CFA_Final Report_SYBT

CFA Institute Research Challenge

hosted by/in

Local Challenge (e.g., CFA Society Virginia, Vietnam, etc.)

Western Kentucky University

[WKU Analysts] Student Research

2

Earnings/Share Mar. Jun. Sep. Dec. Year P/E

Ratio 2013A $0.49 $0.45 $0.53 $0.44 $1.91 16.9x

2014A $0.56 $0.55 $0.67 $0.59 $2.36 13.9x

2015E $0.56 $0.60 $0.61 $0.62 $2.38 13.7x

Highlights HOLD Recommendation: Stock Yards Bancorp has an outstanding history of delivering solid

returns to shareholders even throughout the Great Recession. Although the current interest rate

environment is unfavorable for Stock Yards, the bank’s competitive advantages will mitigate the

effects of a decreasing net interest margin. Loan growth from newer markets as well as stable fee income derived from the wealth management arm will allow Stock Yards to overcome low interest

rates and grow the bank’s net income going forward. We recommend a HOLD position on Stock

Yards Bancorp. Our valuation implies a target price of $34.24, resulting in a 4.67% premium to the

current price of $32.71. With a dividend yield of 2.81%, the total return is 7.48%

Revenue Drivers: The main revenue drivers for Stock Yards Bancorp emanate from its wealth management segment and increasing presence in growth markets. Stock Yards has differentiated

itself from most community banks by developing a wealth management segment that currently

generates about 15% of the company’s revenue. Stock Yards is also expanding in both of its growth

markets, Cincinnati and Indianapolis. Currently, it controls less than 1% of the market share in

both of these markets. Nonetheless, plans to increase the number of bank branches should allow Stock Yards to consistently increase its market share as well as drive loan growth.

Economic Outlook: Stock Yards delivered twenty consecutive years of increasing net income

leading up to the financial crisis, but was not immune from the impact that the recession had on the

banking industry. However, earnings have experienced a 4.6% compound annual growth rate since 2009. The main factors affecting Stock Yard’s earnings going forward will be the path that interest

rates follow due to improving economic conditions as well as the slope of the yield curve.

Projections are for lower long-term rates in addition to a flatter yield curve, which will weigh on

the company’s net interest margin and earnings growth. The bank must be able to grow loans at a

healthy pace in order to overcome the low-rate environment. The company has delivered impressively on their fee income and loan growth targets, which will mitigate the effect of a lower

net interest margin.

Financial Standing: Stock Yards Bancorp has a great financial track record with margins that are

slightly better than its competitors within the industry, specifically an above-peer net interest margin. While the company may have taken on more risk than competitors, via a high equity

multiplier, Stock Yards has demonstrated that it can profitably grow assets at a higher rate than

competitors over longer periods of time. Despite the high equity muliplier, the bank maintains a

well-capitalized balance sheet (12.6% tier one capital ratio), which will enable the bank to pursue

opportunities in its growth markets.

Sources: S&P Capital IQ & Morningstar

0.k

100.k

200.k

300.k

-10%

0%

10%

20%

Stock Yards Bancorp, Inc. (NasdaqGS:SYBT) - Share Pricing

S&P 500 Index (̂ SPX) - Index Value

Ticker: SYBT (NasdaqGS)

Recommendation: HOLD

Price: $32.71 Price Target: $34.24

Market Profile

Current Price $30.47

52 Week Price Range $27.14 - $34.63

Average Daily Volume 27,665.00

Beta 0.82

Dividend Yield (Estimated) 2.81%

Shares Outstanding 14,521,500 M

Market Capitalization $448.12 M

Institutional Holdings 38.98%

Insider Holdings 5.96%

Book Value per Share 17.63

Tier One Capital Ratio 12.60%

Return on Equity 14.2%

Stock Yards Bancorp, Inc. [Financials – Regional Banks]

February 13, 2015

CFA Institute Research Challenge February 13, 2015

Business Description Stock Yards Bancorp (SYBT) is the holding company of Stock Yards Bank & Trust, which is centered in

Louisville, Kentucky, with other locations in Indianapolis, Indiana, and Cincinnati, Ohio. SYBT was

incorporated in December 1988 to wholly own Stock Yards Bank & Trust, which is a state-chartered bank. Stock Yards Bank & Trust was founded to serve the Louisville livestock industry, but has grown and

expanded over the years to reach not only different geographical areas, but a wide variety of customers with

different financial needs. With assets of over $2.4 billion and a total of 34 branches, the bank is now well

recognized nationally, but still maintains the focus of building lasting relationships with consumers. Stock

Yard Bank & Trust offers services in personal banking, business banking, and wealth management.

Financial Products

Checking Accounts

Checking accounts are available for individuals and businesses through Stock Yards Bank & Trust. There are

a wide variety of these products catering to different needs of customers. These accounts range from accounts requiring no minimum balance and no monthly service fees to high interest accounts requiring a relatively

high balance at all times. Accounts for businesses require a $100 deposit to open, but have a wide range of

required daily minimum balances. These accounts also have varied limits on debit card transactions,

electronic transactions, and withdrawals and deposits, as well as different monthly service fees and interest

rates depending on the activity level and balance in the account.

Savings Accounts

The savings products offered at Stock Yards Bank & Trust vary depending on how the customer wishes to

save money. Traditional savings accounts are offered as along with money market accounts, which have a

higher minimum balance and more fees depending on the requirements that must be met for the month. These accounts are the second largest deposit accounts at Stock Yards. There are also Health Savings Accounts for

those customers with high deductible health insurance, Certificates of Deposit for those wishing to put their

money away for up to five years, and Individual Retirement Accounts with benefits of Traditional, Roth, or

SEP accounts as well as rollovers. Both debit and credit cards with ATM access are offered through Stock Yards Bank & Trust for businesses and individuals.

Loan Products

The bank offers consumer and mortgage loans to individuals, but its main focus is on the commercial market.

Businesses will find that Stock Yards Bank can offer real estate loans, working capital lines of credit, term loans, equipment leasing, letters of credit, and acquisition financing. By expanding into these areas, the bank

is more equipped to fill the needs of any business just as well as a large, regional bank. The majority of the

loans that the bank funds are commercial loans (see Figure 1), which gives it the advantage of having close,

“sticky” relationships with customers. These relationships generate steady recurring revenue and aid in

consistent loan growth. Loan growth has been hard to achieve by many community banks due to their rural locations; however, Stock Yards is well-positioned in growing, industrial markets that will help accomplish

mid-single digit loan growth targets set by management.

Figure: 2013 Deposit Composition and 2014 Loan Composition

Source: S&P Capital IQ

31%

44%

11%

8%6%

2014 Loan Composition

CommercialLoansCommercialMortgage LoansResidentialMortgage LoansConsumer Loans

ConstructionLoans

45%

32%

5%18%

2013 Deposit Composition

Demand Deposits

Money MarketAccount/Invest.

