Transcript
Coming up, a casual conversation about bourbon and banking with maybe just a dash of Derby talk, thanks to our friend Jay Hillebrand, who leads Stock Yards Bank & Trust in Louisville, Kentucky. I’m one of your hosts, Al Dominick, coming to you from our nation’s capital, joined as always by my partner in crime, Steve Williams, who I believe is sweating it out in the scorching Arizona desert.
It’s a little hot for late March, Al. You are correct. But I’m excited that we have another high-performing bank to talk about today.
Stay cool in that Scottsdale studio. We’re coming to you from different parts of the country, but I think we share a fascination with what’s happening in this industry, and we appreciate Jay taking a little time to get Plugged In with us.
Before we dive into the deeper stuff, I wanted to share a few fun facts about the bank. Stock Yards Bank got its start in the Bourbon Stock Yards in Louisville, founded by 10 local businessmen, eight of whom were directly involved in the livestock trade.
What I thought was interesting is that they opened the bank on a Saturday in September 1904 because that was the busiest day for livestock merchants, who traditionally sold animals at week’s end.
When you think about the entrepreneurial spirit that exists today, you can draw a line all the way back to that first Saturday in September, when these guys decided to go where the customers already were and set up shop in one of the country’s best-known livestock markets.
Fast-forward to today, and we’re talking about one of the largest community bank footprints in Kentucky. Jay can keep me honest on the stats, but I believe you’ve got around 50 branch locations across the state, along with operations in Indianapolis and Cincinnati, and you’re approaching $10 billion in assets.
Correct. Just under.
Your regulators probably appreciate that clarification. Closer to about $9.3 billion, right?
Right.
Steve and I both feel this is the kind of bank more listeners should know. We have tremendous respect for the team and for what Jay has done during his years as CEO. The bank has deep Kentucky roots and has produced consistent financial performance year after year.
Steve, anything catch your eye besides the fact that the bank originally opened on a Saturday morning?
Jay, great to have you. This is another example of bankers playing the long game. In a recent investor presentation, Stock Yards showed a 24-year track record of earnings growth and dividend growth. Today you’re around a 14% return on equity, a mid-50s efficiency ratio and roughly 24% noninterest income as a percentage of total revenue.
In an environment full of frothy markets and constant ups and downs, this is another example of playing the long game in banking.
Steve, you’re funny because I’ve known you a long time and you always want to go straight into the stats.
You want to go straight to the whiskey.
I do. In fact, I brought a little Weller 12 because I happen to enjoy hearing what people are drinking these days. Jay can probably get us started by talking about a few bourbons worth checking out. Weller 12 is great, but I’m sure there are a few more in your cabinet.
There are a few. We actually had our first wedding at our farm this weekend and did a bourbon tasting, so I could probably update the list.
My go-to bourbon is Old Forester 86 Proof. It’s a great sipping bourbon. Weller Antique 107 is probably my favorite.
This weekend, I also tasted some Shenk’s, S-H-E-N-K-S. It’s out of Michter’s Distillery, the original sour mash whiskey, and it was absolutely fabulous. If you can get your hands on some Shenk’s, I’d recommend it.
Willett is another great distillery with several outstanding options. The Willett Family Estate Purple Top is an excellent bourbon too.
We probably don’t have enough time to go through all the favorites.
That could take the entire episode.
Steve is ferociously taking notes, so maybe for his upcoming birthday I’ll find an excuse to send him something to enjoy with his wife.
Sipping whiskey.
Exactly.
Steve and I also enjoy talking music and movies. I have teenagers who are starting to get into the John Hughes catalog, and it’s pretty easy to spend a weekend going through those movies. They also come with some great music.
I can’t promise every track we’re using today has a John Hughes connection, but we’ll find enough music to keep the conversation moving.
The first song is Mike + The Mechanics’ “All I Need Is a Miracle.” That title lends itself to an uncomfortable truth we see at some banks. They may have an operating model they believe is legitimate and a strategic plan that sounds clear, but there’s a gap between the two. That’s often where performance is won or lost.
Jay, you’re running a high-performing business. How do you think about scale and what a winning approach really looks like for a bank operating in your markets?
Winning depends on what your endgame is. Our endgame is way out in the future. We have a vision for 15 or 20 years from now.
We don’t look at one quarter or one year and say, “We’re winning.” We look at whether we’re executing and moving the ball forward. It’s a long game, as you said earlier.
Every morning, we come to work and earn our right to independence. We take that very seriously. We look for bankers who believe in that philosophy and want to execute on it every day.
Strategic plans are great, but most of them sit on a shelf. We keep ours in view and take it seriously, but the real work is the daily execution of a strategy whose roots go back more than 120 years here.
One of the quotes in your investor materials is, “Technology is not replacing shoe leather.” Can you elaborate on that?
Think about the last 20 years. We heard technology, technology, technology. We heard there wouldn’t be as many banks in the future, and some of those predictions have proven true.
