<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
S. Y. Bancorp, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
(502) 582-2571
------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of S.Y.
BANCORP, INC. ("Bancorp") will be held on Wednesday, April 23, 1997, at 10:00
a.m., at Stock Yards Bank & Trust Company's Exchange Building dining room, 1048
East Main Street, Louisville, Kentucky 40202, for the following purposes:
1. ELECTION OF DIRECTORS. To approve the action of the Board of
Directors fixing the number of directors at fifteen (15) and to elect
five (5) nominees as directors, each named in the accompanying Proxy
Statement.
2. OTHER BUSINESS. To consider and act upon such other matters as may
properly be brought before the Annual Meeting or any adjournment
thereof.
Information regarding the matters to be acted upon at the meeting is
contained in the Proxy Statement accompanying this Notice.
Only those holders of Bancorp Common Stock of record at the close of
business on March 7, 1997, are entitled to notice of and to vote at the Annual
Meeting and any adjournment thereof.
We hope you will be represented at the meeting. Please sign and return the
enclosed proxy card in the accompanying envelope as promptly as possible,
whether or not you expect to be present in person. Your vote is important. The
Board of Directors of Bancorp appreciates the cooperation of shareholders in
directing proxies to vote at the meeting.
Louisville, Kentucky By Order Of The Board Of Directors
March 21, 1997
/s/ David H. Brooks
-------------------------------------
David H. Brooks
Chairman and Chief Executive Officer
YOUR VOTE IS IMPORTANT
PLEASE DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ACCOMPANYING POSTAGE PAID ENVELOPE.
<PAGE>
TABLE OF CONTENTS
Page
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RELATIONSHIP OF BANCORP AND THE BANKS . . . . . . . . . . . . . . . . . . . 2
VOTING AT THE ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . 2
PRINCIPAL HOLDERS OF BANCORP COMMON STOCK . . . . . . . . . . . . . . . . 3
ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 4
MEETINGS AND COMMITTEES OF THE BOARD . . . . . . . . . . . . . . . . . . . 9
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION . . . . . . . . 10
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS . . . . . . . . . . . . . 11
TRANSACTIONS WITH MANAGEMENT AND OTHERS . . . . . . . . . . . . . . . . . . 16
INFORMATION CONCERNING INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . 16
SUBMISSION OF SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . 16
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
APPENDIX :
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . A-1
MARKET DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . A-2
CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . A-12
CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . . . . . . . A-13
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . . . . . . A-14
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . A-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . A-16
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . A-33
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . A-34
Annual Report On Form 10-K
A copy of S.Y. Bancorp, Inc.'s 1996 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission, without exhibits, will be provided without
charge within one business day following receipt of a written or oral request
directed to: Ms. Nancy B. Davis, Senior Vice President, Treasurer and Chief
Financial Officer, S.Y. Bancorp, Inc., P.O. Box 32890, Louisville, Kentucky
40232, (502) 625-9176.
<PAGE>
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
(502) 582-2571
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
April 23, 1997
GENERAL
This Proxy Statement is furnished to the shareholders of S.Y. BANCORP, INC.
("Bancorp") in connection with the solicitation of proxies by Bancorp's Board of
Directors for use at the Annual Meeting of Shareholders (the "Annual
Meeting") to be held on Wednesday, April 23, 1997, at 10:00 a.m., local time,
at Stock Yards Bank & Trust Company's Exchange Building dining room, 1048 East
Main Street, Louisville, Kentucky 40202. The approximate date on which this
Proxy Statement and the accompanying proxy are first being sent or given to
shareholders is March 21, 1997. The mailing address of Bancorp's principal
executive offices is P.O. Box 32890, Louisville, Kentucky 40232-2890.
Only shareholders of record at the close of business on March 7, 1997, are
entitled to notice of and to vote at the Annual Meeting.
Any valid and unrevoked proxy will be voted as specified in the proxy. If
a shareholder does not specify otherwise, the shares represented by the
shareholder's proxy will be voted (a) FOR approval of the action of the Board
of Directors fixing the number of directors at fifteen (15) and FOR election of
the persons named in this Proxy Statement as directors of Bancorp, in accordance
with the terms and conditions set forth in this Proxy Statement; and (b) in
their discretion, on any other matters that may properly come before the Annual
Meeting, or any adjournment thereof, including matters incident to its conduct.
All expenses of preparing, printing, mailing, and delivering the proxy and
all materials used in the solicitation thereof will be borne by Bancorp. In
addition to the use of the mails, proxies may be solicited by personal
interview, telephone and telefax by directors and officers of Bancorp, none of
whom will receive additional compensation for such services. Bancorp has also
requested brokerage houses, custodians, and nominees to forward soliciting
materials to the beneficial owners of Bancorp's Common Stock, no par value
("Bancorp Common Stock"), held of record by them and will pay the reasonable
expenses of such persons for forwarding such materials.
Proxies may be revoked at any time before the taking of the vote at the
Annual Meeting by written notice of revocation to the Secretary of Bancorp, by
delivery of a later dated proxy or by voting in person at the meeting.
Attendance at the Annual Meeting will not have the effect of revoking a proxy
unless the shareholder so attending so notifies the Secretary in writing prior
to voting of the proxy.
1
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RELATIONSHIP OF BANCORP AND THE BANKS
Bancorp is a bank holding company within the meaning of the Bank Holding
Company Act of 1956 and pursuant to that act is registered with the Board of
Governors of the Federal Reserve System. Bancorp has two subsidiaries. Both
Stock Yards Bank & Trust Company ("the Kentucky Bank") and Stock Yards Bank &
Trust Company ("the Indiana Bank") are wholly owned by Bancorp and engaged in
the business of commercial banking. See "MEETINGS AND COMMITTEES OF THE BOARD".
VOTING AT THE ANNUAL MEETING
On March 7, 1997, the record date for the Annual Meeting fixed by Bancorp's
Board of Directors, there were issued and outstanding, and entitled to vote at
the Annual Meeting, 3,274,353 shares of Bancorp Common Stock. Bancorp has no
class of stock other than common stock. The holders of a majority of the total
shares of Bancorp Common Stock issued and outstanding and entitled to vote,
whether present in person or by proxy, will constitute a quorum for the
transaction of business at the Annual Meeting. See note (3) to the tabulation
under the heading, "PRINCIPAL HOLDERS OF BANCORP COMMON STOCK," for a discussion
of shares held by the Kentucky Bank in fiduciary capacities.
