<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
S.Y. BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
(502) 582-2571
____________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
____________
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of
S.Y. BANCORP, INC. ("Bancorp") will be held on Wednesday, April 22, 1998, at
10:00 a.m., at Stock Yards Bank & Trust Company's Exchange Building dining
room, 1048 East Main Street, Louisville, Kentucky 40206, for the following
purposes:
1. ELECTION OF DIRECTORS. To approve the action of the Board of
Directors fixing the number of directors at fifteen (15) and to
elect four (4) nominees as directors, each named in the accompanying
Proxy Statement.
2. APPROVAL OF INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK. To approve a proposed amendment to the Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 5,000,000 to 10,000,000.
3. OTHER BUSINESS. To consider and act upon such other matters as may
properly be brought before the Annual Meeting or any adjournment
thereof.
Information regarding the matters to be acted upon at the meeting is
contained in the Proxy Statement accompanying this Notice.
Only those holders of Bancorp Common Stock of record at the close of
business on March 6, 1998, are entitled to notice of and to vote at the Annual
Meeting and any adjournment thereof.
We hope you will be represented at the meeting. Please sign and return the
enclosed proxy card in the accompanying envelope as promptly as possible,
whether or not you expect to be present in person. Your vote is important. The
Board of Directors of Bancorp appreciates the cooperation of shareholders in
directing proxies to vote at the meeting.
Louisville, Kentucky By Order Of The Board Of Directors
March 18, 1998
/s/ David H. Brooks
--------------------------------------
David H. Brooks
Chairman and Chief Executive Officer
YOUR VOTE IS IMPORTANT
PLEASE DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ACCOMPANYING POSTAGE PAID ENVELOPE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RELATIONSHIP OF BANCORP AND THE BANKS. . . . . . . .. . . . . . . . . . . 2
VOTING AT THE ANNUAL MEETING . . .. . . . . . . . . . . . . . . . . . . 2
PRINCIPAL HOLDERS OF BANCORP COMMON STOCK .. . . . . . . . . . . . . . . 3
ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . .. . . . . 4
MEETINGS AND COMMITTEES OF THE BOARD . . . . . . . . . . . . . . . . . . 9
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION . . . . . . . 10
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS . . . . .. . . . . . . 11
TRANSACTIONS WITH MANAGEMENT AND OTHERS . . . . . . . . . . .. . . . . . 16
APPROVAL OF INCREASE IN AUTHORIZED SHARES OF COMMON STOCK . . .. . . . . 16
INFORMATION CONCERNING INDEPENDENT PUBLIC ACCOUNTANTS . . . . .. . . . . . 17
SUBMISSION OF SHAREHOLDER PROPOSALS .. . . . . . . . . . . . . . . . . . 17
OTHER MATTERS . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
ANNUAL REPORT ON FORM 10-K
A COPY OF S.Y. BANCORP, INC.'S 1997 ANNUAL REPORT ON FORM 10-K AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS, WILL BE PROVIDED WITHOUT
CHARGE WITHIN ONE BUSINESS DAY FOLLOWING RECEIPT OF A WRITTEN OR ORAL REQUEST
DIRECTED TO: MS. NANCY B. DAVIS, SENIOR VICE PRESIDENT, TREASURER AND CHIEF
FINANCIAL OFFICER, S.Y. BANCORP, INC., P.O. BOX 32890, LOUISVILLE, KENTUCKY
40232, (502) 625-9176.
<PAGE>
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
(502) 582-2571
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 22, 1998
GENERAL
This Proxy Statement is furnished to the shareholders of S.Y. BANCORP,
INC. ("Bancorp") in connection with the solicitation of proxies by Bancorp's
Board of Directors for use at the Annual Meeting of Shareholders (the
"Annual Meeting")to be held on Wednesday, April 22, 1998, at 10:00 a.m.,
local time, at Stock Yards Bank & Trust Company's Exchange Building dining
room, 1048 East Main Street, Louisville, Kentucky 40206. The approximate
date on which this Proxy Statement and the accompanying proxy are first being
sent or given to shareholders is March 18, 1998. The mailing address of
Bancorp's principal executive offices is P.O. Box 32890, Louisville, Kentucky
40232-2890.
