Stock Yards Bancorp Reports Third Quarter Earnings of $28.5 Million or $0.97 per Diluted Share

LOUISVILLE, Ky., Oct. 26, 2022 (GLOBE NEWSWIRE) -- Stock Yards Bancorp, Inc. (NASDAQ: SYBT), parent company of Stock Yards Bank & Trust Company, with offices in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets, today reported earnings for the third quarter ended September 30, 2022, of $28.5 million, or $0.97 per diluted share. This compares to net income of $23.2 million, or $0.87 per diluted share, for the third quarter of 2021. Organic loan growth across all markets and expanded net interest margin (NIM) contributed to strong third quarter 2022 operating results.

“Stock Yards delivered the best third quarter in our history, highlighted by outstanding quarterly loan production and significant non-interest revenue generation,” said James A. (Ja) Hillebrand, Chairman and Chief Executive Officer. “Record linked third quarter net loan growth (excluding PPP loans) of $213 million was well diversified within all loan categories and across all of our markets. On the linked quarter, non-interest bearing deposit growth of $79 million was offset by seasonal declines in public funds, leading to an overall $48 million contraction in total deposits. While we chose to proactively raise stated deposit rates and time deposit offering rates in July, the decline in total deposits was tied to anticipated time deposit runoff and the previously mentioned decline in public funds. Additionally, our NIM benefitted from the interest rate increases enacted by the Federal Reserve Board (FRB) during the quarter, and we are well-positioned to benefit even further from anticipated future rate increases in the months ahead.

“We continue to make progress with the integration of our merger with Commonwealth Bancshares (Commonwealth) that we closed in March of this year,” Hillebrand continued. “During the quarter, we executed several cost saving measures and disposed of certain overlapping properties, resulting in a non-recurring pre-tax gain of $3.1 million. Although additional work remains to complete the full integration of the two companies and realize all expected operating synergies, we are exceptionally pleased with the progress we have made through the dedicated efforts of our employees.”

At September 30, 2022, the Company had $7.55 billion in assets, $5.07 billion in loans and $6.50 billion in total deposits. The Company’s combined enterprise, which encompasses 73 branch offices across three contiguous states, will continue to benefit from a diversified geographic footprint and provide significant growth opportunities in both the banking and wealth management arenas.

Additional key factors contributing to the third quarter of 2022 results included:

• Total loans, excluding PPP loans, grew a record $213 million, or 4%, on a linked quarter basis. Excluding the first quarter acquisition, loans grew by $395 million, or 10%, during the first nine months of 2022. Total loan production remained strong for the third consecutive quarter.
• Deposit balances contracted $48 million, or 1%, on a linked quarter basis. When segmenting the fluctuation by deposit type, the largest declines were in interest bearing demand deposits which were largely influenced by seasonal declines in public funds and time deposits. These declines were offset by over $79 million in growth in non-interest bearings deposits during the quarter.
• The Company increased all stated interest bearing demand deposit and savings account rates along with time deposit offering rates during the third quarter.
• Net interest income increased $16.9 million, or 37%, for the third quarter of 2022 compared to the third quarter a year ago, consistent with the $1.42 billion, or 25%, increase in average earning assets and to a lesser extent, the FRB interest rate hikes.
• NIM improved for the third consecutive quarter, increasing 26 basis points on a linked quarter basis to 3.46%.
• Current credit quality remains quite solid, however consistent with very strong loan growth and to a lesser extent, the increase in the projected unemployment rate forecast used in modeling, $4.8 million of net credit loss expense⁽⁶⁾ was recorded for the third quarter of 2022.
• Non-interest income increased by $7.3 million, or 41%, over the third quarter of 2021, as customer expansion and recent acquisitions once again drove record quarterly credit card income and treasury management fees. Also, as previously mentioned, the Company disposed of certain overlapping acquired properties, resulting in a non-recurring pre-tax gain of $3.1 million.
• Despite strong net new business growth, significant declines in both fixed income and equity markets drove linked quarter contraction in wealth management assets under management and asset-based fees, leading to the first quarterly revenue decline in seven consecutive quarters. Additionally, a significant spike in long-term mortgage rates stunted mortgage banking origination volume during the quarter.
• Total non-interest expenses remained controlled and consistent with management expectations.
• Tangible book value per share was $16.98⁽¹⁾ at September 30, 2022, compared to $17.59⁽¹⁾ at June 30, 2022, and $19.63⁽¹⁾ at September 30, 2021. During 2022, tangible common equity and tangible book value have been impacted by the marked increase in interest rates and the related negative impact on accumulated other comprehensive income (AOCI). During the first nine months of 2022, equity was reduced by $120 million as a result of unrealized losses in the available for sale debt securities portfolio. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses.

