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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1996 0-17262
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
(502) 582-2571
INCORPORATED IN KENTUCKY ___________________ I.R.S. NO. 61-1137529
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in a definitive proxy incorporated by reference in Part III of
this Form 10-K.
Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and has
been subject to such filing requirements for the past 90 days.
The aggregate market value of registrant's voting stock (Common Stock, no par
value) held by non-affiliates of the registrant as of February 28, 1997, was
$86,061,500.
The number of shares of registrant's Common Stock, no par value, outstanding
as of February 28, 1997, was 3,274,353.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement related to Registrant's
Annual Meeting of Stockholders to be held on April 23, 1997 (the "Proxy
Statement"), are incorporated by reference into Part III of this Form 10-K.
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S.Y. BANCORP, INC.
FORM 10-K
INDEX
PART I: PAGE
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II:
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 48
PART III:
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners
and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV:
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 48
SIGNATURES 51
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PART I
ITEM 1. BUSINESS
S.Y. Bancorp, Inc. ("Bancorp"), a Kentucky corporation headquartered in
Louisville, Kentucky, is a bank holding company registered with, and subject
to supervision, regulation and examination by the Board of Governors of the
Federal Reserve System. Bancorp has two subsidiaries. Both are wholly owned
and are state chartered banks. Bancorp conducts no active business
operations; accordingly, the business of Bancorp is substantially the same as
that of its subsidiary banks.
STOCK YARDS BANK & TRUST COMPANY (KENTUCKY)
Stock Yards Bank & Trust Company (the Kentucky Bank) was originally chartered
and began operations as a state bank under the name "Stockyards Bank" in
1904. In 1972, the Kentucky Bank was granted full trust powers and changed
its name to "Stock Yards Bank & Trust Company." The Kentucky Bank's
historical market niche has been providing commercial loans to small and
mid-size companies. As an offshoot of these commercial relationships the
Kentucky Bank also provides banking services to the owners and employees of
these businesses. In 1989, the Bank began to branch and thereby expand its
retail business. The Kentucky Bank's staff focuses on establishing and
maintaining long term relationships with customers. The Kentucky Bank
engages in a wide range of commercial and personal banking activities,
including the usual acceptance of deposits for checking, savings and time
deposit accounts; making of secured and unsecured loans; issuance of letters
of credit; and rental of safe deposit boxes. The Kentucky Bank's lending
services include the making of commercial, industrial, real estate, consumer
and guaranteed student loans. Interest and fees on consumer, real estate and
commercial loans constitute the largest contribution to the Kentucky Bank's
operating revenues. In addition, the Kentucky Bank offers Visa credit card
services through an agreement with a non-affiliated bank. Customers of the
Kentucky Bank have access to automatic teller machines through a regional
network. The Kentucky Bank operates a mortgage company as a division of the
Bank. This division originates residential mortgage loans and sells the loans
in the secondary market. The mortgage division provides customers with a
variety of options for home mortgages, including VA and FHA financing. The
Kentucky Bank provides a wide range of personal and corporate trust services.
Assets under management in the investment management and trust department
totaled approximately $470,000,000 at December 31, 1996. In 1996 the Kentucky
Bank began offering full service brokerage products through an affiliation
with Robert Thomas Securities, Inc.
The Kentucky Bank actively competes on the local and regional levels with
other commercial banks and financial institutions for all types of deposits,
loans, trust accounts, and provides financial and other services. Many of the
banks and other financial institutions with which this bank competes have
capital and resources substantially in excess of the capital and resources of
the Kentucky Bank. While primarily serving Jefferson County, Kentucky, the
Kentucky Bank also serves customers residing in the adjacent Kentucky
counties of Oldham, Shelby and Bullitt and in southern Indiana.
STOCK YARDS BANK & TRUST COMPANY (INDIANA)
In 1996, Bancorp acquired the Austin State Bank in Scott County, Indiana (the
Indiana Bank). This acquisition has allowed Bancorp to establish banking
operations in southern Indiana, a natural part of the Louisville, Kentucky
metropolitan area. This bank has been in operation since 1909 and was family
owned until the acquisition by Bancorp. Until the change of ownership, the
bank offered very limited lending products, as well as checking and savings
accounts. The Indiana Bank now offers the same products as the Kentucky Bank.
While the name of this bank has been changed to Stock Yards Bank & Trust
Company, the bank has retained its Indiana charter. As interstate banking
laws change, management will evaluate the benefits of operating the Indiana
Bank as a branch of the Kentucky Bank rather than as a subsidiary of Bancorp.
Regulatory approval has been granted to open a branch in Clarksville,
Indiana. Management anticipates opening that location by mid 1997.
The Kentucky Bank has nine banking centers including the main office. The
Indiana Bank has one location in Scott County, Indiana. Some of these
locations are owned while others are leased. See "ITEM 2. PROPERTIES."
At December 31, 1996, the Banks had 220 full-time equivalent employees.
Employees are not subject to a collective bargaining agreement. Bancorp and
the Banks consider their relationships with employees to be good.
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SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition
and prospects of Bancorp and its subsidiaries, can be materially affected not
only by management decisions, and general economic conditions but also by
legislative and governmental actions of Congress and the various federal and
state regulatory agencies with jurisdiction over Bancorp and the Banks, such
as the Federal Reserve Bank ("FRB"), Federal Deposit Insurance Corporation
("FDIC") and the Kentucky and Indiana Departments of Financial Institutions.
The effect of applicable statutes, regulations and policies can be
significant, cannot be predicted with a high degree of certainty, and can
change over time.
Bank holding companies and banks are subject to enforcement actions by their
regulators for statutory and regulatory violations and safety and soundness
considerations. In addition to compliance with statutory and regulatory
limitations and requirements concerning financial, managerial and operating
matters, regulated financial institutions such as Bancorp and the Banks must
file periodic and other reports and information with their regulators and are
subject to examination by each of their regulators.
The statutory requirements applicable to, and regulatory supervision of, bank
holding companies and banks have increased significantly and have undergone
substantial change in recent years. These changes are embodied in, among
others, the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), enacted in August 1989, the Federal Insurance Corporation
Improvement Act of 1991 ("FDICIA"), enacted in December 1991, the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Community
Development Act") and the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "IBBEA"), the last two of which were enacted in
September 1994, and the regulations promulgated thereunder. Many of the
regulations promulgated pursuant to FDICIA have only recently been finalized,
and the provisions of the Community Development Act and IBBEA are still being
implemented. As a result, the impact of these new laws on Bancorp and the
Banks cannot be predicted with certainty.
Legislation may be introduced from time to time that could, if enacted, have
significant impact on the operations of Bancorp and its subsidiaries.
Congress recently imposed legislation to assess federally insured depository
institutions to cover the cost of interest due on bonds issued to resolve
failed savings and loan associations. Beginning in 1997 institutions will be
required to pay annually approximately 1.29% per $100 of deposits. Congress
is also considering legislation to broaden the powers of bank holding
companies and permit other financial service companies to own banks.
Legislation also has been introduced in the Congress to restructure the
federal bank regulatory system. Although the Secretary of Treasury of the
United States and the Chairman of the FRB have previously expressed support
for restructuring the federal bank regulatory system, there can be no
certainty as to the effect, if any, that such legislation would have on the
regulation of Bancorp or the Banks.
The following discussions and other references to and descriptions of the
regulation of financial institutions and their parent holding companies
contained herein are not intended to constitute and do not purport to be a
complete statement of all legal restrictions and requirements applicable to
Bancorp and the Banks. All such descriptions are qualified in their entirety
by reference to applicable statutes, regulations and policies.
Regulation of Bank Holding Companies
Bancorp is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. As such, Bancorp is subject to regulation,
supervision and examination by the FRB. The business and affairs of Bancorp
are regulated in a variety of ways, including limitations on acquiring
control of other banks and bank holding companies, limitations on activities
and investments, regulatory capital requirements and limitations on payment
of dividends. In addition, it is the FRB's policy that a bank holding company
is expected to act as a source of financial strength to banks that it owns or
controls and, as a result, the FRB could require Bancorp to commit resources
to support the Banks in circumstances in which Bancorp might not do so absent
the FRB's policy.
Federal Reserve examiners began in 1996 to assign a formal supervisory rating
to the adequacy of a bank holding company's and its member bank's risk
management processes, including internal controls. The emphasis on sound risk
management processes
4
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and strong internal controls reflects the Federal Reserve's view that proper
risk management is critical to the conduct of safe and sound banking
activities.
Capital Requirements
The FRB has adopted minimum risk-based capital standards for bank holding
companies. The FRB requires bank holding companies to maintain certain
minimum ratios of risk-weighted capital to total risk-adjusted assets. A bank
holding company must meet two risk-based capital standards, a "core" or "Tier
1" capital requirement and a total capital requirement. The current
regulations require that a bank holding company maintain Tier 1 capital equal
to 4% of risk-adjusted assets and total capital equal to 8% of risk-adjusted
assets, at least one-half of which must be Tier 1 capital. Tier 1 capital
consists of common stockholders' equity; qualifying noncumulative perpetual
preferred stock; qualifying cumulative perpetual preferred stock (up to 25%
of total Tier 1 capital); and minority interests in the equity accounts of
consolidated subsidiaries. Core capital excludes goodwill and certain other
intangible assets.
Total capital represents the sum of Tier 1 capital plus "Tier 2" capital,
less certain deductions. Tier 2 or "supplementary" capital consists, subject
to certain limitations, of the allowance for loan and lease losses; perpetual
preferred stock; hybrid capital instruments; perpetual debt; mandatory
convertible debt securities; term subordinated debt; and intermediate term
preferred stock. In determining total capital, a bank holding company must
deduct its investments in unconsolidated banking and finance subsidiaries
and, as determined by the FRB on a case by case basis, other designated
subsidiaries or associated companies; reciprocal holdings of certain
securities of banking organizations; and other deductions required by
regulation or determined by the FRB on a case by case basis.
The FRB also has established a minimum leverage ratio requirement for bank
holding companies. The leverage ratio, which is defined as Tier 1 capital
divided by average quarterly assets (net of allowance for losses and
goodwill), is 3% for banking organizations that do not anticipate significant
growth and that have well-diversified risk, excellent asset quality, high
liquidity and good earnings. Banking organizations, however, generally are
expected to operate well above these minimum risk-based ratios and are
expected to have ratios of at least 100 to 200 basis points above the stated
minimum, depending upon their particular condition and growth plans. Higher
capital ratios could be required if warranted by the particular circumstances
or risk profile of a given banking organization. The FRB has not advised
Bancorp of any specific minimum Tier 1 leverage ratio applicable to it.
As of December 31, 1996, Bancorp had Tier 1 and total risk-based capital
ratios of 9.82% and 11.27%, respectively, and a Tier 1 leverage ratio of
7.90%.
The failure of a bank holding company to meet its risk-weighted capital
ratios may result in supervisory action, as well as an inability to obtain
approval of any regulatory applications and, potentially, increased frequency
of examination. The nature and intensity of the supervisory action will
depend upon the level of noncompliance.
Risk-based capital ratios which focus principally on broad categories of
credit risk are only one indicator of the overall financial health of a bank
organization. They do not incorporate other factors that can affect Bancorp's
financial condition, such as overall interest rate risk exposure, liquidity,
funding and market risks, the quality and level of earnings, investment or
loan portfolio concentrations, the quality of loans and investments, the
effectiveness of loan and investment policies and management's ability to
monitor and control financial and operating risks.
Regulation of Banks
The Banks are state chartered and subject to regulation, supervision and
examination by the Kentucky and Indiana Departments of Financial
Institutions, respectively. The deposit accounts of the Banks are insured up
to applicable limits by the FDIC's Bank Insurance Fund (the "BIF"). Thus, the
Banks are also subject to regulation, supervision and examination by the
FDIC. In certain instances, the statutes administered and regulations
promulgated by certain of these agencies are more stringent than those of
other agencies with jurisdiction. In these instances, the Banks must comply
with the more stringent restrictions, prohibitions or requirements.
5
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The business and affairs of the Banks are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, the
Banks' capital ratios, payment of dividends, liquidity requirements, the
nature and amount of the investments that the Banks may make, transactions
with affiliates, community and consumer lending, internal policies and
controls, reporting by and examination of the Banks and changes in control of
the Banks. The federal bank regulators have recently adopted an interest rate
risk component to the risk capital requirements to assess the exposure of
banks to declines in the economic value of the bank's capital due to changes
in interest rates.
Capital Requirements
FDIC regulations establish three minimum capital standards for insured state
banks. The Banks' capital ratios are computed in a manner substantially
similar to the manner in which bank holding company capital ratios are
determined. The FDIC capital requirements are minimum requirements and higher
levels of capital will be required if warranted by the particular
circumstances or risk profile of an individual bank.
FDICIA provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized". Under regulations adopted by the federal banking
regulators, a bank is considered "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital
ratio of 6% or greater, has a leverage ratio of 5% or greater and is not
subject to any order or written directive to meet and maintain a specific
capital level. An "adequately capitalized" bank is defined as one that has a
total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based
capital ratio of 4% or greater, has a leverage ratio of 4% or greater (or 3%
or greater in the case of a bank with the highest composite regulatory
examination rating that is not experiencing or anticipating significant
growth) and does not meet the definition of a well capitalized bank. A bank
would be considered "undercapitalized" if it has a total risk-based capital
ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4% or a
leverage ratio of less than 4% (or 3% in the case of a bank with the highest
composite regulatory examination rating that is not experiencing or
anticipating significant growth); "significantly undercapitalized" if the
bank has a total risk-based capital ratio of less than 6%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio of less than 3%;
and "critically undercapitalized" if the bank has a ratio of tangible equity
to total assets of equal to or less than 2%. The appropriate federal banking
regulator may downgrade a bank to the next lower category if the regulator
determines after notice and opportunity for hearing or response, that the
bank is in an unsafe or unsound condition or that the bank has received (and
not corrected) a less-than-satisfactory rating for any of the categories of
asset quality, management, earnings or liquidity in its most recent exam.
As of December 31, 1996, the Banks qualified as "well capitalized." The
Kentucky Bank had total risk-based capital ratio of 11.26%, Tier 1 risk-based
capital ratio of 9.81% and leverage ratio of 7.86%. The Indiana Bank had
total risk-based capital ratio of 76.46%, Tier 1 risk-based capital ratio of
75.99% and leverage ratio of 23.10%.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include a prohibition on capital distributions by the
institution if, after making the distribution, it would be undercapitalized;
prohibition on payment of management fees to controlling persons; requiring
the submission of a capital restoration plan; placing limits on asset growth;
limiting acquisitions, branching or new lines of business; requiring the
institution to issue additional capital stock (including additional voting
stock) or to be acquired; restricting transactions with affiliates;
restricting the interest rates that the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that
senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; requiring the holding company to
divest the institution or other non-banking subsidiaries; prohibiting the
holding company from making any distributions without FRB approval;
prohibiting the payment of principal or interest on subordinated debt; and,
ultimately, appointing a receiver for the institution.
6
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ITEM 2. PROPERTIES
The principal offices of Bancorp and the Kentucky Bank are located at 1040
East Main Street, Louisville, Kentucky, in a two story building containing
approximately 28,000 square feet. Adjacent to the main location there are
also a drive-through facility, an operations center containing approximately
6,000 square feet, a garage of approximately 5,000 square feet, and parking
for approximately 100 customers and employees. Furthermore, in February,
1996, the Kentucky Bank purchased a building adjacent to its main office.
This building is being remodeled to house non-customer contact departments of
the Bank. The Kentucky Bank also owns land and buildings at 4016 Poplar Level
Road, 4537 Outer Loop and 2811 Hurstbourne parkway which are used as branch
facilities. The Indiana Bank's only office contains approximately 1,500
square feet and is located at 275 Highway 31 North, Austin, Indiana.
Properties owned by the Banks are not presently encumbered.
At December 31, 1996, the Kentucky Bank leased the following branch
facilities in Louisville, Kentucky:
South Fifth Street - approximately 10,000 square feet;
Lexington Road - approximately 6,000 square feet;
Shelbyville Road - approximately 3,000 square feet;
Dixie Highway - approximately 7,200 square feet with 3,600 feet sub-leased;
Brownsboro Road - approximately 3,700 square feet;
Lexington, Kentucky - approximately 1,300 square feet;
Elizabethtown, Kentucky - approximately 1,110 square feet
Subsequent to year end, facilities at the last two locations above were
closed and notice given to terminate the leases.
See Notes 6 and 16 to Bancorp's consolidated financial statements for the
year ended December 31, 1996, included for additional information relating to
amounts invested in premises, equipment and lease commitments.
ITEM 3. LEGAL PROCEEDINGS
See Note 16 to Bancorp's consolidated financial statements for the year ended
December 31, 1996, for information relating to legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, and ages (as of December 31, 1996) of
all current executive officers of Bancorp and all persons who it is
anticipated will be chosen as executive officers at the organization meeting
of Bancorp's Board of Directors following the 1997 Annual Meeting of
Shareholders of Bancorp to be held on April 23, 1997. Each executive officer
is appointed by the Bancorp's Board of Directors to serve at the pleasure of
the Board. There is no arrangement or understanding between any executive
officer of Bancorp and any other person(s) pursuant to which he/she was or is
to be selected as an officer.
Name and Age Position and offices
of Executive Officer with Bancorp
-------------------- --------------------
David H. Brooks Chairman and Chief Executive
Age 54 Officer and Director
David P. Heintzman President and Director
Age 37
Kathy C. Thompson Executive Vice President,
Age 35 Secretary and Director
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Bancorp's common stock is traded on the NASDAQ Small Cap market under the
symbol SYBA. The table below sets forth the quarterly high and low market
prices of Bancorp's common stock, and dividends declared per share. The
payment of dividends by the Banks to Bancorp is subject to the restriction
described in note 15 to the consolidated financial statements. On December
31, 1996, Bancorp had 804 shareholders of record. The information below has
been adjusted to reflect the August 1996 2-for-1 stock split.
<TABLE>
<CAPTION>
1996 1995
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Cash Dividends Cash Dividends
Quarter High Low Declared High Low Declared
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<S> <C> <C> <C> <C> <C> <C>
First $ 25.50 $ 21.25 $ .10 $ 17.00 $ 14.50 $ .08
Second 28.75 25.00 .10 19.63 16.38 .09
Third 34.50 24.63 .10 19.69 18.25 .09
Fourth 34.50 27.25 .10 21.25 19.63 .10
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 16,538 $ 14,609 $ 12,338 $ 9,811 $ 8,729
Provision for loan losses 800 1,260 1,000 820 720
Net income 5,179 4,056 3,101 2,515 2,005
PER SHARE DATA
Primary net income $ 1.54 $ 1.23 $ .95 $ .77 $ .62
Fully diluted net income 1.54 1.23 .95 .77 .62
Cash dividends declared .40 .36 .29 .21 .17
AVERAGES
Stockholders' equity $ 29,675 $ 25,964 $ 23,320 $ 21,011 $ 19,064
Assets 352,977 295,892 253,139 236,015 225,704
Long-term debt 1,171 607 617 617 634
RATIOS
Average stockholders' equity to
average assets 8.41% 8.77% 9.21% 8.90% 8.45%
Return on average stockholders' equity 17.45 15.62 13.30 11.97 10.52
Return on average assets 1.47 1.37 1.23 1.07 .89
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide information as to the analysis
of the consolidated financial condition and results of operations of S.Y.
Bancorp, Inc. (Bancorp) and its wholly-owned subsidiaries, Stock Yards Bank &
Trust Company, a Kentucky Bank, and Stock Yards Bank & Trust Company, an
Indiana Bank (the Banks). This discussion should be read in conjunction with
Bancorp's consolidated financial statements and accompanying notes and other
schedules presented elsewhere in this report.
ACQUISITION
On October 1, 1996, the acquisition of the Austin State Bank in Scott County,
Indiana was completed. Bancorp purchased 100% of the common stock of the
Austin bank for a total purchase price of $2,803,000 including acquisition
costs of $128,000. The acquisition was accounted for as a purchase. Assets
with a fair value of $9,065,000 and liabilities with a fair value of
$7,303,000 were acquired, and these amounts are reflected in the December 31,
1996 consolidated balance sheet. Results of operations of the Austin bank
subsequent to the acquisition date are included in the 1996 consolidated
income statement, statement of changes in stockholders' equity and statement
of cash flows.
The excess of the purchase price over the value of net assets acquired of
$1,041,000 is being amortized over fifteen years. Amortization of goodwill
decreased net income by $12,000 in 1996 and is expected to decrease net
income by approximately $69,000 per year for the remainder of the
amortization period.
The name of the Austin bank was changed to Stock Yards Bank & Trust Company.
