Business Overview and History

Stock Yards Bancorp, Inc. (SYBT) is a diversified community bank with a strong presence in the Louisville, Kentucky metropolitan area, as well as in central, eastern, and northern Kentucky, and the Indianapolis, Indiana and Cincinnati, Ohio markets. The company's subsidiary, Stock Yards Bank & Trust Company, has been serving the banking needs of its customers since 1904, establishing a legacy of financial stability and community engagement.

Stock Yards Bancorp was incorporated in Kentucky in 1988 and registered with the Board of Governors of the Federal Reserve System as a bank holding company. The company's primary subsidiary, Stock Yards Bank & Trust Company (SYB), was established in 1904 and has grown to become a prominent regional financial institution, currently operating 72 full-service banking center locations.

Throughout its nearly 120-year history, SYB has successfully navigated various economic cycles and challenges, including the Great Recession of 2008-2009. The Bank implemented prudent risk management practices that enabled it to maintain solid asset quality during this period. SYB also demonstrated resilience during the COVID-19 pandemic, continuing to provide uninterrupted service to its customers while supporting the communities it serves.

The company's history is marked by a series of strategic acquisitions that have expanded its geographic footprint and diversified its service offerings. In 2021, Stock Yards Bancorp acquired Kentucky Bancshares, Inc. (KB), which added $1.1 billion in assets and 19 banking centers to the company's operations. This transaction strengthened Stock Yards' presence in central and eastern Kentucky. The following year, in 2022, the company acquired Commonwealth Bancshares, Inc. (CB), a move that brought an additional $2.1 billion in assets and 21 banking centers, primarily in the Louisville metropolitan area and Cincinnati markets. This acquisition also expanded the company's wealth management capabilities.

These acquisitions have contributed to Stock Yards' steady growth, with total assets increasing from $4.6 billion as of December 31, 2020, to $8.2 billion as of December 31, 2023. The company's net income has also grown, from $58.9 million in 2020 to $107.8 million in 2023, representing a compound annual growth rate of 22.3%.

Financial Overview and Ratios

Stock Yards Bancorp's financial performance has been consistently strong, with a return on average assets (ROAA) of 1.46% and a return on average equity (ROAE) of 14.07% as of December 31, 2023. The company's efficiency ratio, a measure of operating efficiency, stood at 54.35% for the nine months ended September 30, 2024, indicating effective cost management.

The company's capital position is also robust, with a Common Equity Tier 1 (CET1) ratio of 11.07% and a Total Risk-Based Capital ratio of 12.56% as of December 31, 2023, well above the regulatory requirements for a "well-capitalized" institution. This strong capital base provides Stock Yards Bancorp with the flexibility to support its growth initiatives and weather potential economic headwinds.

For the most recent fiscal year (2023), Stock Yards Bancorp reported revenue of $333.10 million, net income of $107.75 million, operating cash flow of $106.70 million, and free cash flow of $98.97 million. In the most recent quarter (Q3 2024), the company achieved revenue of $89.86 million, net income of $29.36 million, operating cash flow of -$68.53 million, and free cash flow of $53.90 million. Compared to the prior year quarter, revenue increased 6.6% and net income increased 8.0%, driven by strong loan growth and net interest margin expansion. The decrease in operating cash flow was due to fluctuations in working capital, while the increase in free cash flow was attributable to the timing of capital expenditures.

Diversified Revenue Streams and Business Lines

Stock Yards Bancorp's revenue is derived from a diversified mix of business lines, including commercial banking, wealth management and trust services, mortgage banking, and investment product sales. This diversification helps to mitigate the company's exposure to any single market or revenue source.

The commercial banking segment, which accounts for the majority of the company's revenue, has experienced steady growth, with total loans increasing by 12.0% from September 30, 2023, to September 30, 2024. This growth has been driven by strong demand across various loan categories, including commercial real estate, commercial and industrial, and residential real estate.

The wealth management and trust services (WMT) segment is a key differentiator for Stock Yards Bancorp, contributing 45.3% of the company's total non-interest income for the nine months ended September 30, 2024. The WMT division provides investment management, financial planning, and trust services to a diverse client base, leveraging the company's expertise and long-standing relationships in its core markets. The magnitude of WMT revenue has long distinguished Stock Yards Bancorp from other community banks of similar asset size.

Mortgage banking and investment product sales have also contributed to Stock Yards Bancorp's revenue diversification, with these business lines accounting for 4.3% and 3.6% of the company's total non-interest income, respectively, for the nine months ended September 30, 2024.

Interest Rate Environment and Margin Management

The company has navigated the evolving interest rate environment effectively, with its net interest margin (NIM) declining by only 18 basis points to 3.26% for the nine months ended September 30, 2024, compared to the same period in 2023. This relatively modest NIM compression can be attributed to Stock Yards Bancorp's proactive management of its funding costs and balance sheet composition.