Hillebrand concluded, “The strong results for the third quarter reflect the solid execution of our strategic plan by our dedicated team. I am also pleased to note that during the quarter we were one of only 35 banks in the U.S. to be named a “Sm-All Star” in Piper Sandler’s annual list of top-performing small-cap banks. This elite annual list reflects the top 10% of the industry across a number of metrics including growth, profitability, credit quality and capital strength. We have now been named a Sm-All Star five times - 2008, 2011, 2019, 2020 and now 2022. We are honored to be recognized and are confident in our ability to continue to deliver value to our shareholders.”

Results of Operations – Third Quarter 2022 Compared with Third Quarter 2021

Net interest income, the Company’s largest source of revenue, increased 37%, or $16.9 million, to $62.4 million, primarily due to higher interest income on non-PPP loans. Organic growth, and to a greater extent the recent acquisitions, have boosted net interest income over the past 12 months.

• Total interest income increased by $20.5 million, or 44%, to $67.4 million.
  • Interest income on loans increased $13.4 million, or 31%, over the prior year quarter. Consistent with the $1.03 billion increase in average non-PPP loans, and to a lesser extent recent interest rate increases, the average quarterly yield earned on non-PPP loans increased 54 basis points over the past 12 months to 4.52%. PPP interest and fee income totaled $703,000 and $4.4 million for the third quarters of 2022 and 2021, respectively.
  • Interest income on debt securities increased $4.7 million compared to the third quarter of 2021, driven by average balance growth of $735 million and significantly improved yields on recent purchases stemming from rising rates.
  • Interest income on overnight funds increased $2.2 million over the prior year quarter. The FRB has increased the rate paid on reserve balances meaningfully during 2022, which has significantly benefitted interest income.
• Total interest expense increased $3.6 million to $5.0 million, as the cost of interest bearing liabilities increased 27 basis points to 0.43%.
• NIM increased 32 basis points to 3.46% for the third quarter of 2022, from 3.14% for the third quarter a year ago, primarily due to higher loan yields which more than offset lower fee income recognition from the slowdown of forgiveness within the PPP loan portfolio.

The Company recorded $4.8 million in provision for credit losses⁽⁶⁾ during the third quarter of 2022, which included a $4.1 million provision for credit losses on loans and $700,000 provision for credit loss expense for off-balance sheet exposures. Significant loan growth during the quarter and to a lesser extent, the increase in the unemployment projection, drove additional provision expense within the CECL allowance model. The increase in provision for credit loss expense for off-balance sheet exposures was attributed to both increased loan production and credit availability.

Non-interest income increased $7.3 million, or 41%, to $24.9 million, with the recent acquisitions contributing significantly to revenue growth.

• Wealth management and trust income ended the third quarter of 2022 at $9.2 million, increasing $2.0 million, or 28%, over the third quarter a year ago. Despite growth in net new business, significant declines in both fixed income and equity markets drove linked quarter compression in wealth management assets under management and asset-based fees.
• Card income increased $823,000, or 21%, over the third quarter of 2021, as card activity continues to benefit from generally strong spending trends and overall inflation in the marketplace.
• Treasury management fees increased $450,000, or 25%, driven by increased transaction volume, new product sales and both organic and acquisition-related customer base expansion. Continued calling efforts and the Company’s ability to generate new fee income has been the catalyst for this growth trend.
• Mortgage banking income, which primarily consists of gain on sale of loans, net servicing income and mortgage servicing rights amortization, totaled $703,000 for the third quarter of 2022, down $212,000, or 23%, compared to the third quarter a year ago. Overall volume in 2022 has cooled consistent with rising interest rates, while income levels have benefitted from better loan pricing and increased net servicing income related to the recently acquired loan servicing portfolio.
• The Company disposed of certain overlapping properties acquired from the March acquisition, resulting in a non-recurring pre-tax gain of $3.1 million during the third quarter of 2022.
  

Non-interest expenses increased $10.3 million compared to the third quarter of 2021, to $44.9 million.

• Compensation expense increased $5.7 million, or 33%, primarily due to the increase in full time equivalent employees associated with the recent acquisitions. Full time equivalent employees increased to 1,028 at September 30, 2022 from 793 at September 30, 2021.
• Employee benefits increased $517,000, or 14%, compared to the third quarter of 2021, mainly due to the elevated health insurance, 401(k) and payroll tax expenses associated with the above-mentioned increase in full time equivalent employees.
• Net occupancy and equipment expenses increased $1.0 million, or 38%, compared to the third quarter a year ago. In connection with the recent acquisition, a total of ten branches were added in addition to operational buildings.
• Technology and communication expenses, which includes computer software amortization, equipment depreciation and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security and internal resources, increased $574,000, or 18%, consistent with an increase in customer accounts and core system upgrades.
• Marketing and business development expense increased $233,000, or 23%, primarily due to increased travel, customer entertainment, community support and advertising expenses associated primarily with sales force expansion.
• Intangible amortization expense increased $1.3 million consistent with the increase in customer intangible assets related to the first quarter acquisition.
• Other non-interest expenses increased $507,000, or 26%, primarily due to increased card rewards expense, fraud losses and insurance captive expense.
  

