Stock Yards Bancorp Reports Solid Third Quarter Earnings of $14.5 Million or $0.64 Per Diluted Share

SYBT Results Reflect Positive Trend in Loan Deferrals

LOUISVILLE, Ky., Oct. 28, 2020 (GLOBE NEWSWIRE) -- 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 stable results for the third quarter ended September 30, 2020. Net income for the third quarter was $14.5 million, or $0.64 per diluted share, compared with net income of $17.2 million, or $0.76 per diluted share for the third quarter of 2019. Operating results were lower compared to the record results posted in the third quarter of 2019, primarily due to increased loan loss provisioning and reserves for off-balance sheet credit exposures.

“Given the ongoing impacts of a global pandemic, we remain focused on supporting our customers, communities and employees while prudently managing risk. We delivered solid earnings in the third quarter, led by improved net interest income, record mortgage banking income and controlled non-interest expenses,” said James A. (Ja) Hillebrand, Chief Executive Officer. “Additionally, credit quality metrics remain stable, and loan deferrals improved dramatically. ”

“Our active participation in the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) has helped service the needs of our customers and our local communities. As a community bank, our expertise, agility and ultimate success in executing this relief effort allowed us to assist over 3,300 customers and originate $657 million in loans while adding new relationships with strong future growth opportunities. We have started processing applications for PPP loan forgiveness for customers. The Bank has nearly $15 million in net unrecognized fees related to the PPP that would be recognized in income immediately once the loan is paid off or forgiven by the SBA. We expect the timing of such forgiveness will add volatility to fourth quarter 2020 and early 2021 operating results for us and all participating financial institutions.

“Uncertainty and volatility have been the common themes so far for 2020, as the magnitude of the economic ramifications of the COVID-19 pandemic are still largely unknown. Despite sound traditional credit metrics, under the CECL methodology, we recorded a significant provision for credit losses during the third quarter based on the predicted impact of the pandemic upon current unemployment forecasts and changing macro-economic conditions, as well as qualitative factor adjustments. We feel that we are well positioned as we navigate through the pandemic, having built up significant loan loss reserves, excluding PPP loans, of 1.78%(2) at September 30, 2020.”

Additional key factors impacting the third quarter of 2020 results included:

• Deposit balances remained at record levels, as consumers/businesses continued to build cash reserves.
• Net interest margin (NIM) compressed 61 basis points to 3.26% compared to the third quarter a year ago. NIM was significantly impacted by loan yield contraction driven by the PPP, the 225-basis point drop in the Federal Funds Target Rate from September 30, 2019 to September 30, 2020 and excess balance sheet liquidity. However, NIM remained consistent on a linked quarter basis.
• The commercial and industrial (C&I) portfolio continued to contract during the third quarter of 2020; however, the pace slowed significantly compared to the second quarter, as borrowers paid down their operating lines of credit. The overall decline in line utilization led to the recording of $550,000 in additional non-interest expense related to credit exposures for unfunded off-balance sheet commitments. The Bank had a total liability of $6 million accrued at September 30, 2020 related to such exposures.
• COVID-19 related loan deferrals declined significantly to 4% of total loans at the end of the third quarter of 2020 from 18% of total loans three months earlier. As of October 27th, loan deferrals represented 3% of total loans.
• Net interest income increased $1.6 million, or 5%, over the third quarter of 2019, driven by PPP loans and related fees and a significant decline in cost of funds.
• Non-interest income decreased $166,000 over the third quarter of 2019. Record mortgage banking results, higher debit/credit card income and treasury management fees were offset by lower deposit service charges, which were significantly impacted by the pandemic and changes in customer behavior.
• Non-interest expenses reflected moderate increases in compensation, technology and communication, FDIC insurance and credit loss expense for off-balance sheet exposures.

Hillebrand added, “We continue to execute our growth trajectory through our expanded branch network. In July we opened our Evendale branch, bringing our total Cincinnati MSA branches to six, and earlier this month we opened our Valley Station branch, bringing total Louisville MSA branches to 33. These two distinct areas and expansion within our existing MSAs provide us great market potential for expanding our deposit base and increasing top line revenue growth.

“During the quarter we were recognized nationally for our customer service and for our performance metrics. We were named to Newsweek’s America’s Best Banks 2021 list as the best small bank in Kentucky. In choosing the best small bank state winners, 55 separate factors were assessed, covering a wide variety of fees, current and historical interest rates, account terms, consumer service features, mobile app satisfaction and bank profile. Additionally, in September we were named once again to the prestigious Piper Sandler Bank and Thrift Sm-All Stars: Class of 2020 list, being one of only 35 institutions to receive this honor. In making their selections, Piper Sandler focused on growth, profitability, credit quality and capital strength. The receipt of these two awards is an honor and a testament to the dedication and commitment of our employees who continue to work diligently to support those in the communities we serve.

