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 June 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
(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 August 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:
Consolidated Balance Sheets
June 30, 1998 (Unaudited) and December 31, 1997
Unaudited Consolidated Statements of Income
for the three months ended June 30, 1998 and 1997
Unaudited Consolidated Statements of Income
for the six months ended June 30, 1998 and 1997
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997
Unaudited Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1998
Notes to Consolidated Financial Statements
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(Unaudited)
June 30, 1998 December 31, 1997
------------- -----------------
(In thousands, except share data)
Assets
Cash and due from banks $ 24,819 $ 18,153
Federal funds sold 2,000 6,000
Mortgage loans held for sale 6,227 5,183
Securities available for sale (amortized
cost $31,142 in 1998 and $31,019 in 1997) 31,548 31,462
Securities held to maturity (approximate market
value $39,839 in 1998 and $28,962 in 1997) 39,572 28,652
Loans 417,924 370,293
Allowance for loan losses 6,465 5,921
------- -------
Net loans 411,459 364,372
Premises and equipment 14,375 13,903
Accrued interest receivable and other assets 11,990 10,872
------- -------
TOTAL ASSETS $541,990 $478,597
======= =======
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 78,073 $ 72,103
Interest bearing 402,236 345,468
------- -------
Total deposits 480,309 417,571
Securities sold under agreements
to repurchase and federal funds purchased 8,847 13,684
Short-term borrowings 4,999 4,483
Accrued interest payable and
other liabilities 5,398 3,827
Long-term debt 2,100 2,115
------- -------
TOTAL LIABILITIES 501,653 441,680
------- -------
Stockholders' equity
Common stock, no par value; 10,000,000
shares authorized; 3,293,759 and
3,281,971 shares issued and
outstanding in 1998 and 1997, respectively 5,525 5,486
Surplus 13,945 13,644
Retained earnings 20,599 17,495
Accumulated other comprehensive income 268 292
------- -------
TOTAL STOCKHOLDERS' EQUITY 40,337 36,917
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $541,990 $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 June 30, 1998 and 1997
1998 1997
(In thousands, except share and per share data) ---- ----
Interest income
Loans $9,386 $7,405
Federal funds sold 178 63
Mortgage loans held for sale 138 72
U.S. Treasury and Federal agencies 796 915
Obligations of states and political
subdivisions 120 98
------ ------
Total interest income 10,618 8,553
------ ------
Interest expense
Deposits 4,719 3,389
Securities sold under agreements
to repurchase and federal funds purchased 134 243
Short-term borrowings 26 30
Long-term debt 39 43
------ ------
Total interest expense 4,918 3,705
------ ------
Net interest income 5,700 4,848
Provision for loan losses 350 225
------ ------
Net interest income after
provision for loan losses 5,350 4,623
------ ------
Non-interest income
Investment management and trust services 1,238 862
Service charges on deposit accounts 735 496
Gains on sales of mortgage loans held for sale 529 275
Other 339 220
------ ------
Total non-interest income 2,841 1,853
------ ------
Non-interest expenses
Salaries and employee benefits 2,976 2,316
Net occupancy expense 342 278
Furniture and equipment expense 491 414
Other 1,344 883
------ ------
Total non-interest expenses 5,153 3,891
------ ------
Income before income taxes 3,038 2,585
Income tax expense 976 864
------ ------
Net income $ 2,062 $ 1,721
====== ======
Net income per share
Basic $ .63 $ .53
====== ======
Diluted $ .60 $ .51
====== ======
Average common shares
Basic 3,293,552 3,275,257
========= =========
Diluted 3,426,441 3,399,799
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
For the six months ended June 30, 1998 and 1997
1998 1997
(In thousands, except share and per share data) ---- ----
Interest income
Loans $18,171 $14,466
Federal funds sold 267 243
Mortgage loans held for sale 234 129
U.S. Treasury and Federal agencies 1,601 1,738
Obligations of states and political
subdivisions 236 194
------ ------
Total interest income 20,509 16,770
------ ------