Saving Deposits

Time Deposits


Wealth Management

The wealth management segment at Stock Yards Bank is also competitive with those of larger banks. With

access to equities, mutual funds, and alternative investments such as real estate or hedge funds, consumers are

not limited on what they can include in their portfolios. The wealth management department stresses the

importance of risk tolerance and the interest rate environment when looking into investments, which is valuable for an investor.

Financial Planning

The bank offers not only portfolio management, but retirement planning as well. Wealth advisors are

available to meet with individuals for an assessment of their needs before deciding on which approach to take toward their retirement. Certified Financial Planners will meet with individuals at no cost and at no obligation

to evaluate the financial situation and review the available products. Wealth advisors are also equipped to

provide estate and trust plans for customers. The bank wants to be available to provide service to its

customers in every area possible, and has significantly expanded its product set over the years.

Industry Overview Commercial Banking

Commercial banking serves an integral role in the growth of our globalized economy. The key role of

commercial banks involves financial intermediation between savers and users of funds. This is the ultimate driver of economic growth as the loaned funds are deployed into the economy when businesses and

consumers make capital investments. Consequently, the banking industry tracks the underlying economy and

is highly cyclical. Furthermore, the industry is extremely competitive because the core products -- loans --

are essentially commodities.

The fundamental method of increasing profits in the banking industry results from increasing the spread between interest rates on loaned funds (assets) and borrowed funds (deposits). The key measure of this

spread is known as the net interest margin. The net interest margin is derived from a bank’s balance sheet,

which is primarily composed of loans. However, banks also invest in government and investment-grade

securities. Since the recession, several catalysts have increased the amount of securities that banks hold. These include an increased amount of liquidity required by federal regulators, low interest rates, and slow

growth in loan demand. In addition, many banks are using securities as a source of liquidity to position

themselves for the projection of increasing interest rates in the near future. The most recent recession has

caused the Federal Reserve to lower interest rates to historical lows, which has depressed bank’s net interest

margins and returns on capital to historically low levels. If the Federal Reserve normalizes rates, banks that have positioned themselves in an asset-sensitive position will stand to benefit tremendously through increased

loans rates as well as higher yields on securities. However, due to enlarged capital requirements and

regulatory burdens placed on banking institutions, profitability is unlikely to return to historic highs.

Trust Services and Asset Management

The wealth management industry is characterized by the administration of customer’s assets on their behalf in order to satisfy their financial needs. The primary source of revenue for an asset manager stems from fees

charged on their total assets under management. Thus, the greater amount of assets the firm oversees, the

higher fee income they earn. These companies can grow their total assets under management in either of two

ways: attracting new clients/assets or the appreciation of capital markets. This industry is highly cyclical as

assets under management are directly correlated with the performance of capital markets. In addition, investors often pull assets out of markets when economic growth contracts. These firms, through specialized

products and personalized services, can achieve differentiation in their markets. Their products consist mainly

of active and passive mutual funds as well as separately managed accounts. These funds encompass all

varieties of investments. Certain characteristics of a firm’s managed assets can produce outsized returns.

These include higher amounts of equity, alternative, and foreign stock funds, as well as greater proportions of retail rather than institutional clients.

In addition, combining trust services with asset management provides companies with another source of fee

income derived from the administration of assets organized in trusts. Financial planning is also commonly

implemented with their product set, where high-net worth individuals provide significant sources of revenue.

The best asset managers can produce solid fee income in any market environment through the diversification of their products. The asset management industry has significant growth opportunities ahead as baby boomers

continue to retire and an increasing number of employees are left to manage their own retirement assets

through defined contribution plans.

Competitive Positioning Business Strategy

The main strategy of Stock Yards Bancorp encompasses developing a strong, healthy commercial loan portfolio funded by core deposits in order to deliver steady returns for shareholders. In addition, the company


5

is increasingly focused on boosting earnings through fee income derived from their wealth management arm.

Stock Yards also strives to generate revenues by cross-selling their diverse product set to customers, which

increases depositor loyalty as customers continue to seek all-in-one banking services. Another strategic focus

involves taking market share from its regional bank competitors. The company is achieving this through the

development of close, personal relationships with customers, offering competitive interest rates, and increasing the number of branches in growth markets. Management has also conveyed that they are seeking

acquisition targets in both the Indianapolis and Cincinnati markets if the environment remains constructive.

Competitive Advantages

Wealth Management Stock Yards has several competitive advantages that set it apart from peers including: a wealth management

arm, low-cost funding, lower regulatory concerns than regional peers, diverse product set, relationship

banking, and competitive positioning in growing markets. The repeal of the Glass-Steagall Act in 1999

resulted in an unprecedented move by banks in integrating securities services into their business models.

Wealth management, in particular, was highly pursued by commercial banks due to the lucrative fee income that it generates on a recurring basis. While this service is mostly constrained to larger banks with the means

to implement such a service, Stock Yards has developed this department into a significant fee generator that

now comprises about 15% of revenues (see Appendix 6) and is the largest contributor to non-interest income.

In addition, the amount of assets under management surpassed two billion dollars in 2013 providing the bank

with the scale necessary to profitably compete with larger peers. Management has expressed that this segment is a great booster of the bank’s return on assets, which is a key advantage in the current low -rate

environment. This is evidenced by the bank’s solid non-interest income to average assets ratio of 1.73%,

which has helped pushed the return on assets to an impressive 1.4% (see Appendix 9). This segment clearly

differentiates Stock Yards from other community bank peers that do not have the scale to deliver these

products to customers. This also gives them the advantage of retaining customers due to the high cost of switching wealth managers. Moreover, management is focused on growing this business at a time when the

tailwinds for the wealth management industry are increasing. Assets under management have increased at a

five-year annual growth rate of 7.9%, which is faster than the net loan growth of 5.4% (see Appendix 14).

Furthermore, assets under management only declined once over the past decade in 2008 due to the severe

market downturn.

Figure 2: Assets Under Management Growth Rates


Low-Cost Funding

The sources that banks utilize to build their funding base have great implications on the cost structure of the

bank. Stock Yards makes extensive use of low-cost funding such as money market deposit accounts and both

non-interest and interest-bearing demand deposits. Collectively, these accounts represent 77% of total liabilities at the end of 2013. In addition, core deposits constitute 94% of the bank’s average total assets. The

bank shies away from using non-core deposits and wholesale sources of funds because of their volatile

nature, high costs, and increasing regulatory scrutiny on these sources. This is reflected in the bank’s lower-

than-peer total interest expense of 0.3% on December 31, 2014. This demonstrates that the bank maintains a

loyal customer base willing to accept lower rates for access to superior service. Loyal depositors will allow the bank to offer lower deposit rates and still maintain core depositors. Having this reliable deposit base will

be an advantage in the face of rising interest rates coupled with increasing loan demand.