“Against the backdrop of the pandemic and disruptions in our geographic locations, we are working to enact and strengthen programs and policies to prepare for whatever the future may bring. We have also continued our conservative stance towards credit, preparing our balance sheet for the potential impacts of the pandemic while mitigating risk. With solid asset quality backed by strong reserves, robust technologies, resourceful employees, loyal customers and strong community partners, we are well-positioned to meet the challenges ahead.”

Results of Operations – Third Quarter 2020 Compared with Third Quarter 2019

Net interest income – the Company’s largest source of revenue – increased $1.6 million, or 5%, to $33.7 million driven primarily by PPP loans and related fees and a significant decline in cost of funds.

• Total interest income declined $1.9 million, or 5%, to $36.1 million, as an increase in average earning assets was more than offset by interest rate contraction.
• Interest expense decreased $3.5 million, or 59%, to $2.4 million. Interest expense on deposits decreased $3.2 million, or 60%, as the interest bearing cost of deposits declined to 0.33% in the third quarter of 2020 from 0.99% in the third quarter a year ago. The decline in interest bearing deposit costs more than offset the significant increase in average balances, as the Bank has benefited from the strategic lowering of stated deposit rates.
• NIM decreased 61 basis points to 3.26% from 3.87% in the third quarter of 2019. The NIM contraction was primarily driven by lower interest rates, as the Federal Reserve dropped short-term rates 225 basis points from September 30, 2019 to September 30, 2020, coupled with higher levels of excess balance sheet liquidity. The Company has maintained significantly higher levels of balance sheet liquidity driven in part by the funding of PPP loans which were funded from deposit growth. The PPP loans had a 12-basis point negative impact to NIM, while excess liquidity had a similar impact.

Loan loss provisioning for the third quarter of 2020 was positively impacted by the downward adjustment of the future unemployment forecast offset by qualitative factors in the allowance for credit loss model based on the current economic conditions related to the pandemic.

Non-interest income decreased $166,000, or 1%, to $13.0 million.

• Deposit service charges decreased $358,000, or 26%, primarily related to the decline in non-sufficient funds fees collected and an overall shift in pandemic related customer behavior.
• Debit/credit card income increased $116,000, or 6%, as interchange income, which lagged in April due to the pandemic and rebounded significantly and continued to increase through the end of the third quarter.
• Treasury management fees increased by $104,000, or 8%, bolstered by record treasury management product sales partially offset by lower transaction volume resulting from the pandemic.
• Mortgage banking revenue increased $1.2 million, or 149%, to a record level of $2.0 million at the end of the third quarter of 2020. Sustained low mortgage rates continued to entice mortgage refinancing, resulting in a record number of loans closed and sold during the quarter.

Non-interest expenses increased $2.3 million, or 10%, to $26.2 million.

• Compensation expense for the third quarter of 2020 increased $970,000, or 8%, primarily due to annual merit increases, increased incentive compensation and a slight increase in full time equivalent employees.
• Technology and communication expense for the third quarter of 2020 increased $424,000, or 23%, compared with the prior year quarter, consistent with expanding customer facing software/system functionality and the migration to a hosted core environment. Also, treasury management customer expansion has led to elevated hardware related expense.
• Marketing and business development expense, which includes all costs associated with promoting the Bank, community investment, retaining customers and acquiring new business, decreased $209,000 in the third quarter of 2020, mainly due to less travel and active prospective customer entertainment due to the pandemic.

Financial Condition – September 30, 2020 Compared with December 31, 2019

Total loans increased $627 million, or 22%, to $3.5 billion. Excluding the PPP loan portfolio, total loans contracted $15 million, with $101 million of growth in the commercial real estate portfolio completely offset by a $107 million decline in the C&I portfolio – primarily operating lines of credit.

The Company has made short-term loan modifications involving primarily full-payment deferrals in response to requests from borrowers who experienced business or personal cash flow interruptions related to the pandemic. Through the close of the third quarter, there were approximately $120 million in full payment deferral balances, with the largest concentration in the commercial real estate segment. Pursuant to the CARES Act, these loan deferrals are not included in non-performing loan statistics.

Full payment loan deferral balances have fluctuated as follows:

The Company’s management team continues to analyze the evolving economic conditions in its markets while closely monitoring credit metrics, particularly related to the following segments comprising deferrals in the Bank’s portfolio:

Asset quality, which has trended within a narrow range over the past several years, remained sound. Non-performing loans (NPLs) were $13.5 million, or 0.39% of total loans outstanding versus $12.1 million, or 0.42% of total loans outstanding at December 31, 2019.

During the third quarter of 2020, the Company recorded charge-offs totaling $1.6 million related to loans that were acquired in the prior year acquisition and fully allocated for through purchase accounting adjustments at the time of acquisition. While these are reflected as charge-offs, there was no impact to the provision for credit losses nor to the income statement for the third quarter of 2020.

