 2013 was $0.49, representing an increase of 11% over the year-earlier quarter. See reconciliation of GAAP and non-GAAP measures later in this release.

Commenting on the results, David Heintzman, Chairman and Chief Executive Officer, said, "We are pleased to announce that S.Y. Bancorp continued to post attractive earnings growth during the second quarter, with adjusted net income per diluted share rising 11% to a record second quarter adjusted earnings per share of $0.49. We also were gratified to see ongoing organic expansion of our loan portfolio and deposit base alongside the new business obtained in the BANCorp acquisition."

Heintzman noted that the BANCorp acquisition expanded the Bank’s footprint in the Louisville MSA by adding three branches in Oldham County and one additional branch in Jefferson County. The acquisition also added approximately $38.8 million in loans as of the end of the second quarter of 2013, along with $53.6 million in investments and $122.3 million in deposits. The Company has implemented initiatives to eliminate redundant costs, which should combine with the results of BANCorp’s operations to produce earnings per share accretion. The BANCorp acquisition is expected to add approximately $0.03 to the Company’s diluted earnings per share for 2013, excluding one-time items, and approximately $0.04 to diluted earnings per share for 2014.

"The Company’s performance continued to reflect solid contributions from all areas of our business," Heintzman continued. "As we have indicated in the past, balanced operations have been key to our long-term record of success, and this quarter again underscored the benefit of that diversity. Spurred by both improving stock market conditions and the addition of new business, our investment management and trust services department experienced a 13% increase in revenue during the quarter, which more than offset the current, more tempered pace of business in our mortgage division following red-hot conditions for home mortgage refinancings over the past year. With $2.0 billion in assets under management, our investment management and trust services department continues to rank among the top 100 in the nation, based on revenue.

"Additionally, steadily strengthening credit quality as seen in the Company’s credit metrics, coupled with an outlook for improving and sustainable economic conditions, allowed the Company to reduce its provision for loan losses in the second quarter," Heintzman added. "Non-performing loans, non-performing assets and net charge-offs all declined on a sequential quarter basis and each is below its year-earlier level. More importantly, leading indicators such as our levels of watch list, classified and past due loans continue to show positive trends. Even as we continue to reduce our loan loss provision, however, we note that our total allowance remains at 1.92% of total end-of period loans, only 12 basis points off the peak in 2012."

Heintzman noted that the Company’s financial performance has continued to gain the attention of investment professionals. S.Y. Bancorp was one of only 47 banks nationwide to be named to the 2012 KBW Bank Honor Roll, a distinction the Company has earned for nine consecutive years. S.Y. Bancorp also was recently recognized as among the top 10% of U.S. community banks in the first annual Raymond James Community Bankers Cup. Lastly, S.Y. Bancorp was recently included in the "Nifty Fifty" list, a ranking by Bank Director magazine and Sandler O’Neill + Partners of the top 50 best users of capital based on profitability and capital strength.

Concluding, Heintzman said, "We are pleased to end the second quarter with solid operating momentum and a strong and growing presence across our three markets. Based on higher loan production this year, our loan pipeline remains strong. We also are excited by the opportunities ahead to grow our business, as with our recent acquisition of The BANCorp and the potential it provides for us to deepen our relationships with our new customers based on an expanded service offerings. Our successful acquisition and integration of the BANCorp, along with the capital strength we possess, add a new dimension to the way we can approach long-term strategic growth for the Bank. While we know that we have continued challenges ahead, especially related to net interest margin compression in the near term, we remain optimistic that our diverse markets, products and service lines, together with improving business conditions, will allow us to extend our record of growth and profitability."

S.Y. Bancorp’s total assets increased $175.0 million or 8% at June 30, 2013, reaching $2.259 billion compared with $2.084 billion at June 30, 2012. The Company’s loan portfolio increased $89.2 million or 6% to $1.667 billion at June 30, 2013, compared with $1.578 billion at June 30, 2012. Total deposits increased $200.6 million or 12% to $1.865 billion at June 30, 2013, from $1.664 billion at the end of the second quarter of 2012.

The Company’s capital levels remained strong during the second quarter of 2013. The Company’s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio were 11.26%, 13.75% and 15.00%, respectively, at June 30, 2013, and included the impact of issuing 531 thousand shares or $12.2 million of common stock in the BANCorp acquisition. Each of these ratios exceeds the required minimum of 5%, 6% and 10%, respectively, necessary to be deemed a "well-capitalized" institution – the highest capital rating for financial institutions. The ratio of tangible common equity to total tangible assets was 9.63% at June 30, 2013, compared with 9.82% at March 31, 2013, and 9.39% as of June 30, 2012 (see reconciliation of GAAP and non-GAAP measures later in this release). The Company intends to maintain capital ratios at historically higher levels until there is greater certainty regarding sustainable economic improvements and to remain well positioned to pursue expansion and other opportunities that may arise. Even with those objectives, S.Y. Bancorp has continued its efforts to enhance stockholder value through steadily increased cash dividends, raising the dividend rate five times over the past six years.

Net interest income – the Company’s largest source of revenue – increased $680 thousand or 4% to $19.0 million in the second quarter of 2013 from $18.3 million in the prior-year quarter. In the second quarter of 2013, net interest margin was 3.72% versus 3.83% in the first quarter of 2013 and 3.98% in the second quarter of 2012. For the first half of 2013, net interest income increased $593 thousand or 2% to $37.4 million from $36.8 million in the prior-year period. Net interest margin for the first half of 2013 declined 24 basis points to 3.78% from 4.02% a year ago. The Company expects that net interest margin compression will continue due to competitive pressures and until interest rates begin to rise.