Interest expense
Deposits 8,959 6,752
Securities sold under agreements
to repurchase and federal funds purchased 284 395
Short-term borrowings 56 52
Long-term debt 78 86
====== ======
Total interest expense 9,377 7,285
------ ------
Net interest income 11,132 9,485
Provision for loan losses 650 450
------ ------
Net interest income after
provision for loan losses 10,482 9,035
------ ------
Non-interest income
Investment management and trust services 2,298 1,508
Service charges on deposit accounts 1,290 940
Gains on sales of mortgage loans held for sale 852 488
Gains on sales of securities available for sale 184 80
Other 645 417
------ ------
Total non-interest income 5,269 3,433
------ ------
Non-interest expenses
Salaries and employee benefits 5,533 4,633
Net occupancy expense 651 533
Furniture and equipment expense 895 771
Other 2,843 1,750
------ -------
Total non-interest expenses 9,922 7,687
------ ------
Income before income taxes 5,829 4,781
Income tax expense 1,870 1,577
------ ------
Net income $ 3,959 $ 3,204
====== ======
Net income per share
Basic $ 1.20 $ .98
====== ======
Diluted $ 1.16 $ .94
====== ======
Average common shares
Basic 3,291,274 3,274,143
========= =========
Diluted 3,416,871 3,395,395
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
S.Y. BANCORP & SUBSIDIARY
Unaudited Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 30, 1998
<CAPTION>
Common Stock Accumulated
------------ 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 3,959 3,959
Stock options exercised 4,869 16 34 50
Shares issued for dividend
reinvestment and employee
stock purchase plan 6,919 23 267 290
Cash dividends, $.26 per
share ( 855) ( 855)
Change in other
comprehensive income,
net of tax ( 24) ( 24)
-------- ------ ------ ------ ------ ------
Balance June 30, 1998 3,293,759 $ 5,525 $ 13,945 $ 20,599 $ 268 $ 40,337
========= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
For the six months ended June 30, 1998 and 1997
1998 1997
(In thousands) ---- ----
Operating Activities
Net income $ 3,959 $ 3,204
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 650 450
Depreciation, amortization and accretion, net 787 649
Gains on sales of mortgages held for sale ( 852) ( 488)
Gains on sales of securities available for sale ( 184) ( 80)
Origination of mortgage loans held for sale ( 48,628) (27,247)
Proceeds from sales of mortgage loans held for sale 48,436 27,175
(Increase) decrease in accrued interest receivable
other assets ( 1,140) ( 582)
Increase (decrease) in accrued interest payable and
other liabilities 1,571 ( 178)
------ ------
Net cash provided (used) by operating activities 4,599 2,903
------ ------
Investing Activities
Net (increase) decrease in federal funds sold 4,000 3,900
Purchases of securities available for sale ( 32,417) ( 17,749)
Purchases of securities held to maturity ( 48,652) ( 10,994)
Proceeds from maturities of securities
available for sale 26,848 3,348
Proceeds from maturities of securities held to maturity 38,283 36,128
Proceeds from sales of securities available for sale 5,031 4,026
Proceeds from sales of other real estate owned - 172
Net (increase) decrease in loans ( 47,737) ( 26,408)
Purchases of premises and equipment ( 1,176) ( 3,115)
------ ------
Net cash provided (used) by investing activities ( 55,820) ( 10,692)
------ ------
Financing Activities
Net increase (decrease) in deposits 62,738 18,074
Net increase (decrease) in securities sold under
agreements to repurchase and federal funds purchased ( 4,837) ( 2,817)
Net increase (decrease) in short-term borrowings 516 1,301
Issuance of common stock for options and dividend
reinvestment plan 340 104
Cash dividends ( 855) ( 723)
Repayments of long-term debt ( 15) ( 512)
------ ------
Net cash provided (used) by financing activities 57,887 15,427
------ ------
Net increase (decrease) in cash and cash equivalents 6,666 7,638
Cash and cash equivalents at beginning of period 18,153 15,348
------- ------
Cash and cash equivalents at end of period $ 24,819 $ 22,986
======= =======
Income tax payments were $1,095,000 in 1998, and $1,644,000 in 1997
Cash paid for interest was $9,498,000 in 1998, and $7,363,000 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 10-K for the year then ended.