Each share of Bancorp Common Stock is entitled to one vote on all matters
presented to the shareholders with the exception of the election of directors.
In the election of directors, Kentucky's Constitution mandates that shareholders
have cumulative voting rights. Under cumulative voting rights, each shareholder
is entitled to cast as many votes in the aggregate as equal the number of shares
of Bancorp Common Stock owned by him or her multiplied by the number of
directors to be elected. Each shareholder, or his or her proxy, may cast all of
his or her votes (as thus determined) for a single nominee for director or may
distribute them among two or more nominees, in the shareholder's discretion.
Directors will be elected by a plurality of the total votes cast at the
Annual Meeting. Assuming five directors are to be elected, a plurality means
that the five nominees receiving the highest number of votes will be deemed
elected.
Votes cast in person or by proxy at the Annual Meeting will be tabulated
by the judges appointed for the meeting, who will conduct the voting and
certify the results. The judges will also determine whether or not a quorum is
present at the meeting. A shareholder entitled to vote for the election of
directors may withhold authority to vote for all nominees for directors or may
withhold authority to vote for certain nominees for directors. A shareholder
may also abstain from voting on the proposal to fix the number of directors.
Votes withheld from the election of any nominee for director and abstentions
from any other proposal will be treated by the judges as shares that are present
and entitled to vote for purposes of determining the presence of a quorum, but
will not be counted in the number of votes cast on any matter. If a broker does
not receive voting instructions from the beneficial owner of shares on a
particular matter and indicates on the proxy that it does not have discretionary
authority to vote on that matter, those shares will not be considered as present
and entitled to vote with respect to that matter.
2
<PAGE>
PRINCIPAL HOLDERS OF BANCORP COMMON STOCK
At January 31, 1997, Bancorp had 3,273,553 shares of Bancorp Common Stock
issued and outstanding held by 803 shareholders of record. The following
tabulation shows the amount and percent of Bancorp Common Stock owned
beneficially at January 31, 1997, by those persons known by Bancorp to own, or
be deemed to own, beneficially five percent (5%) or more of such stock. The
tabulation also shows the beneficial ownership of Bancorp Common Stock by all
directors, executive officers and employees of Bancorp and the Banks at January
31, 1997. Unless otherwise noted, the sole voting and investment power with
respect to such stock is held by the beneficial owner named. For a tabulation
of the beneficial ownership of Bancorp Common Stock by individual directors of
Bancorp and nominees for election as directors of Bancorp at the Annual Meeting,
see "ELECTION OF DIRECTORS."
Amount and Nature Percent of
Name and Address of Beneficial Bancorp Common
of Beneficial Owner Ownership(1) Stock(1)(2)
------------------- ----------------- --------------
Stock Yards Bank & Trust Company 378,972(3) 10.04%
1040 East Main Street
Louisville, Kentucky 40206
Directors and executive officers of 373,616 11.13%
Bancorp as a group (14 persons)(4)(5)
Directors, executive officers, and 473,711(6) 14.11%
employees of Bancorp and the Banks
as a group (109 persons)(4)(5)
Notes:
(1) As of January 31, 1997.
(2) Shares of Bancorp Common Stock subject to currently exercisable options
under Bancorp's Stock Option Plan are deemed outstanding for computing the
percentage of Bancorp Common Stock of the person holding such options but
are not deemed outstanding for computing the percentage of Bancorp Common
Stock of any other person.
3
<PAGE>
(3) Held by the Kentucky Bank as agent, trustee, personal representative and
in other fiduciary capacities, including 33,216 shares held as Trustee
under the Kentucky Bank's Employee Stock Ownership Plan (the "ESOP"). As
to 30,541 shares held in the ESOP, participants direct the Kentucky Bank,
as Trustee, to vote the vested portion of the participant's account balance
attributable to Bancorp Common Stock. The other 2,675 shares held by the
Kentucky Bank as Trustee under the ESOP (together with any shares for
which no directions are received from participants in the ESOP) may then be
voted in the same proportions as the directions given to the Bank, as
trustee, by the respective participants. Under the ESOP, participants or
their beneficiaries are eligible to receive the balance of their accounts
in-kind upon retirement, death or disability. The vested portion of a
participant's account balance in the ESOP is eligible for distribution
in-kind upon termination of employment.
(4) "Executive Officer" means the chairman, president, any vice president in
charge of a principal business unit, division or function, or other officer
who performs a policy making function or any other person who performs
similar policy making functions.
(5) For a description of the voting and investment power with respect to the
shares beneficially owned by the fourteen directors and nominees for
election as directors of Bancorp, see the table under the heading,
"ELECTION OF DIRECTORS."
(6) The shares held by the group, include 360,612 shares held by officers and
employees of the Kentucky Bank. In addition, 82,558 shares are subject to
currently exercisable stock options and 30,541 shares are held by present
employees of the Kentucky Bank in their ESOP accounts at December 31, 1996,
with sole voting power and no current investment power. Bancorp has not
undertaken the expense and effort of compiling the number of shares certain
officers and employees of the Kentucky Bank may hold other than directly in
their own name.
ELECTION OF DIRECTORS
The Articles of Incorporation and Bylaws of Bancorp provide that the Board
of Directors shall be composed of not less than nine (9) nor more than
twenty-five (25) members. The bylaws provide that the exact number of members
shall be fixed each year by the Board of Directors prior to the giving of notice
of the Annual Meeting, subject to any later resolution adopted by the
shareholders at the Annual Meeting. At its February 11, 1997 meeting, the Board
of Directors fixed the number of directors at fifteen (15). The Board of
Directors has recommended that the number of directors constituting the Board be
fixed at fifteen for the ensuing year, subject to the approval of shareholders
at the annual meeting. Assuming five directors are to be elected, there will be
fourteen (14) individuals serving on the Board as of the date of the 1997 Annual
Meeting.
Bancorp's Articles of Incorporation direct the Board of Directors to be
classified into three classes of directors of as nearly equal size as possible
with only one class of directors being elected each year. Accordingly, at the
1997 Annual Meeting, five Directors are to be elected to hold office for
three-year terms, or until successors are elected and qualified. Unless
otherwise instructed, it is intended that the shares represented by the enclosed
proxy will be voted for the election of the nominees named below. Proxies may
not be voted for a greater number of persons than the number of nominees named
below.