But what remains consistent is that relationships matter. You get out in front of customers and prospects. You stay visible. You listen to their needs and take care of their needs before your own. If you stick with that strategy, it works.
You have to wear out the shoe leather. You can’t do everything from email or your phone.
Forty years ago, the convenience was the ATM. It got people out of teller lines because those lines were too long. Now we’re practically begging people to come into branches.
Mobile banking is simply another convenience. Too many companies act as though the technology itself should be the primary point of contact. For us, the point of contact is still the relationship with a banker.
And ideally, it’s deeper than that. A commercial customer may also know somebody in wealth management. They should have relationships with several people inside the organization.
Our president, Phil Poindexter, and I don’t sit in our offices pushing paper all day. We like getting in front of customers and prospects so they know we’re real people, we’re accessible and we’re here to make decisions that help them.
That means calling people back within an hour or two, or at least the same day. Whatever your exact philosophy is, you have to communicate. Face-to-face contact matters because it gives customers confidence that they’re dealing with decision-makers who will be there in good times and bad.
It’s easy to be good when everything is good. You prove yourself and build your brand when things get difficult.
We grew the company significantly during the financial crisis and again during PPP after COVID. During PPP, we decided we weren’t going to centralize and automate everything and leave people wondering whether they’d get help.
Businesses were scared. People needed to know whether they could access that money. We had people from human resources, audit and other departments processing PPP applications. It was all hands on deck.
That’s what community banking is. Wearing out the shoe leather applies to all of it. Be visible, work the streets and don’t sit behind a desk waiting for an email to arrive.
I love that. It reminds me of something Chip Mahan, founder of Live Oak, told me years ago. He expected his team to acknowledge a legitimate email within 24 hours, even if they couldn’t provide the final answer yet. Just let the person know you received it and when you’ll get back to them.
Service never goes out of style.
Chip called that the sundown rule. Before I joined Stock Yards, and I’m in my 30th year here now, I worked for Chip. He’s a great man and was a great mentor to many of us.
I also have to remind Steve that we gave Jay a Gonzo Banker award a few years ago for one of the best lines delivered at a conference.
We were at Bank Director’s Acquire or Be Acquired conference during a conversation about remote work. To paraphrase, Jay said, “You want to work from home? No problem. I’ve got Saturday and Sunday for you, all day, every week.”
That’s right.
It got the room laughing because the point wasn’t to be draconian. It was about showing up every day and performing for clients when they need you. You can’t always do that if you’re not accessible and available.
Correct.
Another thing I like is that Stock Yards publishes the usual investor decks, annual reports and earnings releases, but also puts out a corporate responsibility report.
There was a period when that type of reporting became especially trendy around DEI and ESG, but you seem to treat it more broadly as stakeholder accountability, whether that’s governance, risk management, developing your people or serving the community.
We remember when that became a trend and thought, “Hold on, we already do this. These are standards in our industry.”
But yes, we produced the report and we’re proud of it. It simply says, here’s what we do, here’s what we’ve always done, and here’s how seriously we take it.
Jay, you talked about earning your independence, and I want to tie that into The Clash’s “Should I Stay or Should I Go.”
We’re in another consolidation wave. The industry has been in this M&A game for decades, but right now it’s especially pronounced. Stock Yards is an attractive franchise, so at the board level you have to talk about whether you’re being proper stewards of capital and whether you’re earning independence rather than simply defending it.
How do you make sense of what’s happening around you?
First and foremost, we always have to question whether our service style remains relevant. That goes back to the 15- or 20-year view. Is what we do, and the way we do it, still relevant that far into the future?
Our answer is definitely yes. But remaining relevant requires us to keep up with technology, both customer-facing technology and back-office systems that help protect our assets and operate efficiently.
For us, opportunistic acquisitions can help make that possible. We need enough top-line revenue to support the technology investment required to remain competitive.
And don’t forget regulation. Regulation is important, but it also costs money. It requires more software, more people and more training.
Salaries and benefits used to be the major expense category growing every year. Technology expense has become much more significant.
So opportunistic acquisitions can make sense for us, especially smaller community banks in or around our current markets that share a similar service culture.
You hear it all the time, but culture really is critical. If shareholders, employees and customers can all win, we can preserve the service style while maintaining an attractive financial profile.
Our financial performance is excellent, and we take that seriously because it gives us the ability to keep that service model alive.
We’ll continue with organic growth complemented by the occasional acquisition.
That brings up diversification. Regional and community banks are under a lot of pressure, and people keep saying diversification is important. How much is enough? And what qualifies as a good deposit these days?
Diversification is important, but I think some banks take it too far.
We’re a community bank. We’re going to take care of the communities where we work, live and play. You will not hear us talking about building one national vertical after another.
Loans, deposits and wealth management. That’s what we do, and we do it very well.
Geographic diversification can be important. Our brand is very strong in this region, especially in Kentucky, and we’ll continue to take advantage of that.