Interim results for the quarter and six months ended June 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 for
the six months ended June 30 follows (in thousands):
1998 1997
---- ----
Beginning balance $5,921 $5,155
Provision for loan losses 650 450
Loans charged off ( 150) ( 52)
Recoveries 44 22
----- -----
Ending balance $6,465 $5,575
===== =====
<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." Comprehensive income for S.Y. Bancorp, Inc.
and subsidiary includes net income and unrealized gains and losses
on securities available for sale. The following table sets forth the
components of comprehensive income for the six months ended June 30
(in thousands).
1998 1997
---- ----
Net Income $ 3,959 $ 3,204
Other comprehensive income, net of tax:
Unrealized gains on securities
Unrealized holding losses arising during period ( 145) ( 197)
Less reclassification adjustment for gains
included in net income 121 53
----- -----
( 24) ( 144)
----- -----
Comprehensive income $ 3,935 $ 3,060
===== =====
(4) Net Income per share
The following table reflects, for the three and six month
periods ended June 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 Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Net income, basic and diluted $ 2,062 $ 1,721 $ 3,959 $ 3,204
===== ===== ===== =====
Average shares outstanding 3,294 3,275 3,291 3,274
Effect of dilutive securities 132 125 126 121
----- ----- ----- -----
Average shares outstanding
including dilutive securities 3,426 3,400 3,417 3,395
===== ===== ===== =====
Net income per share, basic $ .63 $ .53 $ 1.20 $ .98
===== ===== ===== =====
Net income per share, diluted $ .60 $ .51 $ 1.16 $ .94
===== ===== ===== =====
<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 Kentucky Bank") for the three and
six month period ended June 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 Kentucky Bank. Unless otherwise indicated, all references
in this discussion to the "Bank" or "Banks" include Bancorp. In
addition, this discussion describes the significant changes in the
financial condition of Bancorp and the Bank that have occurred during
the first six months of 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.
A. RESULTS OF OPERATIONS
Net income of $2,062,000 for the three months ended June 30, 1998
increased $341,000 or 19.8% from $1,721,000 for the comparable 1997 period.
Basic net income per share was $.63 for the second quarter of 1998, an
increase of 18.9% from $.53 for the same period in 1997. Net income on
a diluted basis was $.60 for the second quarter of 1998 compared to $.51
for the second quarter of 1997. This represents a 17.7% increase.
Return on average assets and return on average stockholders' equity were
1.65% and 20.96%, respectively, for the second quarter of 1998, compared
to 1.62% and 20.63%, respectively, for the same period in 1997.
Net income of $3,959,000 for the six months ended June 30, 1997
increased $755,000 or 23.6% from $3,204,000 for the comparable 1997
period. Basic net income per share was $1.20 for the first six months
of 1998, an increase of 22.5% from $.98 for the same period in 1997. Net
income per share on a diluted basis was $1.16 for the first six months
of 1998, an increase of 23.4% from $.94 for the same period in 1997.
Return on average assets and return on average stockholders' equity was
1.56% and 20.65%, respectively, for the first half of 1998, compared to
1.55% and 19.70%, 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 Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Interest income $10,618 $ 8,553 $ 20,509 $ 16,770
Tax equivalent adjustment 52 45 102 89
------ ------ ------ ------
Interest income, tax
equivalent basis 10,670 8,598 20,611 16,859
Total interest expense 4,918 3,705 9,377 7,285
------ ------ ------ ------
Net interest income ,
tax equivalent basis (1) $ 5,752 $ 4,893 $ 11,234 $ 9,574
====== ====== ====== ======
Net interest spread (2),
annualized 3.98% 4.17% 4.03% 4.12%
====== ====== ====== ======
Net interest margin (3),
annualized 4.73% 4.98% 4.81% 4.95%
====== ====== ====== ======
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 $5,752,000 for
the three months ended June 30, 1998 increased $859,000 or 17.6% from
$4,893,000 for the same period last year. For the six months ended
June 30, 1998, net interest income of $11,234,000 increased $1,660,000
or 17.3% from $9,574,000 for the same period last year. Net interest
spread and net interest margin were 3.98% and 4.73%, respectively,
for the second quarter of 1998 and 4.17% and 4.98%, respectively,
for the second quarter of 1997. Net interest spread and margin
were 4.03% and 4.81%, respectively, for the first six months of 1998
and 4.12%, and 4.95%, respectively, for the same period in 1997.
