News Details

Net Income for 2018 Increases 46% to a Record $55.5 Million or $2.42 Per Diluted Share

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 fourth quarter and year ended December 31, 2018. Total revenue, comprising net interest income and non-interest income, increased to $41.5 million for the fourth quarter of 2018 from $38.4 million for the fourth quarter of 2017. Net income for the fourth quarter of 2018 rose to $14.7 million or $0.64 per diluted share from $4.9 million or $0.22 per diluted share for the fourth quarter of 2017.

Key factors affecting the Company's performance for the fourth quarter of 2018 included:

• The loan portfolio increased 6% year-over-year, helping drive interest income 20% higher on a comparable quarter basis, while total deposits increased 8% in support of this growth;
• Net interest margin rose 19 basis points compared with the same quarter of 2017, reflecting loan growth over the past year, higher yields on loans and an increase in non-interest bearing deposits;
• Credit quality metrics, which have remained at historically solid levels, improved further in the fourth quarter;
• The Wealth Management and Trust Group continued to grow, although that growth moderated somewhat in the fourth quarter due to the stock market decline; and
• The effective tax rate declined consistent with federal income tax reform legislation enacted on December 22, 2017; net income for the fourth quarter of 2017 also reflected a non-cash charge of $5.9 million or $0.25 per diluted share to revalue the Company's net deferred tax asset.

"We are pleased to report another quarter and year of record earnings," said James A. (Ja) Hillebrand, Chief Executive Officer. "Beyond lower tax rates in 2018, our results underscore solid operational performance in many aspects of our business platform, including lending, credit quality, deposit growth, wealth management, and margins. These factors combined to produce a strong increase in pre-tax income for the fourth quarter. This momentum continues to validate our confidence in the Company's long-term strategies – to diversify our revenue sources across three attractive markets – and helps strengthen our foundation for future growth. Additionally, these strong fundamentals position us to pursue new expansion opportunities, like our pending acquisition of King Bancorp, which, when completed, will expand our footprint and grow our customer base in the greater Louisville area."

In December 2018, the Company announced its planned acquisition of King Bancorp, the holding company for King Southern Bank, which operates five offices – three in the greater Louisville area and two in Nelson County, approximately 60 miles southeast of Louisville. As of September 30, 2018, King Bancorp had approximately $195 million in assets, $168 million in loans, $126 million in deposits and $16 million in tangible common equity. The all-cash transaction, which is valued at $28 million and expected to close in the second quarter of 2019, enables the Company to leverage capital effectively, and management estimates it will contribute mid-single digit earnings per share accretion on a fully phased-in basis. The transaction remains subject to customary regulatory approval and completion of closing conditions. Deal costs for the Company are expected to be approximately $1.9 million, including $312 thousand recorded in the fourth quarter of 2018.

"We are pleased with the growth of our loan portfolio during 2018 across all three of our markets, especially in core categories such as commercial and industrial, as well as real estate mortgage-owner occupied commercial," Hillebrand continued. "Loan production reached a record in 2018 as we finished the year on a strong pace. However, as has been the case over the past few years, loan pay-offs masked this growth and moderated the net increase in our portfolio. While the competitive landscape remains intense, most loan pay-offs reflect opportunities our customers have for collateral sales and have not disturbed longstanding lending or business relationships. Although we cannot control the timing of loan pay-offs, we do have influence over production and our team continues to perform at high levels. Because our pipeline over the near term is encouraging and customer sentiment is favorable, we remain optimistic on loan growth in the coming year."

Hillebrand added that, as the loan portfolio continues to grow, the Company remains diligent in its conservative credit culture, as indicated by continued improvement in credit quality in the fourth quarter of 2018. Because of the strength of the Company's credit metrics and a significant recovery of a previously charged-off loan, no provision for loan losses was recorded in the fourth quarter.