Only shareholders of record at the close of business on March 6, 1998,
are entitled to notice of and to vote at the Annual Meeting.
Any valid and unrevoked proxy will be voted as specified in the proxy.
If a shareholder does not specify otherwise, the shares represented by the
shareholder's proxy will be voted (a) FOR approval of the action of the Board
of Directors fixing the number of directors at fifteen (15) and FOR election
of the persons named in this Proxy Statement as directors of Bancorp, in
accordance with the terms and conditions set forth in this Proxy Statement;
(b) FOR approval of the proposed amendment to the Articles of Incorporation
to increase the number of authorized shares of Common Stock; and (c) in
their discretion, on any other matters that may properly come before the
Annual Meeting, or any adjournment thereof, including matters incident to its
conduct.
All expenses of preparing, printing, mailing, and delivering the proxy
and all materials used in the solicitation thereof will be borne by Bancorp.
In addition to the use of the mails, proxies may be solicited by personal
interview, telephone and telefax by directors and officers of Bancorp, none
of whom will receive additional compensation for such services. Bancorp has
also requested brokerage houses, custodians, and nominees to forward
soliciting materials to the beneficial owners of Bancorp's Common Stock, held
of record by them and will pay the reasonable expenses of such persons for
forwarding such materials.
Proxies may be revoked at any time before the taking of the vote at the
Annual Meeting by written notice of revocation to the Secretary of Bancorp,
by delivery of a later dated proxy or by voting in person at the meeting.
Attendance at the Annual Meeting will not have the effect of revoking a proxy
unless the shareholder so attending so notifies the Secretary in writing
prior to voting of the proxy.
1
<PAGE>
RELATIONSHIP OF BANCORP AND THE BANKS
Bancorp is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 and pursuant to that act is registered with the
Board of Governors of the Federal Reserve System. Bancorp has two
subsidiaries. Both Stock Yards Bank & Trust Company ("the Kentucky Bank")
and Stock Yards Bank & Trust Company ("the Indiana Bank") are wholly owned by
Bancorp and engaged in the business of commercial banking. See "MEETINGS AND
COMMITTEES OF THE BOARD".
VOTING AT THE ANNUAL MEETING
On March 6, 1998, the record date for the Annual Meeting fixed by
Bancorp's Board of Directors, there were issued and outstanding, and entitled
to vote at the Annual Meeting, 3,290,082 shares of Bancorp Common Stock.
Bancorp has no class of stock other than common stock. The holders of a
majority of the total shares of Bancorp Common Stock issued and outstanding
and entitled to vote, whether present in person or by proxy, will constitute
a quorum for the transaction of business at the Annual Meeting. See note
(3) to the tabulation under the heading, "PRINCIPAL HOLDERS OF BANCORP COMMON
STOCK," for a discussion of shares held by the Kentucky Bank in fiduciary
capacities.
Each share of Bancorp Common Stock is entitled to one vote on all
matters presented to the shareholders with the exception of the election of
directors. In the election of directors, Kentucky's Constitution mandates
that shareholders have cumulative voting rights. Under cumulative voting
rights, each shareholder is entitled to cast as many votes in the aggregate
as equal the number of shares of Bancorp Common Stock owned by him or her
multiplied by the number of directors to be elected. Each shareholder, or
his or her proxy, may cast all of his or her votes (as thus determined) for a
single nominee for director or may distribute them among two or more
nominees, in the shareholder's discretion.
Approval of the increase in authorized shares of Common Stock (Item 2 on
the accompanying proxy) requires the affirmative vote of the holders of a
majority of the outstanding shares of Bancorp's Common Stock present or
represented at the Annual Meeting and entitled to vote on the proposal.
Directors will be elected by a plurality of the total votes cast at the
Annual Meeting. Assuming four directors are to be elected, a plurality means
that the four nominees receiving the highest number of votes will be deemed
elected.