<PAGE>
Average earning assets increased $81,341,000, or 20.9% to
$471,323,000 for the first six months of 1998 compared to 1997.
Average interest bearing liabilities increased $75,795,000 or 23.7%
to $395,247,000 for the first six months of 1998 compared to 1997.
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. Deposits, the Bank's
largest interest bearing liability, do not respond as quickly
nor as significantly to changes in market interest rates. At
June 30, 1998 Bancorp was slightly asset sensitive through one
year. With this position more interest bearing assets re-price
within one year than do interest bearing liabilities. This
position is generally favorable to net interest margin during
periods of rising interest rates and generally unfavorable
during periods of declining rates. At June 30, 1998 Bancorp's
cumulative asset sensitivity position for one year was 1.30%.
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), the table
presents information regarding the most likely withdrawal
behaviors. 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) 6/30/99 6/30/00 6/30/01 6/30/02 6/30/03 Thereafter Total
<S> ------- ------- ------- ------- ------- ---------- -----
Loans <C> <C> <C> <C> <C> <C> <C>
Fixed rate $ 53,712 $38,606 $41,053 $44,976 $50,975 $37,728 $267,050
Average interest rate 9.01% 9.01% 8.97% 8.87% 8.81% 8.26% 8.84%
Variable rate $ 60,118 $13,708 $ 9,077 $ 7,009 $ 9,290 $51,295 $150,497
Average interest rate 9.22% 9.20% 9.25% 9.09% 9.07% 8.88% 9.09%
Securities
Fixed rate $ 16,520 $ 9,542 $ 5,376 $ 8,285 $13,458 $17,939 $ 71,120
Average interest rate 6.02% 6.39% 7.17% 6.62% 6.25% 6.66% 6.44%
Federal funds sold
(variable rate) $ 2,000 $ 2,000
Average interest rate 5.33% 5.33%
Deposits
Non-interest
bearing checking $ 11,712 $11,712 $11,712 $11,712 $11,712 $19,513 $ 78,073
Average interest rate - - - - - -
Savings and interest
bearing checking $ 21,890 $21,890 $21,890 $21,890 $21,890 $36,484 $145,934
Average interest rate 3.15% 3.15% 3.15% 3.15% 3.15% 3.15% 3.15%
Time deposits (fixed rate) $183,240 $60,017 $ 5,277 $ 4,626 $ 2,106 $ 1,036 $256,302
Average interest rate 5.57% 5.99% 5.55% 5.92% 5.84% 6.11% 5.68%
Other short-term borrowings
(variable rate) $ 4,999 $ 4,999
Average interest rate 5.37% 5.37%
Federal funds purchased
and securities sold under
agreements to repurchase
(variable rate) $ 8,847 $ 8,847
Average interest rate 5.01% 5.01%
Long-term debt
(variable rate) $ 1,800 $ 300 $ 2,100
Average interest rate 7.29% 7.50% 7.32%
Derivative Financial
Instrument
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 follow:
Six Months Ended
June 30
(In thousands except percentages)
1998 1997
---- ----
Balance at January 1 $ 5,921 $ 5,155
Provision for loan losses 650 450
Loan charge-offs, net of recoveries ( 106) ( 30)
------- -------
Balance at June 30 $ 6,465 $ 5,575
======= =======
Average loans, net of unearned income $395,608 $314,736
======= =======
Provision for loan losses to average loans (1) .33% .29%
======= =======
Net loan charge-offs to average loans (1) .05% .02%
======= =======
Allowance for loan losses to average loans 1.63% 1.77%
======= =======
Allowance for loan losses to period-end loans 1.55% 1.70%
======= =======
(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 six month periods ended June 30,
1998 and 1997.