For a commercial customer, the best deposit relationship is usually a noninterest-bearing operating account combined with an appropriate sweep, money market or similar account so the customer can earn something on funds that aren’t needed for daily operations.
For an individual, the principle is similar. You need a checking account that fits the way you actually use it, without paying for services you don’t need. Then, depending on balances, you may layer in savings, money market or sweep options.
There may also be assets that fit naturally into our wealth management and trust business.
That’s one of the distinctive things about Stock Yards. Your wealth-management assets under management are approaching the size of the bank’s own balance sheet, which is unusual for a midsize regional bank.
With a major generational wealth transfer underway and a lot of business owners aging, where do you want to take that business?
I don’t think you’ll see us acquire a stand-alone wealth-management company. We prefer to grow that business organically.
Our number-one source of new business for wealth management and trust is our commercial banking team.
We like to serve clients across the full life of the relationship. With a family-owned business, that can include succession planning, estate planning, investment management and eventually working with heirs after ownership or wealth transfers.
What makes our wealth management and trust team strong is that they look at the bigger picture. Performance matters, of course, but they also think about the long-term endgame.
We don’t push products. A business may come to us through a commercial relationship. We bank the company, its management team, its ownership group and often members of its employee base.
Over time, many of those individuals become wealth-management clients because they see the value and understand we’re there for the long term.
I’m trying to connect a few dots. You’ve talked about technology as something that keeps you competitive rather than something that drives the identity of the company.
Steve and I have been talking with Ron Shevlin about how technology used to be more of a differentiator. As certain capabilities become commoditized, they increasingly become table stakes.
So if a well-funded, AI-native competitor came after the top 20% or 25% of one of your most valuable business segments, what would stop them from skimming off those customers?
Nothing stops them from competing, and competition is good. It keeps us on our toes.
But relationships still matter. If you have the full-service relationship, a client may need lending, estate planning, business planning and more. It’s much more than a checking account or a loan.
If a competitor can replicate the full relationship and tie everything together effectively, then yes, they can do some damage.
Stablecoins and other technologies are obviously hot topics. We have to keep an eye on what they mean, including questions around whether certain funds are insured and how the structure evolves.
We’ll be ready to compete, but there are areas where a community bank doesn’t need to be the pioneer. We don’t want to spend excessive time and money being first merely for the sake of being first. We do need to stay informed and prepared.
Banks should care about stablecoins because of potential deposit displacement, fee compression and changes in treasury-management demand.
At the same time, there may be opportunities in areas such as cross-border remittances or merchant programs. That doesn’t mean every use case is right for Stock Yards, but the subject is important enough that the industry shouldn’t simply cede it to others.
I agree. Through our international department, I can see international customers having a real use for some of these capabilities. To me, that’s probably one of the most compelling features of tokenization right now.
When I look at the franchise and the organic commercial-loan growth over the last five to seven years, I also think there’s still upside in treasury-management revenue.
Yes, absolutely. There’s a big opportunity to size treasury services in line with how much the commercial bank has grown.
Ten or 20 years ago, treasury services could be a difficult sell because a business customer might wonder why it needed all these extra features. Today, customers ask for them. Treasury capabilities have become increasingly important to both businesses and individuals, but especially to commercial clients.
Steve, I want to wrap with something a little more fun. Jay is sitting in Kentucky, and Derby season comes around every year. I imagine some clients take out substantial loans just to finance the dresses and hats.
Those hats can be expensive. I bought one for my daughter once.
Jay, for anyone heading to the Kentucky Derby, what are the dos and don’ts?
If you’re coming to the Kentucky Derby on the first Saturday in May, ladies, get your hat early. You may ask whether you really need one. Yes, you do. You’ll love it.
The range is incredible, from the craziest hats imaginable to some of the most elegant you’ve ever seen.
The men dress differently than they usually do too. Al is always a sharp dresser, so he could bring almost anything out of his closet and fit right in.
It’s an incredible scene, but it is crowded. Churchill Downs has built an extraordinary brand around that first Saturday in May.
The day before Derby is the Kentucky Oaks, the race for fillies. What used to feel like Louisville’s local day has expanded into an entire week of events.
Tuesday is now called 502’sDay, named after our local area code, and it usually offers some discounted pricing. Wednesday has its own racing traditions. Thursday is Thurby, which has become a major local event, followed by Oaks on Friday and Derby on Saturday.
It’s a festive week. If you need a hotel room, book it a year in advance. It won’t necessarily be cheaper, but at least you’ll have one. And get your outfit ready early.
I love it. Thanks for winding through bourbon, banking and the Derby with us.
On behalf of the entire Cornerstone team, thank you to Jay for joining us. Steve, what did he do today?
He got Plugged In. And I want to tip my hat to the whole Stock Yards team for executing these numbers, delivering this kind of growth and doing the right thing for customers and communities.
Thank you. It takes all 1,200-plus of us to do it, and I’m proud to lead that group and be part of the team.
Thanks, Jay. Thanks, Steve. And thanks to everyone for getting Plugged In with Cornerstone.
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