Total deposits increased $621 million, or 20%, from December 31, 2019, to September 30, 2020, with non-interest bearing deposits representing $370 million of the increase. The mix of deposits has also improved with higher costing time deposits declining $35 million during 2020. Both period end and average deposit balances ended at record levels at September 30, 2020. Federal programs such as the PPP, stimulus checks and increased weekly unemployment benefits have boosted deposit balances.

At September 30, 2020, the Company remained “well capitalized” – the highest regulatory capital rating for financial institutions with increases in all capital ratios. Total equity to assets was 9.82% and the tangible common equity ratio was 9.52%(1) at September 30, 2020, compared to 10.91% and 10.55%(1), respectively, at December 31, 2019, with the decline attributable to the January 1, 2020 CECL adoption, the prior year acquisition and the impact of loan growth – especially PPP. The Company expects to continue to build capital levels given the current environment.

In September 2020, the Board of Directors continued the dividend rate of $0.27 per common share initially set in November 2019. Given the current economic uncertainty, the Company is committed to maintaining its current dividend level and will continue to evaluate the related impact on capital levels quarterly.

Based on recent economic developments and the increased importance of capital preservation, no shares were repurchased in 2020. Approximately 741,000 shares remain eligible for repurchase under the current buy-back plan.

Results of Operations – Third Quarter 2020 Compared with Second Quarter 2020

Net interest income increased $167,000 over the prior quarter to $33.7 million, led by the continued decline in cost of funds – primarily time deposits.

Loan provisioning in 2020 has been significantly impacted by the economic crisis and its impact upon the national unemployment forecast within the CECL model and changes in loan mix.

Non-interest income increased $421,000 to $13.0 million.

• A significant increase in mortgage banking income, debit/credit card income and higher treasury management fees more than offset a modest reduction in Wealth Management and Trust service fees.

Non-interest expenses increased $1.3 million, or 5%, to $26.2 million.

• Compensation expense increased $1.5 million to $13.3 million compared with the second quarter of 2020, due to increased incentive compensation and the deferred salary costs associated with the volume of PPP loan originations in the second quarter.
• Technology and communication expense increased $318,000 due to the third quarter migration to a hosted core environment and elevated treasury management expenses.
• Credit loss expense of $550,000 for off-balance sheet credit exposures was recorded during the third quarter of 2020 due to qualitative loss factor adjustments within the CECL model and a rise in unused commitments. On a linked quarter basis, this expense category improved by $925,000.

Financial Condition September 30, 2020, Compared with June 30, 2020

Total loans increased $8 million during the quarter to $3.5 billion at quarter end. Excluding the PPP portfolio, total loans contracted $4 million. The commercial real estate portfolio increased $33 million during the quarter, which was offset by contraction in the C&I category. Total line of credit usage declined to 37% as of September 30, 2020, from 39% at June 30, 2020. C&I line usage declined to 26% as of September 30, 2020, compared to 29% at June 30, 2020.

Total deposits increased $27 million on a linked quarter basis. The economic slow-down and uncertainty surrounding the pandemic has resulted in the customer base maintaining generally higher deposit balances.

Stockholders’ equity increased $8 million in the third quarter of 2020 compared with the prior quarter, with net income of $14.5 million and the positive change in equity related to the Bank’s investment portfolio offset by dividends declared.

Asset quality remained at strong levels. The allowance for credit losses was 1.45% of total loans, and the allowance for credit losses, excluding PPP loans, was 1.78%(2) of total loans, at September 30, 2020.

Recent Events

On October 21, 2020, the Company announced the election of James A. (Ja) Hillebrand as Chairman of the Board for Stock Yards Bancorp, effective January 1, 2021. Hillebrand will succeed David P. Heintzman, who was named Non-Executive Chairman on October 1, 2018. These changes complete the succession plan for Heintzman, who had been the Chairman and CEO of Stock Yards through October 1, 2018 and became the Non-Executive Chairman of the board when Hillebrand was promoted from President to CEO. Hillebrand will now serve as Chairman and CEO of the company and Heintzman will continue to serve on the board of the Company.

About the Company

Louisville, Kentucky-based Stock Yards Bancorp, Inc., with $4.4 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 subsidiary operates; competition for the Company’s customers from other providers of financial services; 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; the effects of the FRB’s benchmark interest rate cuts on liquidity and margins; the potential adverse effects of the coronavirus or any other pandemic on the ability of borrowers to satisfy their obligations to the Company, the level of the Company’s non-performing assets, the demand for the Company’s loans or its other products and services, other aspects of the Company’s business and operations, and financial markets and economic growth, 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-Q for the three and six months ended June 30, 2020 and Form 10-K for the year ended December 31, 2019.