The Indiana bank has retained its Indiana charter. Management's primary
intent in this acquisition was to be able to establish banking operations in
southern Indiana. Clarksville, Jeffersonville and New Albany are a natural
part of Bancorp's market. Current banking laws do not permit the Kentucky
bank to branch in Indiana. While interstate banking laws are about to change,
it is anticipated Kentucky and Indiana will still not permit branching on the
opposite side of the Ohio River. Regulatory approval of a branch in
Clarksville has been obtained and it is anticipated the Indiana bank will
open a branch in Clarksville by mid 1997.
RESULTS OF OPERATIONS
Net income was $5,179,000 or $1.54 per share on a fully-diluted basis in
1996. This compares to $4,056,000 or $1.23 per share and $3,101,000 or $.95
per share in 1995 and 1994, respectively. The increase in 1996 earnings was
attributable to several factors, the most notable of which were net interest
income and non-interest income growth. Earnings include a 13.2% increase in
fully taxable equivalent net interest income and a 23.8% increase in
non-interest income.
All components of non-interest income increased. Partially offsetting the
overall income increases were increases in non-interest expenses of 15.1%.
Non-interest expenses increased in all categories except FDIC premiums. These
increases are primarily related to continued expansion of our banking center
network.
The following paragraphs provide a more detailed analysis of the significant
factors affecting operating results.
NET INTEREST INCOME
Net interest income, the most significant component of Bancorp's earnings, is
total interest income less total interest expense. Net interest spread is the
difference between the taxable equivalent rate earned on interest earning
assets and the rate expensed on interest bearing liabilities. Net interest
margin represents net interest income on a taxable equivalent basis as a
percentage of earning assets. Net interest margin is affected by both the
interest rate spread and the level of non-interest bearing sources of funds,
primarily consisting of demand deposits and stockholders' equity. The level
of net interest income is determined by the mix and volume of interest
earning assets, interest bearing deposits and borrowed funds, and by changes
in interest rates. The discussion that follows is based on tax equivalent
interest data.
Net interest income was $16,732,000, $14,783,000 and $12,502,000 for 1996,
1995 and 1994, respectively. This represents a 13.2% increase for 1996 over
1995 and an 18.2% increase for 1995 over 1994. These improvements in net
interest income resulted from an increase in average earning assets offset by
a slight decline in net interest spread. Average earning assets increased
$53,885,000 to $331,352,000 in 1996 and increased $39,474,000 to $277,467,000
in 1995.
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Net interest spread and net interest margin were 4.16% and 5.05%,
respectively, in 1996 and 4.39% and 5.31%, respectively in 1995. The Banks'
prime lending rate was 8.5% at December 31, 1995. It dropped to 8.25% in
February and did not change again in 1996. Average rates earned on earning
assets decreased 31 basis points, and average rates paid on interest bearing
liabilities decreased 8 basis points when comparing 1996 to 1995.
As shown by the Interest Rate Sensitivity Analysis, Bancorp's interest
bearing liabilities slightly exceed its interest earning assets on a
cumulative repricing basis through one year. This position, which is termed a
negative interest sensitivity gap, generally allows for a positive impact on
net interest income in periods of declining interest rates and a negative
impact on net interest income during periods of rising interest rates. In
Bancorp's case, during periods of falling rates, variable rate loans reprice
immediately. While deposit rates will respond by dropping, they will not drop
as quickly nor as drastically. To mitigate the impact of falling rates,
Bancorp's interest rate risk management strategy balances variable rate loans
and fixed rate loans, which at December 31, 1996 were 45% and 55%,
respectively. Management is aware, however, that it will be necessary to
re-negotiate rates on some of the fixed rate loans if the prime rate drops.
In early June, 1996, the Bank entered into a two year interest rate swap
contract with a correspondent bank which effectively converts certain
floating rate loans to fixed rates. The notional amount of the contract is
$20 million. Bancorp has the ability to effectively manage its interest
sensitivity gap to control the degree of interest rate risk on the balance
sheet.
For purposes of the Interest Rate Sensitivity Analysis, Bancorp includes 50%
of interest bearing checking accounts in the 0-365 day categories and 50% of
these accounts in the 1-5 year category. At December 31, 1996, the negative
interest sensitivity gap was 8.6% through one year. Bancorp's one year
cumulative gap position as of December 31, 1995 was a negative position of
1.9%.
INTEREST RATE SENSITIVITY ANALYSIS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
0-90 91-180 181-365 1-5 Over 5 Non-Interest
(Dollars in thousands) Days Days Days Years Years Bearing Funds Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net of unearned income $ 147,616 $ 7,787 $ 14,567 $ 117,713 $ 17,373 $ 854 $ 305,910
Securities 24,501 2,273 3,808 29,371 15,567 - 75,520
Other assets 4,500 - - - 29,435 33,935
---------- -------- --------- --------- --------- -------- ---------
TOTAL ASSETS 176,617 10,060 18,375 147,084 32,940 30,289 $ 415,365
---------- -------- --------- ------- --------- -------- ---------
SOURCES OF FUNDS ---------
Interest bearing deposits 50,203 62,465 82,937 95,049 970 - 291,624
Short-term borrowings 22,396 - - - - - 22,396
Long-term debt 2,697 - - - - - 2,697
Non-interest bearing deposits - - - - - 63,627 63,627
Other liabilities - - - - - 3,427 3,427
Stockholders' equity - - - - - 31,594 31,594
---------- --------- --------- --------- --------- -------- ---------
TOTAL SOURCES OF FUNDS 75,296 62,465 82,937 95,049 970 98,648 $ 415,365
---------- --------- --------- --------- --------- -------- ---------
ASSET/LIABILITY GAP 101,321 (52,405) (64,562) 52,035 31,970 (68,359) ---------
---------- --------- --------- --------- --------- --------
INTEREST RATE SWAP
CONTRACTS AFFECTING
INTEREST RATE SENSITIVITY (20,000) - - - - - -
---------- --------- --------- --------- --------- -------- ---------
INTEREST SENSITIVITY GAP $ 81,321 $ (52,405) $ (64,562) $ 52,035 $ 31,970 $(68,359) ---------
---------- --------- --------- --------- --------- --------
---------- --------- --------- --------- --------- --------
CUMULATIVE INTEREST
SENSITIVITY GAP $ 81,321 $ 28,916 $ (35,646) $ 16,389 $ 48,359 -
---------- --------- --------- --------- --------- --------
---------- --------- --------- --------- --------- --------
CUMULATIVE INTEREST
SENSITIVITY GAP AS A PERCENT
OF TOTAL ASSETS AT PERIOD END 19.6% 7.0% (8.6)% 3.9% 11.6%
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
10
<PAGE>
As interest rates change in the market, rates earned on assets do not
necessarily move identically with rates paid on liabilities. Proper asset and
liability management involves the matching of short-term interest sensitive
assets and liabilities to reduce interest rate risk. The Banks manage
interest rate risk by adjusting the mix of fixed rate loans and securities
against longer term fixed rate time deposits.
The following table presents the increases in net interest income due to
changes in volume and rate computed on a tax equivalent basis and indicates
how net interest income in 1996 and 1995 was impacted by volume increases and
the higher average interest rate environment. The tax equivalent adjustments
are based on a 34% tax rate. The change in interest due to both rate and
volume has been allocated to the change due to volume and change due to rate
in proportion to the relationship of the absolute dollar amounts of the
change in each.
TAXABLE EQUIVALENT RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
1996/1995 1995/1994
- ------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Net Due to Net Due to
(In thousands) Change Rate Volume Change Rate Volume
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 3,291 $ (752) $ 4,043 $ 5,813 $ 2,205 $ 3,608
Federal funds sold (35) (48) 13 34 176 (142)
Mortgage loans held for sale 205 (5) 210 134 (2) 136
Securities
U.S. Treasury and federal agencies 312 (74) 386 18 39 (21)
States and political subdivisiions 131 (10) 141 90 (32) 122
------- ------- ------- ------- ------- --------
TOTAL INTEREST INCOME 3,904 (889) 4,793 6,089 2,386 3,703
------- ------- ------- ------- ------- --------
INTEREST EXPENSE
Deposits
Interest bearing demand deposits 43 (113) 156 180 81 99
Savings deposits 162 (31) 193 238 118 120
Money market deposits (162) (144) (18) 111 364 (253)
Time deposits 1,960 37 1,923 3,178 1,228 1,950
Securities sold under agreements
to repurchase and federal
funds purchased (56) (50) (6) 42 200 (158)
Short-term borrowings (33) (21) (12) 45 44 1
Subordinated debentures 41 - 41 14 15 (1)
------- ------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE 1,955 (322) 2,277 3,808 2,050 1,758
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 1,949 $ (567) $ 2,516 $ 2,281 $ 336 $ 1,945
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
11
<PAGE>
PROVISION FOR LOAN LOSSES
In determining the provision for loan losses charged to expense, management
carefully considers many factors. Among these are the quality of the loan
portfolio, previous loss experience, the size and composition of the loan
portfolio and an assessment of the impact of current economic conditions on
borrowers. Responding to these factors, management provided $800,000 in 1996.
The provision for loan losses was $1,260,000 in 1995 and $1,000,000 in 1994.
At December 31, 1996, the allowance for loan losses was 1.71% of year-end
loans compared to 1.78% at December 31, 1995. Charge off history has been
well below industry average, and management's evaluations indicated a
provision of $800,000 to be sufficient to maintain the allowance for loan
losses at an adequate level.
The Banks' loan portfolios continue to be diversified with no significant
concentrations of credit. Geographically, most loans are extended to
borrowers in the Louisville, Kentucky metropolitan area. The adequacy of the
allowance is monitored on an ongoing basis and it is the opinion of
management that the balance of the allowance for loan losses at December 31,
1996, is adequate to absorb anticipated losses in the loan portfolio as of
this date.
NON-INTEREST INCOME AND EXPENSES
Non-interest income increased by 23.8% in 1996 as compared to 1995, and 34.1%
in 1995 as compared to 1994.
The largest component of non-interest income is investment management and
trust fee income which increased 15.1% in 1996, 38.6% in 1995 and 12.3% in
1994. The investment management and trust department has established a
reputation of personalized service and superior investment returns. Assets
under management, through customer retention and attraction of new business,
grew to $470 million as of December 31, 1996 as compared to $343 million as
of December 31, 1995. Growth in the department's assets include both personal
and employee benefit accounts. Furthermore, the department assumed
responsibility for managing the Banks' securities portfolio during 1996. The
assets under management reported above include $46 million of the Banks'
investment securities as of December 31, 1996.
Service charges on deposit accounts increased 25.0% over 1995. Growth in
deposit accounts, arising primarily from new banking locations, presented
opportunities for increased fee income in this area. Rates for some deposit
services were raised in 1996; however, the vast majority of the increase is
due to account volume.
The Bank operates a mortgage banking company as a department of the Bank.
This department originates residential mortgage loans and sells the loans in
the secondary market. The department offers conventional, VA and FHA
financing as well as a program for low income first time home buyers. Loans
are made for both purchase and refinancing of homes. Gains on sales of
mortgage loans were $1,016,000 in 1996 as compared to $736,000 and $525,000
in 1995 and 1994, respectively. Interest rates on conventional mortgage loans
directly impact the volume of business transacted by the mortgage banking
department. As rates rose throughout 1994, the volume of loans originated
declined. Falling rates in 1995 stimulated the volume of loans originated.
Growth in volume for 1996 has been due more to the mortgage company's
expanding reputation and physical expansion into two towns outside of
Louisville. With shrinking profit margins in the mortgage banking industry,
management has decided to close the two locations outside of Louisville. This
will help focus on the corporate philosophy of capitalizing on relationships
rather than single transactions.
Other non-interest income increased in 1996 as compared to 1995 by $137,000
or 29.8% and $153,000 in 1995 compared to 1994. The increases are due to
several contributing factors, none of which are individually significant
other than the addition of a brokerage services department during 1996.
Through an account executive with Robert Thomas Securities, Inc., bank
customers have convenient access to a full service brokerage company.
Products available include stocks, government and corporate bonds, annuities,
mutual funds and insurance. Services include asset management and investment
advice. Having these products and services readily available enables
customers to find solutions to most all of their financial needs in one
location.
Total non-interest expenses increased 15.1% in 1996 over 1995, and 16.9% in
1995 over 1994.
12
<PAGE>
Salaries and employee benefits, the largest non-interest expense category,
increased 17.7% in 1996 and 17.6% in 1995. These increases occurred
primarily from regular salary increases and new employees added to support
our expansion. As of December 31, 1996, the Banks had 220 full time
equivalent employees (FTEs). As of December 31, 1995, that total was 188
FTEs. Additionally, a performance incentive program is in place, and
increasing earnings have qualified certain bank employees for incentive
compensation. Further, as salary expense increases, so do corresponding
employee benefit expenses. It should be noted there are no significant
obligations for post-retirement or post-employment benefits.
Net occupancy expense increased 6.5% in 1996 and 19.3% in 1995. Occupancy
expenses have increased as Bancorp has continued its expansion plans. In
1996, the Kentucky Bank completed one banking center and opened another in a
temporary facility. This Bank has added, on the average, one branch each year
since its first branch opened in 1989. The Kentucky Bank now has nine banking
center locations including the main office. All are in the metropolitan
Louisville area. The Indiana Bank has one location with plans and regulatory
approval to add a second in 1997. Furniture and equipment expense increased
22.4% in 1996 compared to 1995 and 22.9% in 1995 compared to 1994. Expansion
and investments in computer technology have resulted in significant increases
over the last several years.
FDIC insurance premiums decreased nearly 100% for 1996 and 41.4% for 1995.
These decreases are due entirely to revised premium rates charged to banks.
During 1995, the rates charged well capitalized banks for deposit insurance
decreased from $.23 to $.04 per $100 of deposits. In 1996 the Banks paid only
the minimum charge assessed on well capitalized, well managed institutions.
Beginning in 1997, banks will begin paying a portion of the interest on debt
incurred by the savings and loan bailout. At our current level of deposits
that amount will be approximately $46,000.
Other non-interest expenses increased 19.0% in 1996 and 22.8% in 1995. The
increase in both years largely related to our expansion. Among costs which
increased significantly were delivery, communication and supplies. Management
continues to identify cost containment opportunities where expense reductions
can be made without sacrificing the level of service to customers.
INCOME TAXES
Bancorp had income tax expense of $2,442,000 in 1996 compared to $1,900,000
in 1995 and $1,411,000 in 1994. The effective rates were 32.0%, 31.9%, and
31.3%, respectively. The increases in the effective tax rates are largely due
to a decreasing proportion of tax exempt interest.
FINANCIAL CONDITION
EARNING ASSETS AND INTEREST BEARING LIABILITIES
Total consolidated assets of Bancorp at December 31, 1996 increased 28.1%
over December 31, 1995 to $415,365,000. Average assets for 1996 increased
19.3% over 1995 to $352,977,000. During 1996, Bancorp increased its net
average earning assets to $62,693,000 from $54,463,000 during 1995.
The growth of average earning assets occurred in the areas of loans,
securities and mortgage loans held for sale. Loan demand continued to
increase during 1996. Commercial and industrial loans increased 9.5% and real
estate mortgage loans increased 23.6%. Consumer loans increased 28.8%. Lease
financing receivables decreased 81.0%; management has decided not to pursue
lease financing as a continuing line of business.
Regarding derivative financial instruments as defined by SFAS No. 119,
"Disclosures About Derivative Financial Instruments and Fair Value of
Financial Instruments," the Kentucky Bank holds interest rate swap contracts
as described under the heading "Net Interest Income." In addition, the
Kentucky Bank has, in its portfolio of securities, FHLMC and FNMA issued
collateralized mortgage obligations (CMOs) with a carrying value of
approximately $18,361,000. Management monitors these securities on an ongoing
basis and has determined these not to be high risk. With respect to the total
portfolio of securities held to maturity, amortized cost exceeded market
value at December 31, 1996 by .04%. At December 31, 1995, market value
exceeded amortized cost by 1.3%.
13
<PAGE>
INVESTMENT SECURITIES
The purpose of the investment portfolio is to provide another source of
interest income as well as liquidity management. In managing the composition
of the balance sheet, Bancorp seeks a balance among earnings sources and
credit and liquidity considerations.
The carrying value of securities is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Treasury and federal agency obligations $ 30,100 $ 9,079 $ 24,798
Mortgage-backed securities 18,361 10,046 6,957
Obligations of states and political subdivisions 7,618 7,585 3,697
-------- -------- --------
$56,079 $ 26,710 $35,452
-------- -------- --------
-------- -------- --------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and federal agency obligations $19,276 $ 14,399 $4,034
Obligations of states and political subdivisions 165 - -
Mortgage-backed securities - 1,146 -
-------- -------- --------
$19,441 $ 15,545 $4,034
-------- -------- --------
-------- -------- --------
</TABLE>
The maturity distribution and weighted average interest rates of securities
at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
After one but After five but
Within one year within five years within ten years After ten years
----------------- ------------------- ---------------------- -----------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO
MATURITY
U.S. Treasury and
federal agency
obligations $ 27,023 5.73% $ 3,077 6.40% $ - -% $ - -%
Mortgage-backed
securities 1,625 6.73 9,549 6.80 7,187 6.69 - -
Obligations of states
and political
subdivisions - - 4,262 5.29 3,356 4.61 - -
------ ------ -------- ---- -------- ------ ---- ----
$ 28,648 5.79% $ 16,888 6.45% $ 10,543 6.03% $ - -%
------ ------ -------- ---- -------- ------ ---- ----
------ ------ -------- ---- -------- ------ ---- ----
SECURITIES AVAILABLE
FOR SALE
U.S. Treasury and
federal agency
obligations $ 1,864 5.41% $ 12,388 6.88% $ 5,024 6.67% $ - -%
Obligations of states
and political
subdivisions 70 4.00 95 4.00 - - - -
------ ------ -------- ---- -------- ----- ---- ----
$ 1,934 5.35% $ 12,483 6.86% $ 5,024 6.67% $ - -%
------ ------ -------- ---- -------- ----- ---- ----
------ ------ -------- ---- -------- ----- ---- ----
</TABLE>
15
<PAGE>
LOAN PORTFOLIO
Bancorp's primary source of income is interest on loans. The following table
presents the composition of loans at the end of the years indicated.
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 88,199 $ 80,520 $ 77,661 $ 70,847 $ 61,357
Real estate mortgage 189,092 152,945 113,351 99,167 90,961
Consumer 24,104 18,667 14,664 14,943 17,017
Lease financing 153 805 1,736 3,106 4,049
-------- -------- -------- -------- --------
$ 301,548 $ 252,937 $ 207,412 $ 188,063 $ 173,384
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The following tables show the amounts of commercial and industrial loans, at
December 31, 1996, which, based on remaining scheduled repayments of
principal, are due in the periods indicated. Also shown are the amounts due
after one year classified according to sensitivity to changes in interest
rates.
<TABLE>
<CAPTION>
Maturing
- --------------------------------------------------------------------------------------------------------------
After one but
Within one within five After five
(In thousands) year years years Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 21,585 $ 39,798 $ 26,816 $ 88,199
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Interest
(In thousands) sensitivity
- --------------------------------------------------------------------------------------------------------------
Fixed Variable
rate rate
<S> <C> <C>
Due after one but within five years $ 25,739 $ 14,059
Due after five years 2,490 24,326
------- -------
$ 28,229 $ 38,385
------- -------
------- -------
</TABLE>
16
<PAGE>
NONPERFORMING LOANS AND ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming loans, which include nonaccrual loans and restructured loans,
totaled $854,000 and $1,212,000 at December 31, 1996 and 1995, respectively.
The threshold at which loans are generally transferred to nonaccrual on
interest status is 90 days past due, and at December 31, 1996, there were no
accruing loans which were past due over ninety days which were not well
secured and in the process of collection. Nonperforming loans represent .28%
of total loans at year end 1996 compared to .48% in 1995.
Nonperforming assets include nonperforming loans, other real estate owned and
repossessed assets. At December 31, 1996 and 1995, nonperforming assets
totaled $1,129,000 and $1,212,000, respectively. This represents .27% of
total assets at year end compared to .37% in 1995.
In addition to the nonperforming loans discussed above, there were loans for
which payments were current or less than 90 days past due where borrowers are
experiencing significant financial difficulties. These loans of approximately
$421,000 are monitored by management and considered in determining the level
of the allowance for loan losses. Management feels these loans present no
significant loss exposure. The allowance for loan losses is discussed in
detail under the heading "Provision for Loan Losses."
The following table summarizes impaired loans (1996 and 1995 only),
nonaccrual, restructured and past due loans. Loans are placed in a nonaccrual
income status when, in the opinion of management, the prospects for
recovering both principal and accrued interest are considered doubtful.