Votes cast in person or by proxy at the Annual Meeting will be tabulated
by the judges appointed for the meeting, who will conduct the voting and
certify the results. The judges will also determine whether or not a quorum
is present at the meeting. A shareholder entitled to vote for the election
of directors may withhold authority to vote for all nominees for directors or
may withhold authority to vote for certain nominees for directors. A
shareholder may also abstain from voting on the proposals to fix the number
of directors and increase the number of authorized shares of Common Stock.
Votes withheld from the election of any nominee for director and abstentions
from any other proposal will be treated by the judges as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum, but will not be counted in the number of votes cast on any matter.
If a broker does not receive voting instructions from the beneficial owner of
shares on a particular matter and indicates on the proxy that it does not
have discretionary authority to vote on that matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
2
<PAGE>
PRINCIPAL HOLDERS OF BANCORP COMMON STOCK
At January 31, 1998, Bancorp had 3,289,617 shares of Bancorp Common
Stock issued and outstanding held by 745 shareholders of record. The
following tabulation shows the amount and percent of Bancorp Common Stock
owned beneficially at January 31, 1998, by those persons known by Bancorp to
own, or be deemed to own, beneficially five percent (5%) or more of such
stock. The tabulation also shows the beneficial ownership of Bancorp Common
Stock by all directors, executive officers and employees of Bancorp and the
Banks at January 31, 1998. Unless otherwise noted, the sole voting and
investment power with respect to such stock is held by the beneficial owner
named. For a tabulation of the beneficial ownership of Bancorp Common Stock
by individual directors of Bancorp and nominees for election as directors of
Bancorp at the Annual Meeting, see "ELECTION OF DIRECTORS."
<TABLE>
<CAPTION>
Amount and Nature Percent of
Name and Address of Beneficial Bancorp Common
of Beneficial Owner Ownership(1) Stock(1)(2)
------------------- ----------------- ---------------
<S> <C> <C>
Stock Yards Bank & Trust Company 395,750(3) 12.03%
1040 East Main Street
Louisville, Kentucky 40206
Directors and executive officers of 408,185 12.09%
Bancorp as a group (14 persons)(4)(5)
Directors, executive officers, and 524,079(6) 15.33%
employees of Bancorp and the Banks
as a group (116 persons)(4)(5)
</TABLE>
Notes:
(1) As of January 31, 1998.
(2) Shares of Bancorp Common Stock subject to currently exercisable options
under Bancorp's Stock Option Plan are deemed outstanding for computing the
percentage of Bancorp Common Stock of the person holding such options but
are not deemed outstanding for computing the percentage of Bancorp Common
Stock of any other person.
3
<PAGE>
(3) Held by the Kentucky Bank as agent, trustee, personal representative and
in other fiduciary capacities, including 35,516 shares held as Trustee
under the Kentucky Bank's Employee Stock Ownership Plan (the "ESOP"). As
to 33,365 shares held in the ESOP, participants direct the Kentucky Bank,
as Trustee, to vote the vested portion of the participant's account balance
attributable to Bancorp Common Stock. The other 2,151 shares held by the
Kentucky Bank as Trustee under the ESOP (together with any shares for
which no directions are received from participants in the ESOP) may then be
voted in the same proportions as the directions given to the Bank, as
trustee, by the respective participants. Under the ESOP, participants or
their beneficiaries are eligible to receive the balance of their accounts
in-kind upon retirement, death or disability. The vested portion of a
participant's account balance in the ESOP is eligible for distribution
in-kind upon termination of employment.
(4) "Executive Officer" means the chairman, president, any vice president in
charge of a principal business unit, division or function, or other officer
who performs a policy making function or any other person who performs
similar policy making functions and is so designated by the Board of
Directors.
(5) For a description of the voting and investment power with respect to the
shares beneficially owned by the fourteen directors and nominees for
election as directors of Bancorp, see the table under the heading,
"ELECTION OF DIRECTORS."