Regulatory Scrutiny

Due to the financial crisis of 2008 that was brought on by the negligence of financial institutions, the increased regulations placed on this industry have dramatically decreased the returns of most banks and have

increased the volatility of earnings. Regulators have placed increasing focus on the amount of capital and

liquidity that banks must maintain in order to escape penalties. Having to increase capital

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


6

requirements and hold higher liquidity instruments has lowered the overall returns that banks are

experiencing. This is likely to persist in the future. However, Stock Yards has maintained adequate

levels of capital on its balance sheet even while assets have been increasing at a healthy pace. At the end

of 2014, the bank had a tier one risk-based capital ratio of 12.6%, well above the regulatory minimum of 6.0%. Moreover, the bank’s equity capital has increased at an 11% annual rate over the past five years .

The management team at Stock Yards has expressed that they like to hold excess capital levels in order

to maintain this well-capitalized position. This status allows the company to operate without the great

amount of scrutiny currently being placed on larger banks. Due to the complex structures and riskier

asset profiles of larger banks, they are currently operating under heavy regulatory burdens. In addition, due to their actions causing the crisis, regulators to continue increase capital requirements and place fines

on them for their actions. Stock Yards has avoided these pressures and fines and will benefit from more

predictable returns due to compliance with regulatory matters and more transparent operations.

However, compliance with regulations will remain a key cost concern for smaller banks in the future.

Relationship Banking

Successful community banks can compete and differentiate themselves from their larger peers through

the use of relationship banking. Relationship banking is characterized by creating close, personal ties to

customers, having an in-depth knowledge of the local market, and the cross-selling of many products.

Management at Stock Yards focuses on creating strong relationships, especially concerning commercial customers of the bank. The bank mainly seeks make loans in familiar or current markets, which allows

the bank to closely monitor its entire loan portfolio, which is a practice much more difficult for a larger

bank to perform. This effectively reduces the amount of non-performing assets and net charge-offs the

bank experiences, which ultimately increases returns. The ratio of non-performing loans to total loans at

the end of 2014 was 0.6%, below peer levels. The net charge-off ratio of 0.2% reflects a benign credit portfolio and is indicative of Stock Yards’ unique ability to make high-quality commercial loans (see

Appendix 9). The bank’s low cost of funding as discussed above also reveals its strong ties to

customers. A loyal customer base will provide the bank with less volatile income sources during periods

of unpredictable interest rates. In addition, focusing on smaller markets allows the bank to specialize its

services to the preferences of individual customers as well as position its loan portfolio and funding based on management’s expertise in assessing local economic conditions. Stock Yards also possesses an

advantage over its community bank peers due to its diverse product set encompassing personal banking,

business banking, wealth management, and trust services. Having the ability to cross-sell these unique

products produces a sticky set of clients due to the high switching costs of transferring funds to another

bank. Moreover, the diversity of services and personal relations that the bank is able to develop attracts customers looking for a complete set of services for their financial needs. Most community banks do not

have the scale or expertise that Stock Yards possesses to develop these products.

Inorganic Growth

On April 13, 2013 SYBT completed the acquisition of THE BANCorp , Inc., which is the holding company of THE BANK- Oldham County, Inc. All operations from THE BANK-Oldham County after

that date are considered transactions of Stock Yards Bank and have been considered in SYBT’s financial

results. With the growth prospects and size of Stock Yards Bank, they could afford more acquisitions of

smaller banks in the future which would help them to continue their growth. The increasing cost of

regulatory burdens put on small banks has caused an increasing amount of mergers and acquisitions in the industry. In order to increase the industry’s depressed returns on capital, banks must grow in size to

develop economies of scale and efficiently cope with the increasing regulatory environment. This has

decreased the total number of community banks in existence, but creates many opportunities for these

banks to generate greater synergies. These banks also have the ability to differentiate their services from

larger peers to provide more personalized services that customers increasingly desire.

Growth Markets

Finally, Stock Yards has strategically positioned bank branches in growth markets in order to create

organic loan growth. Its core markets include Indianapolis, Indiana, Cincinnati, Ohio, and Louisville,

Kentucky. In its primary market of Louisville, the bank holds a 9% share of the market. However, they hold less than 1% market share in both Indianapolis and Cincinnati (see Appendix 4). Management sees

the latter two markets as the key drivers for growth in the future. Stock Yards is specifically focused on

opening new branches in these markets, but is open to making acquisitions to capture growth

opportunities. They have set a target of achieving a loan portfolio comprised of 40% of total loans from

Indianapolis and Cincinnati (currently at 20%) with the balance from Louisville. Over the last five years, the compound annual growth in loans for those two markets of 8% (Indianapolis) and 29%

(Cincinnati) far outpaced the 4% loan growth experienced in Louisville. Stock Yards’ distinctive ability

to make quality commercial loans will ensure that this growth does not inhibit the performance of their

entire loan portfolio. Management expressed the view that these two markets are “under-banked”

compared to Louisville as both markets exhibit a much lower ratio of bank branches to total assets (see Appendix 4). This provides the bank ample opportunity to increase its number of branches and deposits


7

in these areas. They plan to execute this growth strategy by targeting the customers of the larger banks

that dominate these markets and potentially acquiring smaller banks at an attractive price. They have the

ability to take market share by offering competitive interest rates compared to those larger peers in

addition to developing the personal relationships that customers increasingly desire.

Porter’s 5 Forces (Refer to Appendix 7)

Threat of Substitutes – High

There are many substitutes for banking products in existence. Technological diffusion is also creating an

increasing number of products by the day. Many deposit products are offered by online firms with little

connection to traditional banks. These online products can be more convenient and easier to access than banking at brick-and-mortar retail branches. These products can often be customized to individual

customers rather than the standardized products that traditional banks offer. Furthermore, many

companies now offer cheap financing when you buy their products, which eliminates banks from the

entire loan process. Traditional banks can decrease these threats by providing superior customer

relationships and more diverse products. Stock Yards possesses a diverse product set and strives to nurture customer relationships.

Threat of New Entrants – Low

Opening a bank requires a large amount of initial capital, which is often hard to find in adequate

quantities. Banking regulations are also high, meaning that much time, money, and expertise needs to be invested to obtain a charter. Increasing regulations are making it harder and less attractive to open a

bank. Moreover, larger firms achieve economies of scale and scope, which allow them to put smaller

banks out of business by their ability to offer lower rates on deposits and loans. Stock Yards has

obtained adequate economies of scale and scope, a loyal depositor base, and expertise of its local

markets. Their main threat stems from a larger bank entering one of their targeted growth markets that management has deemed “under-banked.” However, the Louisville market is highly saturated compared

to both Cincinnati and Indianapolis and a new market participant is unlikely .

Buyer Power – Moderate

Buyers are largely at the mercy of market-based rates when obtaining loans. Most banks negotiate very little on rates when dealing with retail customers while larger buyers may have the advantage of

negotiating lower rates. Banks are often unwilling to lend to undesirable buyers and base pricing on the

credit history of a potential customer. However, the vast amount of competition in a commoditized

market forces most firms to offer the lowest rate possible. Superior service capabilities and switching

costs can mitigate the power of buyers.

