Stock Yards Bancorp, Inc.

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 4/5

Stock Yards Bancorp, Inc. is a regional bank holding company primarily serving Louisville, Kentucky, and surrounding areas offering commercial and retail banking, as well as wealth management and other financial services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Stock Yards Bancorp (SYBT) operates as a regional bank holding company, primarily serving Kentucky, Indiana and Ohio. It provides a range of financial services, including commercial and retail banking, wealth management, and brokerage. The company’s primary focus is on relationship-based banking and offers a suite of services, ranging from traditional deposits and loans to insurance products, and trust services. SYBT’s core revenue streams are net interest income, net interest income after provision, and non interest income (fee income). Their services are tailored towards business and individual customers, including some specialty industries, such as agriculture and medical practices.

The company operates 72 full-service banking locations, mainly concentrated in Louisville and the surrounding areas, with a growing presence in Southern Indiana and greater Cincinnati.

  • Revenue Distribution:
    • Net interest income (NII) is the primary driver of revenue, consisting of interest received from loan payments offset by interest paid out to depositors.
    • Net Interest Income after Provision is the net interest income minus allowances for expected losses in the future.
  • Noninterest income is generated from fee-based banking services, insurance commissions, and trust activities

Industry Trends

  • The banking industry is currently navigating a complex environment. The recent increase in interest rates by the Federal Reserve to battle inflation has resulted in higher borrowing costs and a squeeze on the net interest margins for many banks. At the same time, the market is anticipating possible future rate cuts. The increase in rates had a mixed impact on banks with interest rates hikes providing increased interest income from loans but also increasing the cost of funding. These rising interest rates have also affected the deposit side. Competition is increasing as customers may seek higher rates elsewhere. Banks that are reliant upon regional and commercial banking as well as loans, they are seeing increased competition and more difficult lending environments. Economic concerns are also prevalent. It has affected their businesses across different verticals. Regional banks are more susceptible to this volatility. Investors expect a decrease in borrowing activity and have been closely following the commercial real estate sector and its effect on the regional banks.

Competitive Landscape SYBT operates in a highly competitive market with other regional and national banks, credit unions, and other financial service providers. Within that competitive landscape some banks have better geographic positioning in certain sectors, and better capital and risk management than other competitors. Digital offerings are crucial to retaining and adding new customers. The company has many other peers in its geographical territory. Competitors offer similar products and services, forcing banks to compete on interest rates, customer service, and digital platforms to maintain their existing customer base. In such environment, it becomes difficult to maintain high profit margins. SYBT competes in a wide range of geographies against larger and more established banks. For this type of business, being large helps you lower operational costs. It also helps you create a stronger brand and expand your distribution networks to reach more customers.

What Makes Stock Yards Different?

  • Long standing relationships, with strong links to the Louisville area for over 100 years.
  • Diversified revenue streams, offering commercial and retail banking, wealth management, and insurance.
  • Focus on the local community, with personalized attention and specialized services.

Financials Based on the analysis of the latest quarterly (3 months ended Sept 30th 2024), and 2023 year-ended reports.

  • Income Statement:
    • Net interest income increased for both the current quarter and YTD compared to last year. This increase was largely driven by increased interest rates.
    • Non interest income increased for both the current quarter and YTD compared to last year mainly due to higher trust revenue.

However, the main source of income is interest income, and as interest rates normalize again, these profits will likely fall. * Total expenses increased, mainly due to higher wages and salaries which is probably mainly attributed to the inflationary pressures and market volatility.

Higher total expenses should offset some of the gains from increased revenues.

  • Balance Sheet:
    • Total assets are at around $8 billion
    • Securities available for sale have increased in market value slightly compared to last year, but there are a lot of fluctuations in market values of securities depending on the market conditions.
      • Loans remained relatively stable with commercial and CRE loans seeing increase, whereas residential and industrial loans saw a slight decline.
      • Total liabilities showed a slight decrease.
      • Equity has decreased due to increase in accumulated other comprehensive losses and decrease in retained earnings due to dividend payments.