4
<PAGE>
At the Annual Meeting, a resolution will be submitted approving the action
of the Board of Directors fixing the number of directors at fifteen (15), and,
if such resolution is adopted, the five persons named in the following table
will be nominated on behalf of the Board of Directors for election as directors
of Bancorp. The affirmative vote of a majority of the shares of Bancorp Common
Stock represented at the Annual Meeting in person or by proxy will be required
for approval of the resolution fixing the number of directors.
In the event (1) any person or persons other than the following nominees
are nominated as directors, or (2) the number of directors to be elected shall
be less or more than five, the proxies named in the enclosed proxy, or their
substitutes, shall have the right in their discretion to vote for some number
less or more than all the nominees or for less or more than all of the aforesaid
nominees. In the event any of the nominees becomes unwilling or unable to
accept nomination or election, the said proxies shall have the right to vote for
any substitute nominee in place of the nominee who has become unwilling or
unable to accept nomination or election. The Board of Directors has no reason to
believe that any of the nominees will be unavailable to serve as a director.
All of the nominees and continuing directors of Bancorp are currently
serving as directors of the Kentucky Bank and were elected to that position on
April 24, 1996, by the written consent of Bancorp, the sole shareholder of the
Kentucky Bank. It is anticipated that, if elected as directors of Bancorp at
the Annual Meeting, Bancorp, as the sole shareholder of the Kentucky Bank, will,
by written consent, elect the following nominees and continuing directors of
Bancorp as directors of the Kentucky Bank to serve a one year term.
There are no arrangements or understandings regarding the selection or
election of any of the following nominees as directors of Bancorp. All
nominations for membership on the Board of Directors of Bancorp originated with
the Board of Directors.
Nominees To Serve A Three Year Term Expiring 2000
- -------------------------------------------------
Bancorp Common Stock
Beneficially Owned
Name, Age, And at January 31, 1997
Year First Became Principal Occupation; -------------------------
Director (1) Certain Directorships(2)(3) Amount(4)(5) % of Class
----------------- --------------------------- ------------ ----------
James E. Carrico Vice President, Property 8,928 (6)
Age 55 and Casualty Operations
Director since 1978 Accordia/ReagerHarris
(insurance agency)
Jack M. Crowner Owner, Jack Crowner & 32,721(7) 1.00%
Age 64 Associates (radio and
Director since 1979 TV broadcasting)
Leonard Kaufman Retired(8) 66,603(9) 2.02%
Age 67
Director since 1964
George R. Keller Founder, Tumbleweed 7,921(10) (6)
Age 47 Mexican Food, Inc.
Director since 1991 (restaurant)
Bruce P. Madison Vice President and 12,857(11) (6)
Age 46 Treasurer, Plumbers
Director since 1989 Supply Company, Inc.
(wholesale plumbing)
5
<PAGE>
Continuing Directors - Term Expiring 1998
- -----------------------------------------
Bancorp Common Stock
Beneficially Owned
Name, Age, And at January 31, 1997
Year First Became Principal Occupation; -------------------------
Director (1) Certain Directorships(2)(3) Amount(4)(5) % of Class
----------------- --------------------------- ------------ ----------
David H. Brooks Chairman and 31,695(13) (6)
Age 54 Chief Executive Officer
Director since 1985 Bancorp and the Banks(12)
Carl T. Fischer, Jr. Farmer & horse breeder 30,432(14) (6)
Age 63
Director since 1980
Stanley A. Gall, M.D. Professor and Chairman, 1,386 (6)
Age 60 Department of Obstetrics
Director since 1994 (15) and Gynecology,
University of Louisville
Henry A. Meyer President, Henry 47,344(16) 1.45%
Age 66 Fruechtenicht Co., Inc.
Director since 1966 (feed supplier)
Continuing Directors - Term Expiring 1999
- -----------------------------------------
Charles R. Edinger, III Vice President, J. 21,965(17) (6)
Age 47 Edinger & Son, Inc.
Director since 1984 (truck body assembly)
David P. Heintzman President, 21,251(19) (6)
Age 37 Bancorp and the Banks(18)
Director since 1992
Norman Tasman President, Secretary and 57,884(21) 1.77%
Age 45 Treasurer, Tasman Industries,
Director since 1995 (20) Inc. and President,
Tasman Hide Processing, Inc.
Kathy C. Thompson Executive Vice President and 8,028(24) (6)
Age 35 Secretary, Bancorp and
Director since 1994 (22) Executive Vice President,
Kentucky Bank(23)
Bertrand A. Trompeter Retired, John F. 24,600(26) (6)
Age 68 Trompeter Co. (tobacco
Director since 1980(25) and candy wholesaler
6
<PAGE>
Notes:
(1) Ages listed are as of December 31, 1996.
(2) Except as otherwise noted, each director and nominee has been engaged
in his or her principal occupation for five years or more.
(3) No director or nominee holds any directorship in a company with a
class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934 or subject to the requirements of Section 15(d) of
such act or any company registered as an investment company under the
Investment Company Act of 1940.
(4) This column includes, in some instances, shares in which members of
the nominee's or director's immediate family have a beneficial
interest. The column does not, however, include the interest of certain
of the listed nominees or directors in shares held by other non-dependent
family members in their own right. In each case, the principal
disclaims beneficial ownership of any such shares, and declares that the
listing in this Proxy Statement should not be construed as an admission
that the principal is the beneficial owner of any such securities.
(5) Includes 150 qualifying shares for each director and, for each non-
employee director, 400 shares subject to currently exercisable stock
options issued under Bancorp's stock option plan.
(6) Less than one percent (1%) of outstanding Bancorp Common Stock.
(7) Includes 20,134 shares owned by Mr. Crowner's wife.
(8) Prior to his retirement in January, 1993, Mr. Kaufman was Chairman and
Chief Executive Officer of Bancorp and the Kentucky Bank.
(9) Includes 20,180 shares subject to currently exercisable stock options
issued under Bancorp's Stock Option Plan, 25,930 shares owned by Mr.
Kaufman's wife, and 78 shares jointly owned by Mr. Kaufman and his wife.
(10) Includes 1,141 shares jointly owned by Mr. Keller and his wife.
(11) Includes 4,732 shares jointly owned by Mr. Madison and his wife, 393
shares owned by Mr. Madison's wife, and 6,938 shares held by Mrs.
Madison as custodian for their minor children.
