News Details

Strong Growth in Interest Income Continues, Reflecting Ongoing Momentum in Loan Growth

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Stock Yards Bancorp, Inc. (NASDAQ: SYBT), parent company of Stock Yards Bank & Trust Company, with offices in the Louisville, Indianapolis and Cincinnati metropolitan markets, today reported results for the second quarter and six months ended June 30, 2018. Total revenue, comprising net interest income and non-interest income, was $40.1 million for the second quarter of 2018 compared with $38.2 million for the first quarter of 2018 and $36.8 million for the second quarter of 2017. Net income for the second quarter of 2018 totaled $13.6 million or $0.59 per diluted share compared with $13.4 million or $0.58 per diluted share for the first quarter of 2018 and $10.6 million or $0.46 per diluted share for the second quarter of 2017.

Key highlights of the Company's performance for the second quarter of 2018 included:

• Ongoing and exceptional loan growth, which increased the Company's loan portfolio 3% on a sequential-quarter basis and 12% year over year;
• A higher net interest margin, reflecting both increased volume and rate;
• A continuation of historically strong credit quality metrics;
• Another solid performance by the Wealth Management and Trust Group; and
• The benefit of a lower marginal tax rate.

"Our results for the period – the second consecutive quarter of record growth – clearly show the strong earnings power of the Company and the potential for attractive and predictable income expansion in the future," said David P. Heintzman, Chairman and Chief Executive Officer. "The key levers driving earnings continue to be remarkable loan growth together with historically strong credit quality, an improving net interest margin and solid revenue contributions from our fee-based services. Importantly, our results underscore our strategies for steady, organic growth over the long term – building our business one relationship at a time – a way of doing business that continues to distinguish Stock Yards Bancorp from the competition and differentiate our company's performance from peer community banks."

Commenting on loan growth, Ja Hillebrand, President, said, "We were very pleased to see the momentum that has characterized our lending activities over the past several years extend into the second quarter of 2018. With this continued progress, both loan production and loan growth reached a record level for the first half of the year, significantly outpacing the previous high point set two years ago. In turn, this growth, along with the impact of higher interest rates, provided a significant stimulus to interest income, which increased $5.0 million or 18% compared with the second quarter of 2017.

"As has been the case for some time, our growth reflects ongoing success in core loan categories, particularly commercial real estate and commercial and industrial loans," Hillebrand continued. "Notably, all three of our markets have participated in our overall growth, and while Louisville remains the largest of these, we are especially pleased with the accelerating performance of our Indianapolis market. As we look toward the second half of the year, and knowing that the late summer months are a seasonally slower period for us, we continue to believe that our current loan pipeline positions us to grow our total loan portfolio for the year in the range of mid- to high-single digits, unchanged from the outlook we expressed last quarter."

As previously announced, Hillebrand will assume the responsibilities of Chief Executive Officer of the Company and the Bank, effective October 1, 2018, succeeding Heintzman as he moves into the role of Executive Chairman of the Board.

Non-interest income remained strong in the second quarter, representing 29% of total revenue, adding diverse revenue streams to augment net interest income and helping provide a platform for attractive and predictable long-term growth. The Wealth Management and Trust Group, with $2.9 billion of assets under management, remained the dominant source of fee income, contributing 47% of total non-interest income in the second quarter. Wealth management and trust continues to benefit from the addition of new customer relationships as well as the strong performance of the stock market. Wealth management and trust expects revenue for the full year to increase in the range of 4%-6%. On the other hand, a general slowdown in mortgage banking continues to weigh on its revenue, as rates have risen and housing inventory remained tight.

The Company noted that second quarter results also benefited from recent tax reform. With the implementation of the Tax Cuts and Jobs Act of 2017, the Company's effective tax rate decreased to 18.9% from 29.1% in the second quarter of 2017.

Concluding, Heintzman said, "We are pleased with the Company's noteworthy progress and financial results through the first half, which not only continue a solid trend, but also position us to achieve another great year. This progress reflects strong underpinnings, like organic loan growth, improved margins, diversified revenue sources, and exceptional credit quality, all occurring across three vibrant markets – each where we have significant opportunities for ongoing expansion. As I look toward my retirement at the end of 2018, I am grateful for what we, as a company, have accomplished, including the creation of a strong and service-oriented culture and the internal development of talent within our organization, as we have nurtured the legacy passed down to me 14 years ago. These foundational traits allow us to approach with great confidence the transition in leadership to Ja and his team on October 1, 2018. We believe that Stock Yards Bancorp is well positioned to reach new heights, and we are confident in Ja's abilities to build on our long and distinguished heritage."

Second Quarter 2018 Compared with Second Quarter 2017

Total assets increased $197 million or 6% to $3.32 billion.

• This primarily reflected ongoing growth in the Company's loan portfolio, which rose $268.3 million or 12%.

Total deposits increased $62 million or 2% to $2.54 billion.

• This reflected an increase in all deposit categories except money market deposits.
• Core deposits, which exclude brokered deposits and time deposits greater than $250,000, were 98% of total deposits.

Asset quality, which has trended within a narrow range over the past several years, remained at historically strong levels.

• Non-performing loans (NPLs) were $7.4 million or 0.29% of total loans outstanding versus $6.1 million or 0.26% of total loans outstanding.
• Non-performing assets (NPAs), which include NPLs along with other real estate owned (OREO) and repossessed assets, were $7.7 million or 0.23% of total assets versus $9.3 million or 0.30% of total assets.
• Net charge-offs remained at a reasonably low level relative to average loans outstanding.
• Reflecting many factors, including growth in the loan portfolio and qualitative considerations, the loan loss provision increased $635 thousand.
• The allowance for loan losses relative to total loans decreased 13 basis points to 0.96%.