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 854 $ 1,212 $ 367 $ 158 $ 70
Accruing loans past due
90 days or more - - - - 66
Restructured loans - - 61 159 291
------ ------ ------ ------ -----
854 1,212 428 317 427
------ ------ ------ ------ -----
------ ------ ------ ------ -----
Impaired loans 854 1,212
------ ------
------ ------
</TABLE>
The average balance for impaired loans was $1,025,000, $1,438,000 for 1996
and 1995, respectively, and interest income recorded on these loans (cash
basis) for 1996 and 1995 totaled $400 and $175,000, respectively. For 1996,
interest income that would have been recorded if nonaccrual loans were on a
current basis in accordance with their original terms was $102,000.
17
<PAGE>
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses has been established to provide for loans which
may not be repaid in entirety. Loan losses arise primarily from the loan
portfolio, but may also be generated from other sources such as commitments
to extend credit, guarantees, and standby letters of credit. The allowance
for loan losses is increased by provisions charged to expense and decreased
by charge-offs, net of recoveries. Loans are charged off by management when
deemed uncollectible; however, collection efforts continue and future
recoveries may occur.
The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated. Factors considered include past
loss experience, general economic conditions, and information about specific
borrower situations including financial position and collateral values.
Estimating the risk of loss and amount of loss on any loan is subjective and
ultimate losses may vary from current estimates. Estimates are reviewed
periodically and adjustments are reported in income through the provision for
loan losses in the periods in which they become known. The adequacy of the
allowance for loan losses is monitored by the internal loan review staff and
reported to management and the Board of Directors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of Bancorp's allowance for loan losses. Such
agencies may require Bancorp to make additional provisions to the allowance
based upon their judgements about information available to them at the time
of their examinations. Management believes that the allowance for loan losses
is adequate to absorb any losses on existing loans that may become
uncollectible. SEE "Results of Operations - Provision for Loan Losses."
18
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loans outstanding, changes in the
allowance for loan losses arising from loans charged off and recoveries on
loans previously charged off by loan category, and additions to the allowance
charged to expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans, net of
unearned income $ 273,031 $ 229,674 $ 190,409 $ 177,629 $ 169,206
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Balance of allowance for loan
losses at beginning of year $ 4,507 $ 3,649 $ 2,752 $ 2,179 $ 1,793
Loans charged off
Commercial and industrial 102 435 96 60 297
Real estate mortgage 45 13 9 171 36
Consumer 112 82 64 74 40
Lease financing 5 - 15 22 23
--------- --------- --------- --------- ---------
Total loans charged off 264 530 184 327 396
--------- --------- --------- --------- ---------
Recoveries of loans
previously charged off
Commercial and industrial 27 94 9 19 37
Real estate mortgage 16 13 36 12 6
Consumer 47 20 29 48 16
Lease financing - 1 7 1 3
--------- --------- --------- --------- ---------
Total recoveries 90 128 81 80 62
--------- --------- --------- --------- ---------
Net loans charged off 174 402 103 247 334
Additions to allowance
charged to expense 800 1,260 1,000 820 720
Balance of allowance of
acquired bank at date
of acquisition 22 - - - -
--------- --------- --------- --------- ---------
Balance at end of year $ 5,155 $ 4,507 $ 3,649 $ 2,752 $ 2,179
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs
during year to average
loans net of unearned
income .06% .18% .05% .14% .20%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
19
<PAGE>
The following table sets forth the allocation of the allowance for loan losses
for the loan categories shown. Although specific allocations exist, the entire
allowance is available to absorb future losses in any particular loan category.
<TABLE>
<CAPTION>
DECEMBER 31
- ------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 1,913 $ 2,224 $ 1,672 $ 1,006 $ 873
Real estate mortgage 2,016 1,072 933 846 503
Consumer 253 148 180 237 222
Lease financing - 3 7 22 25
Unallocated 973 1,060 857 641 556
----- ----- ----- ----- -----
$ 5,155 $ 4,507 $ 3,649 $ 2,752 $ 2,179
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
The ratio of loans in each category to total outstanding loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
- ------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial 29.2 % 31.8 % 37.5 % 37.7 % 35.4 %
Real estate mortgage 62.7 60.5 54.6 52.7 52.5
Consumer 8.0 7.4 7.1 7.9 9.8
Lease financing .1 .3 .8 1.7 2.3
----- ----- ----- ----- -----
100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
Presented below are selected ratios relating to the allowance for loan losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses to average loans .29% .55% .53%
Net charge-offs to average loans .06% .18% .05%
Allowance for loan losses to average loans 1.89% 1.96% 1.92%
Allowance for loan losses to year end loan 1.71% 1.78% 1.76%
Loan loss coverage 39.34X 17.95X 53.51X
</TABLE>
20
<PAGE>
DEPOSITS AND BORROWED FUNDS
Bancorp's core deposits consist of non-interest and interest-bearing demand
deposits, savings deposits, certificates of deposit under $100,000, certain
certificates of deposit over $100,000 and IRAs. These deposits, along with
other borrowed funds are used by Bancorp to support its asset base. By
borrowing money from the least costly sources and adjusting rates offered to
depositors, Bancorp is able to influence the amounts of deposits and borrowed
funds to meet its funding needs. The average amount of deposits in the Bank
and average rates paid on such deposits for the years indicated are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing $ 51,780 -% $ 44,340 -% $ 39,377 -%
demand deposits
Interest bearing 32,259 2.15 25,471 2.55 21,325 2.20
demand deposits 20,251 3.47 14,733 3.67 11,012 2.75
Savings deposits 48,059 3.48 48,540 3.78 56,155 3.07
Money market deposits 152,191 5.73 118,611 5.70 81,098 4.41
-------- ------- -------- ------- -------- -------
Time deposits $ 304,540 ------- $ 251,695 ------- $ 208,967 -------
-------- -------- --------
-------- -------- --------
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1996, are summarized as follows:
- --------------------------------------------------------------------------------
(In thousands)
- --------------------------------------------------------------------------------
Amount
3 months or less $ 10,542
Over 3 through 6 months 12,702
Over 6 through 12 months 13,950
Over 12 months 7,351
--------
$ 44,545
--------
--------
21
<PAGE>
SHORT-TERM BORROWINGS
Federal funds purchased represent overnight borrowings. Repurchase agreements
have maturities of less than one month.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Securities sold under
agreements to repurchase and
federal funds purchased
Year end balance $ 19,728 5.73 % $ 12,349 5.17 % $ 14,483 4.95 %
Average during year 13,023 5.00 13,128 5.39 16,626 4.00
Maximum month end
balance during year 19,728 15,024 19,929
</TABLE>
LIQUIDITY
The role of liquidity is to ensure funds are available to meet depositors'
withdrawal and borrowers' credit demands while at the same time maximizing
profitability. This is accomplished by balancing changes in demand for funds
with changes in the supply of those funds. Liquidity to meet the demand is
provided by maturing assets, short-term liquid assets that can be converted
to cash and the ability to attract funds from external sources, principally
depositors. Due to the nature of services offered by the Banks, management
prefers to focus on transaction accounts and full service relationships with
customers. Because the Kentucky Bank has approximately 2% of the market share
in its market area, management believes it has the ability to increase
deposits at any time by offering rates slightly higher than the market rate.
The Indiana Bank will begin to build market share in Southern Indiana when
that Bank branches to Clarksville in 1997.
The Banks have a number of sources of funds to meet liquidity needs on a
daily basis. An increase in loans affects liquidity as the repayment of
principal and interest are a daily source of funds. The deposit base,
consisting of consumer and commercial deposits and large dollar denomination
($100,000 and over) certificates of deposit, is another source of funds. The
majority of these deposits are from long-term customers and are a stable
source of funds. The Banks have no brokered deposits, and have an
insignificant amount of deposits on which the rate paid exceeded the market
rate by more than 50 basis points when the account was established. In
addition, federal funds purchased continues to provide an available source of
liquidity, although this source is seldom needed.
Other sources of funds available to meet daily needs include the sales of
securities under agreements to repurchase and funds made available under a
treasury tax and loan note agreement with the federal government. Also, the
Kentucky Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB).
As a member of the FHLB, the Bank has access to credit products of the FHLB.
To date, the Bank has not needed to access this source of funds.
Bancorp's liquidity depends primarily on the dividends paid to it as the sole
shareholder of the Banks. As discussed in note 15 to Bancorp's consolidated
financial statements, the Banks may pay up to $6,757,000 in dividends to
Bancorp without regulatory approval.
22
<PAGE>
CAPITAL
At December 31, 1996, stockholders' equity totaled $31,594,000, an increase
of $3,980,000 or 14.4% over 1995. This increase was due to the strong
earnings of 1996 coupled with a philosophy to retain approximately 70% of
earnings in equity. Cash dividends declared increased 11.1% over 1995 to $.40
per share.
In August, 1996, the Board of Directors declared a 2-for-1 stock split to be
effected in the form of a 100% stock dividend. The new shares were
distributed in September 1996. In September 1994 and 1993, the Board of
Directors declared 10% stock dividends which were distributed in November,
1994 and 1993, respectively. These capital changes were made to enhance
shareholder value by increasing the shares of Bancorp's stock outstanding and
to adjust the market price of the stock. This should provide for a wider
distribution and improved marketability of Bancorp shares. Per share
information has been restated to reflect the stock split and stock dividends.
Bank holding companies and their subsidiary banks are required by regulators
to meet risk based capital standards. These standards, or ratios, measure the
relationship of capital to a combination of balance sheet and off balance
sheet risks. The value of both balance sheet and off balance sheet items are
adjusted to reflect credit risks.
At December 31, 1996, Bancorp's tier 1 and total risk based capital ratios
were 9.8% and 11.3%, respectively. These ratios exceed the 4.0% tier 1 and
8.0% total risk based capital minimums. A minimum leverage ratio, adopted by
the Federal Reserve Board to assist in the assessment of capital adequacy,
supplements the risk based capital requirements. The minimum leverage ratio
is 3.0%; however, most bank holding companies are required to maintain a
minimum in excess of that amount. Bancorp's leverage ratio at December 31,
1996 was 7.9%. Note 19 to the consolidated financial statements provides more
details of regulatory capital requirements as well as capital ratios of the
Banks. Bancorp and the Banks comfortably exceed regulatory requirements for
capital ratios. However, these ratios for Bancorp and the Kentucky Bank have
decreased over the last several years as assets have grown more quickly than
equity. Management considers the effects of growth on capital ratios as it
contemplates plans for expansion.
The following table presents various key financial ratios:
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Return on average assets 1.47% 1.37% 1.23%
Return on average stockholders' equity 17.45 15.62 13.30
Dividend pay out ratio 25.97 29.27 30.16
Average stockholders' equity to average assets 8.41 8.77 9.21
23
<PAGE>
ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN 1997
The Financial Accounting Standards Board issued the following statements
during 1996 which are effective for Bancorp beginning in 1997.
During 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statement provides consistent standards
for distinguishing transfers of assets that are sales from transfers that are
secured borrowings. The Statement requires that liabilities incurred by
transferors as part of a transfer be measured at fair value and that any
retained interests in transferred assets be measured by allocating the
previous carrying amount between the assets sold and retained interests based
upon their relative fair values at the date of the transfer. The Statement
also requires that debtors reclassify financial assets pledged as collateral
and that secured parties recognize those assets and their obligations to
return them in certain circumstances in which the secured party has taken
control of those assets.
Certain provisions of Statement No. 125 have been deferred for one year, to
after December 31, 1997, by the issuance of SFAS No. 127, "Deferral of the
Effective Dates for Certain Provisions of SFAS No. 125." Management has not
determined the potential effects of SFAS No. 125 on its financial position or
results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Bancorp and report of
independent auditors are included below.
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - years ended December 31, 1996, 1995,
and 1994
Consolidated Statements of Changes in Stockholders' Equity - years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows - years ended December 31, 1996,
1995, and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
Management's Report on Consolidated Financial Statements
24
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
- -----------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,348 $ 16,229
Federal funds sold 4,500 -
Mortgage loans held for sale 4,362 3,910
Securities available for sale (amortized cost $19,111
in 1996 and $15,117 in 1995) 19,441 15,545
Securities held to maturity (approximate market
value $56,055 in 1996 and $27,055 in 1995) 56,079 26,710
Loans 301,548 252,937
Allowance for loan losses 5,155 4,507
--------- ---------
Net loans 296,393 248,430
Premises and equipment 10,079 6,817
Accrued interest receivable 2,299 2,192
Other assets 6,864 4,521
--------- ---------
TOTAL ASSETS $ 415,365 $ 324,354
--------- ---------
--------- ---------
LIABILITIES
Deposits
Non-interest bearing $ 63,627 $ 48,460
Interest bearing 291,624 232,133
--------- ---------
Total deposits 355,251 280,593
Securities sold under agreements to repurchase
and federal funds purchased 19,728 12,349
Short-term borrowings 2,668 745
Accrued interest payable and other liabilities 3,427 2,446
Long-term debt 2,697 607
--------- ---------
TOTAL LIABILITIES 383,771 296,740
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
issued and outstanding 3,271,480 in 1996
and 1,627,334 in 1995 5,451 5,423
Surplus 13,390 13,245
Retained earnings 12,535 8,664
Net unrealized gain on securities available
for sale, net of tax 218 282
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 31,594 27,614
--------- ---------
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 415,365 $ 324,354
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 25,293 $ 21,988 $ 16,156
Federal funds sold 442 477 443
Mortgage loans held for sale 453 248 114
U.S. Treasury and federal agencies 2,562 2,250 2,232
Obligations of states and political subdivisions 388 291 230
------ ------ ------
TOTAL INTEREST INCOME 29,138 25,254 19,175
------ ------ ------
INTEREST EXPENSE
Deposits 11,781 9,778 6,071
Securities sold under agreements to repurchase
and federal funds purchased 1651 707 665
Short-term borrowings 82 115 70
Long-term debt 86 45 31
------ ------ ------
TOTAL INTEREST EXPENSE 12,600 10,645 6,837
------ ------ ------
NET INTEREST INCOME 16,538 14,609 12,338
Provision for loan losses 800 1,260 1,000
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,738 13,349 11,338
------ ------ ------
NON-INTEREST INCOME
Investment management and trust services 2,400 2,086 1,505
Gains on sales of securities available for sale 35 - -
Service charges on deposit accounts 1,551 1,241 1,035
Gains on sales of mortgage loans held for sale 1,016 736 525
Other 597 460 307
------ ------ ------
TOTAL NON-INTEREST INCOME 5,599 4,523 3,372
------ ------ ------
NON-INTEREST EXPENSES
Salaries and employee benefits 7,882 6,694 5,692
Net occupancy expense 963 904 758
Furniture and fixtures expense 1,438 1,175 956
FDIC insurance 3 261 445
Other 3,430 2,882 2,347
------ ------ ------
TOTAL NON-INTEREST EXPENSES 13,716 11,916 10,198
------ ------ ------
INCOME BEFORE INCOME TAXES 7,621 5,956 4,512
Income tax expense 2,442 1,900 1,411
------ ------ ------
NET INCOME $ 5,179 $ 4,056 $ 3,101
------ ------ ------
------ ------ ------
NET INCOME PER SHARE PRIMARY AND FULLY DILUTED $ 1.54 $ 1.23 $ .95
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock
Number Retained Net Unrealized
(In thousands, except share data) of Shares Amount Surplus Earnings Securities Gains Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 1,460,800 $ 4,869 $ 9,436 $ 7,696 $ - $ 22,001
Net income - - - 3,101 - 3,101
Stock options exercised 12,912 42 88 - - 130
Cash dividends, $.29 per share - - - (918) - (918)
10% stock dividend 146,599 489 3,613 (4,102) - -
Net unrealized gain on securities
available for sale - - - - 21 21
---------- --------- --------- --------- --------- ---------
Balance December 31, 1994 1,620,311 5,400 13,137 5,777 21 24,335
Net income - - - 4,056 - 4,056
Stock options exercised 7,023 23 108 - - 131
Cash dividends, $.36 per share - - - (1,169) - (1,169)
Net change in unrealized gain on
securities available for sale - - - - 261 261
---------- --------- --------- --------- --------- ---------
Balance December 31, 1995 1,627,334 5,423 13,245 8,664 282 27,614
Net income - - - 5,179 - 5,179
Stock options exercised 8,431 28 145 - - 173
Cash dividends, $.40 per share - - - (1,308) - (1,308)
Shares issued for
2-for-1 stock split 1,635,715 - - - - -
Net change in unrealized gain on
securities available for sale - - - - (64) (64)
---------- --------- --------- --------- --------- ---------
Balance December 31, 1996 3,271,480 $ 5,451 $ 13,390 $ 12,535 $ 218 $ 31,594
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
</TABLE>
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Net income $ 5,179 $ 4,056 $ 3,101
Adjustments to reconcile net income to cash provided by
operating activities
Provision for loan losses 800 1,260 1,000
Depreciation, amortization and accretion, net 1,097 819 736
Provision for deferred income taxes (131) (247) (342)
Gain on sales of mortgage loans held for sale (1,016) (736) (525)
Gain on sales of securities available for sale (35) - -
(Increase) decrease in mortgage loans held for sale 564 (1,139) 2,230
(Increase) decrease in accrued interest receivable (107) (370) (438)
(Increase) decrease in other assets (1,243) (694) (654)
Increase (decrease) in accrued interest payable 23 415 92
Increase in other liabilities 924 149 255
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,055 3,513 5,455
------- ------- -------
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (2,000) 8,000 (5,000)
Purchases of securities available for sale (10,031) - (6,994)
Proceeds from sales of securities available for sale 7,018 - -
Proceeds from maturities of securities available for sale 3,032 4,034 9,472
Purchases of securities held to maturity (44,878) (36,967) (45,903)
Proceeds from maturities of securities held to maturity 15,328 30,483 45,805
Net increase in loans (48,620) (46,065) (19,677)
Purchases of premises and equipment (4,154) (2,712) (1,839)
Proceeds from sales of other real estate owned 221 - -
Cash paid in acquisition, net of cash received (414) - -
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (84,498) (43,227) (24,136)
------- ------- -------
FINANCING ACTIVITIES
Net increase in deposits 67,385 50,817 30,243
Net increase (decrease) in securities sold under agreements
to repurchase and federal funds purchased 7,379 (2,134) (5,710)
Net increase (decrease) in short-term borrowings 1,923 (2,086) (1,225)
Proceeds from long-term debt 2,200 - -
Repayments of long-term debt (110) - (10)
Exercise of stock options 91 99 105
Cash dividends paid (1,306) (1,103) (848)
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 77,562 45,593 22,555
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (881) 5,879 3,874
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,229 10,350 6,476
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,348 $ 16,229 $ 10,350
------- ------- -------
------- ------- -------
</TABLE>
Income tax payments were $2,482,000 in 1996, $2,266,000 in 1995 and
$1,699,000 in 1994. Cash paid for interest was $12,577,000 in 1996,
$10,230,000 in 1995 and $6,745,000 in 1994. Noncash investing and financing
activities aggregated $475,000 in 1996, $15,203,000 in 1995 and $24,000 in
1994. Included in these totals were transfers from loans to other real estate
owned of $393,000 in 1996 and $22,000 in 1995, and a transfer of securities
held to maturity to securities available for sale of $15,117,000 in 1995.
See accompanying notes to consolidated financial statements.
28
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. The accounting policies which have
a significant effect on financial position, results of operations and cash
flows are summarized below.
PRINCIPLES OF CONSOLIDATION, NATURE OF OPERATIONS AND USE OF ESTIMATES IN THE
FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of S.Y. Bancorp,
Inc. (Bancorp) and its wholly-owned subsidiaries, Stock Yards Bank & Trust
Company, a Kentucky bank and Stock Yards Bank & Trust Company, an Indiana
bank (the Banks). Significant intercompany transactions and accounts have
been eliminated in consolidation. Certain prior year accounts have been
reclassified to conform with 1996 classifications. The Banks engage in
commercial and retail banking services, trust and investment management
services, and mortgage banking services. The Kentucky Bank's offices are
located throughout Louisville and Jefferson County, Kentucky. The Indiana
Bank is located in Scott County, Indiana. Bancorp's market area is Louisville
and surrounding communities including southern Indiana.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of certain assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of related revenues and expenses during the reporting period. Actual results
could differ from those estimates.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, Bancorp considers cash and due from
banks to be cash equivalents.
SECURITIES
Effective January 1994, Bancorp adopted Statement of Financial Accounting
Standards (SFAS) No. 115,"Accounting for Certain Investments in Debt and
Equity Securities." The primary effects of the adoption of this accounting
principle are that securities available for sale are carried at fair value,
and unrealized gains and/or losses are reported net of tax effects, as a
separate component of stockholders' equity.
Securities which are intended to be held until maturity are carried at
amortized historical cost. Securities available for sale include securities
which may be sold in response to changes in interest rates, resultant
prepayment risk and other factors related to interest rate and prepayment
risk changes. Amortization of premiums and accretion of discounts are
recorded using the interest method. Gains or losses on sales of securities
are computed on a specific identification cost basis.