(12) Mr. Brooks was appointed Chairman and Chief Executive Officer of
Bancorp and the Kentucky Bank in January, 1993. Prior thereto he was
President of Bancorp and the Kentucky Bank.
(13) Includes 14,692 shares subject to currently exercisable stock options
issued under Bancorp's Stock Option Plans, 1,310 shares held by Mr.
Brooks as custodian for his son, 11,584 shares owned by Mr. Brooks's
wife, and 3,101 shares held in Mr. Brooks's ESOP account at December
31, 1996.
(14) Includes 19,616 shares held by Mr. Fischer as trustee under an
irrevocable trust established by his father.
7
<PAGE>
(15) Dr. Gall was elected as a director of Bancorp and the Kentucky Bank at
the meetings of the respective Boards of Directors held on January 11,
1994. Dr. Gall was re-elected to the Board at the April, 1994 Annual
Meeting.
(16) Includes 22,892 shares owned by Mr. Meyer's wife.
(17) Includes 10,251 shares owned by Mr. Edinger's wife.
(18) Mr. Heintzman was appointed President of Bancorp and the Kentucky Bank
in January, 1993. He was appointed Treasurer and Chief Financial
Officer of Bancorp in April, 1989 and Secretary in February, 1990.
Prior thereto, he was Assistant Treasurer of Bancorp and Executive Vice
President of the Kentucky Bank. See Note (26) below.
(19) Includes 10,336 shares subject to currently exercisable stock options
issued under Bancorp's Stock Option plans, 1,457 shares owned by Mr.
Heintzman's wife, 2,003 shares jointly owned by Mr. Heintzman and his
wife, 873 shares held by Mr. Heintzman as custodian for his minor
daughter, and 1,910 shares held in Mr. Heintzman's ESOP account at
December 31, 1996.
(20) Mr. Tasman was elected as a director of Bancorp and the Kentucky Bank
at the meetings of the respective Boards of Directors held on January
10, 1995. Mr. Tasman was re-elected to the Board at the April, 1995
Annual Meeting.
(21) Includes 46,000 shares owned by Mr. Tasman's mother for which Mr. Tasman
shares voting control but from which he derives no economic benefit.
Includes 9,968 shares held jointly by Mr. Tasman and his wife, and 1,112
shares held as custodian for his minor son.
(22) Ms. Thompson was elected as a director of Bancorp and the
Kentucky Bank at the meetings of the respective Boards of Directors
held in January, 1994. Ms. Thompson was re-elected to the Board at the
April, 1994 Annual Meeting.
(23) Ms. Thompson joined the Kentucky Bank in June, 1992 as Senior
Vice President and Manager of the Trust Division. Prior thereto,
she was a Vice President of PNC Bank Kentucky's Trust Division.
(24) Includes 5,760 shares subject to currently exercisable stock options
issued under Bancorp's Stock Option Plans and 304 shares held in Ms.
Thompson's ESOP account at December 31, 1996.
(25) Mr. Trompeter is the father-in-law of Mr. David P. Heintzman. No other
family relationship exists among the directors and executive officers of
Bancorp or the Banks.
(26) Includes 13,280 shares owned by Mr. Trompeter's wife and 3,267 held
in a trust account from which Mr. Trompeter derives beneficial interest.
Messrs. David H. Brooks and David P. Heintzman and Ms. Thompson are Bancorp's
three executive officers and the above tabulation also includes other
information with respect to them. Bancorp's executive officers serve at the
pleasure of Bancorp's Board of Directors and there are no arrangements or
understandings regarding their selection or appointment as officers of Bancorp.
8
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD
BOARD MEETINGS
During 1996, the Board of Directors of Bancorp held a total of twelve
regularly scheduled and special meetings.
All directors of Bancorp are also directors of the Kentucky Bank. Mr.
Brooks and Mr. Heintzman serve as directors for the Indiana Bank. During 1996,
the Kentucky Bank's Board of Directors held a total of thirteen regularly
scheduled and special meetings. The Indiana Bank's Board of Directors held four
meetings in 1996 following Bancorp's acquisition of the Indiana Bank.
All incumbent directors except Dr. Gall attended at least 75% of the
aggregate number of meetings of the Board and the committees of which they were
members.
COMMITTEES OF BANCORP
Bancorp has a standing Audit Committee, but it has no standing nominating
or compensation committee of the Board of Directors or committees performing
similar functions. See "MEETINGS AND COMMITTEES OF THE BOARD-Committees of the
Kentucky Bank" for a discussion of Kentucky Bank's Compensation Committee and
its functions.
Bancorp's Board of Directors considers matters relating to the selection
and nomination of directors, but there is no standing nominating committee of
the Board of Directors. There are no formal procedures whereby a security holder
may recommend nominees to the Board of Directors.
AUDIT COMMITTEE. The Audit Committee consists of four members of Bancorp's
Board of Directors: Jack M. Crowner, Carl T. Fischer, Jr., Bruce P. Madison, and
Henry A. Meyer. The committee held four meetings in 1996. The committee
reviews with Bancorp's independent auditors the general audit plan and results
of the audit engagement, other services performed by the auditors, and the audit
fees. Review of internal audit officer's plans and reports, regulatory
compliance officer's plans and reports and internal accounting controls are part
of the function of the committee.
COMMITTEES OF THE KENTUCKY BANK
The Kentucky Bank has a standing Compensation Committee, but it has no
standing audit or nominating committees or committees performing similar
functions.
COMPENSATION COMMITTEE. The Compensation Committee consists of four
members of the Kentucky Bank's and Bancorp's Board of Directors. The committee
considers matters relating to the salary and other compensation of officers of
the Kentucky Bank and Bancorp. The members of the committee are Bruce P.
Madison, James E. Carrico, Jack M. Crowner, and Henry A. Meyer. The committee
meets at least annually and held two meetings in 1996. In 1997, this committee
will become a committee of Bancorp. As such it will consider matters relating
to the salary and other compensation of officers of the Indiana Bank.
9
<PAGE>
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
It is the philosophy of the Compensation Committee to ensure the
compensation of Bancorp's executive officers is adequate to attract and retain
talented individuals with proven abilities to lead Bancorp and the Banks so
growth and profitability are realized while maintaining stability and capital
strength.
