FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 17262
S.Y.BANCORP, INC.
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kentucky 61-1137529
- ------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
1040 East Main Street, Louisville, Kentucky, 40206
- --------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(502)582-2571
- --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
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Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, no par value - 3,296,569
shares issued and outstanding at November 4,1998
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements of S.Y. Bancorp, Inc.
and Subsidiary, Stock Yards Bank & Trust Company, are submitted herewith:
--Unaudited Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997
--Unaudited Consolidated Statements of Income
for the three months ended September 30, 1998 and 1997
--Unaudited Consolidated Statements of Income
for the nine months ended September 30, 1998 and 1997
--Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997
--Unaudited Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 1998
--Notes to Unaudited Consolidated Financial Statements
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(In thousands, except share data) September 30, 1998 December 31, 1997
Assets
Cash and due from banks $ 21,556 $ 18,153
Federal funds sold 10,000 6,000
Mortgage loans held for sale 8,402 5,183
Securities available for sale (amortized
cost $46,637 in 1998 and $31,019 in 1997) 47,653 31,462
Securities held to maturity (approximate market
value $30,336 in 1998 and $28,962 in 1997) 29,802 28,652
Loans 430,508 370,293
Allowance for loan losses 6,696 5,921
------- -------
Net loans 423,812 364,372
Premises and equipment 15,080 13,903
Accrued interest receivable and other assets 12,715 10,872
------- -------
TOTAL ASSETS $569,020 $478,597
======= =======
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 79,223 $ 72,103
Interest bearing 407,608 345,468
------- -------
Total deposits 486,831 417,571
Securities sold under agreements
to repurchase and federal funds purchased 29,591 13,684
Short-term borrowings 1,676 4,483
Accrued interest payable and
other liabilities 6,255 3,827
Long-term debt 2,100 2,115
------- -------
TOTAL LIABILITIES 526,453 441,680
------- -------
Stockholders' equity
Common stock, no par value; 10,000,000
shares authorized; 3,296,669 and
3,281,971 shares issued and
outstanding in 1998 and 1997, respectively 5,535 5,486
Surplus 14,072 13,644
Retained earnings 22,285 17,495
Accumulated other comprehensive income 675 292
------- -------
TOTAL STOCKHOLDERS' EQUITY 42,567 36,917
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $569,020 $478,597
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
For the three months ended September 30, 1998 and 1997
(In thousands, except share and per share data) 1998 1997
Interest income
Loans $9,629 $7,788
Federal funds sold 273 209
Mortgage loans held for sale 157 82
U.S. Treasury and Federal agencies 775 871
Obligations of states and political
subdivisions 169 100
------ ------
Total interest income 11,003 9,050
------ ------
Interest expense
Deposits 4,830 3,820
Securities sold under agreements
to repurchase and federal funds purchased 226 178
Short-term borrowings 27 29
Long-term debt 39 41
------ ------
Total interest expense 5,122 4,068
------ ------
Net interest income 5,881 4,982
Provision for loan losses 375 225
------ ------
Net interest income after provision for loan losses 5,506 4,757
------ ------
Non-interest income
Investment management and trust services 1,148 868
Service charges on deposit accounts 788 487
Gains on sales of mortgage loans held for sale 556 283
Gains on sales of securities available for sale 157 -
Other 483 247
------ ------
Total non-interest income 3,132 1,885
------ ------
Non-interest expenses
Salaries and employee benefits 2,973 2,423
Net occupancy expense 386 324
Furniture and equipment expense 579 442
Other 1,471 985
------ ------
Total non-interest expenses 5,409 4,174
------ ------
Income before income taxes 3,229 2,468
Income tax expense 1,048 800
------ ------
Net income $ 2,181 $ 1,668
====== ======
Net income per share
Basic $ .66 $ .51
====== ======
Diluted $ .64 $ .49
====== ======
Average common shares
Basic 3,296,572 3,277,436
========= =========
Diluted 3,425,364 3,406,393
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
For the nine months ended September 30, 1998 and 1997
(In thousands, except share and per share data) 1998 1997
Interest income
Loans $27,800 $22,254
Federal funds sold 540 452
Mortgage loans held for sale 391 211
U.S. Treasury and Federal agencies 2,376 2,609
Obligations of states and political
subdivisions 405 294
------ ------
Total interest income 31,512 25,820
------ ------
Interest expense
Deposits 13,789 10,572
Securities sold under agreements
to repurchase and federal funds purchased 510 573
Short-term borrowings 83 81
Long-term debt 117 127
------ ------
Total interest expense 14,499 11,353
------ ------
Net interest income 17,013 14,467
Provision for loan losses 1,025 675
------ ------
Net interest income after provision for loan losses 15,988 13,792
