“Net interest income increased for the second consecutive linked quarter, due to loan growth and continued yield expansion from assets re-pricing. However, our net interest margin contracted over the linked quarter, as the increase in cost of funds continued to outpace the growth in yields on earning assets. We anticipate net interest margin compression will most likely persist into the first part of the year,” Hillebrand continued. “Deposit balances expanded nicely during the fourth quarter, increasing $268 million, or 4%, on the linked quarter and increasing $279 million, or 4%, over the last 12 months. We continue to focus on organic growth, while avoiding brokered deposits, which provide more expensive funding than in-market deposit relationships.”

“Non-interest income, led by fourth quarter gains in several categories, once again fueled our operating results. WM&T posted another record year, benefiting from strong equity and fixed income market performance, coupled with net new business growth. Robust card income, treasury management and brokerage fees, driven by increased demand and customer expansion, served to cap off a record fee income year for us. We look forward to carrying this momentum into 2024 – our 120^th year of operation – with an unwavering focus on cultivating full customer relationships,” said Hillebrand.

At December 31, 2023, the Company had $8.17 billion in assets, $5.77 billion in loans and $6.67 billion in total deposits. The Company’s combined enterprise, which encompasses 71 branch offices across three contiguous states, will continue to benefit from a diversified geographic footprint that provides significant growth opportunities in both the banking and WM&T arenas.

Key factors contributing to the fourth quarter of 2023 results included:

• Loan growth and loan production represented the best fourth quarter in the Company’s history. Total loans, excluding PPP loans, increased $155 million, or 3%, on the linked quarter. The yield earned on loans expanded to 5.79% for the fourth quarter of 2023, benefiting from average balance growth and to a lesser extent, interest rate expansion.

• Deposit balances expanded $268 million, or 4%, on the linked quarter, as interest bearing deposits grew $434 million and non-interest bearing deposits contracted by $166 million.

  • Interest bearing demand accounts increased $197 million, or 9%, consistent with seasonal public funds activity.

  • Money market accounts expanded $134 million, or 12%, led by growth in WM&T money market funds held at the Bank.

  • Time deposits grew by $120 million, or 14%, a tribute to successful marketing of promotional products, primarily in the Central Kentucky market.

• Increasing costs of funds continued to outpace earning asset yield growth during the fourth quarter of 2023. Net interest income declined $3.2 million, or 5%, for the fourth quarter of 2023 compared to the fourth quarter a year ago, with net interest margin compressing 39 bps to 3.25%. While net interest margin also declined on the linked quarter, contracting 9 basis points from 3.34%, net interest income increased $701,000. Given the current interest rate environment, the change in deposit mix has and will continue to place pressure on funding costs.

• While credit quality remains strong in comparison to traditional metrics, credit loss expense on loans of $5.8 million was recorded for the fourth quarter of 2023. The Bank recorded a $4.1 million charge-off related to a single Commercial & Industrial (C&I) relationship in late December. The Bank became aware of credit deterioration in the third quarter of 2023 and the relationship was downgraded at that time. The relationship was subsequently placed on non-accrual in the fourth quarter. The Bank considers this to be a conservative approach to an isolated situation with one customer and no additional loss is anticipated. Despite the charge-off, management remains confident in the current quality of the loan portfolio, as demonstrated by the relatively low concentration of classified and delinquent loans, and does not believe this instance is reflective of broader portfolio concerns. With the allowance for credit losses to total loans standing at 1.38%, the Bank is well-positioned based on current credit metrics and forecasts in the allowance for credit losses model.

• Non-interest income increased $1.3 million, or 6%, over the fourth quarter of 2022. WM&T income expanded $878K, or 10%, to $10.1 million, benefitting from improved market conditions and net new business expansion. Card income set quarterly and year to date records, led by interchange income expansion and increased debit card processor incentives and treasury management fees once again demonstrated double digit growth. Fee income expansion in the fourth quarter of 2023 is especially notable given $1.3 million in non-recurring gains on sale of premises and equipment recorded in the fourth quarter of 2022.

• Total non-interest expenses increased $4.1 million, or 9%, during the fourth quarter of 2023 compared to the fourth quarter of 2022, primarily due to higher compensation expense tied to employee growth and expense recorded related to an executive retirement agreement. Further, additional occupancy expense was incurred related to the relocation of all WM&T employees to a consolidated central location.