LOANS
Loans are stated at the unpaid principal balance. Interest income on loans is
recorded on the accrual basis except for those loans in a non-accrual income
status. Interest received on non-accrual loans is generally applied to
principal. Interest income is recorded on non-accrual loans once principal
recovery is reasonably assured. Loans are placed in a nonaccrual income
status when the prospects for recovering both principal and accrued interest
are considered doubtful or when a default of principal or interest has
existed for 90 days or more unless such a loan is well secured and in the
process of collection. Loan fees are not significant.
29
<PAGE>
Effective January 1995, Bancorp adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures."
These statements require that impaired loans be measured based on the present
value of future cash flows discounted at the loan's effective interest rate
or as a practical alternative, at the loan's observable market price or fair
value of the collateral if the loan is collateral dependent. The
implementation of these accounting standards has not had a significant impact
on Bancorp's financial position or results of operations.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Gains on sales of mortgage loans are recorded at the time of
funding by an investor at the difference between the sales proceeds and the
loan's carrying value.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that adequately
provides for potential losses. Management determines the adequacy of the
allowance based on reviews of individual credits, recent loss experience,
current economic conditions, the risk characteristics of the various
categories of loans and such other factors that, in management's judgement,
deserve current recognition in estimating loan losses. The allowance for loan
losses is increased by the provision for loan losses and reduced by net loan
charge-offs.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation of premises and equipment is computed using both
accelerated and straight-line methods over the estimated useful lives of the
assets. Leasehold improvements are amortized on the straight-line method over
the terms of the related lease or over the useful life of the improvements,
whichever is shorter.
OTHER ASSETS
Included in other assets is real estate acquired in settlement of loans.
Other real estate owned is carried at the lower of cost or fair value minus
estimated selling costs. Any write-downs to fair value at the date of
acquisition are charged to the allowance for loan losses. Expenses incurred
in maintaining assets, write-downs to reflect subsequent declines in value
and realized gains or losses are reflected in operations for the period.
STOCK-BASED EMPLOYEE COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
Bancorp has continued to use the intrinsic value based method of accounting
for stock-based compensation arrangements prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
Bancorp has provided expanded disclosures required by SFAS No. 123 related to
the fair value method of accounting for stock-based compensation (see note
14).
INCOME TAXES
Bancorp accounts for income taxes using the asset and liability method. The
objective of the asset and liability method is to establish deferred tax
assets and liabilities for temporary differences between the financial
reporting and the tax bases of Bancorp's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized or settled.
The effect on deferred taxes and liabilities of any change in tax rates is
recognized as income in the period that includes the enactment date.
30
<PAGE>
NET INCOME PER SHARE
Net income per share has been computed on the basis of the weighted average
number of shares of common stock outstanding each year, adjusted for the
effects of common stock equivalents (stock options). Average shares
outstanding for primary and fully diluted net income per share are presented
below. Average shares have been restated to reflect the August, 1996 2-for-1
stock split (see note 11).
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Primary 3,365,494 3,297,648 3,284,456
Fully diluted 3,372,262 3,299,364 3,288,654
(2) ACQUISITION
On October 1, 1996, Bancorp, Inc. completed the acquisition of the Austin
State Bank, Austin, Scott County, Indiana. Bancorp purchased 100% of the
common stock of Austin State Bank for $2,803,000, including acquisition costs
of $128,000. The purchase price plus the costs of the acquisition exceeded
the fair value of the net assets acquired by $1,041,000. This excess is being
amortized on the straight line basis over fifteen years. The acquisition was
accounted for as a purchase; accordingly, the results of the operations of
the Austin State Bank prior to the acquisition have not been included in the
accompanying consolidated statements of income.
In November 1996, the name of the Austin State Bank was changed to Stock
Yards Bank & Trust Company. That bank has retained its Indiana charter and
operates as a subsidiary of Bancorp.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks are required to maintain an average reserve balance in cash or with
the Federal Reserve Bank relating to customer deposits. At December 31, 1996,
the amount of those required reserve balances was approximately $4,593,000.
31
<PAGE>
(4) SECURITIES
The amortized cost and approximate market value of securities held to maturity
as of December 31,1996 and 1995 follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Approximate
Amortized Unrealized Market
(In thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Treasury and federal agencies $ 18,946 $ 338 $ 8 $ 19,276
Obligations of states
and political subdivisions 165 - - 165
-------- ------ ------ --------
$ 19,111 $ 338 $ 8 $ 19,441
-------- ------ ------ --------
-------- ------ ------ --------
DECEMBER 31, 1995
U.S. Treasury and federal agencies $ 13,972 $ 427 $ - $ 14,399
Mortgage-backed securities 1,145 1 - 1,146
-------- ------ ------ --------
$ 15,117 $ 428 $ - $ 15,545
-------- ------ ------ --------
-------- ------ ------ --------
</TABLE>
The amortized cost and approximate market value of securities available for
sale as of December 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Approximate
Amortized Unrealized Market
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Treasury and federal agencies $ 30,100 $ 44 $ 14 $ 30,130
Mortgage-backed securities 18,361 102 227 18,236
Obligations of states and political subdivisions 7,618 95 24 7,689
------- ------- ------ -------
$ 56,079 $ 241 $ 265 $ 56,055
------- ------- ------ -------
------- ------- ------ -------
DECEMBER 31, 1995
U.S. Treasury and federal agencies $ 9,079 $ 127 $ - $ 9,206
Mortgage-backed securities 10,046 127 11 10,162
Obligations of states and political subdivisions 7,585 127 25 7,687
------- ------- ------ -------
$ 26,710 $ 381 $ 36 $ 27,055
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
32
<PAGE>
As permitted under certain 1995 transition guidelines for SFAS No. 115,
Bancorp reassessed the appropriateness of the classification of securities
and, in December 1995, transferred securities with a book value of
$15,117,000 and an unrealized net gain of $370,000 from the held to maturity
to the available for sale category. This transfer increased the equity
portion of unrealized gain on securities available for sale by $244,000.
A summary of debt securities as of December 31, 1996 based on maturity is
presented below. Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations. Therefore,
in the case of mortgage backed securities, the expected remaining life is
reflected rather than contractual maturities.
SECURITIES SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
- --------------------------------------------------------------------------------
Amortized Approximate Amortized Approximate
(In thousands) Cost Market Value Cost Market Value
- --------------------------------------------------------------------------------
Due within one year $ 28,648 $ 28,640 $ 1,934 $ 1,934
Due after one year
through five years 16,888 17,037 12,272 12,483
Due after five years
through ten years 10,543 10,378 4,905 5,024
Securities with an approximate carrying value, of approximately $27,117,000
at December 31, 1996 and $29,816,000 at December 31, 1995 were pledged to
secure public deposits and certain borrowings.
(5) LOANS
The composition of loans as of December 31, 1996 and 1995 follows:
- --------------------------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Commercial and industrial $ 88,199 $ 80,520
Real estate mortgage 189,092 152,945
Consumer 24,104 18,667
Lease financing 153 805
-------- --------
$ 301,548 $ 252,937
-------- --------
-------- --------
The banks' credit exposure is diversified with secured and unsecured loans to
individuals, small businesses and corporations. No specific industry
concentration exceeds 10% of loans. While the Banks have a diversified loan
portfolio, a customer's ability to honor contracts is reliant upon the
economic stability and geographic region and/or industry in which that
customer does business. Loans outstanding and related unfunded commitments
are primarily concentrated within the Banks' market area which encompasses
Louisville, Kentucky and surrounding communities including southern Indiana.
33
<PAGE>
Information about impaired loans follows:
<TABLE>
<CAPTION>
DECEMBER 31
- ----------------------------------------------------------------------------------------
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Principal balance of impaired loans $ 854 $ 1,212
Impaired loans with a Statement No. 114 valuation allowance 4 231
Amount of Statement No. 114 valuation allowance 4 109
Impaired loans with no Statement No. 114 valuation allowance 850 981
Average balance of impaired loans for year 1,025 1,438
Interest income (cash basis) on impaired loans .4 175
----- -----
----- -----
</TABLE>
The principal balance of nonaccrual and restructured loans at December 31,
1994 was $428,000. Interest that would have been recorded if all such loans
were on a current status in accordance with their original terms was
approximately $37,000. The amount of interest income recorded for such loans
was approximately $32,000.
Loans to directors and their associates, including loans to companies for
which directors are principal owners, and executive officers amounted to
approximately $1,824,000 and $1,610,000 at December 31, 1996 and 1995,
respectively. These loans were made on substantially the same terms, and
interest rates and collateral, as those prevailing at the same time for other
customers. During 1996 new loans of $3,922,000 were made to officers and
directors and affiliated companies, repayments amounted to $3,708,000.
An analysis of the changes in the allowance for loan losses for the years
ended December 31, 1996, 1995 and 1994 follows:
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
BALANCE AT JANUARY 1 $ 4,507 $ 3,649 $ 2,752
Provision for loan losses 800 1,260 1,000
Allowance of acquired
bank at acquisition date 22 - -
------ ------ ------
5,329 4,909 3,752
------ ------ ------
Loans charged off 264 530 184
Recoveries 90 128 $81
------ ------ ------
Net loan charge-offs 174 402 103
------ ------ ------
BALANCE AT DECEMBER 31 $ 5,155 $ 4,507 $ 3,649
------ ------ ------
------ ------ ------
34
<PAGE>
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Land $ 1,432 $ 1,403
Buildings and improvements 6,215 5,049
Furniture and equipment 5,849 4,989
Construction in progress 2,100 -
------ ------
15,596 11,441
Less accumulated depreciation
and amortization 5,517 4,624
------ ------
$ 10,079 $ 6,817
------ ------
------ ------
(7) INCOME TAXES
Income taxes consist of the following:
YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
APPLICABLE TO OPERATIONS:
Current $ 2,573 $ 2,147 $ 1,753
Deferred (131) (247) (342)
------- ------- -------
Total applicable to operations 2,442 1,900 1,411
CHARGED (CREDITED) TO
STOCKHOLDERS' EQUITY:
Unrealized gain (loss) on
securities available for sale (33) 134 11
Stock options exercised (82) (32) (25)
------- ------- -------
$ 2,327 $ 2,002 $ 1,397
------- ------- -------
------- ------- -------
An analysis of the difference between the statutory and effective tax rates
follows:
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
U.S. Federal income tax rate 34.0% 34.0% 34.0%
Changes from statutory rate (1.7) (1.9) (2.4)
resulting from tax exempt interest (0.3) (0.2) (0.3)
----- ----- -----
Other, net 32.0% 31.9% 31.3%
----- ----- -----
----- ----- -----
35
<PAGE>
The effects of temporary differences that gave rise to significant portions of
the deferred tax assets and deferred tax liabilities were as follows:
DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Allowance for loan losses $ 1,526 $ 1,309
Deferred compensation 351 296
Other 42 51
----- -----
TOTAL DEFERRED TAX ASSETS 1,919 1,656
----- -----
DEFERRED TAX LIABLITIES
Property and equipment 347 271
Securities 257 242
----- -----
TOTAL DEFERRED TAX LIABLITIES 604 513
----- -----
NET DEFERRED TAX ASSETS $ 1,315 $ 1,143
----- -----
----- -----
No valuation allowance for deferred tax assets was recorded as of December
31, 1996 because Bancorp and the Bank have had sufficient taxable income to
allow for utilization of the future deductible amounts within the carryback
period.
(8) DEPOSITS
Included in deposits are certificates of deposit and other time deposits in
denominations of $100,000 or more in the amounts of $44,545,000 and
$33,398,000 at December 31, 1996 and 1995, respectively. Interest expense
related to certificates of deposit and other time deposits in denominations
of $100,000 or more was $2,073,000, $1,545,000 and $837,000, respectively,
for the years ended December 31, 1996, 1995 and 1994.
At December 31, 1996, the scheduled maturities of certificates of deposit are
as follows:
- --------------------------------------------------------------------------------
(In thousands)
- --------------------------------------------------------------------------------
1997 $ 130,864
1998 17,217
1999 5,699
2000 2,148
2001 and thereafter 1,529
--------
$ 157,457
--------
--------
The aggregate of deposit balances pertaining to accounts of directors, their
associates and executive officers was $4,152,000 at December 31, 1996.
36
<PAGE>
(9) OTHER BORROWED FUNDS
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date.
Short-term borrowings consist of treasury tax and loan deposits and generally
are repaid within one to 120 days from the transaction date.
Information concerning federal funds purchased and securities sold under
agreements to repurchase is summarized as follows:
- --------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
Average balance during the year $ 13,023 $ 13,128
Average interest rate during the year 5.00% 5.39%
Maximum month-end balance
during the year 19,728 15,024
(10) LONG-TERM DEBT
In connection with the acquisition of the Indiana bank, Bancorp borrowed
$2,200,000 from a correspondent bank. The interest rate on the note was
7.313% at December 31, 1996 and is indexed to LIBOR. The debt is to be repaid
in equal quarterly principal payments, plus interest, over five years. The
terms of the note include a number of financial and general covenants,
including capital and debt service coverage as well as restrictions on
additional long term debt, future mergers and significant dispositions
without the consent of the lender. Principal payments will total $440,000 per
year in 1997 through 2000 and $330,000 in 2001.
At December 31, 1996 and 1995 the Bank had $607,000 of redeemable
subordinated debentures outstanding which are due in October 2049. The
interest on these debentures is at a variable rate equal to one percent less
than the Bank's prime rate adjusted annually on January 1 of each year. The
Bank's prime rate was 8.25% at December 31, 1996. The debentures are
subordinated to the claims of creditors and depositors of the Bank. The
debentures are subject to redemption only by the Bank at 100% of the
principal amount thereof, upon the earlier of the death of the registered
owners, or an event of default by the registered owners with respect to loans
from the Bank.
(11) STOCKHOLDERS' EQUITY
In August 1996, the Board of Directors declared a 2-for-1 stock split to be
effected in the form of a 100% stock dividend. The split resulted in the
issuance of 1,635,715 shares of common stock on September 17, 1996 to
shareholders of record as of August 30, 1996. All per share information
herein has been adjusted to reflect the stock split.
(12) ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Kentucky Bank has an agreement with the Federal Home Loan Bank of
Cincinnati (FHLB) which enables this Bank to borrow under terms to be
established at the time of the advance. Advances from the FHLB would be
collateralized by certain first mortgage loans under a blanket mortgage
collateral agreement and FHLB stock. The Bank has not taken any advances
under this agreement.
37
<PAGE>
(13) EMPLOYEE BENEFIT PLANS
The Kentucky Bank has an employee stock ownership plan, a money purchase plan
and a deferred income (401(k)) profit sharing plan. These plans are defined
contribution plans and are available to all employees meeting the eligibility
requirements. The expenses related to all plans for 1996, 1995 and 1994 were
$553,000, $457,000 and $400,000, respectively. Contributions are made in
accordance with the terms of the plans. Effective January 1997, Indiana Bank
employees were added to the Kentucky Bank plans.
The Kentucky Bank also sponsors an unfunded, non-qualified, defined benefit
retirement plan for certain key officers. At December 31, 1996 and 1995 the
accumulated benefit obligation for this plan was $1,334,000 and $1,025,000,
respectively. Expense under the plan was $160,000 in 1996, $71,000 in 1995
and $104,000 in 1994.
Obligations for other post-retirement and post-employment benefits are not
significant.
(14) COMMON STOCK OPTIONS
In 1995 shareholders approved a stock incentive plan which provides for
granting of options to Bank employees and non-employee directors to purchase
up to 160,000 shares of common stock. Under this plan, options for 109,200
shares were granted in 1995 leaving 50,800 shares available for future grant.
Bancorp also has a stock option plan under which all options have been
granted. Outstanding options are exercisable with the exception of those
granted in 1994 and 1995 which vest 20% per year over a five year period. The
options granted at $1.722 per share were granted below market value of common
stock at time of grant and do not expire. All other options were granted at
the market value of common stock at the time of grant and expire ten years
after the date of grant.
Activity with respect to outstanding options follows. Appropriate share and
per share information has been restated to reflect the 1996 2-for-1 stock
split.
- --------------------------------------------------------------------------------
Weighted average
Shares price per share
- --------------------------------------------------------------------------------
Outstanding at December 31, 1993 95,172 $ 3.82
Granted in 1994 25,360 12.84
Expired in 1994 (27,140) 3.80
--------
--------
Outstanding at December 31, 1994 93,392 6.27
Granted in 1995 109,200 14.92
Exercised in 1995 (14,046) 7.04
--------
--------
Outstanding at December 31, 1995 188,546 11.22
Exercised in 1996 (16,812) 4.44
Forfeited in 1996 (1,600) 14.50
--------
Outstanding at December 31, 1996 170,134 11.89
--------
--------
The weighted average fair value of options granted in 1995 was $8.51.
38
<PAGE>
Options outstanding at December 31, 1996 were as follows:
- --------------------------------------------------------------------------------
Option price per share Expiration Shares Options exercisable
- --------------------------------------------------------------------------------
$ 1.722 none 31,880 31,880
7.715 1998 2,904 2,904
12.396 2000 726 726
8.677 2001 4,064 4,064
12.841 2004 25,360 10,144
14.500 2005 83,200 16,640
16.750 2005 22,000 4,400
------- -------
170,134 70,758
------- -------
------- -------
Bancorp applies the provisions APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock options granted at the market value of common stock at the time of
grant. Had compensation cost for Bancorp's stock-based compensation plans been
determined consistent with SFAS No. 123, Bancorp's net income and earnings per
share would have been as follows:
- --------------------------------------------------------------------------------
(In thousands, except per share data) 1996 1995
- --------------------------------------------------------------------------------
Net income as reported $ 5,179 $ 4,056
Net income pro forma 5,056 3,933
Primary and fully diluted EPS as reported 1.54 1.23
Primary and fully diluted EPS pro forma 1.54 1.21
The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes option pricing model. Assumptions used for grants in
1995 were dividend yield of 1.78%; expected volatility of 16.40%; risk free
interest rate of 5.70%; and expected life of 8 years.
(15) DIVIDEND RESTRICTION
Bancorp's principal source of funds is dividends received from the Banks.
Under applicable banking laws, bank regulatory authorities must approve the
declaration of dividends in any year if such dividends are in an amount in
excess of the sum of net income of that year and retained earnings of the
preceding two years. At January 1, 1997, the retained earnings of the Banks
available for payment of dividends without regulatory approval were
approximately $6,757,000.
(16) COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1996, the Banks had various commitments and contingent
liabilities outstanding which arose in the normal course of business, such as
standby letters of credit and commitments to extend credit, which are
properly not reflected in the consolidated financial statements. In
management's opinion, commitments to extend credit of $61,902,000, including
standby
39
<PAGE>
letters of credit of $10,363,000 represent normal banking transactions, and
no significant losses are anticipated to result therefrom. The Bank's
exposure to credit loss in the event of nonperformance by the other party to
these commitments is represented by the contractual amount of these
instruments. The Banks use the same credit and collateral policies in making
commitments and conditional guarantees as it does for on-balance sheet
instruments. Market risk arises on fixed rate commitments if interest rates
move adversely subsequent to the extension of the commitment.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Banks evaluate each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Banks upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Banks to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support private
borrowing arrangements.
Also, as of December 31, 1996 there were various pending legal actions and
proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate result of these legal
actions and proceedings will not have a material adverse effect upon the
consolidated financial position or results of operations of Bancorp.
The Kentucky Bank leases certain facilities and improvements under
non-cancelable operating leases. Future minimum lease commitments for these
leases are $424,000 in 1997, $397,000 in 1998, $325,000 in 1999, $288,000 in
2000, $287,000 in 2001 and $1,201,000 in the aggregate thereafter until 2006.
Rent expense, net of sublease income, was $329,000 in 1996, $446,000 in 1995
and $399,000 in 1994.
(17) FINANCIAL INSTRUMENTS - INTEREST RATE SWAP CONTRACTS
Bancorp manages its exposure to market risk, in part, by using interest rate
swap contracts to modify the existing rate characteristics of its variable
rate loan portfolio. The notional amount of the interest rate swap contracts
represents an agreed upon amount on which calculations of interest payments
to be exchanged are based. The notional amount is significantly greater than
the amount at risk. The cost of replacing contracts in an unrealized gain
position is the measurement of credit risk. Bancorp's contracts are with a
counterparty with high credit ratings and, as of December 31, 1996, the
counterparty is expected to meet its obligations.
At December 31, 1996, Bancorp had entered into interest rate swap contracts
with notional amounts totaling $20 million which mature in June, 1998. Under
these contracts, Bancorp receives or pays the difference between the floating
prime rate and the rates stated in the contracts. Net receipts or payments
under the contracts are recognized as adjustments to interest income on
loans. These contracts increased interest income by $74,000 in 1996.