------ ------
Non-interest income
Investment management and trust services 3,446 2,376
Service charges on deposit accounts 2,078 1,427
Gains on sales of mortgage loans held for sale 1,441 771
Gains on sales of securities available for sale 341 80
Other 1,095 664
------ ------
Total non-interest income 8,401 5,318
----- ------
Non-interest expenses
Salaries and employee benefits 8,506 7,056
Net occupancy expense 1,037 857
Furniture and equipment expense 1,474 1,213
Other 4,314 2,735
------ ------
Total non-interest expenses 15,331 11,861
------ ------
Income before income taxes 9,058 7,249
Income tax expense 2,918 2,377
------ ------
Net income $ 6,140 $ 4,872
====== ======
Net income per share
Basic $ 1.87 $ 1.49
====== ======
Diluted $ 1.80 $ 1.43
====== ======
Average common shares
Basic 3,293,060 3,275,253
========= =========
Diluted 3,415,465 3,407,148
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
S.Y. BANCORP, INC. & SUBSIDIARY
Unaudited Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 1998
<CAPTION>
Accumulated
Common Stock Other
Number of Retained Comprehensive
Shares Amount Surplus Earnings Income Total
------ ------ ------- -------- ------ -----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 3,281,971 $ 5,486 $ 13,644 $ 17,495 $ 292 $ 36,917
Net income - - - 6,140 - 6,140
Stock options exercised 4,969 16 34 - - 50
Shares issued for dividend
reinvestment and employee
stock purchase plans 9,729 33 394 - - 427
Cash dividends, $.41 per
share - - - (1,350) - (1,350)
Change in other
comprehensive income,
net of tax - - - - 383 383
-------- ------ ------ ------- ------- ------
Balance September 30, 1998 3,296,669 $ 5,535 $ 14,072 $ 22,285 $ 675 $ 42,567
======== ======= ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997
(In thousands) 1998 1997
Operating Activities
Net income $ 6,140 $4,872
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,025 675
Depreciation, amortization and accretion, net 1,280 1,068
Gains on sales of mortgages held for sale ( 1,441) ( 771)
Gains on sales of securities available for sale ( 341) ( 80)
Origination of mortgage loans held for sale ( 76,422) (41,979)
Proceeds from sales of mortgage loans held for sale 74,644 41,920
(Increase) decrease in accrued interest receivable
other assets ( 2,085) ( 781)
Increase (decrease) in accrued interest payable and
other liabilities 2,327 67
------ ------
Net cash provided (used) by operating activities 5,127 4,991
------ ------
Investing Activities
Net (increase) decrease in federal funds sold ( 4,000) ( 7,500)
Purchases of securities available for sale ( 55,665) ( 20,245)
Purchases of securities held to maturity ( 49,724) ( 10,994)
Proceeds from maturities of securities available for sale 29,308 3,910
Proceeds from maturities of securities held to maturity 48,280 36,372
Proceeds from sales of securities available for sale 11,306 4,026
Proceeds from sales of other real estate owned - 172
Net (increase) decrease in loans ( 60,465) ( 42,613)
Purchases of premises and equipment ( 2,337) ( 4,149)
------ ------
Net cash provided (used) by investing activities ( 83,297) ( 41,021)
------ ------
Financing Activities
Net increase (decrease) in deposits 69,260 47,651
Net increase (decrease) in securities sold under
agreements to repurchase and federal funds purchased 15,907 ( 7,863)
Net increase (decrease) in short-term borrowings ( 2,807) 2,170
Issuance of common stock for options exercised and
dividend reinvestment and employee stock purchase plans 477 167
Cash dividends paid ( 1,249) ( 1,114)
Repayments of long-term debt ( 15) ( 582)
------ ------
Net cash provided (used) by financing activities 81,573 40,429
------ ------
Net increase (decrease) in cash and cash equivalents 3,403 4,399
Cash and cash equivalents at beginning of period 18,153 15,348
------- -------
Cash and cash equivalents at end of period $ 21,556 $ 19,747
======= =======
Income tax payments were $2,295,000 in 1998, and $2,480,000 in 1997.
Cash paid for interest was $14,621,000 in 1998, and $11,513,000 in 1997.
See accompanying notes to consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. The consolidated
financial statements of S.Y. Bancorp, Inc. and subsidiary reflect all
adjustments (consisting only of adjustments of a normal recurring nature)
which are, in the opinion of management, necessary for a fair presentation
of financial condition and results of operations for the interim periods.
The consolidated financial statements include the accounts of S.Y.
Bancorp, Inc. and its wholly owned subsidiary, Stock Yards Bank & Trust
Company, a Kentucky bank. As of the close of business May 29, 1998, Stock
Yards Bank & Trust Company, an Indiana bank, was merged with the Kentucky
bank. All significant inter-company transactions have been eliminated in
consolidation.
A description of other significant accounting policies is presented in
the notes to the Consolidated Financial Statements for the year ended
December 31, 1997 included in S.Y. Bancorp, Inc.'s Annual Report on Form 10K
for the year then ended.
Interim results for the quarter and nine months ended September 30,
1998 are not necessarily indicative of the results for the entire year.