Corporate profitability and shareholder value are important performance
measurements; however, executive officer base compensation is not directly
related to either. Compensation levels are determined by a number of factors
including comparisons with companies of similar size and complexity. While
executive base compensation is not quantitatively related to Bancorp's or the
Banks' financial performance, there is a qualitative relationship between
performance and executive officer compensation. The salary increases noted in
the Summary Compensation Table under the heading "COMPENSATION OF EXECUTIVE
OFFICERS AND DIRECTORS," were made in light of Bancorp's and the Banks' market
and earnings growth and other favorable factors. Salaries are based on
individual performance contributions within a competitive salary range for each
position. Pay levels are competitive within a range the Committee considers to
be reasonable and necessary.
The salary of the Chief Executive Officer is determined substantially as
described above with additional considerations. A range of salaries is
determined by gathering information regarding salaries at similarly sized banks
and other businesses. This information is obtained from industry publications
such as Sheshunoff, from published compensation studies of both banks and other
businesses, and from area business publications such as BUSINESS FIRST, a weekly
business newspaper of the Louisville metropolitan area. The Compensation
Committee considers the Chief Executive Officer's leadership skills and
managerial results. Among these considerations are consolidated financial
performance and condition, growth of the Banks, regulators' conclusions,
community involvement and the CEO's ability to choose and lead his management
team. Both subjective and objective as well as quantitative and qualitative
measures are used. The Compensation Committee reaches a conclusion as to an
appropriate salary and presents it to the Board of Directors for discussion and
approval. While peer group comparisons of salaries include companies which are
also included in the indices used for the shareholder return performance graph
on page 15 there is no direct correlation between the companies used in CEO
compensation and companies included in that graph.
Beginning in 1993, the Board of Directors of the Kentucky Bank approved an
incentive compensation plan which included all officers. The objectives of this
performance based plan include helping to attract, retain and reward employees.
Obtaining and retaining talented officers helps ensure Bancorp's profitability
and financial strength. The annual determination as to whether any incentive
will be paid is based upon the achievement of certain set goals for earnings
growth, return on average assets and return on average equity. In 1995, the
Compensation Committee changed the executive officers' compensation arrangements
to be more heavily weighted toward incentives than to base salaries. The
committee feels that in a time of significant expansion, there is potential for
strong earnings growth as long as the process is managed with adequate focus on
cost control to prevent deterioration of earnings. Therefore, the committee
established a tiered incentive program based upon the achievement of net income
goals and executive officers' base salaries were increased only nominally for
1995. For 1996, executive officers salaries were increased based upon
historical performance and the complexity of the organization. Incentive
arrangements remained in place to help provide a reward for achievement of
extraordinary operational and financial results. Incentives are computed using
a formula based upon the amount net income and other factors increase over the
prior year. Amounts in 1996 under this incentive plan for individuals listed
in the Summary Compensation Table are shown in the column entitled "Bonus".
10
<PAGE>
The Committee also believes by providing those persons who have
responsibility for the management and growth of Bancorp and the Banks with an
opportunity to increase their ownership of Bancorp Common Stock, the best
interests of shareholders and officers will be similarly aligned. Executive
officers are granted options, from time to time, giving them the right to
purchase Bancorp Common Stock at a specified price in the future. The number
of stock options granted is based upon individual performance contributions and
comparative practices. See the discussion under "COMPENSATION OF EXECUTIVE
OFFICERS AND DIRECTORS-Stock Incentive Plan" page 12. All options for shares
available for issuance under the 1984 Stock Option Plan have been granted. The
1995 Stock Incentive Plan was approved by shareholders at the 1995 Annual
Meeting.
In summary, the Committee believes the total compensation program for
Bancorp's executive officers is competitive with programs offered by similar
institutions, and executive compensation is appropriate to further the goals and
objectives of Bancorp and the Banks.
COMPENSATION COMMITTEE
James E. Carrico
Jack M. Crowner
Bruce P. Madison
Henry A. Meyer
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table shows the compensation paid by the Kentucky Bank for
the three years ended December 31, 1996, for services in all capacities to
executive officers of Bancorp.
Summary Compensation Table
--------------------------------
Long Term
Compen-
Annual Compensation sation
--------------------------------- ----------
Other Securities
Name and Annual Under- All Other
Principal Compen- lying Compen-
Position Year Salary Bonus(1) sation(2) Options sation(3)
- --------- ---- -------- ------- ------ ------- ---------
David H. Brooks 1996 $185,000 $55,500 - - $35,232
Chairman and Chief 1995 175,000 85,000 - 6,800 37,333
Executive Officer 1994 170,000 27,860 - 2,490 32,080
David P. Heintzman 1996 150,000 45,000 - - 34,019
President 1995 130,000 65,000 - 6,800 34,666
1994 125,000 20,860 - 2,490 31,997
Kathy C. Thompson 1996 100,000 20,000 - - 26,839
Executive Vice 1995 94,000 12,000 - 5,000 26,284
President and 1994 90,000 6,800 - 2,200 24,876
Secretary
11
<PAGE>
Notes:
(1) Incentive compensation plan is described in "REPORT OF COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION," page 10.
(2) The aggregate amount of all perquisites and other personal
benefits received by the individuals listed in the above table did not
exceed 10 percent of the total annual salary reported for the respective
executive officer.
(3) Includes director compensation (See "COMPENSATION OF EXECUTIVE
OFFICERS AND DIRECTORS-Director Compensation") and contributions by
the Kentucky Bank to the Bank's defined contribution plans (money
purchase, deferred income (401(k)) profit sharing and employee
stock ownership plans). For Mr. Brooks, these amounts are
$7,800; $14,844; $6,000; and $3,000, respectively. For Mr. Heintzman,
these amounts are $7,800; $14,844; $5,812 and $3,000, respectively.
For Ms. Thompson, these amounts are $7,800; $8,704; $6,000 and
$2,000, respectively. Also includes for Mr. Brooks, Mr. Heintzman and
Ms. Thompson, respectively, $3,588, $2,563 and $2,335 representing
various payments, primarily life insurance policy premiums. The
officer's families are the beneficiaries of these policies.
STOCK INCENTIVE PLAN
Bancorp has a stock option plan under which options may be granted to
officers, other key employees of the Banks, and non-employee directors. Key
employees are those persons who, in the judgement of the Compensation Committee,
are mainly responsible for the success of the Banks. Options under this
plan are granted at the fair market value of Bancorp's Common Stock at the time
of the grant. No options were granted in 1996.