40
<PAGE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Bancorp's financial instruments are as follows:
- --------------------------------------------------------------------------------
Carrying Fair
(In thousands) Amount Value
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
FINANCIAL ASSETS
Cash and short-term investments $ 19,848 $ 19,848
Securities 75,520 75,496
Loans 300,755 299,325
Interest rate swaps - 99
FINANCIAL LIABILITIES
Deposits $ 355,251 $ 368,610
Short-term borrowings 22,396 22,396
Long-term debt 2,697 2,697
Commitments to extend credit - -
Standby letters of credit - 160
DECEMBER 31, 1995
FINANCIAL ASSETS
Cash and short-term investments $ 16,229 $ 16,229
Securities 42,255 42,600
Loans 252,340 253,332
FINANCIAL LIABILITIES
Deposits $ 280,593 $ 282,007
Short-term borrowings 13,094 13,094
Long-term debt 607 607
Commitments to extend credit - -
Standby letters of credit - 122
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value.
CASH, SHORT-TERM INVESTMENTS AND SHORT-TERM BORROWINGS
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
41
<PAGE>
SECURITIES
For securities, fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities or dealer quotes.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
DEPOSITS
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of
similar remaining maturities.
OTHER DEBT
Rates currently available to Bancorp for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair values of commitments to extend credit are estimated using fees
currently charged to enter into similar agreements and the creditworthiness
of the customers. The fair values of standby letters of credit are based on
fees currently charged for similar agreements or the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting date.
INTEREST RATE SWAPS
The fair value of interest rate swaps is the estimated amount, based on
market quotes, that Bancorp would receive to terminate the agreements at the
reporting date, considering interest rates and the remaining term of the
agreements.
LIMITATIONS
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instruments.
Because no market exists for a significant portion of Bancorp's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
42
<PAGE>
(19) REGULATORY MATTERS
The Banks are subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly discretionary, actions by
regulators. If undertaken, these measures could have a direct material effect
on a bank's financial statements. Under capital adequacy guidelines, a bank
must meet specific capital guidelines that involve quantitative measures of a
bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require banks to maintain minimum amounts and ratios of total and Tier I
capital to risk weighted assets and Tier I capital to average assets.
Management believes, as of December 31, 1996, that both Banks meet all
capital adequacy requirements to which they are subject.
As of December 1996, the most recent notifications from each Bank's primary
regulator categorized the Banks as well capitalized under the regulatory
framework. To be categorized as well capitalized, the Banks must maintain
minimum total risk-based, Tier I and leverage ratios as set forth in the
table below. There are no conditions or events since those notifications that
management believes have changed the institutions' categories.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Minimum For Capital Minimum To be
Actual Adequacy Purposes Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Total risk-based capital (1)
Consolidated $ 34,833 11.27% $ 24,726 8.00% $ 30,908 10.00%
Kentucky bank 34,557 11.26 24,552 8.00 30,690 10.00
Indiana bank 1,777 76.46 186 8.00 232 10.00
Tier 1 risk-based capital (1)
Consolidated 30,345 9.82 12,360 4.00 18,541 6.00
Kentucky bank 30,099 9.81 12,273 4.00 18,409 6.00
Indiana bank 1,766 75.99 93 4.00 139 6.00
Leverage (2)
Consolidated 30,345 7.90 15,365 4.00 19,206 5.00
Kentucky bank 30,099 7.86 15,318 4.00 19,147 5.00
Indiana bank 1,766 23.10 306 4.00 382 5.00
DECEMBER 31, 1995
Total risk-based capital (1)
Consolidated 31,027 12.56 19,762 8.00 24,703 10.00
Kentucky bank 29,979 12.13 19,772 8.00 24,715 10.00
Tier 1 risk-based capital (1)
Consolidated 27,332 11.06 9,885 4.00 14,827 6.00
Kentucky bank 26,284 10.64 9,881 4.00 14,822 6.00
Leverage (2)
Consolidated 27,332 8.74 12,509 4.00 15,636 5.00
Kentucky bank 26,284 8.40 12,516 4.00 15,645 5.00
</TABLE>
(1) Ratio is computed in relation to risk-weighted assets.
(2) Ratio is computed in relation to average assets.
43
<PAGE>
(20) S.Y. BANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Cash on deposit with subsidiary bank $ 161 $ 723
Investment in subsidiary banks 33,113 26,566
Dividend receivable 327 325
Other assets 680 453
------- -------
TOTAL ASSETS $ 34,281 $ 28,067
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 327 $ 325
Other liabilities 270 128
Long-term debt 2,090 -
Stockholders' equity 31,594 27,614
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,281 $ 28,067
------- -------
------- -------
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income - Dividends from subsidiary bank $ 1,458 $ 1,169 $ 918
Expenses 130 83 56
------- ------- ------
Income before income taxes and
equity in undistributed net
income of subsidiaries 1,328 1,086 862
Federal income tax benefit 44 28 19
------- ------- ------
Income before equity in
undistributed net income
of subsidiaries 1,372 1,114 881
Equity in undistributed net
income of subsidiaries 3,807 2,942 2,220
------- ------- ------
NET INCOME $ 5,179 $ 4,056 $ 3,101
------- ------- ------
------- ------- ------
</TABLE>
44
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 5,179 $ 4,056 $ 3,101
Net income
Adjustment to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of subsidiaries (3,807) (2,942) (2,220)
Increase in dividend receivable (2) (66) (70)
Increase in other assets (146) (154) (23)
Increase in other liabilities 142 128 -
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,366 1,022 788
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of subsidiary (2,803) - -
Exercise of stock options 91 99 105
Cash dividends paid (1,306) (1,103) (848)
Proceeds from long term debt 2,200 - 1
Repayments of long term debt (110) - 1
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,928) (1,004) (743)
------- ------- -------
NET INCREASE (DECREASE) IN CASH (562) 18 45
CASH AT BEGINNING OF YEAR 723 705 660
------- ------- -------
CASH AT END OF YEAR $ 161 $ 723 $ 705
------- ------- -------
------- ------- -------
</TABLE>
45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS, S.Y. BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of S.Y. Bancorp,
Inc. (Bancorp) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three year period ended December
31, 1996. These consolidated financial statements are the responsibility of
Bancorp's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of S.Y.
Bancorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, Bancorp
adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting For Certain
Investments in Debt and Equity Securities," in 1994.
/s/ KPMG PEAT MARWICK LLP
Louisville, Kentucky
January 24, 1997
46
<PAGE>
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements and other financial data
were prepared by the management of S.Y. Bancorp, Inc. (Bancorp), which has
the responsibility for the integrity of the information presented. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts that
are the best estimates and judgments of management with consideration given
to materiality.
Management is further responsible for maintaining a system of internal
controls designed to provide reasonable assurance that the books and records
reflect the transactions of Bancorp and that its established policies and
procedures are carefully followed. Management believes that Bancorp's system,
taken as a whole, provides reasonable assurance that transactions are
executed in accordance with management's general or specific authorization;
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; access to assets is permitted only in
accordance with management's general or specific authorization, and the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
Management also seeks to assure the objectivity and integrity of Bancorp's
financial data by the careful selection and training of qualified personnel,
an internal audit function and organizational arrangements that provide an
appropriate division of responsibility.
Bancorp's independent auditors, KPMG Peat Marwick LLP, have audited the
consolidated financial statements. Their audit was conducted in accordance
with generally accepted auditing standards, which provide for consideration
of Bancorp's internal controls to the extent necessary to determine the
nature, timing, and extent of their audit tests.
The Board of Directors pursues its oversight role for the consolidated
financial statements through the Audit Committee. The Audit Committee meets
periodically and privately with management, the internal auditor, and the
independent auditors to review matters relating to financial reporting, the
internal control systems, and the scope and results of audit efforts. The
internal and independent auditors have unrestricted access to the Audit
Committee, with and without the presence of management, to discuss
accounting, auditing, and financial reporting matters. The Audit Committee
also recommends the appointment of the independent auditors to the Board of
Directors.
/s/ David H. Brooks
David H. Brooks
Chairman and Chief Executive Officer
/s/ David P. Heintzman
David P. Heintzman
President
/s/ Nancy B. Davis
Nancy B. Davis
Senior Vice President
and Chief Financial Officer
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and executive officers of Bancorp is
incorporated herein by reference to the discussion under the heading,
"ELECTION OF DIRECTORS," on pages 4 through 8 of Bancorp's Proxy Statement
for the 1997 Annual Meeting of Shareholders and the section captioned
EXECUTIVE OFFICERS OF THE REGISTRANT on page 7 of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of Bancorp's executive officers and
directors is incorporated herein by reference to the discussion under the
heading, "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" on pages 11
through 15 of Bancorp's Proxy Statement for the 1997 Annual Meeting of
Shareholders.
Information appearing under the headings "REPORT OF COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION" on pages 10 and 11 and "Shareholder Return
Performance Graph" in the section entitled "COMPENSATION OF EXECUTIVE
OFFICERS AND DIRECTORS" contained on page 15 in Bancorp's Proxy Statement for
the 1997 Annual Meeting of Shareholders shall not be deemed to be
incorporated by reference in this report, notwithstanding any general
statement contained herein incorporating portions of such Proxy Statement by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the discussion under the headings, "ELECTION OF DIRECTORS" on pages 4 through
8 and "PRINCIPAL HOLDERS OF BANCORP'S COMMON STOCK," on pages 3 and 4 of
Bancorp's Proxy Statement for the 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
discussion under the heading, "TRANSACTIONS WITH MANAGEMENT AND OTHERS," on
page 16 of Bancorp's Proxy Statement for the 1997 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are included on pages 25 through 46
of this Form 10-K:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - years ended December 31, 1996,
1995, and 1994
Consolidated Statements of Changes in Stockholders' Equity - years
ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows - years ended December 31, 1996,
1995, and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
48
<PAGE>
(a) 2. List of Financial Statement Schedules
Schedules to the consolidated financial statements of Bancorp are
omitted since they are either not required under the related
instructions, are inapplicable, or the required information is shown
in the consolidated financial statements or notes thereto.
(a) 3. List of Exhibits
3.1 Articles of Incorporation of Bancorp filed with the Secretary of
State of Kentucky on January 12, 1988. Exhibit 3 to
Registration Statement on Form S-4 of Bancorp, File No.
33-22517, is incorporated by reference herein.
3.2 Articles of Amendment to the Articles of Incorporation of
Bancorp filed with the Secretary of State of Kentucky on May 8,
1989. Exhibit 19 to Annual Report on Form 10-K for the year
ended December 31, 1989, of Bancorp is incorporated by reference
herein.
3.3 Articles of Amendment to the Articles of Incorporation of
Bancorp filed with the Secretary of State of Kentucky on June
30, 1994. Exhibit 3.3 to Annual Report on Form 10-K for the year
ended December 31, 1994, of Bancorp is incorporated by reference
herein.
3.4 Bylaws of Bancorp, as amended, currently in effect. Exhibit 3.4
to Annual Report on Form 10-K for the year ended December 31,
1994, of Bancorp is incorporated by reference herein.
10.1* S.Y. Bancorp, Inc. Stock Option Plan as amended. Exhibit 4 to
Registration Statement on Form S-8 of Bancorp, File No.
33-25885, is incorporated by reference herein.
10.2* Stock Yards Bank & Trust Company Senior Officers Security Plan
adopted December 23, 1980. Exhibit 10 to Annual Report on Form
10-K for the year ended December 31, 1988, of Bancorp is
incorporated by reference herein.
10.3* Form of Indemnification agreement between Stock Yards Bank &
Trust Company, S.Y. Bancorp, Inc. and each member of the Board
of Directors. Exhibit 10.3 to the Annual Report on Form 10-K for
the year ended December 31, 1994, of Bancorp is incorporated by
reference herein.
10.4* Senior Executive Severance Agreement executed in July, 1994
between Stock Yards Bank & Trust Company and David H. Brooks.
Exhibit 10.4 to the Annual Report on Form 10-K for the year
ended December 31, 1994, of Bancorp is incorporated by reference
herein.
10.5* Senior Executive Severance Agreement executed in July 1994
between Stock Yards Bank & Trust Company and David P. Heintzman.
Exhibit 10.5 to the Annual Report on Form 10-K for the year
ended December 31,1994, of Bancorp is incorporated by reference
herein.
10.6* Senior Executive Severance Agreement executed in July, 1994
between Stock Yards Bank & Trust Company and Kathy C. Thompson.
Exhibit 10.6 to the Annual Report on Form 10-K for the year
ended December 31, 1994, of Bancorp is incorporated by reference
herein.
10.7* S.Y. Bancorp, Inc. 1995 Stock Incentive Plan. Exhibit 10.7 to
the Annual Report on Form 10-K for the year ended December 31,
1995, of Bancorp is incorporated by reference herein.
49
<PAGE>
10.8* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
Company and David H. Brooks.
10.9* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
Company and David P. Heintzman.
10.10* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
company and Kathy C. Thompson.
10.11* Senior Executive Severance Agreement, as amended, executed in
February, 1997 between Stock Yards Bank & Trust Company and
Nancy B. Davis.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
* Indicates matters related to executive compensation.
Copies of the foregoing Exhibits will be furnished to others upon request and
payment of Bancorp's reasonable expenses in furnishing the exhibits.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed in response to Item 14(a) 3 are filed as a
part of this report.
(d) Financial Statement Schedules
None
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
March 21, 1997 S.Y. BANCORP, INC.
BY: /s/ David H. Brooks
-------------------
David H. Brooks
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ David H. Brooks Chairman and Chief Executive Officer March 11, 1997
- --------------------------- and Director (principal executive officer)
David H. Brooks
/s/ David P. Heintzman President and Director March 11, 1997
- ---------------------------
David P. Heintzman
/s/ Nancy B. Davis Senior Vice President, Treasurer and March 11, 1997
- --------------------------- Chief Financial Officer (principal financial
Nancy B. Davis and accounting officer)
/s/ James E. Carrico Director March 11, 1997
- ---------------------------
James E. Carrico
/s/ Jack M. Crowner Director March 11, 1997
- ---------------------------
Jack M. Crowner
/s/ Charles R. Edinger, III Director March 11, 1997
- ---------------------------
Charles R. Edinger, III
/s/ Carl T. Fischer, Jr. Director March 11, 1997
- ---------------------------
Carl T. Fischer, Jr.
/s/ Stanley A. Gall Director March 11, 1997
- ---------------------------
Stanley A. Gall, M.D.
/s/ Leonard Kaufman Director March 11, 1997
- ---------------------------
Leonard Kaufman
/s/ George R. Keller Director March 11, 1997
- ---------------------------
George R. Keller
51
<PAGE>
/s/ Bruce P. Madison Director March 11, 1997
- ---------------------------
Bruce P. Madison
Director March 11, 1997
- ---------------------------
Henry A. Meyer
/s/ Norman Tasman Director March 11, 1997
- ---------------------------
Norman Tasman
/s/ Kathy C. Thompson Executive Vice President, Secretary March 11, 1997
- --------------------------- and Director
Kathy C. Thompson
/s/ Bertrand A. Trompeter Director March 11, 1997
- ---------------------------
Bertrand A. Trompeter
</TABLE>
52
<PAGE>
INDEX OF EXHIBITS
3.1 Articles of Incorporation of Bancorp filed with the Secretary of
State of Kentucky on January 12, 1988. Exhibit 3 to
Registration Statement on Form S-4 of Bancorp, File No.
33-22517, is incorporated by reference herein.
3.2 Articles of Amendment to the Articles of Incorporation of
Bancorp filed with the Secretary of State of Kentucky on May 8,
1989. Exhibit 19 to Annual Report on Form 10-K for the year
ended December 31, 1989, of Bancorp is incorporated by reference
herein.
3.3 Articles of Amendment to the Articles of Incorporation of
Bancorp filed with the Secretary of State of Kentucky on June
30, 1994. Exhibit 3.3 to Annual Report on Form 10-K for the year
ended December 31, 1994, of Bancorp is incorporated by reference
herein.
3.4 Bylaws of Bancorp, as amended, currently in effect. Exhibit 3.4
to Annual Report on Form 10-K for the year ended December 31,
1994, of Bancorp is incorporated by reference herein.
10.1* S.Y. Bancorp, Inc. Stock Option Plan as amended. Exhibit 4 to
Registration Statement on Form S-8 of Bancorp, File No.
33-25885, is incorporated by reference herein.
10.2* Stock Yards Bank & Trust Company Senior Officers Security Plan
adopted December 23, 1980. Exhibit 10 to Annual Report on Form
10-K for the year ended December 31, 1988, of Bancorp is
incorporated by reference herein.
10.3* Form of Indemnification agreement between Stock Yards Bank &
Trust Company, S.Y. Bancorp, Inc. and each member of the Board
of Directors. Exhibit 10.3 to the Annual Report on Form 10-K for
the year ended December 31, 1994, of Bancorp is incorporated by
reference herein.
10.4* Senior Executive Severance Agreement executed in July, 1994
between Stock Yards Bank & Trust Company and David H. Brooks.
Exhibit 10.4 to the Annual Report on Form 10-K for the year
ended December 31, 1994, of Bancorp is incorporated by reference
herein.
10.5* Senior Executive Severance Agreement executed in July 1994
between Stock Yards Bank & Trust Company and David P. Heintzman.
Exhibit 10.5 to the Annual Report on Form 10-K for the year
ended December 31,1994, of Bancorp is incorporated by reference
herein.
10.6* Senior Executive Severance Agreement executed in July, 1994
between Stock Yards Bank & Trust Company and Kathy C. Thompson.
Exhibit 10.6 to the Annual Report on Form 10-K for the year
ended December 31, 1994, of Bancorp is incorporated by reference
herein.
10.7* S.Y. Bancorp, Inc. 1995 Stock Incentive Plan. Exhibit 10.7 to
the Annual Report on Form 10-K for the year ended December 31,
1995, of Bancorp is incorporated by reference herein.
10.8* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
Company and David H. Brooks.
10.9* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
Company and David P. Heintzman.
10.10* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
company and Kathy C. Thompson.
<PAGE>
10.11* Senior Executive Severance Agreement, as amended, executed in
February, 1997 between Stock Yards Bank & Trust Company and
Nancy B. Davis.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
* Indicates matters related to executive compensation.
<PAGE>
AMENDMENT NUMBER ONE TO THE
SENIOR EXECUTIVE SEVERANCE AGREEMENT
Pursuant to the power reserved in Section 12 of the Senior Executive
Severance Agreement ("Agreement") made and entered into between Stock Yards Bank
and Trust Company, a Kentucky banking corporation ("Bank"), and David H. Brooks
("Executive"), the Bank and the Executive hereby amend the Agreement, effective
this 25th day of February, 1997, as follows:
Section 1
By amending Section 1, DEFINITIONS, to revise the definition of "CHANGE OF
CONTROL" to read as follows:
A "CHANGE IN CONTROL" of SY Bancorp shall be deemed to have occurred
if:
(i) any Person (as defined in this definition) is or becomes the
Beneficial Owner (as defined in this definition) of securities of SY
Bancorp representing 20% or more of the combined voting power of SY
Bancorp's then outstanding securities (unless (A) such Person is the
Beneficial Owner of 20% or more of such securities as of April 26,
1995 or (B) the event causing the 20% threshold to be crossed is an
acquisition of securities directly from SY Bancorp);
(ii) during any period of two consecutive years beginning after April
26, 1995, individuals who at the beginning of such period constitute
the Board of Directors of SY Bancorp and any new director (other than
a director designated by a person who has entered into an agreement
with SY Bancorp to effect a transaction described in clause (i), (iii)
or (iv) of this Change in Control definition) whose election or
nomination for election was approved by a vote of at least two-thirds
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved cease for any reason to constitute a
majority of the Board of Directors of SY Bancorp;
<PAGE>
(iii) the shareholders of SY Bancorp approve a merger or consolidation
of SY Bancorp with any other corporation (other than a merger or
consolidation which would result in the voting securities of SY
Bancorp outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the entity surviving such merger or consolidation), in
combination with voting securities of SY Bancorp or such surviving
entity held by a trustee or other fiduciary pursuant to any employee
benefit plan of SY Bancorp or such surviving entity or of any
subsidiary of SY Bancorp or such surviving entity, at least 80% of the
combined voting power of the securities of SY Bancorp or such
surviving entity outstanding immediately after such merger or
consolidation); or
(iv) the shareholders of SY Bancorp approve a plan of complete
liquidation or dissolution of SY Bancorp or an agreement for the sale
or disposition by SY Bancorp of all or substantially all of SY
Bancorp's assets.
(v) For purposes of the definition of Change in Control, "Person"
shall have the meaning ascribed to such term in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended, as supplemented by
Section 13(d)(3) of such Act; provided, however, that Person shall not
include (i) SY Bancorp, any subsidiary or any other Person controlled
by SY Bancorp, (ii) any trustee or other fiduciary holding securities
under any employee benefit plan of SY Bancorp or of any subsidiary, or
(iii) a corporation owned, directly or indirectly, by the shareholders
of SY Bancorp in substantially the same proportions as their ownership
of securities of SY Bancorp.