Supplier Power – Moderate

Supplier power of capital sources for a bank differ depending on the source. Depositors must accept

market-based rates on their deposits, though intense competition ensures that rates are similar across the

industry. Differentiation is largely achieved through service capabilities, most of which can be duplicated over time. However, loyal customer bases achieved through superior customer relationships

can allow firms to offer lower deposit rates. Stock Yards strives to promote these close customer

relationships. Capital sources from other banks are offered at high rates and are non-negotiable. Lastly,

equity capital is often hard to obtain in large quantities and requires a high return on capital for investors.

Threat of Competition – High

There are numerous firms that compete in the markets where Stock Yards operates. The largest source of

competition comes from larger regional banks that may possess greater resources and products sets than

Stock Yards. However, the bank mitigates this threat through superior customer relationships and

attracting “sticky” assets through the wealth management arm and large number of commercial clients. Moreover, the banking industry is highly saturated and mature, which means that growth comes mainly

through economic expansion. Because of this, most market share gains are achieved by luring customers

away from other firms. This can be accomplished most effectively by reducing the prices of products.

This causes intense competition and lower profitability for all institutions. Stock Yards’ loyal customer

base offsets some of this competition.

Investment Summary HOLD Recommendation Summary

We are initiating coverage of Stock Yards Bancorp with a HOLD recommendation and a target price of

$34.24 implying a share price appreciation of 4.67% as of the close of the market on February 13, 2015.

Our HOLD recommendation is based partly on the following:

Revenue Drivers

The greatest opportunity for growth in Stock Yards revenues comes from its wealth management arm,

especially in this low-rate environment. The wealth management industry is currently experiencing many

tailwinds including greater numbers of employees controlling their retirement assets and the large


8

amount of baby boomers reaching retirement. Stock Yards is well-positioned to take advantage of these

tailwinds as they have the capability to deliver trust and brokerage services as well as financial planning

for potential clients. The large size and diverse product set of Stock Yards has enabled it to achieve

economies of scale to compete profitably with larger competitors. This segment generated 15% more

revenue in the September quarter than the same quarter last year. It also currently generates about 15% of the company’s revenue (see Appendix 6) and is now ranked in the top 150 trust companies in terms

of revenue. Fee income derived from this unit is a great catalyst for an increasing return on assets and is

increasingly important as low interest rates persist. However, management has indicated that 2015 will

exhibit slower growth in this segment from the prior year and may not provide as much growth to

earnings as in the past. This ultimately means that the bank will experience less growth in fee-based income in 2015. Therefore, Stock Yards will be forced to rely more on loan growth in order to increase

net income. In addition, if the U.S. falls back into a recession the reactions in capital markets would

decrease the banks total assets under management. This would cause Stock Yards’ fee income to

decrease dramatically.

Another opportunity for growth is derived from Stock Yards positioning in the Indianapolis and

Cincinnati markets. The company entered these markets in 2003 and 2008, respectively. Currently, they

possess less than 1% of the total market share in both of these markets. Management has expressed that

both of these markets are currently under-banked and they view the opportunity to capture dep osits as

very favorable. The main targets are the large regional banks that dominate these markets. Management has also expressed that they are seeking to make acquisitions in both of these markets if conditions are

favorable. Growing loans at a healthy pace in these markets will be key to overcoming low interest rates

persisting in the future and exhibiting pre-recession return levels. Encouragingly, Stock Yards grew its

entire loan portfolio at a 8.6% pace in 2014 (see Appendix 1).

Interest Rates

The uncertainty of the speed and magnitude of interest rate hikes by the Federal Reserve injects much

ambiguity for the earnings of commercial banks, including Stock Yards. The current consensus estimate

among industry analysts projects the federal funds rate will be just 0.73% at the end of 2015 and 1.75%

at the end of 2016, up from the current 0.25% (see Appendix 12). Rising rates will bode well for Stock Yards over the long run if they are accompanied by a steeper yield curve. However, our projection is for

a flatter yield curve in the near-term meaning that the positive effect of higher rates is unlikely to be felt

over the next year. Approximately 36% of loans are variable rate, however, almost half of those loans

have reached their contractual floors of 4%. These loans would need the federal funds rate to increase by

more than 75 basis points to experience rate increases. The remainder of the variable rate loans would reprice immediately. Although, with those loans only representing about 17% of the entire portfolio and

the federal funds rate only moving by the projected 48 basis points, the impact to earnings would be

marginal. In addition, the reported simulation analysis (see Appendix 15) indicates that Stock Yards’ net

interest income would drop by 3.58% and 2.05% if rates were to rise 100 basis points and fall 100 basis

points, respectively. Therefore, when the Federal Reserve does increase its target rate, there will be a negative impact on Stock Yards’ earnings because deposit rates will reprice faster than asset rates.

Other factors will also weigh on the company’s earnings in addition to this intial rise in rates. This

pressure will come from lower overall interest rates as well as a flattening of the yield curve. These

factors are being felt due to the low inflation outlook, slow global growth, a strong dollar, and the relative attractiveness of U.S. yields to foreign investors. Interest rates in economies around the world

have been decreasing and foreign investors are pouring money into U.S. government securities for safety

and yield. This will decrease long-run rates on all Treasury securities going forward. Moreover, these

effects have had a larger impact on longer duration securities and their yields have decreased at a quicker

pace than short-term rates, which has decreased the slope of the yield curve (see Appendix 13). The Federal Reserve raising short-term rates also increases the likelihood of a flatter yield curve. This will

have a negative impact on Stock Yards’ net interest margin as the previous benefit of progressively

lower deposit rates diminishes and is overcome by the flattening yield curve. Because most of Stock

Yards’ loans are priced off of five-year Treasury yields, loan rates are likely to remain at depressed

levels. Stock Yards will have to consistenly grow their loan portfolio and earn sufficient non-interest income to overcome this shrinking net interest margin. The bank did increase its net interest margin by

one basis points in 2014. However, this was solely the benefit of redeeming their trust preferred

securities in 2013. This benefit will not be felt in the future and Stock Yards net interest margin is

expected to decline in 2015 as loan yields continue to remain under pressure.

Consistency

Stock Yards experienced just two years of decreasing EPS growth through the financial crisis and prior

to the crisis delivered twenty consecutive years of increasing net income. Furthermore, over the past ten

years the bank has produced EPS growth of 6.39%. Net loans have also grown at a 6.61% CAGR (see

Appendix 14) over the past ten years. The consistency and predictability of Stock Yards’ growth is impressive, allowing the company to earn a premium valuation to its peers. In addition, the management

team at Stock Yards continues to over-deliver on their promise to grow loans at a mid-single digit pace


9

and exploit their key competitive advantages. Therefore, it can be assumed that Stock Yards will

continue to deliver solid growth and trade at a premium to peers.