• Tangible common equity per share⁽³⁾ was $21.95 at December 31, 2023, compared to $20.17 at September 30, 2023, and $18.50 at December 31, 2022. Over the past several quarters, tangible common equity and tangible book value have been impacted by the volatile interest rate market and corresponding impact on accumulated other comprehensive income/loss, primarily as a result of changes in unrealized losses in the available for sale debt securities portfolio, which has a current weighted average life of 5.5 years.

Highlights for the year ended December 31, 2023:

• Loans (excluding PPP) grew $580 million, or 11%, over the past 12 months, marking the third consecutive year of double digit loan growth.

• Average loans increased $604 million, or 13%, for the year.

• Loan production set a new record for 2023.

• Deposit balances grew by $279 million, or 4%, over the past 12 months. Interest bearing demand, money market, and time deposit expansion combined to more than offset declines in non-interest bearing demand accounts.

• Net interest income increased $13.9 million, or 6%, over 2022.

• Loan yield expansion led to net interest margin expanding four basis points to 3.39% in 2023 over 2022.

• WM&T income reached and surpassed record levels during the year, increasing $3.7 million, or 10%, over the past 12 months, reflecting improved market conditions and net new business growth. Assets Under Management (AUM) surpassed the $7 billion mark at year-end.

• Customer expansion and increased transaction volume led to record 2023 card, treasury management and brokerage income.

Hillebrand concluded, “In January, Stock Yards was named to Stephen’s 2024 Bank Industry & Top Picks List as the top Small-Cap stock with upside price potential. We were also named to Stephen’s 2024 Best Ideas List, as the top company within the Midwest Bank category. In November, we were once again nationally recognized by American Banker Magazine as one of the Best Banks to Work for in 2023. The Best Banks to Work For program identifies and honors U.S. banks for outstanding employee satisfaction. In addition, in May, we were named a winner of the 2022 Raymond James Community Bankers Cup, which recognizes the top 10% of community banks with assets between $500 million and $10 billion based on various profitability, operational efficiency and balance sheet metrics, marking our 8^th time being named to the Raymond James Community Bankers Cup. These recognitions are a testament to the dedication of our employees, who continue to work diligently to support our customers. We will not rest on our laurels as we enter 2024 – our 120^th year of service to the communities we are honored to serve.”

Results of Operations – Fourth Quarter 2023 Compared with Fourth Quarter 2022

Net interest income, the Company’s largest source of revenue, decreased by $3.2 million, or 5%, to $62.0 million. While strong organic loan growth boosted net interest income over the past 12 months, the cost of interest bearing liabilities more than offset the increase in total interest income.

• Total interest income increased by $20.1 million, or 27%, to $95.2 million.

  • Interest income and fees on loans increased $18.7 million, or 29%, over the prior year quarter. Consistent with the $582 million, or 11%, increase in average loans and interest rate expansion, the average quarterly yield earned on loans increased 79 basis points, or 16%, over the past 12 months to 5.79%.

  • Interest income on securities decreased $413,000, or 5%, compared to the fourth quarter of 2022. While average securities balances have declined $168 million, or 9%, over the past 12 months, the rate earned on securities has increased 9 bps to 2.05%, as lower rate securities either matured or paid down.

  • Average overnight funds increased $24 million quarter over prior year quarter, with interest income increasing $1.4 million consistent with the increase in seasonal public funds accounts. The Federal Reserve Bank has increased the rate paid on reserve balances meaningfully during the past 12 months, which has significantly benefited related interest income on excess cash held at the Bank.

• Total interest expense increased $23.3 million to $33.2 million, as the cost of interest bearing liabilities increased 158 basis points to 2.44%.

  • Interest expense on deposits increased $20.6 million over the past 12 months, as the overall cost of interest bearing deposits increased from 0.81% for the fourth quarter of 2022 to 2.34%. Deposit costs during the fourth quarter of 2023 have been significantly impacted by changes in mix, individual rate exceptions, successful new product promotions and growth in the WM&T money market account. Average interest bearing deposit balances increased $597 million, or 13%, from the fourth quarter of 2022 to the fourth quarter of 2023, with time deposits representing $458 million of the increase.

  • Interest expense on Federal Home Loan Bank (FHLB) advances totaled $2.1 million for the fourth quarter of 2023. The Bank had $200 million in FHLB advances outstanding at the end of the fourth quarter of 2023.
    