(vi) For purposes of the definition of Change in Control, a Person
shall be deemed the "Beneficial Owner" of any securities which such
Person, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) of, including pursuant to
any agreement, arrangement or understanding (whether or not in
writing); provided, however, that: (i) a Person shall
2
<PAGE>
not be deemed the Beneficial Owner of any security as a result of an
agreement, arrangement or understanding to vote such security (x) arising
solely from a revocable proxy or consent given in response to a public
proxy or consent solicitation made pursuant to, and in accordance with, the
Securities Exchange Act of 1934, as amended, and the applicable rules
and regulations thereunder or (y) made in connection with, or to
otherwise participate in, a proxy or consent solicitation made, or to
be made, pursuant to, and in accordance with, the applicable
provisions of the Securities Exchange Act of 1934, as amended, and the
applicable rules and regulations thereunder; in either case described
in clause (x) or clause (y) above, whether or not such agreement,
arrangement or understanding is also then reportable by such Person on
Schedule 13D under the Securities Exchange Act of 1934, as amended (or
any comparable or successor report); and (ii) a Person engaged in
business as an underwriter of securities shall not be deemed to be the
Beneficial Owner of any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until
the expiration of forty days after the date of such acquisition.
Section 2
By amending Section 1, DEFINITIONS, to revise the preamble to definition of
"FORCED RESIGNATION" to read as follows:
"FORCED RESIGNATION" means a resignation at the Executive's initiative
following a Change in Control and the occurrence of any of the following
triggering events, provided such resignation occurs within twelve (12)
months after a triggering event or, if earlier, within thirty-six (36)
months after a Change in Control:
Section 3
By amending Section 1, DEFINITIONS, to add a definition of the term
"Acquisition Transaction" to read as follows:
"ACQUISITION TRANSACTION" shall be deemed to have taken place if the
shareholders of SY Bancorp approve (a) a merger or consolidation of SY
Bancorp with any other
3
<PAGE>
corporation, other than a merger or consolidation which would result
in the voting securities of SY Bancorp which are outstanding immediately
prior to such merger or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
entity surviving such merger or consolidation) at least 80% of the voting
securities of SY Bancorp or such surviving entity outstanding immediately
after such merger or consolidation or (b) a plan of complete liquidation or
dissolution of SY Bancorp or an agreement for the sale or disposition
by SY Bancorp of all or substantially all of SY Bancorp's assets.
Section 4
By amending Section 2 to renumber the existing language in Section 2 as
Section 2(b) and to add a new Section 2(a) to read as follows:
(a)(i) SEVERANCE PAYMENT UPON INVOLUNTARY TERMINATION PRIOR TO
ACQUISITION TRANSACTION. Except as set forth in Section 2(a)(ii), if
the Executive's employment with the Bank is involuntarily terminated
by the Board of Directors of the Bank during the Term and within a
twelve month period beginning on the later of the date the Board of
Directors approves the going forward of discussions with a potential
buyer or buyers for SY Bancorp or the Bank or the date the Executive
has expressed the Executive's written opposition to such sale or
potential sale of SY Bancorp or the Bank to the Board of Directors,
the Bank shall pay the Executive (A) his full salary through the date
of such termination, which termination shall not be effective until
the later of the effective date set forth in the Notice of Termination
or two weeks following written notice to the Executive, and (B) the
Severance Payment described in this Section 2(a)(i). On the effective
date of an Acquisition Transaction which results from such
discussions, the Bank shall pay to the Executive a severance payment
equal to 299 percent of the Executive's Base Amount (the "Severance
Payment"). The Severance Payment under this Section 2(a)(i) shall be
payable to the Executive in a lump sum, in immediately available
funds, and shall be subject to any applicable
4
<PAGE>
payroll or other taxes required to be withheld. Such Severance Payment
shall be in lieu of any other severance payment provided for by the Bank
in accordance with its standard of practice and operations for Executive
at the time of payment of this Severance Payment.
(a)(ii) FORFEITURE OF SEVERANCE PAYMENT. No payment shall be
made under Section 2(a)(i) to the Executive if (A) the Executive
voluntarily divulges or otherwise discloses, directly or indirectly,
any trade secrets or other confidential information concerning the
business, policies, or sale or potential sale of SY Bancorp or the
Bank which is not lawfully attainable from public sources, unless such
disclosure is required by law or authorized by the Bank, (B) the
Executive is involuntarily terminated by the Bank for Cause, (C) the
Executive is terminated due to death, Retirement or Permanent
Disability, or (D) the Executive fails to fulfill the Executive's
responsibilities as an officer and/or director of the Bank and SY
Bancorp during the period after the above-mentioned Board of
Director's approval and while the Executive remains employed by the
Bank; provided, however, following public announcement by the Bank or
SY Bancorp of an Acquisition Transaction or proposed Acquisition
Transaction, the Executive shall not be deemed to have breached his
responsibilities as an officer or director of the Bank and SY Bancorp
and thereby to have forfeited his entitlement to the severance payment
described in Section 2(a)(i) above if he expresses publicly his
opposition to such transaction or proposed transaction, solicits votes
or proxies from shareholders of SY Bancorp against the transaction or
otherwise solicits or encourages others to oppose such transaction.
Section 5
By amending the new Section 2(b) to read as follows:
(b) SEVERANCE PAYMENT UPON TERMINATION FOLLOWING CHANGE IN CONTROL.
During the Term, if the Executive's employment with the Bank terminates
(either at the initiative of the
5
<PAGE>
Bank or the Executive) within thirty-six (36) months after a Change in
Control for any reason whatsoever other than for Cause or as a result
of the Executive's death, Retirement, or Permanent Disability, the
Bank shall pay the Executive his full salary through the date of
such termination, which termination shall not be effective until
the later of two (2) weeks following written notice thereof to the
Executive or the effective date set forth in the notice of termination. In
addition, for a termination at the initiative of the Executive (other than
a Forced Resignation) that occurs within twenty-four (24) months after a
Change in Control, the Bank shall pay the Severance Payment to the
Executive as of the effective date of such termination. For a termination
at the initiative of the Executive (other than a Forced Resignation) that
occurs more than twenty-four (24) months but less than thirty-six (36)
months after a Change in Control, the Bank shall pay the Executive as of
the effective date of such termination 2/3 of the Severance Payment. For a
termination at the Bank's initiative (other than for Cause) that occurs
within thirty-six (36) months after a Change in Control or for a Forced
Resignation, the Bank shall pay the Severance Payment to the Executive as
of the effective date of such termination. Notwithstanding any provision
to the contrary, in no event shall any Severance Payment (or portion
thereof) be paid to the Executive if the Executive's employment is
terminated for Cause or as a result of the Executive's death, Retirement,
or Permanent Disability. Further, the Severance Payment (or portion
thereof) shall be payable to the Executive in a lump sum, in immediately
available funds, on the date the Executive's termination is effective, and
shall be subject to any applicable payroll or other taxes required to be
withheld. The Severance Payment shall be in lieu of any other severance
payment provided for by the Bank in accordance with its standard of
practice and operations for Executive at the time of payment of the
Severance Payment.
Section 6
By amending Section 2 to add a new Section 2(c) to read as follows:
(c) NON-DUPLICATION OF PAYMENTS. In no event shall the Executive
receive a payment under both Sections 2(a) and 2(b), and to the extent
the Executive
6
<PAGE>
satisfies the conditions for payment under both such sections,
the Bank shall pay to the Executive the payment computed
under whichever section results in the largest payment to the
Executive.
Section 7
By amending Section 3(a), ACCRUED VACATION AND SICK PAY, to read as
follows:
The Executive shall be entitled to receive, in accordance
with the Bank's standard employment policies in effect as of
the date of this Agreement (or such more favorable policies
as exist on the date of such termination), payment for any
vacation and sick days which have accrued for the year in
which the termination occurs but have not yet been paid to
the Executive.
Section 8
By amending Section 4(a) to delete the second sentence of such section,
which prior to its deletion read as follows:
(Should the Bank determine that the payment of (a) a Severance Payment
equal to 299% of the Base Amount, plus (b) the payments provided for
in Section 3 hereof, plus (c) any other payments under this Agreement,
plus (d) any other payments payable to the Executive as a result of
his severance, cause the total of all such payments to constitute a
"parachute payment" under Section 280G of the Internal Revenue Code of
1986, then the Bank shall have the right to reduce the Severance
Payment to the highest amount payable to the Executive which does not
cause the total of all such payments to constitute a "parachute
payment".
Section 9
By amending Section 7 to replace the phrase "Section 6" with "Section 7"
wherever such phrase appears in such section, to add the words "as amended"
after the phrase "Internal Revenue Code of 1986" each time such phrase appears
in such section, and to add the following sentence at the end of Section 7:
7
<PAGE>
For purposes of the preceding sentence, to the extent the payments
made under this Agreement, together with other payments made by SY
Bancorp or the Bank to the Executive, cause the total of all such
payments to result in an "excess parachute payment" under Section 280G
of the Internal Revenue Code of 1986, as amended, an ordering rule
shall apply whereby the payments under this Agreement shall be deemed
the "excess parachute payment"; provided, however, in no event shall
the amount which is deemed to be the "excess parachute payment" for
purposes of the indemnification under this Section 7 exceed the actual
"excess parachute payment" under Section 280G of the Internal Revenue
Code of 1986, as amended, resulting from payments made to the
Executive by SY Bancorp or the Bank.
IN WITNESS WHEREOF, the parties have executed this Amendment Number One as
of the day and year first above written.
STOCK YARDS BANK AND TRUST COMPANY
By: /S/ Henry A. Meyer
--------------------
Title: VICE CHAIRMAN OF THE BOARD
--------------------------
/S/ David H. Brooks
-------------------------
Executive
8
<PAGE>
AMENDMENT NUMBER ONE TO THE
SENIOR EXECUTIVE SEVERANCE AGREEMENT
Pursuant to the power reserved in Section 12 of the Senior Executive
Severance Agreement ("Agreement") made and entered into between Stock Yards
Bank and Trust Company, a Kentucky banking corporation ("Bank"), and David P.
Heintzman ("Executive"), the Bank and the Executive hereby amend the
Agreement, effective this 25th day of February, 1997, as follows:
Section 1
By amending Section 1, DEFINITIONS, to revise the definition of "CHANGE OF
CONTROL" to read as follows:
A "CHANGE IN CONTROL" of SY Bancorp shall be deemed to have occurred
if:
(i) any Person (as defined in this definition) is or becomes the
Beneficial Owner (as defined in this definition) of securities of SY
Bancorp representing 20% or more of the combined voting power of SY
Bancorp's then outstanding securities (unless (A) such Person is the
Beneficial Owner of 20% or more of such securities as of April 26,
1995 or (B) the event causing the 20% threshold to be crossed is an
acquisition of securities directly from SY Bancorp);
(ii) during any period of two consecutive years beginning after April
26, 1995, individuals who at the beginning of such period constitute
the Board of Directors of SY Bancorp and any new director (other than
a director designated by a person who has entered into an agreement
with SY Bancorp to effect a transaction described in clause (i), (iii)
or (iv) of this Change in Control definition) whose election or
nomination for election was approved by a vote of at least two-thirds
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved cease for any reason to constitute a
majority of the Board of Directors of SY Bancorp;
<PAGE>
(iii) the shareholders of SY Bancorp approve a merger or consolidation
of SY Bancorp with any other corporation (other than a merger or
consolidation which would result in the voting securities of SY
Bancorp outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the entity surviving such merger or consolidation), in
combination with voting securities of SY Bancorp or such surviving
entity held by a trustee or other fiduciary pursuant to any employee
benefit plan of SY Bancorp or such surviving entity or of any
subsidiary of SY Bancorp or such surviving entity, at least 80% of the
combined voting power of the securities of SY Bancorp or such
surviving entity outstanding immediately after such merger or
consolidation); or
(iv) the shareholders of SY Bancorp approve a plan of complete
liquidation or dissolution of SY Bancorp or an agreement for the sale
or disposition by SY Bancorp of all or substantially all of SY
Bancorp's assets.
(v) For purposes of the definition of Change in Control, "Person"
shall have the meaning ascribed to such term in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended, as supplemented by
Section 13(d)(3) of such Act; provided, however, that Person shall not
include (i) SY Bancorp, any subsidiary or any other Person controlled
by SY Bancorp, (ii) any trustee or other fiduciary holding securities
under any employee benefit plan of SY Bancorp or of any subsidiary, or
(iii) a corporation owned, directly or indirectly, by the shareholders
of SY Bancorp in substantially the same proportions as their ownership
of securities of SY Bancorp.
(vi) For purposes of the definition of Change in Control, a Person
shall be deemed the "Beneficial Owner" of any securities which such
Person, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) of, including pursuant to
any agreement, arrangement or understanding (whether or not in
writing); provided, however, that: (i) a Person shall
2
<PAGE>
not be deemed the Beneficial Owner of any security as a result of an
agreement, arrangement or understanding to vote such security (x) arising
solely from a revocable proxy or consent given in response to a public
proxy or consent solicitation made pursuant to, and in accordance with, the
Securities Exchange Act of 1934, as amended, and the applicable rules
and regulations thereunder or (y) made in connection with, or to
otherwise participate in, a proxy or consent solicitation made, or to
be made, pursuant to, and in accordance with, the applicable
provisions of the Securities Exchange Act of 1934, as amended, and the
applicable rules and regulations thereunder; in either case described
in clause (x) or clause (y) above, whether or not such agreement,
arrangement or understanding is also then reportable by such Person on
Schedule 13D under the Securities Exchange Act of 1934, as amended (or
any comparable or successor report); and (ii) a Person engaged in
business as an underwriter of securities shall not be deemed to be the
Beneficial Owner of any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until
the expiration of forty days after the date of such acquisition.
Section 2
By amending Section 1, DEFINITIONS, to revise the preamble to definition of
"FORCED RESIGNATION" to read as follows:
"FORCED RESIGNATION" means a resignation at the Executive's initiative
following a Change in Control and the occurrence of any of the following
triggering events, provided such resignation occurs within twelve (12)
months after a triggering event or, if earlier, within thirty-six (36)
months after a Change in Control:
Section 3
By amending Section 1, DEFINITIONS, to add a definition of the term
"Acquisition Transaction" to read as follows:
"ACQUISITION TRANSACTION" shall be deemed to have taken place if the
shareholders of SY Bancorp approve (a) a merger or consolidation of SY
Bancorp with any other
3
<PAGE>
corporation, other than a merger or consolidation which would result
in the voting securities of SY Bancorp which are outstanding immediately
prior to such merger or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
entity surviving such merger or consolidation) at least 80% of the voting
securities of SY Bancorp or such surviving entity outstanding immediately
after such merger or consolidation or (b) a plan of complete liquidation or
dissolution of SY Bancorp or an agreement for the sale or disposition
by SY Bancorp of all or substantially all of SY Bancorp's assets.
Section 4
By amending Section 2 to renumber the existing language in Section 2 as
Section 2(b) and to add a new Section 2(a) to read as follows:
(a)(i) SEVERANCE PAYMENT UPON INVOLUNTARY TERMINATION PRIOR TO
ACQUISITION TRANSACTION. Except as set forth in Section 2(a)(ii), if
the Executive's employment with the Bank is involuntarily terminated
by the Board of Directors of the Bank during the Term and within a
twelve month period beginning on the later of the date the Board of
Directors approves the going forward of discussions with a potential
buyer or buyers for SY Bancorp or the Bank or the date the Executive
has expressed the Executive's written opposition to such sale or
potential sale of SY Bancorp or the Bank to the Board of Directors,
the Bank shall pay the Executive (A) his full salary through the date
of such termination, which termination shall not be effective until
the later of the effective date set forth in the Notice of Termination
or two weeks following written notice to the Executive, and (B) the
Severance Payment described in this Section 2(a)(i). On the effective
date of an Acquisition Transaction which results from such
discussions, the Bank shall pay to the Executive a severance payment
equal to 299 percent of the Executive's Base Amount (the "Severance
Payment"). The Severance Payment under this Section 2(a)(i) shall be
payable to the Executive in a lump sum, in immediately available
funds, and shall be subject to any applicable
4
<PAGE>
payroll or other taxes required to be withheld. Such Severance Payment
shall be in lieu of any other severance payment provided for by the Bank
in accordance with its standard of practice and operations for Executive
at the time of payment of this Severance Payment.
(a)(ii) FORFEITURE OF SEVERANCE PAYMENT. No payment shall be
made under Section 2(a)(i) to the Executive if (A) the Executive
voluntarily divulges or otherwise discloses, directly or indirectly,
any trade secrets or other confidential information concerning the
business, policies, or sale or potential sale of SY Bancorp or the
Bank which is not lawfully attainable from public sources, unless such
disclosure is required by law or authorized by the Bank, (B) the
Executive is involuntarily terminated by the Bank for Cause, (C) the
Executive is terminated due to death, Retirement or Permanent
Disability, or (D) the Executive fails to fulfill the Executive's
responsibilities as an officer and/or director of the Bank and SY
Bancorp during the period after the above-mentioned Board of
Director's approval and while the Executive remains employed by the
Bank; provided, however, following public announcement by the Bank or
SY Bancorp of an Acquisition Transaction or proposed Acquisition
Transaction, the Executive shall not be deemed to have breached his
responsibilities as an officer or director of the Bank and SY Bancorp
and thereby to have forfeited his entitlement to the severance payment
described in Section 2(a)(i) above if he expresses publicly his
opposition to such transaction or proposed transaction, solicits votes
or proxies from shareholders of SY Bancorp against the transaction or
otherwise solicits or encourages others to oppose such transaction.
Section 5
By amending the new Section 2(b) to read as follows:
(b) SEVERANCE PAYMENT UPON TERMINATION FOLLOWING CHANGE IN CONTROL.
During the Term, if the Executive's employment with the Bank terminates
(either at the initiative of the
5
<PAGE>
Bank or the Executive) within thirty-six (36) months after a Change in
Control for any reason whatsoever other than for Cause or as a result
of the Executive's death, Retirement, or Permanent Disability, the
Bank shall pay the Executive his full salary through the date of
such termination, which termination shall not be effective until
the later of two (2) weeks following written notice thereof to the
Executive or the effective date set forth in the notice of termination. In
addition, for a termination at the initiative of the Executive (other than
a Forced Resignation) that occurs within twenty-four (24) months after a
Change in Control, the Bank shall pay the Severance Payment to the
Executive as of the effective date of such termination. For a termination
at the initiative of the Executive (other than a Forced Resignation) that
occurs more than twenty-four (24) months but less than thirty-six (36)
months after a Change in Control, the Bank shall pay the Executive as of
the effective date of such termination 2/3 of the Severance Payment. For a
termination at the Bank's initiative (other than for Cause) that occurs
within thirty-six (36) months after a Change in Control or for a Forced
Resignation, the Bank shall pay the Severance Payment to the Executive as
of the effective date of such termination. Notwithstanding any provision
to the contrary, in no event shall any Severance Payment (or portion
thereof) be paid to the Executive if the Executive's employment is
terminated for Cause or as a result of the Executive's death, Retirement,
or Permanent Disability. Further, the Severance Payment (or portion
thereof) shall be payable to the Executive in a lump sum, in immediately
available funds, on the date the Executive's termination is effective, and
shall be subject to any applicable payroll or other taxes required to be
withheld. The Severance Payment shall be in lieu of any other severance
payment provided for by the Bank in accordance with its standard of
practice and operations for Executive at the time of payment of the
Severance Payment.
Section 6
By amending Section 2 to add a new Section 2(c) to read as follows:
(c) NON-DUPLICATION OF PAYMENTS. In no event shall the Executive
receive a payment under both Sections 2(a) and 2(b), and to the extent
the Executive
6
<PAGE>
satisfies the conditions for payment under both such sections,
the Bank shall pay to the Executive the payment computed
under whichever section results in the largest payment to the
Executive.
Section 7
By amending Section 3(a), ACCRUED VACATION AND SICK PAY, to read as
follows:
The Executive shall be entitled to receive, in accordance
with the Bank's standard employment policies in effect as of
the date of this Agreement (or such more favorable policies
as exist on the date of such termination), payment for any
vacation and sick days which have accrued for the year in
which the termination occurs but have not yet been paid to
the Executive.
Section 8
By amending Section 4(a) to delete the second sentence of such section,
which prior to its deletion read as follows:
(Should the Bank determine that the payment of (a) a Severance Payment
equal to 299% of the Base Amount, plus (b) the payments provided for
in Section 3 hereof, plus (c) any other payments under this Agreement,
plus (d) any other payments payable to the Executive as a result of
his severance, cause the total of all such payments to constitute a
"parachute payment" under Section 280G of the Internal Revenue Code of
1986, then the Bank shall have the right to reduce the Severance
Payment to the highest amount payable to the Executive which does not
cause the total of all such payments to constitute a "parachute
payment".