Corporate Management

The board of directors in recent years has averaged 11 members. There are a majority of independent directors on the board. Historically, three inside directors have been on the board, these include the

chairman and CEO, the manager of a significant business unit, the trust department, as well as the

president of the bank. The pay-for-performance compensation philosophy of the compensation

committee supports S.Y. Bancorp’s primary objective of creating value for its shareholders. The

compensation committee strives to ensure that compensation of S.Y. Bancorp’s executive officers is market-competitive to attract and retain talented individuals to lead S.Y. Bancorp and the bank to growth

and higher profitability while maintaining stability and capital strength. Additionally, the audit

committee is appointed by the board of directors to assist the board in fulfilling its oversight

responsibilities.

Valuation Framework To derive an intrinsic value for Stock Yards Bancorp, Inc. our team decided to use a dividend discount

model (DDM) valuation, price-to-earnings (P/E) valuation and price-to-tangible book value (P/TBV)

valuation. Through analysis Stock Yards Bancorp’s history, we concluded that all three are equally important valuation tools for the company. The bank has been steadily increasing its’ dividends since

1993, showing that the DDM is an accurate valuation tool for the company . Price-to-earnings and price-

to-tangible book value are also important valuation tools for Stock Yards Bancorp due to the historic

premium the company's stock has commanded in the market. This premium is deserved due to the

company's consistant performance in the face of many obstacles in the environment.

Dividend Discount Model

We decided to use a two-stage dividend discount models (DDM) due to there being less assumptions and

variables that would impact the calculation of Stock Yards Bancorp’s intrinsic value. This model only required the calculation and selection of three pieces of information. In our DDM, we used calculations

over five-, ten-, and fifteen-year time periods because of the uncertainty of the duration of the abnormal

growth period.

The are three vital pieces of information to our valuation are the abnormal growth rate, the mature growth rate, and the rate of return for Stock Yards Bancorp. The abnormal growth rate was calculated by

taking the compounded annual growth rate of the diluted earnings per share (EPS) for the last ten years.

The ten-year growth rate in EPS is 6.39%. We decided that the abnormal growth rate of the dividend

would be similar to this historic rate of EPS growth because dividends must be paid from earnings.

Therefore, dividends cannot increase faster than earnings indefinitely. We also assumed the company would maintain a constant dividend payout ratio in the future. For the mature growth rate, we decided

that Stock Yards Bancorp will grow at a similar growth rate to the GDP growth of the United States. The

use of the U.S. GDP instead of international GDP is due to the fact that Stock Yards conducts all of its

business within the U.S. To forecast future GDP growth, we utilized a future estimate of United States’

GDP from 2014 to 2019 given by the International Monetary Fund. These estimates implied that the U.S GDP would grow at a rate of 2.87% over the next five years. To find Stock Yards Bancorp’s rate of

return we used the CAPM equation. In our CAPM equation we assumed a risk-free rate of 1%. We

believe this is the long-run average rate of return for the one-year Treasury bill. We used the average

historic market premium of 7% and the beta of the company given by S&P (0.86) to get the required rate

of return of 7.02% for Stock Yards.

In the two-stage model, we calculated a best-, base-, and worst-case scenario. In each scenario we used

the same abnormal growth rate and mature growth rate. For the best-case scenario we used a fifteen-year

abnormal growth rate period. For the base case scenario we used a ten-year abnormal growth rate period

and for the worst case scenario we used a five-year abnormal growth rate period. We then used the abnormal growth rate to project the dividend amount from the trailing twelve months ($0.88) to five-,

ten-, and fifteen-year time periods depending on the scenario. At the end of the allotted time period, we

took the final estimated dividend and derived a terminal value of the stock using the Gordon Growth

Model. This terminal value was calculated by increasing the dividend at the end of the abnormal growth

period by the mature growth rate. Then this dividend was divided by the difference between the required rate of return and the mature growth rate. After forecasting the future dividends and terminal stock value,

we discounted them back to present value. The present values of all of the dividend payments as well as

the terminal stock price were then summed together to get the value of the stock for each scenario. We

then weighted the value of the base case scenario at 50% because we believe it has a greater probability

of occurring than the other two scenarios. The best and worst cases were weighted by 25% each because we believe those scenarios have similar chances of happening. The intrinsic value we calculated for the

stock using the two-stage model is $29.08.


10

Price to Tangible Book Value and Price to Earnings

In our team's price-to-tangible book value valuation (P/TBV), we used Stock Yards Bancorp's historic

multiples. Our calculation utilized the last ten years of share price and tangible book value per share

information. From those two figures we calculated the P/TBV for each year by dividing the share price

by the tangible book value. After finding each historical P/TBV multiple an arithmetic average was calculated for the ten year period (2.17x). This average was used as the P/TBV multiplier in the

valuation model. We then multiplied the trailing twelve month tangible book value per share for Stock

Yards Bancorp ($17.10) by this multiple. This model gave us an intrinsic value of $37.10.

Our price-to-earnings (P/E) valuation was performed in a similar manner as the P/TBV valuation. We used a ten year average of Stock Yards P/E ratios (15.48x) and the trailing twelve month earnings per

share for Stock Yards ($2.36). The intrinsic value calculated using the P/E valuation is $36.53.

Price Target

Our price target is based on all three valuations. As mentioned in the introduction of our valuation framework, we gave each valuation the same importance in calculating our price target. We took the

calculated intrinsic value for each model and took an average of the three outcomes to obtain our target

price of $34.24. This implies a 4.67% share price appreciation over the next year. In addition, Stock

Yards currently pays a dividend of $0.23 per quarter. If we project this dividend over the next year, the

shares have a dividend yield of 2.81%. Adding these two returns together to obtain a total return for Stock Yards over the next year gives a total return of 7.48%.

Financial Analysis

Ratio Analysis

Profitability ratios examine the extent to which a firm is successfully generating profits. Over the past

five years, SYBT has demonstrated consistent profitability ratios with higher ROA and ROE in 2014

fisical year and five-year average compared with FITB and PNC. In addition, with the net interest

margin and profit margin both higher than FITB and PNC in 2014 and over five years, we can see SYBT is successfully generating profits. Lastly, Stock Yards Bancorp has a unique niche in the regional market

because of abundant fee income as a main non-interest income source. Compared to its peer group, we

can see that Stock Yards Bancorp has a higher non-interest income to average assets ratio on September

30, 2014 and over past four years. Stock Yards Bancorp provides various fee-based services. These

services not only reduced its dependence on interest income, but also reduced its risk exposure to interest rate sensitive assets and liabilities.

Capital adequency and asset quality are key factors for determining the success of banks. Regulators use

the tier one capital ratio to grade a firm’s capital adequency. If it is equal to or greater than 6%, a firm

can be classified as well-capitalized. Stock Yards Bancorp’s tier one ratio is 12.6% for fisical year 2014, which is higher than the peer group and FITB.