In thousands
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Non-interest income
Investment management and
trust services $1,238 $ 862 $ 2,298 $ 1, 508
Service charges on deposit accounts 735 496 1,290 940
Gains on sales of mortgage loans
held for sale 529 275 852 488
Gains on sales of securities
available for sale - - 184 80
Other 339 220 645 417
----- ----- ----- -----
Total non-interest income $2,841 $1,853 $5,269 $3,433
===== ===== ===== =====
Non-interest expenses
Salaries and employee benefits $2,976 $2,316 $ 5,533 $ 4,633
Net occupancy expense 342 278 651 533
Furniture and equipment expense 491 414 895 771
Other 1,344 883 2,843 1,750
----- ---- ----- -----
Total non-interest expenses $5,153 $3,891 $9,922 $7,687
===== ===== ===== =====
Non-interest income increased $988,000, or 53.3%, for the second quarter
of 1998, and $1,836,000 or 53.5% for the first six months of 1998 compared to
the same periods in 1997. Trust income increased $376,000 or 43.6% in the
second quarter and $790,000 or 52.4% for the first half of 1998, as compared
to the same periods in 1997. Trust assets under management at June 30, 1998
were $755 million as compared to $632 million at December 31, 1997 and $595
million at June 30, 1997. In addition to asset growth, trust income in the
first half of 1998 benefited from a fee rate increase in June 1997 and
approximately $230,000 in non-recurring estate fees.
<PAGE>
Service charges on deposit accounts increased $239,000 or 48.2% in
the second quarter and $350,000 or 37.2% in the first half 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 in this area. Additionally, some deposit service
charges were raised in the second quarters of 1998 and 1997.
Gains on sales of mortgage loans were $529,000 in the second
quarter and $852,000 in the first six months of 1998 compared
to $275,000 and $488,000, 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 $33,000 to the above gains in 1998. Investors commit
to purchase both prime and sub-prime loans when such loans are originated.
Therefore, mortgage loans held for sale do not subject the Bank to interest
rate risk.
Gains on sales of securities available for sale during the first
quarter of both 1998 and 1997 occurred as management sold lower
yielding, shorter term securities for intermediate term, higher
yielding securities.
Other non-interest income increased $119,000 or 54.1% in the
second quarter and $228,000 or 54.7% in the first half of 1998
compared to 1997. Numerous factors contributed to this increase,
including $20,000 from full service brokerage, $17,000 from credit
card merchant fees and $45,000 from check card income. The remaining
portion of the increase arose from increasing volume of various
sources of fee income.
Non-interest expenses increased $1,262,000 or 32.4% for the
second quarter and $2,235,000 or 29.1% in the first six months of
1998 compared to the same periods in 1997. Salaries and employee
benefits increased $660,000 or 28.5%, for the second quarter and
900,000 or 19.4% in the first half 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 265 full time equivalent employees
as of June 30, 1998 and 231 full time equivalents as of June 30, 1997.
In addition, the Bank has an incentive plan in place which is based on
profitability and employee performance. Expense accrues throughout the
year, and with higher Bank earnings and a growing employee base, these
incentives have increased. Net occupancy expense increased $64,000 or
23.0% in the second quarter and $118,000 or 22.1% in the first half
of 1998 as compared to 1997. Furniture and equipment expense increased
$77,000, or 18.6%, for the second quarter and $124,000 or 16.1% in the first
half of 1998 compared to 1997. These increases are largely due to the
opening of new banking centers. In 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 $461,000 or 52.2% in the second
quarter and $1,093,000 or 62.5% in the first six months of 1998 as compared
to 1997. Again, this increase is reflective of the Bank's expansion.
Included in other non-interest expenses for the first half of 1998 are
$150,000 representing a buy-out of a lease for a future branch
location and advertising expenses of $447,000 compared to $61,000 in 1997.
The Bank has 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.
<PAGE>
Income Taxes
Bancorp had income tax expense of $1,870,000 for the first six months
of 1998, compared to $1,577,000 for the same period in 1997. The effective
rate was 32.1% in 1998 and 33.0% in 1997.
B. FINANCIAL CONDITION
Total Assets
Total assets increased $63.4 million from December 31, 1997 to June 30,
1998. Average assets for the first six months of 1998 were $512.2 million.
Total assets at June 30, 1998 increased $95.9 million from June 30, 1997,
representing a 23.0% increase. Since year end, loans have increased
approximately $47.6 million; cash and due from banks and federal funds sold
increased $2.7 million; securities available for sale increased $.1 million,
and securities held to maturity increased $10.9 million. Mortgage loans
available for sale increased $1.0 million.