Section 9
By amending Section 7 to replace the phrase "Section 6" with "Section 7"
wherever such phrase appears in such section, to add the words "as amended"
after the phrase "Internal Revenue Code of 1986" each time such phrase appears
in such section, and to add the following sentence at the end of Section 7:
7
<PAGE>
For purposes of the preceding sentence, to the extent the payments
made under this Agreement, together with other payments made by SY
Bancorp or the Bank to the Executive, cause the total of all such
payments to result in an "excess parachute payment" under Section 280G
of the Internal Revenue Code of 1986, as amended, an ordering rule
shall apply whereby the payments under this Agreement shall be deemed
the "excess parachute payment"; provided, however, in no event shall
the amount which is deemed to be the "excess parachute payment" for
purposes of the indemnification under this Section 7 exceed the actual
"excess parachute payment" under Section 280G of the Internal Revenue
Code of 1986, as amended, resulting from payments made to the
Executive by SY Bancorp or the Bank.
IN WITNESS WHEREOF, the parties have executed this Amendment Number One as
of the day and year first above written.
STOCK YARDS BANK AND TRUST COMPANY
By: /S/ Henry A. Meyer
--------------------
Title: VICE CHAIRMAN OF THE BOARD
--------------------------
/S/ David P. Heintzman
-------------------------
Executive
8
<PAGE>
AMENDMENT NUMBER ONE TO THE
SENIOR EXECUTIVE SEVERANCE AGREEMENT
Pursuant to the power reserved in Section 12 of the Senior Executive
Severance Agreement ("Agreement") made and entered into between Stock Yards
Bank and Trust Company, a Kentucky banking corporation ("Bank"), and Kathy C.
Thompson ("Executive"), the Bank and the Executive hereby amend the
Agreement, effective this 25th day of February, 1997, as follows:
Section 1
By amending Section 1, DEFINITIONS, to revise the definition of "CHANGE OF
CONTROL" to read as follows:
A "CHANGE IN CONTROL" of SY Bancorp shall be deemed to have occurred
if:
(i) any Person (as defined in this definition) is or becomes the
Beneficial Owner (as defined in this definition) of securities of SY
Bancorp representing 20% or more of the combined voting power of SY
Bancorp's then outstanding securities (unless (A) such Person is the
Beneficial Owner of 20% or more of such securities as of April 26,
1995 or (B) the event causing the 20% threshold to be crossed is an
acquisition of securities directly from SY Bancorp);
(ii) during any period of two consecutive years beginning after April
26, 1995, individuals who at the beginning of such period constitute
the Board of Directors of SY Bancorp and any new director (other than
a director designated by a person who has entered into an agreement
with SY Bancorp to effect a transaction described in clause (i), (iii)
or (iv) of this Change in Control definition) whose election or
nomination for election was approved by a vote of at least two-thirds
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved cease for any reason to constitute a
majority of the Board of Directors of SY Bancorp;
<PAGE>
(iii) the shareholders of SY Bancorp approve a merger or consolidation
of SY Bancorp with any other corporation (other than a merger or
consolidation which would result in the voting securities of SY
Bancorp outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the entity surviving such merger or consolidation), in
combination with voting securities of SY Bancorp or such surviving
entity held by a trustee or other fiduciary pursuant to any employee
benefit plan of SY Bancorp or such surviving entity or of any
subsidiary of SY Bancorp or such surviving entity, at least 80% of the
combined voting power of the securities of SY Bancorp or such
surviving entity outstanding immediately after such merger or
consolidation); or
(iv) the shareholders of SY Bancorp approve a plan of complete
liquidation or dissolution of SY Bancorp or an agreement for the sale
or disposition by SY Bancorp of all or substantially all of SY
Bancorp's assets.
(v) For purposes of the definition of Change in Control, "Person"
shall have the meaning ascribed to such term in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended, as supplemented by
Section 13(d)(3) of such Act; provided, however, that Person shall not
include (i) SY Bancorp, any subsidiary or any other Person controlled
by SY Bancorp, (ii) any trustee or other fiduciary holding securities
under any employee benefit plan of SY Bancorp or of any subsidiary, or
(iii) a corporation owned, directly or indirectly, by the shareholders
of SY Bancorp in substantially the same proportions as their ownership
of securities of SY Bancorp.
(vi) For purposes of the definition of Change in Control, a Person
shall be deemed the "Beneficial Owner" of any securities which such
Person, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) of, including pursuant to
any agreement, arrangement or understanding (whether or not in
writing); provided, however, that: (i) a Person shall
2
<PAGE>
not be deemed the Beneficial Owner of any security as a result of an
agreement, arrangement or understanding to vote such security (x) arising
solely from a revocable proxy or consent given in response to a public
proxy or consent solicitation made pursuant to, and in accordance with, the
Securities Exchange Act of 1934, as amended, and the applicable rules
and regulations thereunder or (y) made in connection with, or to
otherwise participate in, a proxy or consent solicitation made, or to
be made, pursuant to, and in accordance with, the applicable
provisions of the Securities Exchange Act of 1934, as amended, and the
applicable rules and regulations thereunder; in either case described
in clause (x) or clause (y) above, whether or not such agreement,
arrangement or understanding is also then reportable by such Person on
Schedule 13D under the Securities Exchange Act of 1934, as amended (or
any comparable or successor report); and (ii) a Person engaged in
business as an underwriter of securities shall not be deemed to be the
Beneficial Owner of any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until
the expiration of forty days after the date of such acquisition.
Section 2
By amending Section 1, DEFINITIONS, to revise the preamble to definition of
"FORCED RESIGNATION" to read as follows:
"FORCED RESIGNATION" means a resignation at the Executive's initiative
following a Change in Control and the occurrence of any of the following
triggering events, provided such resignation occurs within twelve (12)
months after a triggering event or, if earlier, within thirty-six (36)
months after a Change in Control:
Section 3
By amending Section 1, DEFINITIONS, to add a definition of the term
"Acquisition Transaction" to read as follows:
"ACQUISITION TRANSACTION" shall be deemed to have taken place if the
shareholders of SY Bancorp approve (a) a merger or consolidation of SY
Bancorp with any other
3
<PAGE>
corporation, other than a merger or consolidation which would result
in the voting securities of SY Bancorp which are outstanding immediately
prior to such merger or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
entity surviving such merger or consolidation) at least 80% of the voting
securities of SY Bancorp or such surviving entity outstanding immediately
after such merger or consolidation or (b) a plan of complete liquidation or
dissolution of SY Bancorp or an agreement for the sale or disposition
by SY Bancorp of all or substantially all of SY Bancorp's assets.
Section 4
By amending Section 2 to renumber the existing language in Section 2 as
Section 2(b) and to add a new Section 2(a) to read as follows:
(a)(i) SEVERANCE PAYMENT UPON INVOLUNTARY TERMINATION PRIOR TO
ACQUISITION TRANSACTION. Except as set forth in Section 2(a)(ii), if
the Executive's employment with the Bank is involuntarily terminated
by the Board of Directors of the Bank during the Term and within a
twelve month period beginning on the later of the date the Board of
Directors approves the going forward of discussions with a potential
buyer or buyers for SY Bancorp or the Bank or the date the Executive
has expressed the Executive's written opposition to such sale or
potential sale of SY Bancorp or the Bank to the Board of Directors,
the Bank shall pay the Executive (A) his full salary through the date
of such termination, which termination shall not be effective until
the later of the effective date set forth in the Notice of Termination
or two weeks following written notice to the Executive, and (B) the
Severance Payment described in this Section 2(a)(i). On the effective
date of an Acquisition Transaction which results from such
discussions, the Bank shall pay to the Executive a severance payment
equal to 299 percent of the Executive's Base Amount (the "Severance
Payment"). The Severance Payment under this Section 2(a)(i) shall be
payable to the Executive in a lump sum, in immediately available
funds, and shall be subject to any applicable
4
<PAGE>
payroll or other taxes required to be withheld. Such Severance Payment
shall be in lieu of any other severance payment provided for by the Bank
in accordance with its standard of practice and operations for Executive
at the time of payment of this Severance Payment.
(a)(ii) FORFEITURE OF SEVERANCE PAYMENT. No payment shall be
made under Section 2(a)(i) to the Executive if (A) the Executive
voluntarily divulges or otherwise discloses, directly or indirectly,
any trade secrets or other confidential information concerning the
business, policies, or sale or potential sale of SY Bancorp or the
Bank which is not lawfully attainable from public sources, unless such
disclosure is required by law or authorized by the Bank, (B) the
Executive is involuntarily terminated by the Bank for Cause, (C) the
Executive is terminated due to death, Retirement or Permanent
Disability, or (D) the Executive fails to fulfill the Executive's
responsibilities as an officer and/or director of the Bank and SY
Bancorp during the period after the above-mentioned Board of
Director's approval and while the Executive remains employed by the
Bank; provided, however, following public announcement by the Bank or
SY Bancorp of an Acquisition Transaction or proposed Acquisition
Transaction, the Executive shall not be deemed to have breached his
responsibilities as an officer or director of the Bank and SY Bancorp
and thereby to have forfeited his entitlement to the severance payment
described in Section 2(a)(i) above if he expresses publicly his
opposition to such transaction or proposed transaction, solicits votes
or proxies from shareholders of SY Bancorp against the transaction or
otherwise solicits or encourages others to oppose such transaction.
Section 5
By amending the new Section 2(b) to read as follows:
(b) SEVERANCE PAYMENT UPON TERMINATION FOLLOWING CHANGE IN CONTROL.
During the Term, if the Executive's employment with the Bank terminates
(either at the initiative of the
5
<PAGE>
Bank or the Executive) within thirty-six (36) months after a Change in
Control for any reason whatsoever other than for Cause or as a result
of the Executive's death, Retirement, or Permanent Disability, the
Bank shall pay the Executive his full salary through the date of
such termination, which termination shall not be effective until
the later of two (2) weeks following written notice thereof to the
Executive or the effective date set forth in the notice of termination. In
addition, for a termination at the initiative of the Executive (other than
a Forced Resignation) that occurs within twenty-four (24) months after a
Change in Control, the Bank shall pay the Severance Payment to the
Executive as of the effective date of such termination. For a termination
at the initiative of the Executive (other than a Forced Resignation) that
occurs more than twenty-four (24) months but less than thirty-six (36)
months after a Change in Control, the Bank shall pay the Executive as of
the effective date of such termination 2/3 of the Severance Payment. For a
termination at the Bank's initiative (other than for Cause) that occurs
within thirty-six (36) months after a Change in Control or for a Forced
Resignation, the Bank shall pay the Severance Payment to the Executive as
of the effective date of such termination. Notwithstanding any provision
to the contrary, in no event shall any Severance Payment (or portion
thereof) be paid to the Executive if the Executive's employment is
terminated for Cause or as a result of the Executive's death, Retirement,
or Permanent Disability. Further, the Severance Payment (or portion
thereof) shall be payable to the Executive in a lump sum, in immediately
available funds, on the date the Executive's termination is effective, and
shall be subject to any applicable payroll or other taxes required to be
withheld. The Severance Payment shall be in lieu of any other severance
payment provided for by the Bank in accordance with its standard of
practice and operations for Executive at the time of payment of the
Severance Payment.
Section 6
By amending Section 2 to add a new Section 2(c) to read as follows:
(c) NON-DUPLICATION OF PAYMENTS. In no event shall the Executive
receive a payment under both Sections 2(a) and 2(b), and to the extent
the Executive
6
<PAGE>
satisfies the conditions for payment under both such sections,
the Bank shall pay to the Executive the payment computed
under whichever section results in the largest payment to the
Executive.
Section 7
By amending Section 3(a), ACCRUED VACATION AND SICK PAY, to read as
follows:
The Executive shall be entitled to receive, in accordance
with the Bank's standard employment policies in effect as of
the date of this Agreement (or such more favorable policies
as exist on the date of such termination), payment for any
vacation and sick days which have accrued for the year in
which the termination occurs but have not yet been paid to
the Executive.
Section 8
By amending Section 4(a) to delete the second sentence of such section,
which prior to its deletion read as follows:
(Should the Bank determine that the payment of (a) a Severance Payment
equal to 299% of the Base Amount, plus (b) the payments provided for
in Section 3 hereof, plus (c) any other payments under this Agreement,
plus (d) any other payments payable to the Executive as a result of
his severance, cause the total of all such payments to constitute a
"parachute payment" under Section 280G of the Internal Revenue Code of
1986, then the Bank shall have the right to reduce the Severance
Payment to the highest amount payable to the Executive which does not
cause the total of all such payments to constitute a "parachute
payment".
Section 9
By amending Section 7 to replace the phrase "Section 6" with "Section 7"
wherever such phrase appears in such section, to add the words "as amended"
after the phrase "Internal Revenue Code of 1986" each time such phrase appears
in such section, and to add the following sentence at the end of Section 7:
7
<PAGE>
For purposes of the preceding sentence, to the extent the payments
made under this Agreement, together with other payments made by SY
Bancorp or the Bank to the Executive, cause the total of all such
payments to result in an "excess parachute payment" under Section 280G
of the Internal Revenue Code of 1986, as amended, an ordering rule
shall apply whereby the payments under this Agreement shall be deemed
the "excess parachute payment"; provided, however, in no event shall
the amount which is deemed to be the "excess parachute payment" for
purposes of the indemnification under this Section 7 exceed the actual
"excess parachute payment" under Section 280G of the Internal Revenue
Code of 1986, as amended, resulting from payments made to the
Executive by SY Bancorp or the Bank.
IN WITNESS WHEREOF, the parties have executed this Amendment Number One as
of the day and year first above written.
STOCK YARDS BANK AND TRUST COMPANY
By: /S/ Henry A. Meyer
--------------------
Title: VICE CHAIRMAN OF THE BOARD
--------------------------
/S/ Kathy C. Thompson
-------------------------
Executive
8
<PAGE>
SENIOR EXECUTIVE SEVERANCE AGREEMENT
INCLUDING AMENDMENT NUMBER ONE
This Agreement is made and entered into between Stock Yards Bank & Trust
Company, a Kentucky banking corporation with its principal office located in
Louisville, Kentucky (the "Bank") and Nancy B. Davis, and with an address at
1040 East Main Street, Louisville, Kentucky 40206 (the "Executive").
W I T N E S S E T H:
The Bank is a wholly owned subsidiary of S.Y. Bancorp, Inc., a Kentucky
corporation and bank holding company ("S.Y. Bancorp").
S.Y. Bancorp, as the sole shareholder of the Bank, considers the
establishment and maintenance of a sound and vital management team to be
essential to protecting and enhancing the best interests of the Bank, S.Y.
Bancorp, and S.Y. Bancorp's shareholders.
S.Y. Bancorp and the Bank recognize that, as is the case with many publicly
held bank holding companies, the possibility exists that an unsolicited tender
offer or takeover bid and a consequent change of control of S.Y. Bancorp may
occur, and thus, that as a practical matter, a change of control of the Bank,
may occur, and that such a possibility is unsettling and distracting to key
executives of the Bank.
S.Y. Bancorp and the Bank have concluded that it is in the best interests
of S.Y. Bancorp, its shareholders and the Bank to take reasonable steps to help
assure certain key executives of the Bank that, notwithstanding an unsolicited
tender offer or takeover bid, or an actual change of control, they will be
treated fairly and with concern for their welfare.
S.Y. Bancorp and the Bank have also concluded that it is important that,
should S.Y. Bancorp receive takeover or acquisition proposals from third
parties, that it be able to call upon the key executives of the Bank for their
candid assessment and advice concerning whether such proposals are in the best
interests of S.Y. Bancorp, its shareholders and the Bank, free of the influences
caused by the uncertainties and risks of their own personal employment
situations.
-1-
<PAGE>
For the foregoing reasons the Board of Directors of S.Y. Bancorp and of the
Bank have approved the Bank's entering into severance agreements with key
executives of the Bank pursuant to the Bank's Senior Executive Severance Plan
(the "Plan").
The Executive is a key executive of the Bank and has been selected by the
Bank's board of directors and by the board of directors of the Bank's sole
shareholder, S.Y. Bancorp, as a key executive to participate in and under the
Plan.
NOW THEREFORE, in consideration of these premises and for other good and
valuable consideration, the Bank and the Executive agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
"TERM" shall mean the period commencing on the date first above written and
ending on the last day of the month in which Executive attains the age of sixty-
five (65) years.
A "CHANGE IN CONTROL" of S.Y. Bancorp shall be deemed
to have occurred if:
(i) any Person (as defined in this definition) is or becomes the Beneficial
Owner (as defined in this definition) of securities of S.Y. Bancorp representing
20% or more of the combined voting power of S.Y. Bancorp's then outstanding
securities (unless (A) such Person is the Beneficial Owner of 20% or more of
such securities as of April 26, 1995 or (B) the event causing the 20% threshold
to be crossed is an acquisition of securities directly from S.Y. Bancorp);
(ii) during any period of two consecutive years beginning after April 26,
1995, individuals who at the beginning of such period constitute the Board of
Directors of S.Y. Bancorp and any new director (other than a director designated
by a person who has entered into an agreement with S.Y. Bancorp to effect a
transaction described in clause (i), (iii) or (iv) of this Change in Control
definition) whose election or nomination for election was approved by a vote of
at least two-thirds of the directors then still in office who either were
directors at the
-2-
<PAGE>
beginning of the period or whose election or nomination for election was
previously so approved cease for any reason to constitute a majority of the
Board of Directors of S.Y. Bancorp;
(iii) the shareholders of S.Y. Bancorp approve a merger or consolidation of
S.Y. Bancorp with any other corporation (other than a merger or consolidation
which would result in the voting securities of S.Y. Bancorp outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the entity surviving
such merger or consolidation), in combination with voting securities of S.Y.
Bancorp or such surviving entity held by a trustee or other fiduciary pursuant
to any employee benefit plan of S.Y. Bancorp or such surviving entity or of any
subsidiary of S.Y. Bancorp or such surviving entity, at least 80% of the
combined voting power of the securities of S.Y. Bancorp or such surviving entity
outstanding immediately after such merger or consolidation); or
(iv) the shareholders of S.Y. Bancorp approve a plan of complete
liquidation or dissolution of S.Y. Bancorp or an agreement for the sale or
disposition by S.Y. Bancorp of all or substantially all of S.Y. Bancorp's
assets.
(v) For purposes of the definition of Change in Control, "Person" shall
have the meaning ascribed to such term in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended, as supplemented by Section 13(d)(3) of such
Act; provided, however, that Person shall not include (i) S.Y. Bancorp, any
subsidiary or any other Person controlled by S.Y. Bancorp, (ii) any trustee or
other fiduciary holding securities under any employee benefit plan of S.Y.
Bancorp or of any subsidiary, or (iii) a corporation owned, directly or
indirectly, by the shareholders of S.Y. Bancorp in substantially the same
proportions as their ownership of securities of S.Y. Bancorp.
(vi) For purposes of the definition of Change in Control, a Person shall be
deemed the "Beneficial Owner" of any securities which such Person, directly or
indirectly, has the right to vote or dispose of or has "beneficial ownership"
(within the meaning of Rule 13d-3 under the
-3-
<PAGE>
Securities Exchange Act of 1934, as amended) of, including pursuant to any
agreement, arrangement or understanding (whether or not in writing); provided,
however, that: (i) a Person shall not be deemed the Beneficial Owner of any
security as a result of an agreement, arrangement or understanding to vote such
security (x) arising solely from a revocable proxy or consent given in response
to a public proxy or consent solicitation made pursuant to, and in accordance
with the Securities Exchange Act of 1934, as amended, and the applicable rules
and regulations thereunder or (y) made in connection with, or to otherwise
participate in, a proxy or consent solicitation made, or to be made, pursuant
to, and in accordance with, the applicable provisions of the Securities Exchange
Act of 1934, as amended, and the applicable rules and regulations thereunder; in
either case described in clause (x) or clause (y) above, whether or not such
agreement, arrangement or understanding is also then reportable by such Person
on Schedule 13D under the Securities Exchange Act of 1934, as amended (or any
comparable or successor report); and (ii) a Person engaged in business as an
underwriter of securities shall not be deemed to be the Beneficial Owner of any
securities acquired through such Person's participation in good faith in a firm
commitment underwriting until the expiration of forty days after the date of
such acquisition.
"CAUSE" for termination shall exist if the Executive (i) willfully and
continually fails to substantially perform his duties (other than as a result of
incapacity or temporary or Permanent Disability) for the Bank as described in
the most recent written description of such duties maintained by the Bank's
personnel department and communicated to the Executive after a written demand
for substantial performance is delivered to the Executive by the Bank's board of
directors specifically identifying the manner in which the board of directors
believes that the Executive has not substantially performed his duties; or (ii)
engages in gross misconduct constituting a violation of law or breach of
fiduciary duty which misconduct is materially and demonstrably injurious to the
Bank.