"We also are pleased to note the ongoing contribution of our wealth management and trust services, which accounts for 47% of our annual non-interest income, provides a high level of diversity to our total revenue, and differentiates Stock Yards Bank & Trust from most community banks," Hillebrand continued. "With $2.8 billion of assets under management, it continues to benefit from the addition of new customer relationships. Revenue from other fee-based areas, such as debit and credit cards, along with treasury management, has helped offset an industry-wide slowdown in mortgage banking caused by rising rates and a tight housing market."

In closing, Hillebrand said, "Our record-breaking results for 2018 reflect both the Company's sound strategies and solid execution of those strategies by our team. My compliments go out to all who helped make this year great. The Company's fundamentals – lending and loan growth, margins, credit quality, sources of fee-based revenue, and cost structure – are encouraging. In addition to organic growth opportunities in the year ahead, we look forward to closing our acquisition of King Bancorp and forging new relationships with its customers. Together, these strengths position us for another solid performance in 2019, as we continue to differentiate Stock Yards from peer community banks."

Fourth Quarter 2018 Compared with Fourth Quarter 2017

Total assets increased $63.3 million or 2% to $3.3 billion.

• The increase primarily reflected ongoing growth in the Company's loan portfolio, which rose $138.6 million or 6%.

Total deposits increased $216.1 million or 8% to $2.8 billion.

• This reflected an increase in all deposit categories, especially time deposits and demand deposits.
• Core deposits, which exclude brokered deposits and time deposits greater than $250,000, represented 97% of total deposits.

Asset quality, which has remained exceptional and has trended within a narrow range over the past several years, strengthened further in the fourth quarter of 2018. While the Company is pleased with this performance, management recognizes the cyclical nature of banking and believes asset quality metrics will normalize over the long term, which will eventually result in higher provisioning for loan and lease losses.

• Non-performing loans (NPLs) were $3.4 million or 0.13% of total loans outstanding versus $7.4 million or 0.31% of total loans outstanding.
• Non-performing assets (NPAs), which include NPLs along with other real estate owned and repossessed assets, were $4.4 million or 0.13% of total assets versus $10.0 million or 0.31% of total assets.
• A net loan loss recovery of $312 thousand versus a net charge-off of $963 thousand, combined with other considerations, enabled the Company to forego a provision for loan and lease losses in the fourth quarter of 2018.
• The allowance for loan and lease losses relative to total end-of-period loans declined three basis points to 1.00% from 1.03%.

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

• Total equity to assets was 11.10% and tangible common equity ratio was 11.05% (tangible common equity is a non-GAAP financial measure (2)).
• Even with its strong capital position, the Company continues to consistently achieve industry-leading returns on equity due to its superior earnings' performance.
• Stock Yards Bancorp continues to pursue and consider strategies to enhance stockholder value, including a substantial and sustained dividend payout ratio. In November 2018, the Company's Board of Directors continued the higher rate of $0.25 per common share set in August 2018. With the August increase, Stock Yards Bancorp has raised its quarterly dividend rate a total of 11 times since 2013, including two increases during 2018 and each of the previous four years.
• The Company also opportunistically pursues strategic fill-in or adjacent-market acquisitions from time to time to augment organic growth and its capital allocation strategies. In December 2018, the Company announced its planned acquisition of King Bancorp, the holding company for King Southern Bank.

Net interest income – the Company's largest source of revenue – increased approximately $2.9 million or 11% to $29.9 million.

• Interest income rose $5.9 million or 20%. This increase was driven by both higher market interest rates and loan volumes.
• As anticipated, interest expense increased during the fourth quarter due to growth of deposits – primarily time deposits – resulting from a recent deposit-gathering campaign, along with higher costs on those deposits. This campaign, which began in the second quarter to help fund loan growth, together with ongoing competition for deposits, could cause funding costs to increase further.
• Net interest margin increased 19 basis points to 3.84%. This primarily reflected the positive impact of recent increases in the prime rate, which was 100 basis points higher at the end of 2018 versus the end of 2017, higher loan prepayment penalties and an increased level of non-interest bearing deposits.
• Approximately 40% of the Company's current loan portfolio is priced at variable rates, so any future rate increases will benefit this part of the portfolio. The remainder of the portfolio is priced at fixed rates. As these loans renew and new fixed-rate loans originate, pricing could be higher, but pricing will be subject to competitive conditions, prevailing interest rates and a flattening or possibly inverted yield curve.