(2) Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses follows (in
thousands):
Nine Months Ended Twelve Months Ended
September 30 December 31
1998 1997 1997
Beginning balance $5,921 $5,155 $5,155
Provision for loan losses 1,025 675 1,000
Loans charged off ( 326) ( 199) (284)
Recoveries 76 40 50
----- ----- -----
Ending balance $6,696 $5,671 $5,921
===== ===== =====
<PAGE>
(3) Comprehensive Income
S.Y. Bancorp, Inc. adopted FASB Statement No. 130, "Reporting
Comprehensive Income", during the first quarter of 1998. This statement
established standards for reporting and displaying comprehensive income
and its components. Comprehensive income is defined as "the change in
equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners." Currently, the
only components of comprehensive income for S.Y. Bancorp, Inc. and
subsidiary are net income and unrealized gains and losses on securities
available for sale. The following table sets forth the components of
comprehensive income for the nine months ended September 30 (in thousands).
1998 1997
Net income $ 6,140 $ 4,872
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising
during period 158 ( 67)
Less reclassification adjustment for gains
included in net income 225 53
----- -----
383 ( 14)
----- -----
Comprehensive income $ 6,523 $ 4,858
===== =====
(4) Net Income per share
The following table reflects, for the three and nine month periods
ended September 30, the numerators (net income) and denominators (average
shares outstanding) for the basic and diluted net income per share computations
(in thousands except per share data).
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Net income, basic and diluted $ 2,181 $ 1,668 $ 6,140 $ 4,872
===== ===== ===== =====
Average shares outstanding 3,297 3,277 3,293 3,275
Effect of dilutive securities 128 129 122 132
----- ----- ----- -----
Average shares outstanding
including dilutive securities 3,425 3,406 3,415 3,407
===== ===== ===== =====
Net income per share, basic $ .66 $ .51 $ 1.87 $ 1.49
===== ===== ===== =====
Net income per share, diluted $ .64 $ .49 $ 1.80 $ 1.43
===== ===== ===== =====
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This item discusses the results of operations for S.Y. Bancorp, Inc.
("Bancorp"), and its subsidiary, Stock Yards Bank & Trust Company
("the Bank") for the three and nine month periods ended September 30, 1998
and compares those periods with the same periods of the previous year. As of
the close of business May 29, 1998, the Stock Yards Bank & Trust Company
(Indiana) was merged with the Bank. Unless otherwise indicated, all references
in this discussion to the "Bank" or "Banks" include Bancorp. In addition,
this discussion describes changes management deems to be significant in the
financial condition of Bancorp and the Bank at September 30, 1998 compared to
December 31, 1997. This discussion should be read in conjunction with the
consolidated financial statements and accompanying notes presented in Part I,
Item 1 of this report.
This report contains forward-looking statements under the Private
Securities Litigation Reform Act that involve risks and uncertainties.
Although Bancorp believes the assumptions underlying the forward-looking
statements contained herein are reasonable, any of these assumptions could be
inaccurate. Therefore, there can be no assurance forward-looking
statements included herein will prove to be accurate. Factors that could cause
actual results to differ from results discussed in forward-looking statements
include, but are not limited to: economic conditions both generally and more
specifically in the market in which Bancorp and its subsidiary operate;
competition for Bancorp's customers from other providers of financial services;
government legislation and regulation which change from time to time and over
which Bancorp has no control; changes in interest rates; material unforeseen
changes in liquidity, results of operations, or financial condition of Bancorp's
customers; and other risks detailed in Bancorp's filings with the Securities
and Exchange Commission, all of which are difficult to predict and many of which
are beyond the control of Bancorp.
A. RESULTS OF OPERATIONS
Net income of $2,181,000 for the three months ended September 30, 1998
increased 513,000 or 30.8% from $1,668,000 for the comparable 1997 period.
Basic net income per share was $.66 for the third quarter of 1998, an
increase of 29.4% from $.51 for the same period in 1997. Net income on a
diluted basis was $.64 for the third quarter of 1998 compared to $.49 for
the third quarter of 1997. This represents a 30.6% increase. Return on
average assets and return on average stockholders' equity were 1.56%
and 20.84%, respectively, for the third quarter of 1998, compared to
1.49% and 19.07%, respectively, for the same period in 1997.
Net income of $6,140,000 for the nine months ended September 30, 1997
increased $1,268,000 or 26.0% from $4,872,000 for the comparable 1997 period.
Basic net income per share was $1.87 for the first nine months of 1998,
an increase of 25.5% from $1.49 for the same period in 1997. Net income
per share on a diluted basis was $1.80 for the first nine months of 1998,
an increase of 25.9% from $1.43 for the same period in 1997. Return on
average assets and return on average stockholders' equity was 1.56% and
20.72%, respectively, for the first nine months of 1998, compared to
1.53% and 19.46%, respectively, for the same period in 1997.
<PAGE>
The following paragraphs provide an analysis of the significant
factors affecting operating results and financial condition.
Net Interest Income
In thousands except percentages
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Interest income $11,003 $ 9,050 $ 31,512 $ 25,820
Tax equivalent adjustment 73 44 174 133
------ ------ ------ ------
Interest income, tax
equivalent basis 11,076 9,094 31,686 25,953
Total interest expense 5,122 4,068 14,499 11,353
------ ------ ------ ------
Net interest income,
tax equivalent basis (1) $ 5,954 $ 5,026 $ 17,187 $ 14,600
====== ====== ====== ======
Net interest spread (2),
annualized 3.83% 4.38% 3.96% 4.20%
====== ====== ====== ======
Net interest margin (3),
annualized 4.60% 5.03% 4.73% 4.97%
====== ====== ====== ======
Notes:
(1) Net interest income, the most significant component of the Bank's earnings,
is total interest income less total interest expense. 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.