The following table shows, as to the individuals included in the Summary
Compensation Table, information as to aggregate options exercised in 1996 and
December 31, 1996 year end option values.
12
<PAGE>
AGGREGATED OPTIONS EXERCISED IN 1996 AND 1996 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Acquired Value Options at in the Money Options
Name on Exercise Realized December 31, 1996 at December 31, 1996
---- --------------- -------- ---------------------- --------------------
<S> <C> <C> <C> <C>
David H. Brooks - $ - 25,840(1) $ 475,703(4)
David P. Heintzman 3,956 63,437 21,484(2) 339,483(5)
Kathy C. Thompson - - 14,400(3) 216,100(6)
</TABLE>
(1) 14,692 options are currently exercisable. 11,148 options are not yet
vested as provided by a vesting schedule of 20% per year beginning one year from
date of issue.
(2) 10,336 options are currently exercisable. 11,148 options are not yet vested
as provided by a vesting schedule of 20% per year beginning one year from date
of issue.
(3) 5,760 options are currently exercisable. 8,640 options are not yet vested
as provided by a vesting schedule of 20% per year beginning one year from date
of issue.
(4) Of this total $309,100 relates to options which are currently exercisable,
and $166,603 relates to options yet to vest as described at (1) above.
(5) Of this total $172,880 relates to options which are currently exercisable,
and $166,603 relates to options yet to vest as described at (2) above.
(6) Of this total $86,440 relates to options which are currently exercisable,
and $129,660 relates to options yet to vest as described at (3) above.
SENIOR OFFICER SECURITY PLAN
The Kentucky Bank has established a Senior Officer Security Plan (the
"Security Plan") for a select group of management and highly compensated
officers who contribute materially to the continued growth, development and
future business success of the Kentucky Bank. Life insurance owned and paid for
by the Kentucky Bank has been purchased on each covered officer. The Security
Plan is designed so that if the assumptions made as to mortality experience,
policy dividends and other factors are realized, the Kentucky Bank will recover
both the cost of benefits and after tax costs of the plan. The amount of
benefits to be received under the Security Plan was determined by projecting
each participant's current salary amount to that at his/her retirement date.
His/her expected social security benefits and expected benefits under the
defined contribution plans were also estimated. The Security Plan supplemental
retirement benefit amount was determined to be the amount necessary to bring
total retirement payments to an approximate 75% of his/her projected salary at
retirement age.
Under the Security Plan, the following individuals listed in the Summary
Compensation Table at page 11 will receive the following annual supplemental
retirement benefits at their normal retirement age of 65:
David H Brooks, $84,000 each year for 15 years
David P. Heintzman, $136,500 each year for 15 years
Kathy C. Thompson, $82,000 each year for 15 years
In addition, there are pre-retirement death and disability benefits
provided for Mr. Brooks in the Security Plan.
13
<PAGE>
SENIOR EXECUTIVE SEVERANCE AGREEMENT
The Kentucky Bank has established a Senior Executive Severance Agreement
(the "Severance Agreement") for certain senior officers, including the Executive
Officers, of the Kentucky Bank. Bancorp and the Kentucky Bank have concluded it
to be in the best interests of Bancorp, its Shareholders and the Kentucky Bank
to take reasonable steps to help assure key executives of the Kentucky Bank that
they will be treated fairly in the event of a tender offer or takeover bid, or
an actual change of control. It is important, should Bancorp receive take over
or acquisition proposals from third parties, that Bancorp be able to call upon
the key executives of the Kentucky Bank for their advice and assessment of
whether such proposals are in the best interests of shareholders, free of the
influences of their personal employment situations. This severance agreement
was not entered into because of any belief by management that a change in
control of Bancorp was imminent.
The Severance Agreement provides that, in the event (1) an executive is
forced to resign following a change in control of Bancorp or (2) an executive
voluntarily terminates employment with the Kentucky Bank for up to three years
following a change in control, the Kentucky Bank will pay the executive a
severance payment equal to 299 percent of the executive's annual salary. Should
voluntary termination occur between 24 and 36 months following the change in
control, the executive will receive only 2/3 of the severance payment.
Furthermore, if the executive is 58 years old or more at the date of the
severance payment, the amount of the payment is reduced. As the executive
approaches retirement age of 65 years, the severance payment decreases
proportionately to zero at age 65. The severance agreement also provides that
the Kentucky Bank pay legal fees and expenses incurred in contesting any
termination or enforcing the severance agreement.
In the event of receipt of severance payments by an executive officer, the
executive officer, for a period of eighteen months will not solicit customers of
the Kentucky Bank, divert from the Kentucky Bank any customer of the Kentucky
Bank or solicit for employment any employee of the Kentucky Bank.
DIRECTOR COMPENSATION
Directors of Bancorp receive no compensation for attendance at regular or
special meetings of the board if the meetings are held immediately before or
after a regular or special meeting of the Board of Directors of the Kentucky
Bank. However, Bancorp's directors are paid $600 for each meeting of Bancorp's
Board of Directors attended if the meeting is not held immediately before or
after a meeting of the Board of Directors of the Kentucky Bank. Bancorp's
directors, who are also directors of the Kentucky Bank, are paid $600 for each
Kentucky Bank board meeting attended. Non-employee directors receive an annual
retainer of $1,200.
Non-employee directors of Bancorp and the Kentucky Bank who are members of
the various committees of the respective Boards of Directors are also paid the
following fees: $200 per meeting attended of Bancorp's Audit Committee and the
Kentucky Bank's Compensation, Loan and Trust Committees.
Beginning in 1996, non-employee directors receive options to purchase 1,000
shares of Bancorp Common Stock. These options are granted at the fair market
value of Bancorp Common Stock at the time of the grant.
Directors of the Indiana Bank are not compensated for attendance at
meetings of the Board of Directors of the Indiana Bank.
14
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following performance graph compares the performance of Bancorp Common
Stock to the NASDAQ U.S. index and to the NASDAQ Banking index for Bancorp's
last five fiscal years. The graph assumes the value of the investment in Bancorp
Common Stock and in each index was $100 at December 31, 1991, and that all
dividends were reinvested.