(6) The shares held by the group, include 44,955 shares held by nonexecutive
officers and employees of the Kentucky Bank. In addition, 43,262 shares
are subject to currently exercisable stock options and 27,676 shares are
held by present employees of the Kentucky Bank in their ESOP accounts at
December 31, 1997, with sole voting power and no current investment power.
Bancorp has not undertaken the expense and effort of compiling the number
of shares certain officers and employees of the Kentucky Bank may hold
other than directly in their own name.
ITEM 1. ELECTION OF DIRECTORS
The Articles of Incorporation and Bylaws of Bancorp provide that the
Board of Directors shall be composed of not less than nine (9) nor more than
twenty-five (25) members. The bylaws provide that the exact number of
members shall be fixed each year by the Board of Directors prior to the
giving of notice of the Annual Meeting, subject to any later resolution
adopted by the shareholders at the Annual Meeting. At its February 10, 1998
meeting, the Board of Directors fixed the number of directors at fifteen
(15). The Board of Directors has recommended that the number of directors
constituting the Board be fixed at fifteen for the ensuing year, subject to
the approval of shareholders at the annual meeting. Assuming four directors
are to be elected, there will be fourteen (14) individuals serving on the
Board as of the date of the 1998 Annual Meeting.
Bancorp's Articles of Incorporation direct the Board of Directors to be
classified into three classes of directors of as nearly equal size as
possible with only one class of directors being elected each year.
Accordingly, at the 1998 Annual Meeting, four Directors are to be elected to
hold office for three-year terms, or until their successors are elected and
qualified. Unless otherwise instructed, it is intended that the shares
represented by the enclosed proxy will be voted for the election of the
nominees named below. Proxies may not be voted for a greater number of
persons than the number of nominees named below.
4
<PAGE>
At the Annual Meeting, a resolution will be submitted approving the
action of the Board of Directors fixing the number of directors at fifteen
(15), and, if such resolution is adopted, the four persons named in the
following table will be nominated on behalf of the Board of Directors for
election as directors of Bancorp. The affirmative vote of a majority of the
shares of Bancorp Common Stock represented at the Annual Meeting in person or
by proxy will be required for approval of the resolution fixing the number of
directors.
In the event (1) any person or persons other than the following
nominees are nominated as directors, or (2) the number of directors to be
elected shall be less or more than four, the proxies named in the enclosed
proxy, or their substitutes, shall have the right in their discretion to vote
for some number less or more than all the nominees or for less or more than
all of the aforesaid nominees. In the event any of the nominees becomes
unwilling or unable to accept nomination or election, the said proxies shall
have the right to vote for any substitute nominee in place of the nominee who
has become unwilling or unable to accept nomination or election. The Board of
Directors has no reason to believe that any of the nominees will be
unavailable to serve as a director.
All of the nominees and continuing directors of Bancorp are currently
serving as directors of the Kentucky Bank and were elected to that position
on April 23, 1997, by the written consent of Bancorp, the sole shareholder of
the Kentucky Bank. It is anticipated that, if elected as directors of
Bancorp at the Annual Meeting, Bancorp, as the sole shareholder of the
Kentucky Bank, will, by written consent, elect the following nominees and
continuing directors of Bancorp as directors of the Kentucky Bank to serve a
one year term.
There are no arrangements or understandings regarding the selection or
election of any of the following nominees as directors of Bancorp. All
nominations for membership on the Board of Directors of Bancorp originated
with the Board of Directors.
NOMINEES TO SERVE A THREE YEAR TERM EXPIRING 2001
<TABLE>
<CAPTION>
Bancorp Common Stock
Beneficially Owned
Name, Age, And at January 31, 1998
Year First Became Principal Occupation: ---------------------------------
Director (1) Certain Directorships(2)(3) Amount(4)(5) % of Class
- ----------------- ---------------------------- ------------ -----------
<S> <C> <C> <C>
David H. Brooks Chairman and Chief 42,959(8) 1.30%
Age 55 Executive Officer, S.Y.
