Stock Yards Bancorp, Inc. Annual Report: A Strong Year of Growth and Strategic Expansion

Stock Yards Bancorp, Inc. achieved a strong performance in the fiscal year ended December 31, 2023, showcasing significant growth across its core banking and wealth management segments. The company also strategically expanded its market presence, reinforcing its robust financial health through prudent risk management and a clear strategic vision.

Business Overview: Stock Yards Bancorp, Inc. is a financial holding company based in Louisville, Kentucky. It operates Stock Yards Bank & Trust Company, a full-service community bank. The company delivers a wide array of financial services to individuals, businesses, and corporations, primarily across Kentucky, Indiana, and Ohio, through its core banking and wealth management operations.

Financial Highlights for Fiscal Year 2023:

• Net Income: The company's net income rose to $85.2 million, a 12% increase from the prior year. This translated to diluted earnings per share (EPS) of $3.65.
• Revenue Growth: Total revenue climbed 15% year-over-year, reaching $310.5 million. Strong net interest income and significant growth in non-interest income fueled this increase.
• Net Interest Income (NII): NII grew by 10% to $220.1 million. A favorable interest rate environment and disciplined loan growth contributed to this success. The company maintained a healthy net interest margin of 3.85%.
• Non-Interest Income: Non-interest income surged 30% to $90.4 million, primarily due to higher wealth management fees and service charges.
• Asset Growth: Total assets expanded 18% to $8.1 billion. Total loans increased 15% to $5.5 billion, and total deposits rose 17% to $6.8 billion.
• Asset Quality: The company set aside 1.25% of its total loans as an allowance for credit losses, a reserve for potential loan defaults. Non-performing assets remained low at 0.45% of total assets, reflecting sound lending practices.

Key Business Segments and Performance:

• Commercial Banking: This segment remains central to the company's operations, providing comprehensive financial solutions to businesses. In 2023, commercial loan balances grew 12%, and commercial deposits increased 14%. Income from product sales, commissions, and fees within this segment—including treasury management and credit/debit card services—significantly boosted non-interest income, totaling $25.8 million. The company maintains a diversified lending portfolio, which includes future loan commitments, letters of credit, overdrafts, credit cards, home equity loans, construction and development loans, and commercial and industrial loans.
• Wealth Management & Trust (WMT): The WMT segment achieved exceptional growth. Assets Under Management (AUM) increased 25% to $7.2 billion. Fee income from investment management and trust services climbed 28% to $64.6 million, reflecting successful client acquisition and market appreciation. This segment provides a stable, recurring revenue stream and diversifies the company's overall income.

Strategic Expansion: Field Main Bancorp Inc. Acquisition:

After the fiscal year-end on December 31, 2023, and before this report's filing on January 27, 2024, Stock Yards Bancorp successfully acquired Field Main Bancorp Inc. This strategic move, valued at approximately $150 million, will significantly expand the company's footprint. The acquisition is expected to:

• Broaden Stock Yards Bancorp's market presence in key metropolitan areas by adding 10 new branches and approximately $1.2 billion in assets.
• Increase its deposit base by $950 million and its loan portfolio by $700 million.
• Generate estimated annual cost savings (synergies) of $8 million, fully realized within 18 months post-acquisition.
• Boost earnings per share by approximately 5% in the first full year of integration (2025). This acquisition marks a significant step in the company's growth strategy, leveraging Field Main's established customer base and market expertise.

Risk Factors: The company's operations face various risks that could materially affect its business, financial condition, and operating results. These include, but are not limited to:

• Credit Risk: This is the risk of financial loss if a borrower or counterparty fails to meet its obligations. It includes risks associated with specific loan portfolios, such as commercial real estate, commercial and industrial, and consumer loans.
• Interest Rate Risk: Changes in interest rates can impact net interest income, the value of financial instruments, and overall profitability. While the company employs active management strategies, significant or rapid rate changes could still have an adverse effect.
• Liquidity Risk: This is the risk that the company may not be able to meet its financial obligations as they become due without incurring unacceptable losses. It includes the ability to fund loan growth, meet deposit withdrawals, and satisfy other cash commitments.
• Operational Risk: Risks can arise from inadequate or failed internal processes, human error, system failures, or external events. This category includes fraud, cybersecurity breaches, data privacy issues, compliance failures, and disruptions to critical operations.
• Regulatory and Compliance Risk: The banking industry is highly regulated. Changes in laws, regulations, or their interpretations could significantly impact the company's operations, capital requirements, and profitability. Non-compliance could lead to penalties or restrictions.
• Economic Conditions: Adverse changes in local, regional, national, or global economic conditions—such as recessions, inflation, or unemployment—could negatively affect loan demand, credit quality, and deposit levels.
• Competition: The financial services industry is highly competitive. The company competes with large national and regional banks, smaller community banks, credit unions, and non-bank financial service providers. This competition could affect its ability to attract and retain customers, grow its loan and deposit bases, and maintain profitability.
• Acquisition and Integration Risk: As seen with the Field Main Bancorp acquisition, the company engages in strategic acquisitions. These transactions carry risks related to successful integration, the realization of anticipated synergies, and potential disruption to existing operations.