"CUSTOMER" shall mean any firm, individual, corporation or entity which
used the facilities, products or services of the Bank during the twelve (12)
month period immediately preceding the voluntary or involuntary termination of
Executive's
-4-
<PAGE>
employment with the Bank; but Customer shall not include any firm, individual,
corporation or entity with which Executive had a business relationship, either
for Executive or for Executive's previous employer, prior to the date of
Executive's employment with the Bank and which Executive specifically identifies
in writing to the Bank within thirty (30) days following the date of Executive's
employment with the Bank, except that following eighteen (18) months employment
with the Bank, any such firm, individual, corporation or entity so identified by
Executive shall be deemed to have become a Customer of the Bank if they
otherwise meet the definition of "Customer" as set forth above.
"FORCED RESIGNATION" means a resignation at the Executive's initiative
following a Change in Control and the occurrence of any of the following
triggering events, provided such resignation occurs within twelve (12) months
after a triggering event or, if earlier, within thirty-six (36) months after a
Change in Control:
(i)without his express written consent, the Executive is assigned any
duties inconsistent with the positions, duties, responsibilities and status he
held with the Bank immediately prior to the Change in Control, or a change
occurs in the Executive's reporting responsibilities, titles or offices as in
effect immediately prior to the Change in Control, or the Executive is removed
from, or there is a failure to re-elect the Executive to, any of such positions,
except in connection with the termination of the Executive's employment for
Cause, or Retirement, or as a result of his death or Permanent Disability;
(ii) a reduction by the Bank in the Executive's salary as in effect on the
date hereof or as the same may have been increased from time to time prior to
the Change in Control;
(iii) the Bank's requiring the Executive to work from an office anywhere
other than at the Bank's principal executive offices, except for required travel
on the Bank's business to an extent substantially consistent with his present
business travel obligations or such obligations as are incident to a promotion;
(iv) the failure by the Bank to continue in effect any deferred benefit or
compensation plan, pension plan, profit sharing plan, life insurance plan, major
medical or hospitalization plan or disability plan in which the Executive is
participating at the time of the Change in Control (or plans
-5-
<PAGE>
providing substantially similar benefits), or the taking of any action by the
Bank which would adversely affect the Executive's participation in, or
materially reduce his benefits under, any of such plans or deprive him of any
material fringe benefits; or
(v)the failure by the Bank to provide the Executive with the number of paid
vacation, illness, and personal leave days to which he is entitled at the time
of a Change in Control in accordance with the Bank's normal personnel policy
applicable to all employees.
"RETIREMENT" shall mean the Executive's retirement in accordance with the
Bank's retirement policy applicable to all employees classified as "senior
executives".
"BASE AMOUNT" shall have the meaning given to such term in Section
280G(b)(3) of the Internal Revenue Code of 1986.
"PERMANENT DISABILITY" means any mental or physical condition or impairment
which prevents the Executive from substantially performing his duties for a
period of more than ninety (90) consecutive days.
"ACQUISITION TRANSACTION" shall be deemed to have taken place if the
shareholders of SY Bancorp approve (a) a merger or consolidation of SY Bancorp
with any other corporation, other than a merger or consolidation which would
result in the voting securities of SY Bancorp which are outstanding immediately
prior to such merger or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting securities of the entity
surviving such merger or consolidation) at least 80% of the voting securities of
SY Bancorp or such surviving entity outstanding immediately after such merger or
consolidation or (b) a plan of complete liquidation or dissolution of SY Bancorp
or an agreement for the sale or disposition by SY Bancorp of all or
substantially all of SY Bancorp's assets.
2(a)(i) SEVERANCE PAYMENT UPON INVOLUNTARY TERMINATION PRIOR TO
ACQUISITION TRANSACTION. Except as set forth in Section 2(a)(ii), if the
Executive's employment with the Bank is involuntarily terminated by the Board of
Directors of the Bank during the Term and within a twelve month period beginning
on the
-6-
<PAGE>
later of the date the Board of Directors approves the going forward of
discussions with a potential buyer or buyers for SY Bancorp or the Bank or the
date the Executive has expressed the Executive's written opposition to such sale
or potential sale of SY Bancorp or the Bank to the Board of Directors, the Bank
shall pay the Executive (A) his full salary through the date of such
termination, which termination shall not be effective until the later of the
effective date set forth in the Notice of Termination or two weeks following
written notice to the Executive, and (B) the Severance Payment described in this
Section 2(a)(i). On the effective date of an Acquisition Transaction which
results from such discussions, the Bank shall pay to the Executive a severance
payment equal to 299 percent of the Executive's Base Amount (the "Severance
Payment"). The Severance Payment under this Section 2(a)(i) shall be payable to
the Executive in a lump sum, in immediately available funds, and shall be
subject to any applicable payroll or other taxes required to be withheld. Such
Severance Payment shall be in lieu of any other severance payment provided for
by the Bank in accordance with its standard of practice and operations for
Executive at the time of payment of this Severance Payment.
(ii) FORFEITURE OF SEVERANCE PAYMENT. No payment shall be made under
Section 2(a)(i) to the Executive if (A) the Executive voluntarily divulges or
otherwise discloses, directly or indirectly, any trade secrets or other
confidential information concerning the business, policies, or sale or potential
sale of SY Bancorp or the Bank which is not lawfully attainable from public
sources, unless such disclosure is required by law or authorized by the Bank,
(B) the Executive is involuntarily terminated by the Bank for Cause, (C) the
Executive is terminated due to death, Retirement or Permanent Disability, or (D)
the Executive fails to fulfill the Executive's responsibilities as an officer
and/or director of the Bank and SY Bancorp during the period after the above-
mentioned Board of Director's approval and while the Executive remains employed
by the Bank; provided, however, following public announcement by the Bank or SY
Bancorp of an Acquisition Transaction or proposed Acquisition Transaction, the
Executive shall not be deemed to have breached his responsibilities as an
officer or director of the Bank and SY Bancorp and thereby to have forfeited his
entitlement to the severance payment described in Section 2(a)(i) above if he
expresses publicly his opposition to such transaction or proposed transaction,
solicits votes or proxies from shareholders of SY
-7-
<PAGE>
Bancorp against the transaction or otherwise solicits or encourages others to
oppose such transaction.
(b) SEVERANCE PAYMENT UPON TERMINATION FOLLOWING CHANGE IN CONTROL.
During the Term, if the Executive's employment with the Bank terminates (either
at the initiative of the Bank or the Executive) within thirty-six (36) months
after a Change in Control for any reason whatsoever other than for Cause or as a
result of the Executive's death, Retirement, or Permanent Disability, the Bank
shall pay the Executive his full salary through the date of such termination,
which termination shall not be effective until the later of two (2) weeks
following written notice thereof to the Executive or the effective date set
forth in the notice of termination. In addition, for a termination at the
initiative of the Executive (other than a Forced Resignation) that occurs within
twenty-four (24) months after a Change in Control, the Bank shall pay the
Severance Payment to the Executive as of the effective date of such termination.
For a termination at the initiative of the Executive (other than a Forced
Resignation) that occurs more than twenty-four (24) months but less than thirty-
six (36) months after a Change in Control, the Bank shall pay the Executive as
of the effective date of such termination 2/3 of the Severance Payment. For a
termination at the Bank's initiative (other than for Cause) that occurs within
thirty-six (36) months after a Change in Control or for a Forced Resignation,
the Bank shall pay the Severance Payment to the Executive as of the effective
date of such termination. Notwithstanding any provision to the contrary, in no
event shall any Severance Payment (or portion thereof) be paid to the Executive
if the Executive's employment is terminated for Cause or as a result of the
Executive's death, Retirement, or Permanent Disability. Further, the Severance
Payment (or portion thereof) shall be payable to the Executive in a lump sum, in
immediately available funds, on the date the Executive's termination is
effective, and shall be subject to any applicable payroll or other taxes
required to be withheld. The Severance Payment shall be in lieu of any other
severance payment provided for by the Bank in accordance with its standard of
practice and operations for Executive at the time of payment of the Severance
Payment.
(c) NON-DUPLICATION OF PAYMENTS. In no event shall the Executive receive
a payment under both Sections 2(a) and 2(b), and to the extent the Executive
satisfies the conditions for payment under both such sections, the Bank shall
pay to the
-8-
<PAGE>
Executive the payment computed under whichever section results in the largest
payment to the Executive.
3. OTHER PAYMENTS AND BENEFITS. Upon termination of the Executive's
employment, the Executive shall have the following rights with respect to
certain fringe benefits provided by the Bank:
(a) ACCRUED VACATION AND SICK PAY. The Executive shall be
entitled to receive, in accordance with the Bank's standard employment policies
in effect as of the date of this Agreement (or such more favorable policies as
exist on the date of such termination), payment for any vacation and sick days
which have accrued for the year in which the termination occurs but have not yet
been paid to the Executive.
(b) INSURANCE. The Executive shall be entitled to continue, at
his sole cost and expense, his participation in all life, disability, major
medical and hospitalization insurance plans maintained by the Bank for his
benefit or, in the event that such continuation is not permitted under the terms
of such plans, the Bank shall, at the Executive's request, arrange for
comparable individual plans for the benefit of, but at the sole expense of, the
Executive, or shall provide the Executive with such other and greater rights as
are required by applicable law.
(c) PROFIT SHARING AND PENSION PLANS. The Executive's
participation in all profit sharing, pension, deferred benefit and retirement
plans shall continue through the last day of the Executive's employment, with
any terminating distributions and/or vested rights under such plans being
governed by the terms of such plans.
(d) LOAN PROGRAM. All loans to the Executive under the Bank's
loan program that are outstanding as of the time the Executive's employment
ceases hereunder shall be treated in the same manner as loans are treated upon
Retirement under the Bank's personnel policies in effect on the date hereof.
(e) EDUCATION PROGRAM. The Executive shall be entitled to
complete, at the Bank's expense, all courses in which the Executive is enrolled
under the Bank's Education Program on the date of his termination.
-9-
<PAGE>
4. CALCULATION METHOD; ADJUSTMENTS TO SEVERANCE PAYMENT
(a) MISCELLANEOUS REDUCTION. The Bank shall have the responsibility for
calculating the Base Amount which shall serve as the basis for calculating the
Severance Payments and shall provide such calculations and the support therefor
to the Executive on the date of his termination, Voluntary Resignation or Forced
Resignation. The Executive shall have a right to cause an audit to be made of
the Bank's calculation of the Base Amount, the Severance Payment and the other
amounts payable hereunder by a certified public accountant, benefits consultant
or similar expert chosen by the Executive. If such audit reveals that the
calculations performed by the Bank were in error or have resulted in the payment
to the Executive of an amount less than that to which he is entitled hereunder,
the Bank shall immediately rectify such underpayment and, in addition, reimburse
the Executive for the cost of performing such audit.
(b) TRANSITION TO RETIREMENT. The Bank and Executive each acknowledge and
agree that the purpose of this Agreement is not to provide unjust enrichment to
Executive, but rather to provide funds or employment security, as the case may
be, during any potential transition as a result of Change of Control.
Accordingly, the parties hereto agree that as Executive approaches retirement
age, the need for providing such support in the event of a Change of Control
decreases proportionately, in part due to retirement and related benefits and
their imminent availability to Executive. Based upon such rationale, the
Severance Payment payable to Executive shall decrease as follows:
AGE OF EXECUTIVE AT DATE PERCENTAGE OF EXECUTIVE'S
OF SEVERANCE PAYMENT BASE AMOUNT PAYABLE
------------------------- -------------------------
58 250%
59 225%
60 200%
61 175%
62 150%
63 125%
64 100%
-10-
<PAGE>
AGE OF EXECUTIVE AT DATE PERCENTAGE OF EXECUTIVE'S
OF SEVERANCE PAYMENT BASE AMOUNT PAYABLE
------------------------- -------------------------
65 0%
5. BANK REGULATORY PROVISION. Notwithstanding any other provision
of this Agreement, the parties agree as follows:
(a) The Bank's board of directors may terminate the Executive's employment
at any time, but any termination by the Bank's board of directors other than
termination for Cause, shall not prejudice the Executive's right to compensation
or other benefits under the Agreement. The Executive shall have no right to
receive compensation or other benefits for any period after termination for
Cause.
(b) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1818(e)(3) and (g)(1)) the Bank's obligations under the Agreement shall be
suspended as of the date of service unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may, in its discretion, (i)
pay the Executive all or part of the compensation withheld while its contract
obligations were suspended or (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) and
(g)(1)), all obligations of the Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default (as defined in section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under the Agreement shall
terminate as of the date of default, but this paragraph 5(d) shall not affect
any vested rights of the contracting parties.
-11-
<PAGE>
(e) All obligations under the Agreement shall be terminated, except to the
extent determined that continuation of the contract is necessary for the
continued operation of the Bank:
(i) by the Director or his or her designee, at the time the Federal
Deposit Insurance Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in section 13(c) of the
Federal Deposit Insurance Act; or
(ii) by the Director or his or her designee, at the time the Director
or his or her designee approves a supervisory merger to resolve problems related
to operation of the Bank or when the Bank is determined by the Director to be in
an unsafe or unsound condition.
6. FEES AND COSTS. The Bank agrees to advance to Executive all legal
fees, costs, and expenses arising out of or in any way related to or incurred by
the Executive in connection with enforcing any right or benefit provided in this
Agreement, or in interpreting this Agreement, or in contesting or disputing any
termination of the Executive's employment hereunder purportedly for Cause or
other action taken by the Bank hereunder;
7. INDEMNITY. The Bank agrees to and does hereby indemnify and hold
Executive harmless from and against any and all excise taxes payable by the
Executive pursuant to section 4999 of the Internal Revenue Code of 1986, as
amended, as a result of any payment hereunder being deemed an "excess parachute
payment" under Section 280(G) of the Internal Revenue Code of 1986, as amended,
and all further excise taxes and federal and state income taxes (together with
interest and penalty, if any) payable with respect to, or as a result of the
operation of, this indemnification provision, it being the intent of this
Section 7 to "gross up" the amount paid to the Executive so that he is in the
same economic position he would have been but for certain payments hereunder
being deemed excess parachute payments. For purposes of the preceding sentence,
to the extent the payments made under this Agreement, together with other
payments made by SY Bancorp or the Bank to the Executive, cause the total of all
such payments to result in an "excess parachute payment" under Section 280G of
the Internal Revenue Code of 1986, as amended, an ordering rule shall apply
whereby the payments under this
-12-
<PAGE>
Agreement shall be deemed the "excess parachute payment"; provided, however, in
no event shall the amount which is deemed to be the "excess parachute payment"
for purposes of the indemnification under this Section 7 exceed the actual
"excess parachute payment" under Section 280G of the Internal Revenue Code of
1986, as amended, resulting from payments made to the Executive by SY Bancorp or
the Bank.
8. MITIGATION. The Executive shall not be required to mitigate the
amount of any payment provided for in its Agreement, whether by seeking other
employment or otherwise, nor shall the amount of any payment provided for herein
be reduced by any compensation earned or received by the Executive as a result
of his employment by another employer following his termination hereunder.
9. COVENANT NOT TO COMPETE. Notwithstanding the terms and provisions of
any other "Officer Non-Solicitation and Confidentiality Agreement" by and
between the Bank and the Executive, which may provide for negation of covenants
not to compete from the Executive to the Bank in the event of a Change in
Control as defined herein, in the event of the receipt by the Executive of
Severance Payments hereunder, the Executive hereby covenants to the Bank, for a
period of eighteen (18) months following the receipt of the Severance Payment as
contemplated herein, Executive will not, directly or indirectly, either for the
Executive or for any other person, entity or company, (i) solicit Customers, or
business patronage, of the Bank for the purpose of providing services which are
identical or similar to services then provided by the Bank either within the
Commonwealth of Kentucky, or within a radius of fifty (50) miles from the Bank's
offices in Louisville, Kentucky, (ii) divert or attempt to divert from the Bank
any Customer of the Bank, or (iii) solicit for employment any employee of the
Bank. It is understood that breach of this provision by Executive will result
in irreparable injury to the Bank and, by reason thereof, Executive consents and
agrees that, for any violation of this provision, the rights of the Bank under
the terms of this Agreement may be specifically enforced with injunctive relief
and Executive hereby waives any claim or defense that the Bank has an adequate
remedy at law. This remedy of injunctive relief shall be in addition to the
right of the Bank to pursue any other remedies at law or in equity available to
it, including the recovery of damages and reasonable attorney fees.
-13-
<PAGE>
10. NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he has filed
in writing with the Bank or, in the case of the Bank, at its principal executive
offices.
11. GOVERNING LAW. The provisions of this Agreement shall be construed in
accordance with the laws of the Commonwealth of Kentucky.
12. AMENDMENT. This Agreement may be amended or cancelled by mutual
agreement of the parties in writing without the consent of any other person and,
so long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the Bank and its successors and assigns; including but
not limited to any successor to the Bank, direct or indirect, resulting from
purchase, merger, consolidation or otherwise. This Agreement shall also be
binding upon the Executive and shall inure to the benefit of the Executive, his
personal or legal representatives, successors, heirs and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
STOCK YARDS BANK & TRUST COMPANY
By: /s/ Henry A. Meyer
--------------------------------------
Title: Vice Chairman
-----------------------------------
/s/ Nancy B. Davis
-----------------------------------
Executive
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<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
S.Y. BANCORP, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
-------------------------------------
PRIMARY
Average shares outstanding 3,267,614 3,246,526 3,221,766
Effect of assumed conversion of stock
options under treasury stock method 97,880 51,122 62,690
--------- --------- ---------
3,365,494 3,297,648 3,284,456
--------- --------- ---------
Net income $ 5,179,000 $ 4,056,000 $ 3,101,000
--------- --------- ---------
--------- --------- ---------
Per share $ 1.54 $ 1.23 $ .95
--------- --------- ---------
--------- --------- ---------
FULLY DILUTED
Average shares outstanding 3,267,614 3,246,526 3,221,766
Effect of assumed conversion of stock
options under treasury stock method 104,648 52,838 66,888
--------- --------- ---------
3,372,262 3,299,364 3,288,654
--------- --------- ---------
--------- --------- ---------
Net income $ 5,179,000 $ 4,056,000 $ 3,101,000
--------- --------- ---------
--------- --------- ---------
Per share $ 1.54 $ 1.23 $ .95
--------- --------- ---------
--------- --------- ---------
<PAGE>
EXHIBIT 21
TO ANNUAL REPORT ON FORM 10-K
Subsidiaries of the Registrant
Stock Yards Bank & Trust Company, a Kentucky banking corporation
1040 East Main Street
Louisville, Kentucky 40206
Stock Yards Bank & Trust Company, an Indiana banking corporation
275 Highway 31 North
Austin, Indiana 47102
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
S.Y. Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statement Nos. 33-
96740, 33-96742 and 33-25885 on Form S-8 and 33-96744 on Form S-3 of S.Y.
Bancorp. Inc. of our report dated January 24, 1997, relating to the consolidated
balance sheets of S.Y. Bancorp. Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the 1996 annual report
on Form 10-K of S.Y. Bancorp, Inc.
Our report refers to a change in the method of accounting for certain
investments in debt and equity securities in 1994.
/s/ KPMG Peat Marwick LLP
Louisville, Kentucky
March 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF S.Y. BANCORP, INC. AND SUBSIDIARIES AND IS
QUALIFIED ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15348
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19441
<INVESTMENTS-CARRYING> 56079
<INVESTMENTS-MARKET> 56055
<LOANS> 301548
<ALLOWANCE> 5155
<TOTAL-ASSETS> 415365
<DEPOSITS> 355251
<SHORT-TERM> 22396
<LIABILITIES-OTHER> 3427
<LONG-TERM> 2697
0
0
<COMMON> 5451
<OTHER-SE> 26143
<TOTAL-LIABILITIES-AND-EQUITY> 415365
<INTEREST-LOAN> 25293
<INTEREST-INVEST> 2950
<INTEREST-OTHER> 895
<INTEREST-TOTAL> 29138
<INTEREST-DEPOSIT> 11781
<INTEREST-EXPENSE> 12600
<INTEREST-INCOME-NET> 16538
<LOAN-LOSSES> 800
<SECURITIES-GAINS> 35
<EXPENSE-OTHER> 13716
<INCOME-PRETAX> 7621
<INCOME-PRE-EXTRAORDINARY> 7621
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5179
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 8.85
<LOANS-NON> 854
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 421
<ALLOWANCE-OPEN> 4507
<CHARGE-OFFS> 264
<RECOVERIES> 90
<ALLOWANCE-CLOSE> 5155
<ALLOWANCE-DOMESTIC> 5155
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 973
</TABLE>