(2) Net interest spread is the difference between the taxable equivalent
rate earned on interest earning assets less the rate expensed on
interest bearing liabilities.
(3) Net interest margin represents net interest income on a taxable equivalent
basis as a percentage of average interest 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.
Fully taxable equivalent net interest income of $5,954,000 for the three
months ended September 30, 1998 increased $928,000 or 18.5% from $5,026,000 for
the same period last year. For the nine months ended September 30, 1998, net
interest income of $17,187,000 increased $2,587,000 or 17.7% from $14,600,000
for the same period last year. Net interest spread and net interest margin
were 3.83% and 4.60%, respectively, for the third quarter of 1998 and 4.38%
and 5.03%, respectively, for the third quarter of 1997. Net interest spread
and margin were 3.96% and 4.73%, respectively, for the first nine months
of 1998 and 4.20%, and 4.97%, respectively, for the same period in 1997.
<PAGE>
Average earning assets increased $92,901,000, or 23.7% to $485,384,000
for the first nine months of 1998 compared to 1997. Average interest bearing
liabilities increased $79,326,000 or 24.3% to $406,684,000 for the first
nine months of 1998 compared to 1997. For the nine months, average federal
funds sold increased $1.5 million, investment securities decreased $1.1
million, loans increased $89.3 million and mortgage loans held for sale
increased $3.2 million. Average interest bearing deposits increased $80.9
million, securities sold under agreements to repurchase and federal funds
purchased decreased $1.0 million, short-term borrowings decreased $.4
million and long-term debt decreased $1.5 million.
Interest rate sensitivity has a major impact on the earnings of the
Banks. 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 interest sensitive
assets and liabilities to reduce interest rate risk. Bancorp manages
interest rate risk by making both variable and fixed rate loans. Fixed
rate loans are matched, along with investment securities against longer
term fixed rate time deposits. The Bank's largest interest earning asset
is loans and approximately half of the loan portfolio is comprised of
variable rate loans. Variable rate loans re-price immediately with a change
in prime rates. Additionally, during periods of declining interest rates,
some customers with fixed rate loans may refinance to obtain lower rates on
their loans. Deposits, the Bank's largest interest bearing liability, do not
respond as quickly nor as significantly to changes in market interest rates.
At September 30, 1998 Bancorp was slightly liability sensitive (4%) through
one year. With this position more interest bearing liabilities re-price
within one year than do interest earning assets. This position is generally
favorable to net interest margin during periods of falling interest rates and
generally unfavorable during periods of rising rates. Bancorp's management
believes it has the ability to effectively manage the degree of market risk
inherent in its interest sensitive financial instruments.
The following table provides information about Bancorp's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For loans, securities and liabilities with
contractual maturities, the table presents principal cash flows and weighted
average interest rates as well as Bancorp's experience of the impact of
interest rate fluctuations on the prepayment of mortgage-backed securities.
For deposits that have no contractual maturity (non-interest bearing checking,
interest bearing checking and savings), management has estimated withdrawal
activity using a ratable amount over the next six years. This information is
based on Bancorp's historical experience and management's judgments. For
interest rate caps and floors, the table presents notional amounts. Notional
amounts are used to calculate the contractual payments to be exchanged under
the contracts.
<PAGE>
<TABLE>
<CAPTION>
For Twelve Month Period Ending
(Dollars in thousands) 9/30/99 9/30/00 9/30/01 9/30/02 9/30/03 Thereafter Total
<S>
Loans <C> <C> C> <C> <C> <C> <C>
Fixed rate $ 58,067 $41,632 $41,814 $44,270 $51,433 $44,811 $282,027
Average interest rate 9.00% 9.07% 8.90% 8.85% 8.74% 8.68% 8.87%
Variable rate $ 65,734 $13,684 $ 8,365 $ 6,968 $ 8,209 $47,227 $150,187
Average interest rate 9.29% 9.15% 8.95% 8.85% 9.02% 9.19% 9.19%
Securities
Fixed rate $ 14,238 $ 7,852 $ 6,066 $13,736 $12,942 $22,621 $ 77,455
Average interest rate 6.50% 6.77% 7.15% 6.18% 5.89% 6.51% 6.42%
Federal funds sold
(variable rate) $ 10,000 $ 10,000
Average interest rate 5.45% 5.45%
Deposits
Non-interest
bearing checking $ 11,884 $11,884 $11,884 $11,884 $11,884 $19,803 $ 79,223
Average interest rate - - - - - - -
Savings and interest
bearing checking $ 23,356 $23,356 $23,356 $23,356 $23,356 $38,856 $155,636
Average interest rate 3.22% 3.22% 3.22% 3.22% 3.22% 3.22% 3.22%
Time deposits (fixed rate) $191,137 $43,496 $ 6,510 $ 4,687 $ 3,201 $ 2,941 $251,972
Average interest rate 5.54% 5.74% 5.62% 5.87% 5.80% 5.38% 5.59%
Other short-term borrowings
(variable rate) $ 1,676 $ 1,676
Average interest rate 5.97% 5.97%
Federal funds purchased
and securities sold under
agreements to repurchase
(variable rate) $ 29,591 $ 29,591
Average interest rate 4.51% 4.51%
Long-term debt
(variable rate) $ 1,800 $ 300 $ 2,100
Average interest rate 7.31% 7.50% 7.34%
Derivative Financial
Instruments
Interest rate cap sold $ 50,000 $ 50,000
Strike rate 9.00% 9.00%
Interest rate floor
purchased $ 50,000 $ 50,000
Strike rate 8.00% 8.00%
</TABLE>
<PAGE>
Provision for Loan Losses
The allowance for loan losses is based on management's continuing review
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.