Director since 1985 Bancorp, Inc. and Stock
Yards Bank & Trust Company(7)
Carl T. Fischer, Jr. President, Meadowlake Farm 30,832(9) (6)
Age 64 Stables, Inc.; Farmer and
Director since 1980 Horse Breeder
Stanley A. Gall, M.D. Professor and Chairman, 1,790 (6)
Age 61 Department of Obstetrics
Director since 1994 (10) and Gynecology,
University of Louisville
Henry A. Meyer President, Henry 46,794(11) 1.42%
Age 67 Fruechtenicht Co., Inc.;
Director since 1966 Vice Chairman,
S.Y. Bancorp, Inc.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Bancorp Common Stock
Beneficially Owned
Name, Age, And at January 31, 1998
Year First Became Principal Occupation: ---------------------------------
Director (1) Certain Directorships(2)(3) Amount(4)(5) % of Class
- ----------------- ---------------------------- ------------ -----------
<S> <C> <C> <C>
CONTINUING DIRECTORS - TERM EXPIRING 1999
Charles R. Edinger, III Vice President, 22,635(12) (6)
Age 48 J. Edinger & Son, Inc.
Director since 1984
David P. Heintzman President, S.Y. Bancorp, Inc. 32,525(14) (6)
Age 38 and Stock Yards Bank & Trust
Director since 1992 Company(13)
Norman Tasman President, Secretary and 58,284(16) 1.77%
Age 46 Treasurer, Tasman Industries, Inc.;
Director since 1995(15) President, Tasman Hide
Processing, Inc.
Kathy C. Thompson Executive Vice President and 16,050(19) (6)
Age 36 Secretary, S.Y. Bancorp, Inc.;
Director since 1994 (17) Executive Vice President,
Stock Yards Bank & Trust
Company(18)
Bertrand A. Trompeter Retired, John F. 25,410(21) (6)
Age 69 Trompeter Co., Inc.
Director since 1980(20)
CONTINUING DIRECTORS - TERM EXPIRING 2000
James E. Carrico President, Reager Harris 9,332 (6)
Age 56 DBA/Accordia of Kentucky
Director since 1978
Jack M. Crowner Owner 33,217(22) 1.01%
Age 65 Jack Crowner & Associates
Director since 1979
Leonard Kaufman Retired Chairman and Chief 66,603(24) 2.01%
Age 68 Chief Executive Officer,
Director since 1964 S.Y. Bancorp, Inc. and Stock
Yards Bank & Trust Company(23)
George R. Keller Founder, Tumbleweed 8,340(25) (6)
Age 48 Mexican Food, Inc.;
Director since 1991 Managing Member,
First Blue Rock Grill,LLC
Bruce P. Madison Vice President and 13,413(26) (6)
Age 47 Treasurer, Plumbers
Director since 1989 Supply Company, Inc.
</TABLE>
6
<PAGE>
Notes:
(1) Ages listed are as of December 31, 1997.
(2) Except as otherwise noted, each director and nominee has been
engaged in his or her principal occupation for five years or more.
(3) No director or nominee holds any directorship in a company with a class
of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934 or subject to the requirements of Section 15(d) of
such act or any company registered as an investment company under the
Investment Company Act of 1940.
(4) This column includes, in some instances, shares in which members of the
nominee's or director's immediate family have a beneficial interest.
The column does not, however, include the interest of certain of the
listed nominees or directors in shares held by other non-dependent
family members in their own right. In each case, the principal disclaims
beneficial ownership of any such shares, and declares that the listing
in this Proxy Statement should not be construed as an admission that the
principal is the beneficial owner of any such securities.
(5) Includes 150 qualifying shares for each director and, for each
non-employee director, 800 shares subject to currently exercisable stock
options issued under Bancorp's stock option plan.
(6) Less than one percent (1%) of outstanding Bancorp Common Stock.
(7) Mr. Brooks was appointed Chairman and Chief Executive Officer of Bancorp
and the Kentucky Bank in January, 1993. Prior thereto he was President
of Bancorp and the Kentucky Bank.
