Stock Yards Bancorp(SYBT) - 2022 Q4 - Annual Report

Revenue and Growth - WM&T revenue distinguishes Bancorp from other community banks of similar asset size, providing a strong competitive advantage[29] - Bancorp has seen significant growth in non-interest revenue sources, particularly in treasury management services and debit/credit card services[29] - The company aims to pursue organic growth opportunities while capitalizing on strategic acquisitions to broaden its market presence[30] - The acquisition of KB in Q2 2021 expanded Bancorp's footprint into central and eastern Kentucky, providing broader product offerings and increased lending capabilities[31] - The acquisition of CB in Q1 2022 bolstered Bancorp's market share in Louisville and expanded its presence in Shelby County and northern Kentucky, creating the largest bank-owned trust company in Kentucky[32] Efficiency and Capitalization - The efficiency ratio (FTE) for the years ended December 31, 2022, 2021, and 2020 was 59.30%, 59.94%, and 54.06%, respectively, with elevated ratios in 2022 and 2021 attributed to merger-related expenses[34] - Bancorp's adjusted efficiency ratio (FTE) for the years ended December 31, 2022, 2021, and 2020 was 53.62%, 51.77%, and 52.42%[35] - As of December 31, 2022, Bancorp exceeded the requirements to be considered well-capitalized, maintaining a Common Equity Tier 1 Risk-Based Capital ratio above the minimum 6.5%[57] - The adequately-capitalized minimums, including a 2.5% capital conservation buffer, were 7.0% for Common Equity Tier 1, 8.5% for Tier 1, and 10.5% for Total Risk-Based Capital as of December 31, 2022[58] Risk Factors - Bancorp's allowance for credit losses reflects management's estimate of expected credit losses, which may not be adequate to cover actual losses, potentially impacting earnings[76] - The company is subject to risks from fluctuations in interest rates, which could reduce profitability due to gaps in interest rate sensitivities[69] - Bancorp's mortgage banking business is highly dependent on programs administered by FNMA and FHLMC, with potential adverse effects from changes in these programs[89] - The company is exposed to interest rate risk on loans held for sale and rate lock loan commitments, which could lead to fluctuations in fair value as market interest rates change[93] - Approximately 47% of total deposits are centralized in accounts with balances of $500,000 or greater, categorized as core funds, indicating a reliance on large commercial deposit relationships[103] Market Conditions and Economic Outlook - The Federal Reserve raised the Federal Funds Target Rate (FFTR) by a cumulative 425 basis points in 2022, reaching a range of 4.25% - 4.50%[70] - The economic outlook for 2023 suggests sluggish growth and continued monetary tightening, with potential impacts on borrowers' ability to perform[75] - Income from Wealth Management & Trust (WM&T) constitutes approximately 41% of non-interest income, indicating reliance on market conditions[80] - Bancorp's credit metrics are currently at historically strong levels, but normalization is anticipated over time[78] Operational Challenges - The company experienced record levels of excess liquidity in 2021, which began normalizing in the latter half of 2022, with expectations of continued normalization into 2023[104] - Competitive factors, including the reduction of certain deposit account fees, pose challenges to maintaining deposit-related non-interest income, which has been declining industry-wide[95] - The integration of acquired institutions may present risks, including unanticipated losses and the potential loss of key customers and employees if not managed effectively[97] - The company relies on third-party vendors for processing transactions, and any failure in their controls could disrupt business operations and adversely affect financial condition[111] - The financial services industry is undergoing rapid technological changes, and the company's ability to keep pace with these changes is critical for maintaining competitiveness[113] - Changes in customer behavior towards non-bank alternatives for financial transactions could lead to a loss of fee income, deposits, and loans[114] Regulatory and Compliance Issues - The company is subject to extensive regulation, and any changes in laws or regulations could significantly impact financial condition and results of operations[115] - Increasing scrutiny regarding environmental, social, and governance practices may impose additional costs and risks on the company[119] - Regulatory compliance requirements are increasing, which may impact the company's operations and strategic decisions[19] - The company is aware of potential litigation and governmental investigations that could affect its business[19] - There are concerns regarding the coverage of the company by securities analysts, which may impact market perceptions[19] - The company is monitoring significant acquisitions or business combinations involving competitors that could affect its market position[19] Employee and Service Focus - Approximately 67% of Bancorp's employees are located in Louisville, Kentucky, with a total of 1,040 full-time equivalent employees as of December 31, 2022[38] - The company emphasizes personalized service tailored to individual client needs, enhancing its competitive ability in the market[44] - Bancorp's strategy includes maintaining disciplined underwriting standards and a commitment to operational efficiency[28]