The bank is not experiencing any major growth, and there is a slight reduction in total assets, liabilities, and equity. This is usually indicative of lack of lending opportunities and an uncertain lending environment.

  • Cash Flows:
    • The company continues to generate a large positive operating cash flows.
    • The company has been decreasing its investing activities and increasing its financing activities.
      • This means the company has slowed investment in its own business, probably expecting limited growth, and is allocating more capital for buybacks or dividends.

Moat Rating: 2 / 5

SYBT has some local brand recognition and client loyalty. However, these are not enough to be very sustainable moats. SYBT does not have scale or a unique product or service that competitors can’t replicate. Many other similar companies do the same operations. This makes their business susceptible to competition.

  • Justification:
    • Limited Scale Advantage: While they have an established customer base in their core geographic areas, they do not operate in a particularly specialized or unique business.
    • Competition: The banking industry is highly competitive, and competitors like larger banks or more efficient regional banks will quickly come and replicate SYBT’s successes.
    • Low Switching Costs: Customers can readily move their bank accounts to other providers without much difficulty.
    • Local Brand: They do have a strong brand in their local community. However, this only gives it an advantage in their geographical areas, not when considering broader market competition.
    • Lack of Technological Edge: SYBT does not have a significant technological advantage over competitors and, as a result, new startups or competitors are more than likely to compete with them by adding superior and technologically innovative products.
    • No Pricing Power: SYBT has limited power to change their prices higher than their competitors without losing customers.

Risks to the Moat and Business Resilience

  • Interest rate risk: Changes in interest rates can cause interest rates on loans to fall or increase resulting in volatile earnings, in addition changes in interest rate will greatly affect the deposit side as customers may look to other avenues.
  • Competition: Fierce competition from both traditional banks and new fintech companies, which can take away customers and their deposits. This may also lead to increased expenses due to better offers or lower charges.
  • Macroeconomic instability: Slowing economic activity, recessions, and the state of the broader housing market, all can significantly reduce loan volumes, cause greater defaults or increase defaults. This would hurt profitability and growth.
  • Regulation and Compliance: Stringent regulatory and compliance requirements of a highly regulated industry, and compliance costs can be high. In addition new laws may materially impact the bank’s financials.
  • Technological Disruption: Failure to adapt new technology may cause the company to struggle against their more tech-focused competitors.

  • Acquisition Risks: The risk of not being able to realize the synergies expected from the acquisitions or the acquisitions may cause additional debt burden or management instability.

  • Business Resilience:
    • Geographic Concentration: Strong ties to a particular region does help them in the community; however, this limited geographical diversity may expose it to higher economic distress if the local economy struggles.
    • Experienced Team: SYBT does have an experienced team and is well known in the industry and has the experience to manage risks, however, this is not a significant moat since other banks also have experienced teams.
    • Strong Relationships: They have established customer base in their core geographic areas. This strong relationship will allow them to retain many customers.

Understandability: 1 / 5

The business model of SYBT is extremely simple to understand. They take deposits and offer loans; their other streams of income are also quite straightforward, including insurance and trust operations. A complete beginner can understand their business operations. However, the business financials can be complicated, including derivatives and their valuation, interest rate risk, and leverage. However, understanding a bank’s operations from a layman’s perspective is very simple.

  • Justification:
    • Simple Business Model: Their core business is well understood and is straight forward.
    • Traditional banking focus. Their business is relatively simple when compared to tech businesses.
    • Limited Innovation: They do not have a large degree of innovation compared to new technologies, but rather are reliant on a traditional business model.

Balance Sheet Health: 4 / 5 SYBT’s balance sheet is reasonably strong, with good liquidity and low levels of NPAs (Non-performing Assets). They have a decent Tier 1 capital ratio. Their level of debt has been stable, and they are actively reducing it for a healthier balance sheet.

  • Justification:
    • Adequate Capital: The bank maintains a Tier-1 Capital ratio that meets regulatory standards.
    • Stable Asset Quality: Though they do have some non-performing loans, it is not very high and is stable over time.
    • Prudent Liquidity: The company does have sufficient cash and marketable securities to meet its obligations.
    • Low Debt Levels: SYBT has low long term debt with high total equity.

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