(8) Includes 25,848 shares subject to currently exercisable stock options
issued under Bancorp's Stock Option Plans, 1,310 shares held by Mr.
Brooks as custodian for his son, 11,584 shares owned by Mr. Brooks's
wife, and 3,229 shares held in Mr. Brooks's ESOP account at December 31,
1997.
(9) Includes 19,616 shares held by Mr. Fischer as trustee under an
irrevocable trust established by his father.
(10) Dr. Gall was elected as a director of Bancorp and the Kentucky Bank at the
meetings of the respective Boards of Directors held on January 11, 1994.
Dr. Gall was re-elected to the Board at the April, 1994 Annual Meeting.
(11) Includes 21,942 shares owned by Mr. Meyer's wife.
(12) Includes 10,380 shares owned by Mr. Edinger's wife.
(13) Mr. Heintzman was appointed President of Bancorp and the Kentucky Bank in
January, 1993. He was appointed Treasurer and Chief Financial Officer of
Bancorp in April, 1989 and Secretary in February, 1990. Prior thereto, he
was Assistant Treasurer of Bancorp and Executive Vice President of the
Kentucky Bank. See Note (20) below.
(14) Includes 18,588 shares subject to currently exercisable stock options
issued under Bancorp's Stock Option plans, 1,470 shares owned by Mr.
Heintzman's wife, 884 shares held by Mr. Heintzman as custodian for his
minor daughter, and 2,019 shares held in Mr. Heintzman's ESOP account at
December 31, 1997.
7
<PAGE>
(15) Mr. Tasman was elected as a director of Bancorp and the Kentucky Bank at
the meetings of the respective Boards of Directors held on January 10,
1995. Mr. Tasman was re-elected to the Board at the April, 1995 Annual
Meeting.
(16) Includes 46,000 shares owned by Mr. Tasman's mother for which Mr. Tasman
shares voting control but from which he derives no economic benefit.
Includes 9,968 shares held jointly by Mr. Tasman and his wife, and 1,112
shares held as custodian for his minor son.
(17) Ms. Thompson was elected as a director of Bancorp and the Kentucky Bank
at the meetings of the respective Boards of Directors held in January,
1994. Ms. Thompson was re-elected to the Board at the April, 1994 Annual
Meeting.
(18) Ms. Thompson joined the Kentucky Bank in June, 1992 as Senior Vice
President and Manager of the Trust Division. Prior thereto, she was a
Vice President of PNC Bank Kentucky's Trust Division.
(19) Includes 13,640 shares subject to currently exercisable stock options
issued under Bancorp's Stock Option Plans and 440 shares held in Ms.
Thompson's ESOP account at December 31, 1997.
(20) Mr. Trompeter is the father-in-law of Mr. David P. Heintzman. No other
family relationship exists among the directors and executive officers of
Bancorp or the Banks.
(21) Includes 13,817 shares owned by Mr. Trompeter's wife and 3,267 held in a
trust account from which Mr. Trompeter derives beneficial interest.
(22) Includes 20,134 shares owned by Mr. Crowner's wife.
(23) Prior to his retirement in January, 1993, Mr. Kaufman was Chairman and
Chief Executive Officer of Bancorp and the Kentucky Bank.
(24) Includes 19,780 shares subject to currently exercisable stock options
issued under Bancorp's Stock Option Plan, 25,930 shares owned by Mr.
Kaufman's wife, and 78 shares jointly owned by Mr. Kaufman and his
wife.
(25) Includes 1,155 shares jointly owned by Mr. Keller and his wife.
(26) Includes 4,791 shares jointly owned by Mr. Madison and his wife, 398
shares owned by Mr. Madison's wife, and 7,025 shares held by Mrs.
Madison as custodian for their minor children.
Messrs. David H. Brooks and David P. Heintzman and Ms. Thompson are Bancorp's
three executive officers and the above tabulation also includes other
information with respect to them. Bancorp's executive officers serve at the
pleasure of Bancorp's Board of Directors and there are no arrangements or
understandings regarding their selection or appointment as officers of Bancorp.