The Company remained "well capitalized" – the highest capital rating for financial institutions.

• Total equity to assets was 10.40% and tangible common equity ratio was 10.35% (tangible common equity is a non-GAAP financial measure; see reconciliation of total stockholders' equity to tangible common equity and total assets to tangible assets later in this release).
• Even with its strong capital position, the Company still produces industry-leading returns on equity due to its superior earnings performance.

• Stock Yards Bancorp continues to pursue strategies to enhance stockholder value, including a substantial and sustained dividend payout ratio. In May 2018, Stock Yards Bancorp's Board of Directors maintained its quarterly cash dividend at $0.23 per common share.

Net interest income – the Company's largest source of revenue – increased approximately $3.4 million or 14% to $28.7 million.

• Interest income rose $5.0 million or 18%. Much of this increase reflected higher volume driven by strong momentum in loan growth, and the remainder was due to higher rates on interest-earning assets.
• As expected, interest expense remained under rate pressure due to rising deposit costs, which is expected to increase over the balance of 2018 due to competition for deposits. Given these circumstances, management anticipates that the impact of the prime rate increase in June 2018 will be revenue neutral. As of June 30, 2018, the Company's 12-month deposit beta was 47% of the movement in the prime rate, and management expects that to increase.
• Net interest margin increased 28 basis points to 3.88%. These improvements primarily reflected the positive impact of three increases in the prime rate during 2017 along with the first one in 2018.
• Approximately 40% of the Company's loans are priced at variable rates, so future rate increases will benefit this part of the portfolio. The remainder of the portfolio is priced at fixed rates, and as these loans renew and new loans originate, pricing will be subject to competitive conditions and prevailing interest rates. Fixed-rate pricing is generally indexed to the five-year treasury rate, and as the yield curve continues to flatten, fixed-rate loans may not provide a significant lift in yields.

Non-interest income decreased $90 thousand or 1% to $11.4 million.

• This was due primarily to a reduction in income from bank owned life insurance as well as fee income from mortgage banking, both of which were partially offset by higher revenue from wealth management and trust services and fees from debit and credit cards.

Non-interest expense increased $0.9 million or 4% to $22.1 million.

• This increase primarily reflected higher compensation expense, which included incentive compensation related to loan production and company performance. Also increasing were employee benefits, due to higher health insurance costs, employment taxes and retirement plan expenses, technology and communications costs, and marketing and business development expenses.
• These increases were partially offset by a reduction in amortization/impairment of investment in tax credit partnerships due to the irregular timing of such opportunities, which can cause corresponding expenses and tax benefits to vary widely.

The Company's effective tax rate decreased to 18.9% from 29.1%.

• The decrease reflected lower marginal tax rates resulting from tax reform in December 2017.
• The year-earlier effective tax rate benefited from significantly more tax savings related to investments in tax credit partnerships and stock-based compensation deductions.

Second Quarter 2018 Compared with First Quarter 2018

Total assets increased $38 million or 1%.

• This primarily reflected ongoing growth in the Company's loan portfolio, which rose $65.6 million or 3%.

Total deposits decreased $33 million.

• This reflected a seasonal decline in most deposit categories other than time deposits and non-interest-bearing demand deposits.

Asset quality remained at historically strong levels on a sequential-quarter basis.

• Reflecting the successful resolution of several non-accrual loans, NPLs declined to $7.4 million or 0.29% of total loans outstanding versus $12.3 million or 0.49% of total loans outstanding.
• NPAs were $7.7 million or 0.23% of total assets versus $12.6 million or 0.38% of total assets.
• Net charge-offs declined.
• The loan loss provision increased $500 thousand to $1.2 million for reasons mentioned earlier.
• The allowance for loan losses relative to total loans was unchanged at 0.96%.

Net interest income increased approximately $1.4 million or 5%.

• Interest income rose $2.3 million or 8%, reflecting both volume and rate.
• Interest expense rose 37% as the Company boosted deposit rates in early May and late June.
• Net interest margin increased nine basis points to 3.88%.

Non-interest income increased $526 thousand or 5%.

• This primarily reflected higher other non-interest income, fee income from debit and credit cards and mortgage banking, which were more than offset by a slight decline in revenue from wealth management and trust services following a better-than-expected performance in the first quarter.

Non-interest expense increased $1.1 million or 5%.

• This increase primarily reflected higher compensation expense, marketing and business development, and other non-interest expense. These increases were partially offset by a reduction in employee benefits.

The Company's effective tax rate increased to 18.9% from 18.5%.

About the Company

Louisville, Kentucky-based Stock Yards Bancorp, Inc., with $3.3 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 following table provides a reconciliation of total stockholders' equity, in accordance with US GAAP, to tangible common equity, which is a non-GAAP financial measure. The Company provides the tangible common equity ratio, in addition to those defined by banking regulators, because of its widespread use by investors to evaluate capital adequacy.

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. See Risk Factors outlined in the Company's Form 10-K for the year ended December 31, 2017.

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Stock Yards Bancorp, Inc.
Nancy B. Davis, 502-625-9176
Executive Vice President and Chief Financial Officer

Source: Stock Yards Bancorp, Inc.