Financial Condition – September 30, 2022 Compared with September 30, 2021

Total assets increased $1.37 billion, or 22%, year over year to $7.55 billion, boosted by the recent acquisition and strong organic growth.

Total loans increased $884 million year over year, or 21%, to $5.07 billion. Excluding the PPP loan portfolio, total loans increased $1.10 billion, or 28%, over the past 12 months, with approximately $630 million of the growth attributable to the first quarter acquisition. Further, loan pipelines, while not quite at recent levels, remain on target with our projections set for 2022.

Total investment securities have increased $557 million, or 52%, year over prior year, as the Company added $247 million in securities in the first quarter Commonwealth acquisition and deployed a significant amount of excess cash into securities.

Total deposits increased $1.16 billion, or 22%, over the past 12 months, with approximately $1.12 billion of the growth assumed in the recent acquisition.

Asset quality, which has trended within a narrow range over the past several years, has remained solid. During the third quarter of 2022, the Company recorded net loan charge-offs of $382,000, compared to net loan charge-offs of $1.9 million in the third quarter of 2021. Non-performing loans were $10.6 million, or 0.21%⁽²⁾ of total loans outstanding (excluding PPP) compared to $5.0 million, or 0.13%⁽²⁾ of total loans (excluding PPP) outstanding at September 30, 2021. The ratio of allowance for credit losses to loans (excluding PPP) ended at 1.39%⁽²⁾ at September 30, 2022 compared to 1.43%⁽²⁾ at September 30, 2021.

At September 30, 2022, the Company continued to be “well-capitalized,” the highest regulatory capital rating for financial institutions, with all capital ratios remaining strong. Total equity to assets was 9.63%⁽¹⁾ and the tangible common equity ratio was 6.78%⁽¹⁾ at September 30, 2022, compared to 10.73%⁽¹⁾ and 8.64%⁽¹⁾ at September 30, 2021, respectively. The increase in interest rates during 2022 have led to outsized unrealized losses within the available for sale debt securities portfolio, with the decline in AOCI driving down the tangible common equity ratio.

In August 2022, the board of directors increased the quarterly cash dividend to $0.29 per common share. The dividend was paid October 3, 2022, to shareholders of record as of September 19, 2022.

No shares were repurchased in 2022 or 2021 and approximately 741,000 shares remain eligible for repurchase under the current buy-back plan, which expires in May 2023.

Results of Operations – Third Quarter 2022 Compared with Second Quarter 2022

Net interest income increased $5.4 million, or 9%, over the prior quarter to $62.4 million, led by the increase in earning assets and to a lesser extent rising rates. NIM improved for the second consecutive quarter, increasing 26 basis points on a linked quarter basis to 3.46%.

Despite solid ongoing credit quality statistics, the Company recorded credit loss expense during the third quarter consistent with strong loan growth and to a lesser extent, an increase in the projected unemployment rate forecast used in modeling. During the third quarter, the Company recorded $4.8 million in provision for credit loss expense, which included a $4.1 million provision for credit losses on loans and a $700,000 provision for credit losses expense for off-balance sheet exposures. During the second quarter of 2022, the Company recorded a net benefit of $200,000 for credit losses, which included a $700,000 benefit to provision for credit losses on loans associated with release of specific reserves related to several recently acquired loans and a $500,000 provision for credit losses on off-balance sheet exposures.

Non-interest income increased $2.9 million, or 13%, to $24.9 million. As previously mentioned, the Company disposed of certain overlapping acquired properties, resulting in a non-recurring pre-tax gain of $3.1 million during the third quarter of 2022.

Non-interest expenses increased $198,000 to $44.9 million.

Financial Condition – September 30, 2022, Compared with June 30, 2022

Total assets decreased $29 million on a linked quarter basis to $7.55 billion.

Total loans (excluding PPP) increased a record $213 million, or 4%, on a linked quarter basis, with meaningful increases across all major loan categories. Total line of credit usage declined to 40% as of September 30, 2022, compared to 41% as of June 30, 2022. Commercial and industrial line usage declined to 30% as of September 30, 2022, compared to 31% as of June 30, 2022.

Total deposits decreased $48 million, or 1%, on a linked quarter basis attributable to seasonal reductions in public funds, time deposit maturities and other fluctuations.

About the Company

Louisville, Kentucky-based Stock Yards Bancorp, Inc., with $7.55 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 Stock 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 banking subsidiary operates; competition for the Company’s customers from other providers of financial services; changes in, or forecasts of, future political and economic conditions, inflation and efforts to control it; government legislation and regulation, which change 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. Refer to Stock Yards’ Annual Report on Form 10-K for the year ended December 31, 2021, as well as its other filings with the SEC for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.