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
S.Y. Bancorp, Inc. 100.00 136.60 188.87 237.43 341.37 481.92
NASDAQ U.S. Index 100.00 116.40 133.52 130.51 184.67 227.13
NASDAQ Banking
Index 100.00 145.60 165.93 165.45 246.41 325.61
15
<PAGE>
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The Kentucky Bank has had, and expects to have in the future, banking
transactions in the ordinary course of business with certain directors and
officers of Bancorp and the Banks and their associates, as well as with
corporations or organizations with which they are connected as directors,
officers, shareholders or partners, on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons. In the opinion of management of Bancorp and
the Banks, such transactions do not involve more than the normal risk of
collectibility or present other unfavorable features.
At December 31, 1996, loans to directors and officers of Bancorp and the
Banks and their associates totaled $1,824,000, equaling 5.8% of the Bancorp's
consolidated stockholders' equity.
During 1996, Bancorp and the Banks purchased property damage and other
insurance through Accordia of Louisville/ReagerHarris, Inc., a general insurance
agency, for which net premiums aggregating $156,700 were paid to Accordia of
Louisville/ReagerHarris, Inc. Net commissions earned by Accordia of
Louisville/ReagerHarris, Inc., on account of such insurance totaled $14,800 in
1996. Mr. James E. Carrico, a director of Bancorp and the Kentucky Bank, is a
shareholder, director and Vice President of Accordia of Louisville/ReagerHarris,
Inc.
INFORMATION CONCERNING INDEPENDENT PUBLIC ACCOUNTANTS
KPMG Peat Marwick has been engaged to audit the consolidated financial
statements of Bancorp for the past eight years. Management intends to recommend
that KPMG Peat Marwick be engaged to perform the independent audit of Bancorp's
consolidated financial statements for the year ending December 31, 1997, and it
is anticipated that such recommendation will be followed by Bancorp's Board of
Directors.
Representatives of KPMG Peat Marwick will be present at the Annual Meeting,
will have the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions.
SUBMISSION OF SHAREHOLDER PROPOSALS
Any proposals by shareholders intended to be presented at Bancorp's 1998
Annual Meeting of shareholders must be received by Bancorp at its principal
executive offices by November 21, 1997, to be included in Bancorp's Proxy
Statement and form of proxy for the 1998 Annual Meeting. The Board of Directors
will decide, subject to the rules of the Securities and Exchange Commission,
whether such proposals are appropriate for inclusion in the proxy statement and
form of proxy.
In addition, Bancorp's Bylaws impose certain advance notice requirements on
a shareholder nominating a director or submitting a proposal to an Annual
Meeting. Such notice must be submitted to the secretary of Bancorp no earlier
than 90, nor later than 60, days before an Annual Meeting, and must contain the
information prescribed by the Bylaws, copies of which are available from the
secretary. These requirements apply even if the shareholder does not desire to
have his or her nomination or proposal included in Bancorp's proxy statement.
16
<PAGE>
OTHER MATTERS
The officers and directors of Bancorp do not know of any matters to be
presented for shareholder approval at the Annual Meeting other than those
described in this Proxy Statement. If any other matters should come before the
Annual Meeting, the Board of Directors intends that the persons named in the
enclosed form of proxy, or their substitutes, will vote such proxy in accordance
with their best judgment on such matters.
By Order Of The Board Of Directors
/s/ David H. Brooks
--------------------------------------
David H. Brooks
Chairman and Chief Executive Officer
S.Y. Bancorp, Inc.
Louisville, Kentucky
March 21, 1997
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------
(Dollars in thousands except
per share data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
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
MARKET DATA
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.
1996 1995
- ------------------------------------------------------------------------------
Cash Dividends Cash Dividends
Quarter High Low Declared High Low Declared
- ------------------------------------------------------------------------------
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
A-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
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.
A-2
<PAGE>
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.
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.
A-3
<PAGE>
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 47,084 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>
A-4
<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 subdivisions 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>
A-5
<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.
Presented below is a schedule of loan loss experience and selected data relating
to the allowance for loan losses.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance 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 - -
Loan charge-offs, net of recoveries $ (174) $ (402) $ (103)
------- ------- -------
Balance December 31 $ 5,155 $ 4,507 $ 3,649
------- ------- -------
------- ------- -------
Average loans, net of unearned income $ 273,031 $ 229,674 $ 190,409
------- ------- -------
------- ------- -------
Loans outstanding at year end, net of unearned income 301,548 252,937 207,274
------- ------- -------
------- ------- -------
RATIOS
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 loans 1.71% 1.78% 1.76%
Loan loss coverage 39.34X 17.95X 53.51X
</TABLE>
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.
A-6
<PAGE>
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.
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.
A-7
<PAGE>
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
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%.
Growth of average interest bearing liabilities occurred in categories other than
money market deposit accounts, securities sold under agreements to repurchase
and federal funds purchased, and short-term borrowings. With lower interest
rates over the last two years, some depositors have chosen to shift money market
funds to time deposit accounts. Average time deposits increased 28% in 1996
from the 1995 average. Interest bearing demand deposits increased 27% and
savings accounts averaged 37% higher in 1996 as compared to 1995. Overall,
average interest bearing deposits increased 22% in 1996. Average balances of
securities sold under agreements to repurchase decreased slightly in 1996.
Commercial depositors have the opportunity to enter into a sweep agreement
whereby excess demand deposit balances are transferred to a separate account.
This balance is then used to purchase securities sold under agreements to
repurchase. Of the total securities sold under agreements to repurchase and
federal funds purchased caption, the 1996 average balance for federal funds
purchased was $586,000.