Management Discussion: The preceding sections, including Financial Highlights, Key Business Segments, Strategic Expansion, and Risk Factors, summarize management's discussion and analysis of the company's financial condition and operating results. Management remains focused on driving profitable growth, effectively managing risk, and enhancing shareholder value through strategic initiatives and operational efficiency.

Financial Health: Stock Yards Bancorp maintains a strong financial position, characterized by robust capital levels and careful management of its assets and liabilities.

• Capital Adequacy: The company's Common Equity Tier 1 (CET1) ratio of 11.5% and Total Capital ratio of 14.2% significantly exceed regulatory requirements. This provides a solid foundation for future growth and resilience.
• Interest Rate Risk Management: The company actively manages its exposure to interest rate fluctuations using financial instruments like interest rate swaps. As of year-end, Stock Yards Bancorp held interest rate swaps with a total face value of $500 million, maturing between August 2026, 2028, and 2029. These swaps convert a portion of variable-rate debt or assets to fixed rates (or vice versa), helping to stabilize net interest income and protect against adverse interest rate movements.
• Liquidity Management: The company manages its liquidity to ensure it has sufficient funds to meet deposit withdrawals, loan demand, and other financial obligations. Its sources of liquidity include a stable deposit base, cash and equivalents, investment securities, and access to wholesale funding markets. The company also maintains contingency funding plans to address potential liquidity stresses.
• Debt Structure: The company uses various funding sources, including deposits, borrowings from the Federal Home Loan Bank, and subordinated debt, to support its operations and growth initiatives. Management actively monitors debt maturities and interest rate exposures to optimize funding costs and manage risk.
• Cash Flow: The company generates strong cash flows from its operating activities. It primarily uses these funds to support loan growth, investments in securities, and shareholder distributions. Investing activities include originating loans and purchasing investment securities, while financing activities involve deposit growth, borrowings, and dividend payments.

Competitive Position: Stock Yards Bancorp operates in a highly competitive financial services market across its primary service areas in Kentucky, Indiana, and Ohio. It competes with a diverse range of financial institutions, including large national and regional banks, smaller community banks, credit unions, and non-bank financial service providers.

The company's competitive advantages include:

• Strong Customer Relationships: A long-standing presence and focus on personalized service cultivate deep customer relationships, particularly within its commercial banking and wealth management segments.
• Local Market Expertise: In-depth knowledge of its local markets enables tailored financial solutions and responsive decision-making.
• Comprehensive Service Offering: Integrating commercial banking and wealth management services provides clients with holistic financial solutions, differentiating the company from competitors that may specialize in only one area.
• Prudent Risk Management: A conservative approach to lending and financial management contributes to stability and builds trust among customers and investors. The company continuously evaluates its market position and adapts its strategies to effectively compete for deposits, loans, and wealth management clients.

Employee Compensation and Alignment:

The company uses a comprehensive stock-based compensation program for its employees, including Restricted Stock Units (RSUs), Restricted Stock, Stock Appreciation Rights (SARs), and Performance Shares for executive officers. This program aligns employee incentives with long-term shareholder value creation, fostering a culture of ownership and performance. In 2023, stock-based compensation expense totaled $15.3 million.

Outlook:

Looking ahead to 2024, Stock Yards Bancorp anticipates continued growth. This growth will stem from the successful integration of Field Main Bancorp, sustained performance in its wealth management segment, and careful expansion of its commercial banking activities. The company remains focused on enhancing shareholder value through strategic growth, efficient operations, and disciplined risk management, all while navigating potential economic headwinds and evolving regulatory landscapes.