To mitigate the impact of rising interest rates, the company has strategically utilized interest rate swaps, which have helped to stabilize its net interest income. Additionally, the company's loan portfolio, with approximately 69% fixed-rate loans, has provided a degree of protection against rising rates.

Liquidity

Stock Yards Bancorp maintains a strong liquidity position to support its operations and meet regulatory requirements. The company's liquidity management strategy includes maintaining a diverse funding base, access to various liquidity sources, and a portfolio of high-quality liquid assets. This approach ensures that the bank can meet its financial obligations and customer needs even during periods of market stress or economic uncertainty.

As of September 30, 2024, Stock Yards Bancorp had a debt-to-equity ratio of 0.26. The company held $265.96 million in cash and cash equivalents and had access to $1.33 billion in available credit from the FHLB of Cincinnati and unsecured lines with correspondent banks. The company's current ratio and quick ratio both stood at 1.15 as of the same date, indicating a solid short-term liquidity position.

Risks and Challenges

While Stock Yards Bancorp has demonstrated resilience, the company faces several risks and challenges common to the banking industry. These include credit risk, interest rate risk, and competition from larger regional and national banks.

The company's credit risk is managed through a diversified loan portfolio and rigorous underwriting standards. As of September 30, 2024, the company's non-performing loans to total loans ratio stood at 0.27%, indicating a relatively low level of problem assets.

Interest rate risk is another key concern, as the company's earnings and capital are susceptible to fluctuations in market interest rates. Stock Yards Bancorp's proactive hedging strategies and balance sheet management have helped to mitigate this risk, but the company remains vigilant in monitoring and adapting to changes in the interest rate environment.

Competition from larger banks with greater resources and scale is an ongoing challenge for Stock Yards Bancorp. The company's focus on its core markets, relationship-based banking approach, and diversified revenue streams help to differentiate it from its competitors and maintain its market position.

Outlook and Guidance

Stock Yards Bancorp has provided guidance for the full year 2024, expecting net income to be in the range of $105 million to $110 million, or $3.55 to $3.75 per diluted share. This guidance reflects the company's confidence in its ability to navigate the current economic and industry landscape.

The company's management has also indicated that they remain focused on organic growth, both in their existing markets and through strategic acquisitions that align with their long-term strategic objectives. Stock Yards Bancorp's strong capital position and demonstrated integration capabilities position the company well for future growth opportunities.

Segment Performance

Stock Yards Bancorp operates through two reportable business segments: Commercial Banking and Wealth Management and Trust (WMT).

The Commercial Banking segment provides a comprehensive range of loan and deposit products to individual consumers and businesses across all of Bancorp's markets. This includes retail lending, mortgage banking, deposit services, online/mobile banking, private banking, commercial lending, commercial real estate lending, treasury management services, merchant services, international banking, correspondent banking, and other traditional banking services. The bank also offers securities brokerage services through an arrangement with a third-party broker-dealer as part of this segment.

Key financial metrics for the Commercial Banking segment show positive growth trends. Net interest income increased by 6% and 1% for the three and nine month periods ended September 30, 2024, compared to the same periods in 2023. This growth was driven by an increase in average loans and higher interest rates, partially offset by rising funding costs. Non-interest income for this segment also saw growth, increasing by 8% and 6% for the three and nine month periods, respectively, compared to the prior year. This growth was attributed to increased treasury management fees, debit/credit card income, and mortgage banking revenue.

The Wealth Management and Trust (WMT) segment provides investment management, financial retirement planning, trust and estate services, as well as retirement plan management for businesses and corporations across Bancorp's markets. The WMT segment has been a significant differentiator for Stock Yards Bancorp, contributing substantially to the company's non-interest income.

WMT services revenue increased by 9% for both the three and nine month periods ended September 30, 2024, compared to the prior year. This growth was driven by an increase in recurring fees from managed assets as well as higher non-recurring estate fees. As of September 30, 2024, managed assets under management (AUM) totaled $7.32 billion, up from $7.16 billion at December 31, 2023, due to market appreciation. It's worth noting that WMT fees are predominantly based on a percentage of AUM, with larger relationships typically paying a lower fee rate, and these fees are not performance-based.

Geographic Performance

Stock Yards Bancorp primarily operates in Louisville, central, eastern, and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets. The company's performance is largely tied to the economic conditions and growth opportunities within this regional footprint, with no significant operations or performance outside of these areas.

Conclusion

Stock Yards Bancorp, Inc. (SYBT) has established itself as a well-diversified community bank with a proven track record of financial stability and growth. The company's strategic acquisitions, diversified revenue streams, and effective balance sheet management have contributed to its success in navigating the evolving financial landscape. With strong performance across its Commercial Banking and Wealth Management and Trust segments, solid liquidity position, and focused geographic strategy, Stock Yards Bancorp appears well-positioned to continue delivering value for its shareholders in the years to come. As the company executes on its growth strategies and manages its risks, it remains a significant player in its regional markets, leveraging its diverse business mix to drive sustainable growth and profitability.