The Bank recorded $5.8 million in credit loss expense for loans during the fourth quarter of 2023. In addition to strong loan growth, a flat unemployment projection and other factors within the CECL allowance model, the Bank recorded $4.7 million in charge-offs, with $4.1 million attributed to one C&I relationship offset by $235,000 in total recoveries. The Bank also recorded a $275,000 expense for off balance sheet exposures associated with expansion of Construction & Land Development (C&LD) and C&I lines of credit (increased availability and utilization). For the fourth quarter of 2022, consistent with strong loan growth and deterioration within the future unemployment rate forecast, the Company recorded $3.6 million in provision for credit losses on loans and a $225,000 benefit to credit loss expense for off balance sheet exposures. In addition, the Bank recorded a $1.6 million specific reserve for a Commercial Real Estate loan during the fourth quarter of 2022.

Non-interest income increased $1.3 million, or 6%, to $24.4 million.

• WM&T income ended the fourth quarter of 2023 at $10.1 million, increasing $878,000, or 10%, over the fourth quarter of 2022. WM&T income benefited from strong fourth quarter equity and fixed income market performance, coupled with quarterly estate fees collected and net new business growth.

• WM&T AUM expanded $575 million, or 9%, over the past 12 months consistent with market performance and net new business growth. With the especially strong market performance experienced in November and December, AUM once again surpassed the $7 billion mark.

• Treasury management fees increased $253,000, or 11%, compared to the fourth quarter of 2022, driven by strong transaction volume, organic growth, modified fee schedules, strong foreign exchange income, new product sales and continued product expansion to the customer base added through recent merger activity.

• Card income increased $328,000, or 7%, over the fourth quarter of 2022, driven by increased interchange income and credit card processor spend incentives. While card volume has increased over 2022, interchange rate compression has placed pressure on growth.

• The Company recognized $1.3 million in non-recurring gains on sales of premises and equipment in the fourth quarter of 2022 related to the disposition of acquired locations.

• Other non-interest income, which primarily includes swap fees, letter of credit fees and OREO activity increased by $527,000, or 34%, over the fourth quarter of 2022. During the fourth quarter of 2023, the Company sold other real estate owned and Visa Class B stock for $207,000 and $487,000 in non-recurring gains, respectively.

Non-interest expenses increased $4.1 million, or 9%, compared to the fourth quarter of 2022, to $50.0 million.

• Compensation and employee benefits expense combined to increase $1.5 million, or 6%, compared to the fourth quarter of 2022, consistent with a 4% increase in full time equivalent employees and expense recorded related to an executive retirement agreement.

• Net occupancy and equipment expenses increased $1.3 million, or 34%, over the fourth quarter of 2022 primarily due to the relocation of all WM&T employees to a consolidated central location.

• Technology and communication expenses, which include 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 $865,000, or 23%, consistent with software upgrades, equipment upgrades, customer expansion and increased transaction activity.

• Legal and professional fees increased $801,000 compared to the fourth quarter of 2022, led by increased compliance-related consulting in preparation for expanded regulatory oversight in conjunction with future growth in total assets.

• During the fourth quarter of 2022, the Company sold its partial interest in an investment adviser subsidiary that was acquired from Commonwealth Bancshares, realizing a non-recurring pre-tax loss of $870,000. Also, intangible amortization expense decreased $443,000, or 28%, during the fourth quarter of 2023, consistent with the sale of the investment advisor and the prior year intangible asset write-off.
  

Financial Condition – December 31, 2023 Compared with December 31, 2022

Total assets increased $674 million, or 9%, year over year to $8.17 billion.

Total loans (excluding PPP) increased $580 million, or 11%, to $5.77 billion, with the largest sources of growth stemming from the commercial real estate and residential real estate portfolios. In addition to the strong growth, the Company has benefitted from the higher rate environment in 2023 that has generally slowed loan payoff activity. Total line of credit usage was 39.2% as of December 31, 2023, compared to 42.3% as of December 31, 2022, driven by strong production. C&I line of credit usage was 28.6% as of December 31, 2023, compared to 33.1% as of December 31, 2022.

Total investment securities, which spiked during the second quarter of 2021 and the first quarter of 2022 in part due to acquisitions, decreased $147 million, or 9%, year over year. Maturities/pay-downs of lower yielding investments have boosted the overall portfolio yield to 2.05% for the fourth quarter of 2023, from 1.96% in the fourth quarter of 2022. In 2023, cash flows from the investment portfolio have been utilized to fund loan growth and provide liquidity in lieu of redeployment.