Loans comprise the majority of a bank’s assets and are also the primary interest-bearing asset. Stock

Yards Bancorp focuses more on obtaining commercial real estate loans when compared to FITB, PNC

and its peers. Stock Yards Bancorp also ranked in the 87th percentile in terms of the percentage of commercial and industrial loans to total loans among its peer group on September 30, 2014. Lower

residential loans and higher commercial loans helps to explain Stock Yards’ high net interest margin and

earnings; however, it also exposes its operations to higher risk because commercial loans have higher

default risk. Stock Yards Bancorp has the lowest net charge-off ratio compared to FITB and PNC in

fiscal 2014 and over the past five years. Indicative of the ratio, SYBT has been successfully managing risk. This demonstrates that Stock Yards has a unique ability to make the high-quality commercial loans,

which management has indicated is their desired customer.

Figure 3: Competitor Ratio Analysis

SYBT FITB PNC

Net Interest Margin (2014) 3.80% 3.10% 3.10%

Net Interest Margin - 5 Yr. Avg. 3.88% 3.50% 3.70%

Profit Margin (2014) 28.20% 25.80% 27.70%

Profit Margin - 5 Yr.Avg 26.00% 23.80% 25.20%

Interest Rate Spread(2014) 3.62% 2.94% 2.95%

Interest Rate Spread- 5 Yr. Avg. 3.70% 3.30% 3.60%

Return on Equity (2014) 14.20% 9.80% 9.30%

Return on Equity - 5 Yr. Avg. 13.50% 9.90% 9.00%

Return on Assets (2014) 1.40% 1.00% 1.30%

Return on Assets - 5 Yr. Avg. 1.30% 1.10% 1.20%

Total Assets Growth Rate (2014) 7.30% 6.30% 7.70%

Total Assets Growth Rate- 5 Yr. Avg. 7.50% 4.20% 5.20%

Noninterest Income/Total Revenue (2014) 31.80% 43.10% 45.40%

Noninterest Income/Total Revenue- 5 Yr. Avg. 35.90% 47.60% 44.00%

Net Charge-offs/Total Average Loans % (2014) 0.20% 0.60% N/A

Net Charge-offs/Total Average Loans % (5 Yr. Avg) 0.50% 1.30% 1.2%

Commercial Mortgage Loans / Total Loans % (2014) 44.40% 8.20% 11.40%

Commercial Mortgage Loans / Total Loans %- 5 Yr. Avg 44.80% 10.90% 10.90%

Companies Comparison


11

Figure 4: Peer Group Ratio Analysis

Liquidity is the ability to meet financial obligations as they come due. Stock Yards Bancorp has lower

liquid assets to total assets among its peer group, this can be explained by a higher concentration of real estate loans.

A highlight for Stock Yards is the ability to maintain the highest net interest margin compared to

competitors this past year while also achieving the highest deposit growth rate. In fact, Stock Yards has

experienced the highest deposit growth rate over the last five years at 8.4%, which is well above its

competitors. The ability to grow deposits and maintain a high net interest margin shows that the bank has been successful in promoting its services through other means than just rates. The high interest spread of

Stock Yards Bancorp is also indicated by having a higher total earning assets yield and a lower interest -

bearing funds cost compared to the peer group over the past four years. This shows the potential for high

profitability and leads to the conclusion that Stock Yards has excelled in the relationship development

portion of the banking business.

Investment Risks

Economic Conditions

Economic conditions on both the local and national level affect the profitability of Stock Yards Bancorp. Unemployement, government regulation, and economic recovery will affect Stock Yards on a national

level, but local factors will affect a large number of customers as well, especially for a community bank

serving in one general area. During times of poor economic conditions, it will be more of a financial

burden for customers to pay back their loans. There may also be a decrease in the demand for new loans.

The deterioration of the bank’s credit portfolio comes less profitable income than usual from a lending standpoint, which could directly affect the capital of the bank.

Loan Loss Allowance

Not building reserves adequately enough for projected loan losses is a mistake, which could decrease earnings. If loans aren’t repaid by borrowers, collateral isn’t sufficient, or the guarantors on loans don’t

have the ability to pay back the loan themselves, this becomes a loss for the bank. While SYBT monitors

the credit risk in their portfolio and makes assumptions regarding the amount of loans that will result in a

loss, there are still errors that could be made. Regulators review these allowance numbers and could

require an increase if they think there is more risk than the bank is projecting. More than half of the loans in the bank’s portfolio are secured by real estate. If there were a decrease in real estate values in their

markets, this would make the loans even more risky and could potentially increase losses on loans.

Having to increase the allowance for loan losses will have a negative effect on the bank’s financials.

Policy and Security The policies in place at the bank are vital to the protection of assets and growth of the company. There

are also many factors involved in valuing these assets which have been outlined and detailed within the

policies and procedures required of each employee. It is also vital that the bank protects their

infrastructure and operating systems from any sort of disaster or security breach which could disrupt the

flow of daily activities or cause major harm to their customers. The bank has protection plans in place in the form of third-party vendors who store information electronically at the bank so that information

would not be lost in the event of natural disaster. There are also security training sessions frequently

given to employees as well as detective controls to help prevent fraud or theft.

Regulations Banks are highly regulated and examined each year by banking authorities on both the federal and state

level. Changes in laws and regulations the bank is held to could immediately impact the bank’s

operations and profitability. Banks must stay up to date on all compliance and regulation laws regarding

their procedures and operations due to the fact that these laws are always subject to change.

9/30/2014 9/30/2013 9/30/2012 9/30/20113.74 3.76 4.3 4.093.62 3.6 3.7 3.77

9/30/2014 9/30/2013 9/30/2012 9/30/201112.67 12.04 11.34 10.7512.31 12.22 11.89 11.29

9/30/2014 9/30/2013 9/30/2012 9/30/201126.59 24.36 21.72 21.24

14.1 13.3 13.07 13.899/30/2014 9/30/2013 9/30/2012 9/30/2011

18.89 17.48 16.67 13.7821 22.43 23.7 24.07

9/30/2014 9/30/2013 9/30/2012 9/30/20111.73 1.84 1.81 1.670.93 1.06 1.04 0.92

9/30/2014 9/30/2013 9/30/2012 9/30/20110.26 0.48 0.67 0.850.56 0.66 0.87 1.18

9/30/2014 9/30/2013 9/30/2012 9/30/20113.93 4.16 4.56 4.7

4 4.08 4.39 4.69

SYBT

SYBT

Peer GroupSYBT

Peer GroupSYBT

Net Interest Margin (%)

Tier one Capital Ratio

Commercial and Industrial Loans/Total Loans&Leases

Liquid Assets/Total Assets

Non interest Income/Avg Assets(%)

All Interest Bearing Funds Yield

Total Earning Assets Yield

Peer GroupSYBT

Peer GroupSYBT

Peer Group

Peer GroupSYBT

Peer Group


12

Appendix 1: Annual Growth in Stock Yards Bancorp Loan Portfolio (2005-2014) Source: S&P Capital IQ