An analysis of the changes in the allowance for loan losses and selected
ratios follows:
Nine Months Ended
September 30
(In thousands except percentages)
1998 1997
Balance at January 1 $ 5,921 $ 5,155
Provision for loan losses 1,025 675
Loan charge-offs, net of recoveries ( 250) ( 159)
------- -------
Balance at September 30 $ 6,696 $ 5,671
======= =======
Average loans, net of unearned income $404,525 $315,224
======= =======
Provision for loan losses to average loans (1) .35% .29%
======= =======
Net loan charge-offs to average loans (1) .08% .07%
======= =======
Allowance for loan losses to average loans 1.66% 1.80%
======= =======
Allowance for loan losses to period-end loans 1.60% 1.65%
======= =======
(1) Amounts annualized
<PAGE>
Non-interest Income and Expenses
The following table sets forth the major components of non-interest income
and expenses for the three and nine month periods ended September 30, 1998
and 1997.
In thousands
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Non-interest income
Investment management and
trust services $1,148 $ 868 $3,446 $2,376
Service charges on deposit accounts 788 487 2,078 1,427
Gains on sales of mortgage loans
held for sale 556 283 1,441 771
Gains on sales of securities
available for sale 157 - 341 80
Other 483 247 1,095 664
----- ----- ------ -----
Total non-interest income $3,132 $1,885 $8,401 $5,318
===== ===== ===== =====
Non-interest expenses
Salaries and employee benefits $2,973 $2,423 $ 8,506 $ 7,056
Net occupancy expense 386 324 1,037 857
Furniture and equipment expense 579 442 1,474 1,213
Other 1,471 985 4,314 2,735
----- ---- ----- -----
Total non-interest expenses $5,409 $4,174 $15,331 $11,861
===== ===== ====== ======
Non-interest income increased $1,247,000, or 66.2%, for the third quarter
of 1998, and $3,083,000 or 58.0% for the first nine months of 1998 compared to
the same periods in 1997. Trust income increased $280,000 or 32.3% in the
third quarter and $1,070,000 or 45.0% for the first nine months of 1998, as
compared to the same periods in 1997. Trust assets under management at
September 30, 1998 were $712 million as compared to $632 million at December
31, 1997 and $630 million at September 30, 1997. In addition to asset growth,
trust income in the first nine months of 1998 benefited from a fee rate
increase in June 1997 and approximately $336,000 in non-recurring estate fees.
In 1998 and $104,000 in 1997.
<PAGE>
Service charges on deposit accounts increased $301,000 or 61.8% in the
third quarter and $651,000 or 45.6% in the first nine months of 1998 as
compared to the same periods in 1997. Growth in deposit accounts spurred
by the opening of new branch offices and by reactions to recent mergers of
other local institutions has presented opportunities for increased fee
income. Additionally, deposit service charges were raised in the
second quarters of 1998 and 1997.
Gains on sales of mortgage loans were $556,000 in the third quarter and
$1,441,000 in the first nine months of 1998 compared to $283,000 and $771,000,
respectively, in 1997. The Bank operates a mortgage banking company which
originates residential mortgage loans and sells the loans in the secondary
market. The volume of loans originated by the mortgage company increased
dramatically in 1998. Favorable interest rates have stimulated home buying
and refinancing. Additionally, the mortgage company began origination and
sale of sub-prime loans in 1998. The latter contributed $70,000 to the
above gains in 1998. Investors commit to purchase both prime and sub-prime
loans when such loans are originated, subject to verification of certain
underwriting criteria.
Gains on sales of securities available for sale during both 1998 and 1997
occurred as management sold lower yielding, shorter term securities for
intermediate term, higher yielding securities.
Other non-interest income increased $236,000 or 95.5% in the third quarter
and $431,000 or 64.9% in the first nine months of 1998 compared to 1997.
Numerous factors contributed to this increase, including $47,000 from full
service brokerage, $51,000 from credit card merchant fees and $74,000 from
check card income. The remaining portion of the increase arose from
increasing volume of various sources of fee income.