8
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD
BOARD MEETINGS
During 1997, the Board of Directors of Bancorp held a total of thirteen
regularly scheduled and special meetings.
All directors of Bancorp are also directors of the Kentucky Bank. Mr.
Brooks and Mr. Heintzman serve as directors for the Indiana Bank. During
1996, the Kentucky Bank's Board of Directors held a total of fourteen
regularly scheduled and special meetings. The Indiana Bank's Board of
Directors held twelve meetings in 1997.
All incumbent directors attended at least 75% of the aggregate number of
meetings of the Board and the committees of which they were members.
COMMITTEES OF BANCORP
Bancorp has a standing Audit Committee and Compensation Committee of the
Board of Directors.
Bancorp's Board of Directors considers matters relating to the selection
and nomination of directors, but there is no standing nominating committee of
the Board of Directors. There are no formal procedures whereby a security
holder may recommend nominees to the Board of Directors.
AUDIT COMMITTEE. The Audit Committee consists of four members of
Bancorp's Board of Directors: Charles R. Edinger, III, Carl T. Fischer, Jr.,
Bertrand A. Trompeter, and Henry A. Meyer. The committee held four meetings
in 1997. The committee reviews with Bancorp's independent auditors the
results of the audit engagement, other services performed by the auditors,
and the audit fees. Review of internal audit officer's detailed audit plans
and reports, regulatory compliance officer's plans and reports and internal
accounting controls are part of the function of the committee.
COMPENSATION COMMITTEE. The Compensation Committee consists of four
members of Bancorp's Board of Directors. The committee considers matters
relating to the salary and other compensation of officers of the Kentucky and
Indiana Banks and Bancorp. The members of the committee are Bruce P.
Madison, James E. Carrico, Jack M. Crowner, and Henry A. Meyer. The
committee meets at least annually and held three meetings in 1997.
9
<PAGE>
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
It is the philosophy of the Compensation Committee to ensure the
compensation of Bancorp's executive officers is adequate to attract and
retain talented individuals with proven abilities to lead Bancorp and the
Banks so growth and profitability are realized while maintaining stability
and capital strength.
Corporate profitability and shareholder value are important performance
measurements; however, executive officer base compensation is not directly
related to either. Compensation levels are determined by a number of factors
including comparisons with companies of similar size and complexity. While
executive base compensation is not quantitatively related to Bancorp's or the
Banks' financial performance, there is a qualitative relationship between
performance and executive officer compensation. The salary increases noted
in the Summary Compensation Table under the heading "COMPENSATION OF
EXECUTIVE OFFICERS AND DIRECTORS," were made in light of Bancorp's and the
Banks' market and earnings growth and other favorable factors. Salaries are
based on individual performance contributions within a competitive salary
range for each position. Pay levels are competitive within a range the
Committee considers to be reasonable and necessary.
The salary of the Chief Executive Officer is determined substantially as
described above with additional considerations. A range of salaries is
determined by gathering information regarding salaries at similarly sized
banks and other businesses. This information is obtained from industry
publications such as SNL EXECUTIVE COMPENSATION REVIEW for banks, and from
area business publications such as BUSINESS FIRST, a weekly business
newspaper of the Louisville metropolitan area. The Compensation Committee
considers the Chief Executive Officer's leadership skills and managerial
results. Among these considerations are consolidated financial performance
and condition, growth of the Banks, regulators' conclusions, community
involvement and the CEO's ability to choose and lead his management team.
Both subjective and objective as well as quantitative and qualitative
measures are used. The Compensation Committee reaches a conclusion as to an
appropriate salary and presents it to the Board of Directors for discussion
and approval. While peer group comparisons of salaries include companies
which are also included in the indices used for the shareholder return
performance graph on page 15 there is no direct correlation between the
companies used in CEO compensation and companies included in that graph.
