S.Y. Bancorp Reports Record Quarterly Earnings, with Net Income Increasing 15% over Prior Year to $7.7 Million or $0.53 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 third quarter and first nine months of 2013. The Company's performance continued to underscore solid contributions from key areas of the Company, including:

• Continued net loan growth as well as a stable pipeline of new loan opportunities;
• Growing confidence in credit quality that supported a lower loan loss provision compared with the prior-year quarter; and
• Higher revenue from the investment management and trust services department.

The following is a summary of the Company's reported results:

The Company's results for the third quarter and first nine months of 2013 included the effect of several unusual items. Excluding these items, net income for the third quarter of 2013 and year-to-date period ended September 30, 2013, was $7.4 million or $0.51 per diluted shares and $21.1 million or $1.49 per diluted share, respectively. 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 another solid quarterly performance by S.Y. Bancorp, demonstrating the diversity of our revenue streams. Continued loan growth and an ongoing improvement in credit quality, combined with an increased contribution from our investment management and trust services, helped boost our results to a record amount for the third quarter.

"During the third quarter, our loan production reached the strongest level on record for a quarter, as we closed $146 million in new loans, resulting in $42 million of net growth since June 30," Heintzman continued. "Importantly, all of our markets participated in this growth, which continues to drive earnings and a higher loan portfolio. We were particularly pleased to see our business in Oldham County gain traction following our acquisition of THE BANCorp, INC. ("BANCorp"), the holding company for THE BANK – Oldham County, in the second quarter, as both net loans and deposits have grown. Mortgage banking also has increased in our Oldham County market, along with new investment management and trust business.

"As our loan volume has strengthened, so too has our credit quality continued to signal further improvement," Heintzman added. "Non-performing loans and assets continue to decline, both in absolute terms and relative to total loans and assets. Also, leading indicators of credit quality problems, such as past due and watch list loans, continue to show positive trends. With these indications of lower risk in our loan portfolio, and consistent with the second quarter of 2013, we again were positioned to reduce our provision for loan losses compared with the prior-year quarter." Heintzman pointed out that an increase in net charge-offs for the third quarter reflected the charge down of a single non-accrual loan for which the Company had previously allocated a partial specific reserve.

In addition to the momentum seen in its banking operations, Heintzman noted that the Company's investment management and trust services department continued to make a significant contribution to earnings in the third quarter, generating a 14% increase in income. The department, which has $2.14 billion in assets under management, has benefited from new business growth as well as the strengthening of stock market conditions. It continues to rank among the top 100 bank trust departments in the nation, based on revenue. On the other hand, Heintzman said, lending volume for the Company's mortgage division slowed in the third quarter of 2013 as, consistent with national trends, refinancing activity declined in the face of rising interest rates. Purchase loan activity, however, has continued to rise, with the number of purchase loans increasing 18% in the third quarter over the year-earlier quarter and 24% for the year-to-date period.

Concluding, Heintzman said, "Our solid results for the third quarter, combined with the momentum we developed in the first half of the year, position us to build on our record of growth, profitability and improved stockholder returns for 2013. Looking ahead, we are encouraged by the pipeline of new loans, which remains consistent with the past quarter. While this pipeline only gives visibility for a few months, it still bodes well for the fourth quarter. Near term, we continue to expect further compression in net interest margin and, somewhat more broadly, we remain concerned about continued stability in the economy given current interest rate and fiscal uncertainties. Nevertheless, we see strength in our three markets and have confidence in our style of community banking, both of which are good signs for continued growth in each market."

S.Y. Bancorp's total assets increased $187.0 million or 9% at September 30, 2013, reaching $2.29 billion compared with $2.10 billion at September 30, 2012. The Company's loan portfolio increased $131.0 million or 8% to $1.71 billion at September 30, 2013, compared with $1.58 billion at September 30, 2012. Total deposits increased $192.4 million or 11% to $1.88 billion at September 30, 2013, from $1.69 billion at the end of the third quarter of 2012.

The Company's capital levels remained strong during the third quarter of 2013. The Company's Tier 1 leverage ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio were 11.21%, 13.66% and 14.91%, respectively, at September 30, 2013. 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 9.78% at September 30, 2013, compared with 9.63% at June 30, 2013, and 9.55% as of September 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 in light of current economic and political uncertainties 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.

In September 2013, the Company announced that it would redeem all of its 10% fixed-rate cumulative trust preferred securities, totaling $30 million. The redemption will eliminate related future interest costs and is expected to add $0.13 to annual earnings per diluted share beginning in 2014. In connection with this, the Company will write off approximately $1.3 million in unamortized debt issuance costs. Following the redemption, the Company's capital ratios are expected to remain well in excess of the regulatory minimum for well capitalized status.