A-8
<PAGE>
AVERAGE BALANCES AND INTEREST RATES - TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
YEAR 1996 YEAR 1995 YEAR 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in thousands) Balances Interest Rate Balances Interest Rate Balances Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal funds sold $ 7,851 $ 442 5.63% $ 7,635 $ 477 6.25% $ 10,490 $ 443 4.22%
Mortgage loans held for sale 5,883 453 7.70 3,158 248 7.85 1,430 114 7.97
Securities
U.S. Treasury and federal agencies 36,901 2,562 6.94 31,294 2,250 7.12 31,591 2,232 7.07
States and political subdivisions 7,686 546 7.10 5,706 415 7.27 4,073 325 7.98
Loans, net of unearned income 273,031 25,329 9.28 229,674 22,038 9.60 190,409 16,225 8.52
------- ------ ---- ------- ------ ---- ------- ------ -----
TOTAL EARNING ASSETS 331,352 29,332 8.85 277,467 25,428 9.16 237,993 19,339 8.13
------ ---- ------ ---- ------ -----
Less allowance for loan losses 4,807 4,115 3,157
------- ------- -------
326,545 273,352 234,836
NON-EARNING ASSETS
Cash and due from banks 11,120 10,721 9,180
Premises and equipment 8,529 5,672 4,057
Accrued interest receivable and
other assets 6,783 6,147 5,066
------- ------- -------
TOTAL ASSETS $352,977 $295,892 $253,139
------- ------- -------
------- ------- -------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand deposits $ 32,259 $692 2.15% $ 25,471 $ 649 2.55% $ 21,325 $ 469 2.20%
Savings deposits 20,251 703 3.47 14,733 541 3.67 11,012 303 2.75
Money market deposits 48,059 1,671 3.48 48,540 1,833 3.78 56,155 1,722 3.07
Time deposits 152,191 8,715 5.73 118,611 6,755 5.70 81,098 3,577 4.41
Securities sold under agreements
to repurchase and federal funds
purchased 13,023 651 5.00 13,128 707 5.39 16,626 665 4.00
Short-term borrowings 1,705 82 4.81 1,914 115 6.01 1,898 70 3.69
Long-term debt 1,171 86 7.34 607 45 7.41 617 31 5.02
------- ------ ---- ------- ------ ---- ------- ------ ----
TOTAL INTEREST BEARING LIABILITIES 268,659 12,600 4.69 223,004 10,645 4.77 188,731 6,837 3.62
------ ---- ------ ---- ------ ----
NON-INTEREST BEARING LIABILITIES
Non-interest bearing demand deposits 51,780 44,340 39,377
Accrued interest payable and
other liabilities 2,863 2,584 1,711
------- ------- -------
TOTAL LIABILITIES 323,302 269,928 229,819
STOCKHOLDERS' EQUITY 29,675 25,964 23,320
------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $352,977 $295,892 $253,139
------- ------- -------
NET INTEREST INCOME $ 16,732 $ 14,783 $ 12,502
------ ------ ------
NET INTEREST SPREAD 4.16% 4.39% 4.51%
---- ---- ----
---- ---- -----
NET INTEREST MARGIN 5.05% 5.31% 5.24%
---- ---- -----
---- ---- -----
</TABLE>
A-9
<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."
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.
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.
A-10
<PAGE>
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.
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.
A-11
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
- --------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
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
------- -------
------- -------
See accompanying notes to consolidated financial statements.
A-12
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS 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 651 707 665
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.
A-13
<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>
See accompanying notes to consolidated financial statements.
A-14
<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.
A-15
<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.
A-16
<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.
A-17
<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.
(4) SECURITIES
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 $ 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>
A-18
<PAGE>
<TABLE>
<CAPTION>
The amortized cost and approximate market value of securities held to maturity
as of December 31,1996 and 1995 follow:
- ----------------------------------------------------------------------------------------------------------
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>
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.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
- -------------------------------------------------------------------------------------
Amortized Approximate Amortized Approximate
(In thousands) Cost Market Value Cost Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
A-19
<PAGE>
(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.
Information about impaired loans follows:
DECEMBER 31
- -------------------------------------------------------------------------------
(In thousands) 1996 1995
- -------------------------------------------------------------------------------
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
----- -----
----- -----
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.
A-20
<PAGE>
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
------ ------ ------
------ ------ ------
(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
------ ------
A-21
<PAGE>
(7) INCOME TAXES
Income taxes consist of the following:
YEARS 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
resulting from tax exempt interest (1.7) (1.9) (2.4)
Other, net (.3) (.2) (.3)
----- ----- -----
32.0% 31.9% 31.3%
----- ----- -----
----- ----- -----
A-22
<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 LIABILITIES
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.
A-23
<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:
DECEMBER 31
- -------------------------------------------------------------------------------
(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.
A-24
<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.
A-25
<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
A-26
<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.
A-27
<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.
A-28
<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.
A-29
<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 Purpose 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.
A-30
<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
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
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
A-31
<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
Net income $ 5,179 $ 4,056 $ 3,101
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 -
Repayments of long term debt (110) -
NET CASH USED IN FINANCING ACTIVITIES (1928) (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>
A-32
<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
A-33
<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
A-34
<PAGE>
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
PROXY FOR HOLDERS OF COMMON STOCK
ANNUAL MEETING OF SHAREHOLDERS - APRIL 23, 1997
The undersigned hereby appoints David H. Brooks and David P. Heintzman, or
either of them, attorneys with power of substitution and revocation to each, to
vote any and all shares of Common Stock of S.Y. Bancorp, Inc. ("Bancorp") held
of record by the undersigned, in the name and as the proxy of the undersigned,
at the Annual Meeting of shareholders of Bancorp (the "Annual Meeting") to be
held at Stock Yards Bank & Trust Company's Exchange Building dining room, 1048
East Main Street, Louisville, Kentucky 40202, on April 23, 1997, at 10:00 a.m.,
or any adjournment thereof, hereby revoking any prior proxies to vote said
stock, upon the following proposals more fully described in the Notice of and
Proxy Statement for the meeting (receipt of which is hereby acknowledged):
(1) FOR [ ] AGAINST [ ] ABSTAIN [ ] a proposal to approve the action of the
Board of Directors fixing the number of directors at fifteen (15) and
electing at the Annual Meeting five (5) directors.
(2) ELECTION OF DIRECTORS - Nominees are: James E. Carrico; Jack M. Crowner;
Leonard Kaufman; George R. Keller; Bruce P. Madison.
Mark [ ] FOR ALL nominees listed above
One Box [ ] FOR ALL nominees listed above EXCEPT the following:
Only [ ] WITHHOLD authority to vote for ALL nominees listed above
(3) In their discretion on such other business as may properly come before the
Annual Meeting or any adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF BANCORP AND
WILL BE VOTED AS SPECIFIED ABOVE. UNLESS OTHERWISE SPECIFIED, IT WILL BE VOTED
FOR PROPOSAL (1) AND FOR ALL NOMINEES FOR DIRECTORS, AND IN ACCORDANCE WITH THE
ATTORNEYS' DISCRETION ON ANY OTHER BUSINESS WHICH MAY PROPERLY COME BEFORE THE
MEETING OR ANY ADJOURNMENT THEREOF.
Date: ,1997
--------------- ----------------------------------
----------------------------------
(Signatures)
(Executors, administrators, trustees, attorneys, and officers of corporations
should give full title. For joint accounts, each joint owner must also sign.)