Total deposits increased $279 million, or 4%, over the past 12 months, led by interest bearing demand and time deposit expansion which was partially offset by a decline in non-interest bearing demand deposits.

During the fourth quarter of 2023, the Company recorded net loan charge-offs of $4.5 million, with $4.1 million attributed to one C&I relationship. This compares to $152,000 in net charge offs during the fourth quarter of 2022. Non-performing loans⁽⁵⁾ totaled $19 million, or 0.33% of total loans outstanding at December 31, 2023, compared to $15 million, or 0.29% of total loans outstanding at December 31, 2022. The ratio of allowance for credit losses to loans ⁽⁵⁾ ended at 1.38% at December 31, 2023 compared to 1.41% at December 31, 2022.

At December 31, 2023, 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⁽³⁾ was 10.50% and the tangible common equity ratio⁽³⁾ was 8.09% at December 31, 2023, compared to 10.14% and 7.44% at December 31, 2022, respectively. Interest rate volatility over the last 12 months has significantly impacted unrealized losses within the available for sale debt securities portfolio.

In November 2023, the board of directors declared a quarterly cash dividend of $0.30 per common share. The dividend was paid December 29, 2023 to shareholders of record as of December 18, 2023.

No shares have been purchased since 2020, and approximately 741,000 shares remain eligible for repurchase under the current buy-back plan, which expires in May 2025.

Results of Operations – Fourth Quarter 2023 Compared with Third Quarter 2023

Net interest margin declined 9 basis points on the linked quarter to 3.25%, as cost of funds growth continued to outpace earning asset yield growth.

Net interest income expanded $701,000, or 1%, over the prior quarter to $62.1 million, as management is optimistic that net interest margin contraction is starting to slow.

• Total interest income increased $6.3 million, or 7%, led predominantly by the increase in interest income on loans.

  • Interest income and fees on loans increased $4.5 million, or 6%, over the linked quarter. Average loans increased $190 million, or 4%, and the corresponding yield earned increased 13 basis points over the linked quarter.

  • Average overnight funds increased $134 million over the linked quarter with interest income increasing $1.9 million. The fourth quarter of each year reflects elevated cash levels consistent with the seasonal increase in public funds.

• Total interest expense increased $5.6 million, or 20%, led by a $8.3 million, or 39%, increase in the cost of total interest-bearing deposits, which was partially offset by a $2.8 million decline in FHLB borrowings expense.

The Company recorded $6.0 million in provision for credit losses⁽¹⁾ during the fourth quarter of 2023, which included a $5.8 million provision for credit losses on loans and $275,000 of credit loss expense for off-balance sheet exposures. During the third quarter of 2023, the Company recorded $2.8 million in provision for credit losses, which included a $2.3 million provision for credit losses on loans and $475,000 of credit loss expense for off-balance sheet exposures.

Non-interest income increased $1.5 million, or 7% on the linked quarter, led by record card income, strong swap and letter of credit fees, OREO activity and the sale of Visa Class B stock.

Non-interest expenses increased $3.3 million, or 7%, to $50.0 million, as increased compensation, net occupancy expense, technology expense and consulting expenses more than off-set a decline in employee benefits.

Financial Condition – December 31, 2023 Compared with September 30, 2023

Total assets increased $267 million, or 3%, on the linked quarter to $8.17 billion.

Total loans expanded $154 million, or 3%, on the linked quarter, led by increases in nearly every category, with the C&I and C&LD loan portfolios leading the growth. Total line of credit usage was 39.2% as of December 31, 2023, compared to 38.8% as of September 30, 2023, driven by strong production. C&I line of credit usage was 28.6% as of December 31, 2023, compared to 26.8% as of September 30, 2023.

Total deposits increased $268 million, or 4%, on the linked quarter. Total interest bearing deposits increased $434 million, on the linked quarter, as increases in interest bearing demand, money market accounts and time deposits more than offset the $166 million contraction in non-interest bearing demand. Excluding public funds, total deposits increased $121 million on the linked quarter.

About the Company

Louisville, Kentucky-based Stock Yards Bancorp, Inc., with $8.17 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, 2022, 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.

Contact: T. Clay Stinnett
Executive Vice President,
Treasurer and Chief Financial Officer
(502) 625-0890