Net interest income – the Company's largest source of revenue – increased $1.2 million or 7% to $20.0 million in the third quarter of 2013 from $18.8 million in the prior-year quarter. For the first nine months of 2013, net interest income increased $1.8 million or 3% to $57.5 million from $55.6 million in the prior-year period. In the third quarter of 2013, net interest margin was 3.79% versus 3.72% in the second quarter of 2013 and 3.92% in the third quarter of 2012. Net interest margin for the first nine months of 2013 declined 21 basis points to 3.78% from 3.99% a year ago. Net interest margin in the third quarter of 2013 continued to reflect a higher amount of prepayment fees that management considers non-recurring. The Company's more normalized or core net interest margin declined to 3.63% for the third quarter of 2013 from 3.66% for the second quarter of 2013, 3.77% in the first quarter of 2013, 3.74% in the fourth quarter of 2012, and 3.85% in the third 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 3.65% and 3.70%.

Non-performing loans (NPLs) totaled $30.5 million or 1.78% of total loans outstanding at September 30, 2013, compared with $31.5 million or 1.89% of total loans outstanding at June 30, 2013, and $31.2 million or 1.98% of total loans at September 30, 2012. Included in NPLs are loans that have been restructured totaling approximately $8.6 million at September 30, 2013, $8.6 million at June 30, 2013, and $7.5 million at September 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 $37.0 million or 1.62% of total assets at September 30, 2013, a decrease from $39.1 million or 1.73% of total assets at June 30, 2013, and $38.1 million or 1.81% of total assets at September 30, 2012.

Net charge-offs in the third quarter of 2013 totaled $4.3 million or 0.26% of average loans, up from $1.4 million or 0.08% of average loans in the second quarter of 2013 and $3.0 million or 0.19% of average loans in the year-earlier period. The increase in net charges-offs in the third quarter of 2013 reflected the charge down of a single non-accrual loan for which the Company had previously allocated a partial specific reserve.

The Company's loan loss provision for the third quarter of 2013 was $1.3 million, level with the second quarter of 2013 and down from $2.5 million in the prior-year quarter. The allowance for loan losses stood at 1.70% of total loans as of September 30, 2013, compared with 1.92% at June 30, 2013, and 1.98% at September 30, 2012. Management continues to see favorable trends in credit quality metrics and believes the Company remains adequately reserved based on its current assessment of overall risk in the loan portfolio.

Total non-interest income decreased $143 thousand or 2% to $9.7 million in the third quarter of 2013 compared with $9.8 million for the prior-year quarter. The decline primarily reflected a decrease of $618 thousand or 48% in gains on sales of mortgage loans. Partially offsetting the decline in gains on sales of mortgage loans was a $502 thousand or 14% increase in income from investment management and trust services for the third quarter of 2013. For the first nine months of 2013, total non-interest income increased $861 thousand or 3% to $29.2 million compared with $28.3 million in the first nine months of 2012, including the bargain purchase gain of $449 thousand related to the acquisition of BANCorp during the second quarter of 2013.

Total non-interest expense increased $526 thousand or 3% to $17.6 million in the third quarter of 2013 from $17.0 million in the same period last year. The change primarily reflected a $797 thousand or 8% increase in salaries and employee benefits, a $224 thousand or 17% increase in data processing expense, and a $157 thousand or 12% increase in net occupancy expenses. The increase in salaries and employee benefits on a comparable quarterly basis was attributable largely to health insurance expense and other employee benefits as well as the addition of personnel in connection with the acquisition of BANCorp. Virtually all of the increase in data processing was due to the acquisition, reflecting the temporary operation of dual data systems, which has now ended. Approximately one-half of the increase in occupancy costs was related to the acquisition and will be ongoing. Non-interest expense for the quarter benefitted from the elimination of a $505 thousand liability for expired debit card rewards, which was partially offset by a $365 thousand write-off of other real estate owned (OREO). Regulators limit the holding period for OREO to 10 years. For the first nine months of 2013, total non-interest expense increased $3.7 million or 8% to $52.0 million compared with $48.3 million in the first nine months of 2012. In addition to the impact of usual items in the third quarter of 2013, total non-interest expense for the year-to-date period ended September 30, 2013, included acquisition-related expenses of $1.5 million. The Company's third quarter efficiency ratio was 58.72% compared with 58.91% in the third quarter of 2012.

In August 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 October 1, 2013, to stockholders of record as of September 9, 2013.

Louisville, Kentucky-based S.Y. Bancorp, Inc., with $2.29 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.

The following table provides a reconciliation of net income and earnings per diluted share to adjusted net income and adjusted earnings per diluted share, both non-GAAP measures. 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.

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.

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.