Appendix 2: Annual Growth in Stock Yards Bancorp Deposits (2004-2013) Source: S&P Capital IQ

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Commercial Loans 4.5% 21.8% 12.7% 12.5% -3.2% 2.1% 14.5% 8.4% 19.6% 13.2%

Commercial Mortgage Loans -30.9% 13.4% 4.6% 12.9% 11.8% 22.1% 2.6% 3.1% 5.7% 9.1%

Residential Mortgage Loans 0.0% -1.9% -3.3% 10.3% -8.1% 7.2% -2.2% 7.6% 10.5% 6.2%

Consumer Loans 18.4% -4.1% -4.6% 9.0% 7.9% -11.8% -9.3% -6.7% -2.9% 7.9%

Construction Loans 54.3% 5.0% 8.5% 15.7% 22.3% -22.1% -7.4% -11.1% -1.3% -8.9%

Total Loans 7.0% 9.0% 4.6% 12.3% 6.4% 5.1% 2.4% 2.6% 8.6% 8.6%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%Loan Growth

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Demand Deposits 2.9% -2.4% -4.3% -4.9% 6.4% 12.1% 14.7% 18.0% 21.3% 19.4%

Money Market Account/Invest. 35.9% 27.0% 11.5% 32.9% 23.0% 21.6% 19.8% 10.7% 10.1% 11.1%

Saving Deposits 6.0% 9.4% -13.7% -7.8% 18.5% 31.7% 10.5% 6.2% 19.5% 19.8%

Time Deposits 5.1% 14.6% 19.6% -8.5% 16.9% 2.7% -14.9% -5.5% -8.2% -6.8%

Total Deposits 7.7% 8.6% 7.0% 0.3% 14.8% 11.6% 5.3% 8.3% 10.1% 11.2%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Deposit Growth


13

Appendix 3: Loan and Deposit Composition Changes Source: S&P Capital IQ

Appendix 4: Percent of Deposit Share By Market Source: Stock Yards Bancorp Company Presentation

24%

39%

10%

13%

14%


Commercial Loans

CommercialMortgage Loans

ResidentialMortgage Loans

Consumer Loans

Construction Loans

32%

28%4%

36%


Demand Deposits


Saving Deposits

Time Deposits

31%

44%

11%

8%6%


Commercial Loans

CommercialMortgage Loans

ResidentialMortgage Loans

Consumer Loans

Construction Loans

45%

32%

5%

18%


Demand Deposits


Saving Deposits

Time Deposits


14

Appendix 5: Loan Growth By Market Source: Stock Yards Bancorp Company Presentation

Appendix 6: Growth in Investment Management and Trust Revenue Source: Stock Yards Bancorp Company Presentation