Non-interest expenses increased $1,235,000 or 29.6% for the third quarter
and $3,470,000 or 29.3% in the first nine months of 1998 compared to the same
periods in 1997. Salaries and employee benefits increased $550,000 or 22.7%,
for the third quarter and $1,450,000 or 20.6% in the first nine months of 1998
compared to the same periods in 1997. These increases arose in part from
regular salary increases. Also, employees continue to be added to support the
Bank's growth. The Bank had 267 full time equivalent employees as of September
30, 1998 and 237 full time equivalents as of September 30, 1997. Net occupancy
expense increased $62,000 or 19.1% in the third quarter and $180,000 or 21.0%
in the first nine months of 1998 as compared to 1997. Furniture and equipment
expense increased $137,000, or 31.0%, for the third quarter and $261,000 or
21.5% in the first nine months of 1998 compared to 1997. These increases are
largely due to the opening of new banking centers. During 1997, the Stony
Brook and Clarksville branches moved into permanent facilities, and the historic
rehabilitation of the Bourbon Stockyards Exchange building was completed.
Virtually all non-customer contact employees moved into this building during
the second quarter of 1997. Additionally, the Bank continues to update
computer equipment and software as technology advances. These capital
additions flow through the statement of income as depreciation expense.
Other non-interest expenses have increased $486,000 or 49.3% in the third
quarter and $1,579,000 or 57.7% in the first nine months of 1998 as compared
to 1997. Again, this increase is reflective of the Bank's expansion.
<PAGE>
Included in other non-interest expenses for the first nine months of 1998 are
$150,000 representing a buy-out of a lease for a future branch location an
advertising expenses of $694,000 compared to $136,000 in 1997. In early 1998
the Bank embarked on a large advertising campaign to attract bank and investment
management customers. Other expenses such as office supplies, telephone,
postage, insurance and franchise (state) taxes have increased with the Bank's
growth; however, other than the items enumerated above, there are no
individually significant increases in other non-interest expenses.
Income Taxes
Bancorp had income tax expense of $2,918,000 for the first nine months
of 1998, compared to $2,377,000 for the same period in 1997. The effective
rate was 32.2% in 1998 and 32.8% in 1997.
B. FINANCIAL CONDITION
Total Assets
Total assets increased $90.4 million from December 31, 1997 to September
30, 1998. Average assets for the first nine months of 1998 were $526.4
million. Total assets at September 30, 1998 increased $108.3 million from
September 30, 1997, representing a 23.5% increase. Since year end, loans
have increased approximately $60.2 million; cash and due from banks and
federal funds sold increased $7.4 million; securities available for sale
increased $16.2 million, and securities held to maturity increased $1.1
million. Mortgage loans available for sale increased $3.2 million.
Nonperforming Loans and Assets
Nonperforming loans, which include non-accrual and accruing loans past
due over 90 days, totaled $3,699,000 at September 30, 1998 and $290,000 at
December 31, 1997. This represents .86% of total loans at September 30, 1998
compared to .08% at December 31, 1997. Nonperforming assets, which include
non-performing loans, other real estate and repossessed assets, totaled
$4,055,000 at September 30, 1998 and $290,000 at December 31, 1997. This
represents .71% of total assets at September 30, 1998 compared to .06% at
December 31, 1997.
The increase in non-accrual loans arose primarily from loans to one
obligor, a long time customer of the Bank. These loans are secured
by real estate. No loss of principal or interest is anticipated.
C. LIQUIDITY
The role of liquidity is to ensure that 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 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 deposits.
<PAGE>
The Bank has a number of sources of funds to meet its liquidity needs
on a daily basis. The deposit base, consisting of relatively stable consumer
and commercial deposits, and large 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. In addition,
federal funds purchased continue to be a source of funds. Other sources of
funds available to meet daily needs include the sale of securities under
agreements to repurchase and funds made available under a treasury tax and
loan note agreement with the federal government. Also, the 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. These credit services
provide the Bank with another source of funds. To date, the Bank has not
accessed this source of funds.
Bancorp's liquidity depends primarily on the dividends paid to it as
the sole shareholder of the Bank. At September 30, 1998, the Bank may pay
up to $13,267,000 in dividends to Bancorp without regulatory approval, subject
to capital requirements of the bank.
D. CAPITAL RESOURCES
At September 30, 1998, stockholders' equity totaled $42,567,000, an
increase of $5,650,000 since December 31, 1997. One component of equity is
accumulated other comprehensive income which for Bancorp consists solely of
net unrealized gains on securities available for sale, net of taxes.
Accumulated other comprehensive income was $675,000 at September 30, 1998
and $292,000 at December 31, 1997.
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 values of both balance sheet and off-balance
sheet items are adjusted to reflect credit risks.
At September 30, 1998, Bancorp's tier 1, total risk based capital and
leverage ratios were 9.54%, 10.86% and 7.40%, respectively. These ratios
exceed the minimum required by regulators to be well capitalized. Capital
ratios of the Bank and the consolidated entity have continued to decrease
slowly. With the rapid expansion of the Bank, assets have increased faster
than capital has grown. Management monitors this situation and plans to
maintain the Bank's capital ratios within well capitalized parameters.
E. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of the Enterprise and Related Information."
This statement requires reporting of certain information about operating
segments and is effective in 1998 for year end reporting.
<PAGE>
In June, 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement standardizes the accounting for derivative instruments. Under this
standard, entities are required to carry all derivative instruments in the
balance sheet at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of
a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reason for
holding it. If certain conditions are met, entities may elect to designate
a derivative instrument as a hedge of exposures to changes in fair values,
cash flows, or foreign currencies. If the hedged exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain
on the hedged item attributable to the risk being hedged. If the hedged
exposure is a cash flow exposure, the effective portion of the gain or loss
on the derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness as well as the ineffective
portion of the gain or loss is reported in earnings immediately. Accounting
for foreign currency hedges is similar to the accounting for fair value and
cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change.
Bancorp must adopt Statement 133 by January 1, 2000; however, early
adoption is permitted. On adoption, the provisions of Statement 133 must be
applied prospectively. Bancorp has not determined when it will adopt
Statement 133 nor has it determined the impact that Statement 133 will have
on its financial statements. Management believes that such determination will
not be meaningful until closer to the date of initial adoption.
<PAGE>
F. YEAR TWO THOUSAND
General nature and impact of Year 2000 issues
Challenges and problems anticipated with the Year 2000 (Y2K) have
received a great deal of press. The underlying problem is that many
computers now use only the last two digits in reading a date. In these
cases, the computer could interpret dates with the Year 2000 to be 1900.
As a result, on January 1, 2000, computers could stop working or generate
erroneous data unless they are reprogrammed to read all dates properly.
Some companies have anticipated significant Year 2000 expenses. In addition
to information technology issues, equipment with embedded micro-controllers
may not function properly. Examples of this equipment would include
thermostats, elevators, and electronics with time/date mechanisms. Banking
institutions have been near the forefront in addressing Year 2000 issues
as bank regulators began focusing banks' attention on Year 2000 issues
earlier than most businesses. The Bank and Bancorp began addressing Y2K
issues in mid 1997. Year 2000 issues were first a part of banking
regulatory review at Stock Yards Bank & Trust Company in its November, 1997
examination by the FDIC. The FDIC has established a schedule of dates by
which banks should have accomplished specific phases of their project plans.
These guidelines require banking institutions to:
* Ensure board of director involvement in Year 2000 efforts
* Adopt a written project plan
* Renovate mission-critical systems
* Complete tests of renovated systems by specific deadlines
* Plan for contingencies
* Manage customer risk
The bank is in compliance with this schedule. The Year 2000 project coordinator
and committee report regularly to the Board of Directors as to the project plan
and status.
Bancorp's general plans and actions to address Year 2000 issues,
including relationships with customers, vendors and others
Bancorp's management has undertaken an evaluation of the effects
Year 2000 (Y2K) will have on its information system and other important
aspects of its business. Bancorp's program has five phases: awareness,
assessment, renovation, validation and implementation. As a part of the
assessment phase, degrees of risk were determined for various areas. Impact
assessment guidelines used are as follows:
Absolutely critical - If these systems were to fail or produce
inaccurate data, it could lead to the failure of the institution.
Important - Failure of these could significantly impair the bank's
ability to function at full potential.
Useful - These systems are used regularly but are not deemed to be
critical.
Expendable - These systems could be retired. They are convenient to
have, but the bank could do without them.
<PAGE>
Using the above appraisal guidelines, each system was assigned a
priority for timing of renovation, testing and implementation. Areas deemed
to be absolutely critical are mainly related to computer technology. These
include the bank's mainframe computer, related software, the bank's wide area
network of computers, trust and mortgage department hardware and software as
well as wire transfer computer capabilities. All of the Bank's software is
purchased; no programming is performed in house. Management has received
representation from software vendors with regard to Y2K readiness for these
applications. Testing and contingency planning for these areas are
addressed below. Other technology areas deemed absolutely critical are internet
connections and ATM network. With regard to our Year 2000 evaluation of non-
information technology area, we identified general issues similar to those
of other businesses and bank specific issues such as vault doors and security
equipment. Non information technology areas deemed absolutely critical are
telephone service and systems, utilities and vault doors. Through a
combination of consultations with and certifications from vendors and testing
of these non-information technology areas, we have concluded there are no
material Y2K risks or uncertainties presented in these areas.
The Bank's assessment has taken into account whether third parties
with whom it has a material business relationship are or will be Year 2000
compliant. We have requested certification as to Y2K readiness from current
vendors and use Y2K readiness as a part of our selection criteria for
selection of vendors/products as we move forward. In addition to obtaining
written Y2K certification regarding equipment and services, the bank's Y2K
plan includes testing of such equipment and services for Y2K readiness. This
testing is complete in many areas and has identified no material Y2K risks or
uncertainties.