Nonperforming Loans and Assets
Nonperforming loans, which include non-accrual and accruing loans past due
over 90 days, totaled $3,312,000 at June 30, 1998 and $290,000 at December 31,
1997. This represents .79% of total loans at June 30, 1998 compared to .08% at
December 31, 1997. Nonperforming assets, which include non-performing loans,
other real estate and repossessed assets, totaled $3,408,000 at June 30, 1998
and $290,000 at December 31, 1997. This represents .63% of total assets at
June 30, 1998 compared to .06% at December 31, 1997.
The increase in non-accrual loans at June 30, 1998 arose from loans to one
obligor, a long time customer of the Bank. These loans are well 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 Banks have a number of sources of funds to meet its 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 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 Kentucky Bank is a member of the Federal Home Loan Bank of Cincinnati
(FHLB). As a member of the FHLB, the Kentucky Bank has access to credit
products of the FHLB. These credit services provide the Kentucky Bank with
another source of funds. To date, the Kentucky 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 June 30, 1998, the Bank may pay
up to $11,968,000 in dividends to Bancorp without regulatory approval.
D. CAPITAL RESOURCES
At June 30, 1998, stockholders' equity totaled $40,337,000, an
increase of $3,420,000 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 $268,000
at June 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 June 30, 1998, Bancorp's tier 1, total risk based capital and
leverage ratios were 9.50%, 10.83% and 7.42%, 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. The
implementation of this statement has not had a significant impact
on Bancorp's financial position or results of operations.
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.
<PAGE>
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.
F. YEAR TWO THOUSAND
Bancorp's management has undertaken an evaluation of the effects
Year 2000 will have on its information system and other important
aspects of its business. The program has five phases: awareness,
assessment, renovation, validation and implementation. Bancorp
has progressed through the first three phases of the plan, and for
mission critical systems, is in the final stages of the validation
phase. The Year 2000 project coordinator and committee report to
the Board of Directors with regard to the project plan and status.
Costs to prepare for the Year 2000 include new hardware, software,
internal staff costs and some consulting. Because Bancorp has made
recent large investments in upgrades of hardware and software,
management does not anticipate significant incremental information
systems costs related to the Year 2000. 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 $30,000.
Management is also addressing the matter of loan collectibility as it
relates to customers' accounting, manufacturing, and other systems.
Customers' noncompliance with Year 2000 issues could adversely affect their
ability to service their debt. Management's evaluation of the
creditworthiness of customers now includes a review of the customer's
self assessment as to compliance with Year 2000 issues. Additionally,
management has contacted all major vendors used by the Bank and/or Bancorp
to assess each vendor's ability to continue servicing the Bank's/Bancorp's
needs into the next millennium.
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
On April 22, 1998, at the Annual Meeting of Shareholders of S.Y.
Bancorp, Inc., the following matters were submitted to a vote of
shareholders. Represented in person or by proxy were 2,756,775
shares, and those shares were as follows.
(1) Fixing the number of directors at fifteen (15) and electing at the
Annual Meeting four (4) directors:
FOR 2,749,484
AGAINST 5,395
ABSTAIN 1,896
(2) Election of Directors: Bancorp has a staggered Board of Directors.
The following individuals were nominated in 1996. All nominees
were elected. The results below reflect cumulative voting.
FOR AGAINST ABSTAIN WITHHOLD
--- ------- ------- --------
David H. Brooks 10,969,536 - - 57,564
Carl T. Fischer, Jr. 10,969,144 - - 57,956
Stanley A. Gall, M.D. 10,969,300 - - 59,800
Henry A. Meyer 10,966,520 - - 60,580
(3) Proposal to increase the authorized shares of common stock from
5,000,000 to 10,000,000:
FOR 2,695,645
AGAINST 52,296
ABSTAIN 8,824
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 June 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: August 12, 1998 By: /s/ David H. Brooks
-----------------------------
David H. Brooks, Chairman
and Chief Executive Officer
Date: August 12, 1998 By: /s/ David P. Heintzman
------------------------------
David P. Heintzman, President
Date: August 12, 1998 By: /s/ Nancy B. Davis
------------------------------
Nancy B. Davis, Senior Vice
President, Treasurer and Chief
Financial Officer
<PAGE>
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