Non-interest income increased $169 thousand or 1% to $11.6 million.

• Wealth Management and Trust remained the largest single source of non-interest income for the Company, although growth in the fourth quarter of 2018 was dampened by the recent stock market downturn and a resulting decline in the amount of assets under management.
• Higher bank owned life insurance income, reflecting receipt of life insurance proceeds, and fees from debit and credit cards were offset by lower mortgage banking income and a decline in other non-interest income due primarily to lower interest rate swap fees.

Non-interest expenses decreased $2.5 million or 9% to $24.6 million.

• The decrease primarily reflected a reduction in amortization/impairment of investments in tax credit partnerships related to the irregular timing of such opportunities, which causes corresponding expenses and tax benefits to vary widely.
• Higher compensation expense resulted from an increase in employee head count, as the Company has expanded its lending, sales and support staff, along with increased incentive compensation related to loan production and overall company performance.
• Legal and professional expense also increased due to costs associated with the Company's pending acquisition.

The Company's effective tax rate for 2018 primarily reflected lower marginal tax rates while the effective tax rate for 2017 was higher due to a charge for the remeasurement of deferred tax assets following tax reform in December 2017 that was partially offset by an increased level tax savings related to investments in tax credit partnerships.

Fourth Quarter 2018 Compared with Third Quarter 2018

Total deposits increased $196 million or 8%.

• This reflected seasonal increases in interest bearing demand deposits and money market deposits.

Asset quality remained at historically strong levels.

• NPLs declined to $3.4 million or 0.13% of total loans outstanding versus $5.0 million or 0.20% of total loans outstanding.
• NPAs were $4.4 million or 0.13% of total assets versus $6.6 million or 0.20% of total assets.
• Net loan loss recoveries were $312 thousand versus $386 thousand in charge-offs.
• Largely because of the net loan loss recovery in the fourth quarter and based on other quantitative and qualitative credit quality considerations, the Company did not provide a loan and lease loss provision; in the third quarter, the Company provided $735 thousand.
• The allowance for loan and lease losses relative to total end-of-period loans was 1.00%, unchanged from the third quarter of 2018.

Net interest income increased 5%.

• Interest income rose $2.0 million or 6%.
• Interest expense rose $592 thousand or 13%, primarily due to higher funding costs.
• Net interest margin increased five basis points to 3.84%.

Non-interest income increased 1%.

• An increase in bank owned life insurance income, reflecting life insurance proceeds, was offset by lower mortgage banking and other non-interest income.

Non-interest expenses increased 13%.

• This increase reflected primarily an increase in amortization/impairment of investments in tax credit partnerships caused by the irregular timing of such opportunities, which causes corresponding expenses and tax benefits to vary widely.
• The increase also included legal and professional expense related to the Company's pending acquisition.

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.

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. Additionally, these forward-looking statements include, but are not limited to, statements relating to the expected timing and benefits of the proposed acquisition of King Bancorp, Inc., including future financial and operating results, cost savings, enhanced revenues, and accretion/dilution to reported earnings that may be realized from the acquisition, as well as other statements of expectations regarding the acquisition and other statements of goals, intentions and expectations; statements regarding its business plan and growth strategies; statements regarding the asset quality of King Bancorp's loan and investment portfolios; and estimates of King Bancorp's risks and future costs and benefits, whether with respect to the acquisition or otherwise.

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Nancy B. Davis
Executive Vice President and
Chief Financial Officer
(502) 625-9176

Source: Stock Yards Bancorp, Inc.