Two other major areas of evaluation are the Bank's loan customers and
fiduciary responsibilities arising from the trust department. Customers'
noncompliance with Year 2000 issues could adversely affect their ability to
service their debt. The Bank has requested written representation from
significant loan customers to verify and document customer Year 2000
readiness. Evaluation of the creditworthiness of these customers now includes
a review of the customer's self assessment as to compliance with Year 2000
issues. Based upon the responses of customers, an evaluation of the nature of
these customers' businesses and their states of Y2K readiness, and the
collateral held on these loans, management has concluded the degree of risk
of loss to the bank does not warrant a specific Y2K allowance for loan losses at
this time.
The trust department's written business resumption plan and testing
plans have been completed for the trust accounting sysems. Testing is
in process and is scheduled to be completed by December 31, 1998. Trust system
vendors have indicated they are already Y2K compliant or they are committed
to being Y2K compliant by the Year 2000. Other fiduciary Y2K plans have been
finalized. Y2K relates to the department's fiduciary responsibilities with
regard to the ability of investments to continue to maintain income and
principal payment streams, if applicable. Also, third party paying agents
and processors must be able to continue providing timely and accurate
services. The department has taken measures to identify and mitigate risks
and uncertainties related to Y2K. Correspondence has been sent to most
companies, issuers, and paying agents relating to Stock Yards Bank & Trust
Company's trust accounts. These letters request documentation with regard
to the third party's Year 2000 compliance status. The department will not
authorize investments in companies which have not made reasonably complete
Y2K disclosures. The department may waive this requirement if they can
determine through other channels the target company is not technologically
dependent. All of this will be considered as investment decisions and
recommendations are made in the trust department.
<PAGE>
Timetable for carrying out Year 2000 plans
The awareness, assessment and renovation phases of the Company's
Year 2000 plan are essentially complete. Testing has been completed in
some areas. Testing for absolutely critical systems is underway and scheduled
to be substantially completed by the end of 1998. Remaining areas will be
tested by June 30, 1999. In addition to testing, the Bank has developed
business resumption plans in the event absolutely critical systems fail
despite representations from vendors and positive test results. These plans
should enable the Bank to function at a level sufficient to serve the
majority of customers' needs. Additionally, management plans to
significantly curtail the installation of new information technology
systems after the first quarter of 1999. To ensure our ability to respond
to customer needs and demands, some significant information technology
additions have been accelerated into the last quarter of 1998 and the first
quarter of 1999. Essential information technology additions have been
accelerated to allow adequate time to test the new applications.
Cost to Address Bancorp's Year 2000 issues
Costs to prepare for the Year 2000 include new hardware, software,
internal staff costs and consulting. Bancorp recorded expense related to the
Year 2000 of $60,000 in 1997 and management anticipates incurring a similar
total for 1998. Expensed to date in 1998 is $45,000. Detailed budgets
include capital expenditures, primarily to replace desk top computers which
will not be Year 2000 compliant. To date, capital expenditures to replace non
compliant equipment have totaled approximately $83,000. Management
anticipates spending another $80,000 in 1998 for capital expenditures.
Approximately $60,000 in period expenses was recorded in 1997 with like amounts
anticipated for 1998 and 1999.
Impact Year 2000 expenditures are anticipated to have on Bancorp's
results of operations, liquidity and capital resources
In addition to the factors mentioned above, the Bank is considering
other ramifications of the Year 2000. Management reviews the liquidity
position and needs of the Bank on a regular basis. Anticipating Year 2000,
the Bank has prepared to be more liquid. Loan customers with lines of
credit may experience more cash needs and, therefore, draw more on their
lines of credit. Loan customers may make payments more slowly if their cash
positions are more tight. Depositors may withdraw higher than average
amounts of their funds. These situations will require the Bank to have
higher than average levels of funds available. Management has made
arrangements with correspondent banks to be able to meet those needs.
<PAGE>
Remaining risks and uncertainties related to Year 2000
As noted above, the Bank has performed or will perform extensive testing
of important systems and equipment.
Based upon representations received from vendors and other third parties,
management does not anticipate major malfunctions to be identified as a result
of testing. However, in the event there are unidentified problems, the bank
has developed a business resumption plan. This plan makes arrangements for
alternative means of processing/operation should absolutely critical functions
fail when Y2K arrives. These include manual processing, processing
transactions by personal computer rather than mainframe, and curtailing
banking hours and/or number of locations open. Management's objective is to
continue to offer and process transactions that would be critical to customers
Assumptions used in the business resumption planning include the
satisfactory operation of utilities, the U.S. Postal Service and electronic
spreadsheet software.
As a result of all of the above, management does not anticipate Year 2000
to materially affect the Company's capital resources, financial condition or
results of operations. Management is committed to be Year 2000 ready.
Part II - Other Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is include in Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the three
months ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
S.Y. BANCORP, INC.
Date: November 12, 1998 By: /s/ David H. Brooks
-----------------------------
David H. Brooks, Chairman
and Chief Executive Officer
Date: November 12, 1998 By: /s/ David P. Heintzman
-----------------------------
David P. Heintzman, President
Date: November 12, 1998 By: /s/ Nancy B. Davis
----------------------------
Nancy B. Davis, Senior Vice
President, Treasurer and Chief
Financial Officer
<PAGE>
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