Net interest margin in the second quarter of 2013 continued to reflect a higher amount of prepayment fees associated with an increase in loan refinancing activity. Adjusting for these sources of additional income, the Company’s more normalized or core net interest margin declined to 3.66% for the second quarter of 2013 from 3.77% for the first quarter of 2013, 3.74% in the fourth quarter of 2012, 3.85% for the third quarter of 2012, and 3.94% in the second quarter of 2012 (see reconciliation of GAAP and non-GAAP measures later in this release). Management believes these core margins better indicate the increasing pressure of a low interest rate environment and a highly competitive loan market, and it currently expects margin compression to continue in 2013, resulting in core net interest margin for the full year of between 3.60% and 3.65%.

Non-performing loans (NPLs) totaled $31.5 million or 1.89% of total loans outstanding at June 30, 2013, compared with $33.5 million or 2.09% of total loans outstanding at March 31, 2013, and $35.6 million or 2.25% of total loans at June 30, 2012. Included in NPLs are loans that have been restructured totaling approximately $8.6 million at June 30, 2013, $11.0 million at March 31, 2013, and $7.5 million at June 30, 2012. These loans are performing in accordance with their restructured terms and are accruing interest. Non-performing assets (NPAs), which include NPLs and repossessed assets, were $39.1 million or 1.73% of total assets at June 30, 2013, a decrease from $39.2 million or 1.85% of total assets at March 31, 2013, and $42.6 million or 2.04% of total assets at June 30, 2012.

Net charge-offs in the second quarter of 2013 totaled $1.4 million or 0.08% of average loans, down from $2.2 million or 0.14% of average loans in the first quarter of 2013 and $1.9 million or 0.12% of average loans in the year-earlier period.

The Company’s loan loss provision for the second quarter of 2013 was $1.3 million, resulting in an allowance for loan losses of 1.92% of total loans as of June 30, 2013. This compared with a provision of $2.3 million and an allowance for loan losses of 2.00% for the first quarter of 2013 and a provision of $2.5 million and an allowance for loan losses of 2.01% for the second quarter of 2012. Management continues to take a conservative stance toward allowance levels and believes the Company remains adequately reserved based on its current assessment of overall credit quality.

Total non-interest income increased $1.0 million or 11% to $10.3 million in the second quarter of 2013 compared with $9.3 million for the prior-year quarter. However, as previously noted, total non-interest income included a bargain purchase gain of $449 thousand related to the acquisition of BANCorp. Excluding this gain, adjusted total non-interest income for the second quarter increased $572 thousand or 6% compared with the year-earlier quarter and primarily reflected strong growth in income from investment management and trust services of $4.1 million. Income from investment management and trust services increased $459 thousand or 13% in the second quarter of 2013 versus the year-earlier period. For the first half of 2013, total non-interest income increased $1.0 million or 5% to $19.5 million compared with $18.5 million in the first half of 2012, primarily as a result of the same factors during the second quarter. Adjusted total non-interest income for the first half of 2013 increased $555 thousand or 3% versus the comparable period in 2012.

Total non-interest expense increased $2.3 million or 14% to $18.8 million in the second quarter of 2013 from $16.5 million in the same period last year. However, total non-interest expense included acquisition costs of $1.5 million. Excluding these expenses, adjusted total non-interest expense for the second quarter increased $766 thousand or 5% compared with the year-earlier quarter and primarily reflected higher acquisition-related salaries and employee benefits along with data processing expenses. Incremental data processing expenses will continue through the August 2013 systems conversion. Adjusted total non-interest expense for the first half of 2013 increased $1.6 million or 5% versus the comparable period in 2012. The Company’s second quarter efficiency ratio was 63.72% compared with 59.05% in the second quarter of 2012. Excluding acquisition-related gains and expenses, the adjusted efficiency ratio for the second quarter of 2013 was 59.38%.

In May 2013, S.Y. Bancorp’s Board of Directors declared a quarterly cash dividend of $0.20 per common share. The latest dividend was distributed on July 1, 2013, to stockholders of record as of June 10, 2013.

Louisville, Kentucky-based S.Y. Bancorp, Inc., with $2.26 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 subsidiaries 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.

The following table provides a reconciliation of net income and earnings per diluted share, along with total stockholders’ equity, in accordance with GAAP to adjusted net income and adjusted earnings per diluted share, both non-GAAP measures, along with tangible common equity in accordance with applicable regulatory requirements. The Company provides non-GAAP earnings information to improve the comparability of its results and provide additional insight into the strength of the Company’s operations. In addition, the Company provides the tangible common equity ratio because of its widespread use by investors as a means to evaluate capital adequacy.

The following table provides a reconciliation of total stockholders’ equity in accordance with US GAAP to tangible common equity in accordance with applicable regulatory requirements. The Company provides the tangible common equity ratio, in addition to those defined by banking regulators, because of its widespread use by investors as a means to evaluate capital adequacy.

The following table provides a reconciliation of net interest margin in accordance with US GAAP to core net interest margin. The Company provides this information to illustrate the trend in quarterly net interest margin sequentially during 2012 and 2013 and to show the impact of prepayment fees and late charges on net interest margin.