15

Appendix 7: SWOT Analysis & Porter’s Five Forces of Competitive Position

Source: Student Analysis

Strengths

-Wealth management arm

-Close customer relationships

-Easy access to capital

-Low cost of funds

-Diverse product set

Weaknesses

-High regulatory burdens

-Less resources than larger competitors

-Lower market share than larger competitors

-Less brand recognition in wealth management

-Highly reliant on commercial loan market

Opportunities

-New growth markets

-Acquisitions in growth markets

-Technological improvements

Threats

-Larger institution entering market

-Increasing regulatory requirements

-Greater use of substitute online products

-Prolonged economic weakness nationally and locally


16

Appendix 8: Valuation and Sensitivity Analysis

Source: Student Calculations

Assumptions

Discount Dividend Model

Beta .86

Risk Free Rate 1.00%

Market Risk Premium 7.00%

Two-Stage

Model

Three -Stage

Model

Abn. Growth

Years of Abn. Growth

Mature Rate

Abn. Growth

Years of Abn. Growth

2nd Stage Growth

Yrs. of 2nd Stage growth

Mature Rate

Best Case 6.39% 15 yrs. 3.83% 6.39% 8 yrs. 5.11% 7 yrs. 3.83%

Base Case 6.39% 10 yrs. 2.87% 6.39% 5 yrs. 4.63% 5 yrs. 2.87%

Worst Case

6.39% 5 yrs. 2.56% 6.39% 3 yrs. 4.48% 2 yrs. 2.56%

Price to Tangible Book

Companies Individual P/TBV

SYBT 1.708

PNC 1.393

RBCAA .9565

FITB 1.323

Price to Tangible Book Combined Peer P/TBV Assumed Growth Rate

Best Case 1.35 14.68%

Base Case 1.35 6.39%

Worst Case 1.35 2.87%

Price to Earnings

Companies Individual P/E

SYBT 13.61

PNC 10.66

RBCAA 11.87

FITB 11.62

Price to Earnings Combined Peer P/E Assumed Growth Rate

Best Case 11.94 14.68%

Base Case 11.94 6.39%

Worst Case 11.94 2.87%

Results

Two-Stage DDM Three-Stage DDM Price to Tangible Book

Price to Earnings

Best Case $38.85 $36.45 $27.20 $32.32

Base Case $29.11 $27.26 $25.23 $29.99

Worst Case $23.98 $23.36 $24.40 $28.99

Weighted Average $30.26 $28.58 $25.52 $30.32

Price Target From All Valuations

$28.67


17

Appendix 9: Stock Yards Bancorp and Competitor Financial Ratio Comparison


SYBT FITB PNC

P/E Ratio (TTM) 13.57 11.32 12.27

P/E – 5 Yr. Avg 14.53 19.46 11.12

PEG Ratio 1.35% 1.69% 2.09%

PEG Ratio - 5 Yr. Avg(TTM) 2.23% 0.40% 0.86%

P/B (2014) 1.90 1.10 1.10

P/B - 5 Yr. Avg. 1.80 1.10 1.00

EPS(TTM) $2.23 $1.70 $7.52

EPS-5 Yr. Avg. $1.83 $1.38 $6.22

Profit Margin (2014) 28.20% 25.80% 27.70%

Profit Margin - 5 Yr.Avg 26.00% 23.80% 25.20%

Tier 1 capital ratio (2014) 12.60% 10.80% 12.70%

Tier 1 capital ratio- 5 Year Avg. 12.60% 11.50% 12.30%

Allowance for Credit Losses/Total loans(2014) 1.30% 1.50% 1.60%

Allowance for Credit Losses/Total loans - 5 Yr. Avg. 1.70% 2.40% 2.30%

Nonperforming Loans/Total Loans(2014) 0.60% 0.70% 1.20%

Nonperforming Loans/Total Loans- 5 Yr. Avg. 1.30% 1.40% 1.90%

Total Assets Growth Rate (2014) 7.30% 6.30% 7.70%

Total Assets Growth Rate- 5 Yr. Avg. 7.50% 4.20% 5.20%

Gorss Loans Growth Rate(2014) 8.50% 0.90% 3.60%

Gorss Loans Growth Rate-5 Yr. Avg. 5.40% 2.90% 5.20%

Total Deposits (2014) 7.20% 2.50% 5.10%

Total Deposits-5 Yr. Avg. 8.40% 3.90% 4.60%

Net Charge-offs/Total Average Loans % (2014) 0.20% 0.60% N/A

Net Charge-offs/Total Average Loans % (5 Yr. Avg) 0.50% 1.30% 1.2%

Return on Equity (2014) 14.20% 9.80% 9.30%

Return on Equity - 5 Yr. Avg. 13.50% 9.90% 9.00%

Return on Assets (2014) 1.40% 1.00% 1.30%

Return on Assets - 5 Yr. Avg. 1.30% 1.10% 1.20%

Net Interest Income 5 Year Avg Growth Rate 7.40% 1.40% -1.00%

Net Loans/Total Deposits (2014) 86.80% 87.30% 86.80%

Net Loans/Total Deposits- 5 Yr Avg. 90.50% 90.40% 84.10%

Noninterest Income/Total Revenue (2014) 31.80% 43.10% 45.40%

Noninterest Income/Total Revenue- 5 Yr. Avg. 35.90% 47.60% 44.00%

Net Interest Margin (2014) 3.80% 3.10% 3.10%

Net Interest Margin - 5 Yr. Avg. 3.88% 3.50% 3.70%

Net interest Income/ Total Revenue (2014) 67.90% 62.40% 56.40%

Net interest Income/ Total Revenue-5 Yr. Avg. 72.90% 63.30% 64.30%

Interest Rate Spread(2014) 3.62% 2.94% 2.95%

Interest Rate Spread- 5 Yr. Avg. 3.70% 3.30% 3.60%

Noninterest Income/Average Assets (2014) 1.60% 1.90% 2.1%

Noninterest Income/Average Assets - 5 Yr. Avg. 1.70% 2.30% 2.1%

Equity Multiplier (2014) 9.9 8.9 7.5

Equity Multiplier- 5 Yr. Avg. 10.6 8.7 7.5

Appendix 10: Stock Yards Bancorp and Competitor Loan/Deposit Composition Comparison Source: S&P Capital IQ

Commercial Loans / Total Loans % (2014) 30.90% 49.40% 51.30%

Commercial Loans / Total Loans %- 5 Yr. Avg. 27.20% 45.20% 47.00%

Commercial Mortgage Loans / Total Loans % (2014) 44.40% 8.20% 11.40%

Commercial Mortgage Loans / Total Loans %- 5 Yr. Avg 44.80% 10.90% 10.90%

Residential Mortgage Loans/Total Loans % (2014) 10.40% 13.80% 6.80%

Residential Mortgage Loans/Total Loans % - 5 Yr. Avg 10.00% 13.40% 8.20%

Total Consumer Loans / Total Loans %(2014) 8.00% 26.40% 30.30%

Total Consumer Loans / Total Loans %- 5 Yr. Avg 9.20% 29.00% 33.60%

Demand Deposit/Total Deposit (2014) 24.70% 60.60% 31.60%

Demand Deposit/Total Deposit - 5Yr.Avg 36.70% 57.10% 31.90%


18

Money Market and Savings Account Deposits / Total Deposits % (2014) N/A 31.60% N/A

Money Market and Savings Account Deposits / Total Deposits %- 5 Yr. Avg 37.00% 30.70% 52.50%

Total Time Deposits / Total Deposits %(2014) N/A 6.70% N/A

Total Time Deposits / Total Deposits %- 5 Yr. Avg 23.20% 9.70% 15.60%

Appendix 11: SYBT vs. Peer Group Comparison Source:FFIEC BHC Reports

Net Interest Margin (%) 9/30/2014 9/30/2013 9/30/2012 9/30/2011

SYBT as of 9/30/2014 Percentile 58 3.74 3.76 4.3 4.09

Peer Group 3.62 3.6 3.7 3.77

Non interest Income/Avg Assets(%)

SYBT 87 1.73 1.84 1.81 1.67

Peer Group 0.93 1.06 1.04 0.92

All Interest Bearing Funds Yield

SYBT 9 0.26 0.48 0.67 0.85

Peer Group 0.56 0.66 0.87 1.18

Total Earning Assets Yield

SYBT 49 3.93 4.16 4.56 4.7

Peer Group 4 4.08 4.39 4.69

Tier one Capital Ratio

SYBT 60 12.67 12.04 11.34 10.75

Peer Group 12.31 12.22 11.89 11.29

Total Assets Growth Rate

SYBT 48 5.16 8.9 5.73 5.7

Peer Group 7.32 5.05 4.32 2.16

Net Loans and Leases Growth Rate

SYBT 22 4.64 7.93 2.6 3.12

Peer Group 11.65 7.41 4.19 -1.78

Loans&Leases Allowance/Total Loans&Leases

SYBT 64 1.52 1.69 1.96 1.88

Peer Group 1.41 1.63 1.85 2.05

Mutual Fund Fee Income/Non interest Income

SYBT 79 5.19 5.62 6.63 6.63

Peer Group 1.98 1.82 1.78 2.22

Personnel Expense/Average Assets

SYBT 74 1.94 1.91 1.91 1.71

Peer Group 1.7 1.7 1.67 1.57

Commercial and Industrial Loans/Total Loans&Leases

SYBT 87 26.59 24.36 21.72 21.24

Peer Group 14.1 13.3 13.07 13.89

Commerical Real Estate Loans/Total Loans&Leases

SYBT 62 48.98 49.95 51.08 54.36

Peer Group 44.78 45.7 45.15 46.97

RE loans secured by 1-4 family/Total Loans&Leases

SYBT 28 16.81 16.71 17.29 18.68

Peer Group 26.78 26.53 27.75 24.95

Liquid Assets/Total Assets

SYBT 45 18.89 17.48 16.67 13.78

Peer Group 21 22.43 23.7 24.07


19

Appendix 12: Federal Funds Rates Projection Source: CNBC

Appendix 13: Graph of Yield Curve at Prior Dates



20

Appendix 14: Various Balance Sheet and Income Statement Items Growth Rate Calculations

Source: Student Calculations

Appendix 15: SYBT Simulation Analysis

Source: Stock Yards Bancorp 2013 10-K


21

Disclosures:

O wnership and material conflicts of interest: The authors, or a member of their household, of this report do not hold a financial interest in the securities of this company. The authors, or a member of their household, of this report do not know of the existence of any conflicts of interest that might bias the content or

publication of this report.

Receipt of compensation: Compensation of the authors of this report is not based on investment banking revenue.

Position as an officer or director: The authors, or a member of their household, do not serves as an officer, director or advisory board member of the subject company.

Market making: The authors do not act as a market maker in the subject company’s securities.

Ratings guide: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD ratin g

implies flat returns over the next twelve months.

Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not inten ded to

be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an o ffer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

Documents

CFA_Final Report_SYBT