Beginning in 1993, the Board of Directors of the Kentucky Bank approved
an incentive compensation plan which included all officers. The objectives
of this performance based plan include helping to attract, retain and reward
employees. Obtaining and retaining talented officers helps ensure Bancorp's
profitability and financial strength. The annual determination as to whether
any incentive will be paid is based upon the achievement of certain set goals
for earnings growth, return on average assets and return on average equity.
In 1995, the Compensation Committee changed the executive officers'
compensation arrangements to be more heavily weighted toward incentives than
those arrangements had been in the past. The committee feels that in a time
of significant expansion, there is potential for strong earnings growth as
long as the process is managed with adequate focus on cost control to prevent
deterioration of earnings. Therefore, the committee established a tiered
incentive program based upon the achievement of net income goals and
executive officers' base salaries were increased only nominally for 1995.
For 1997, executive officers salaries were increased based upon historical
performance and the complexity of the organization. Incentive arrangements
remained in place to help provide a reward for achievement of extraordinary
operational and financial results. Incentives are computed using a formula
based upon the amount net income and other factors increase over the prior
year. Amounts in 1995, 1996 and 1997 under this incentive plan for
individuals listed in the Summary Compensation Table are shown in the column
entitled "Bonus".
10
<PAGE>
The Committee also believes by providing those persons who have
responsibility for the management and growth of Bancorp and the Banks with an
opportunity to increase their ownership of Bancorp Common Stock, the best
interests of shareholders and officers will be similarly aligned. Executive
officers are granted options, from time to time, giving them the right to
purchase Bancorp Common Stock at a specified price in the future. The
number of stock options granted is based upon individual performance
contributions and comparative practices. See the discussion under
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS-Stock Incentive Plan" page
12. All options for shares available for issuance under the 1984 Stock
Option Plan have been granted. The 1995 Stock Incentive Plan was approved by
shareholders at the 1995 Annual Meeting.
In summary, the Committee believes the total compensation program for
Bancorp's executive officers is competitive with programs offered by similar
institutions, and executive compensation is appropriate to further the goals
and objectives of Bancorp and the Banks.
COMPENSATION COMMITTEE
James E. Carrico
Jack M. Crowner
Bruce P. Madison
Henry A. Meyer
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table shows the compensation paid by the Kentucky Bank for
the three years ended December 31, 1997, for services in all capacities to
executive officers of Bancorp.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPEN-
ANNUAL COMPENSATION SATION
---------------------------------------- ---------
OTHER SECURITIES
NAME AND ANNUAL UNDER- ALL OTHER
PRINCIPAL COMPEN- LYING COMPEN-
POSITION YEAR SALARY BONUS(1) SATION(2) OPTIONS SATION (3)
- --------- ---- ------ ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David H. Brooks 1997 $195,000 $78,000 - 2,000 $37,457
Chairman and Chief 1996 185,000 55,000 - - 35,232
Executive Officer 1995 175,000 85,000 - 13,600(4) 37,333
David P. Heintzman 1997 159,000 63,600 - 2,000 36,200
President 1996 150,000 45,000 - - 34,019
1995 130,000 65,000 - 13,600(4) 34,666
Kathy C. Thompson 1997 108,000 30,000 - 1,000 28,894
Executive Vice 1996 100,000 20,000 - - 26,839
President and 1995 94,000 12,000 - 10,000(4) 26,284
Secretary
</TABLE>
11
<PAGE>
Notes:
(1) Incentive compensation plan is described in "REPORT OF COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION," page 10.
(2) The aggregate amount of all perquisites and other personal benefits
received by the individuals listed in the above table did not exceed 10
percent of the total annual salary reported for the respective executive
officer.
(3) Includes director compensation (See "COMPENSATION OF EXECUTIVE OFFICERS AND
DIRECTORS-Director Compensation") and contributions by the Kentucky Bank to
the Bank's defined contribution plans (money purchase, deferred income
(401(k)) profit sharing and employee stock ownership plans). For
Mr. Brooks, these amounts are $8,400; $15,962; $6,400; and $3,200,
respectively. For Mr. Heintzman, these amounts are $8,300; $15,839; $6,360
and $3,180, respectively. For Ms. Thompson, these amounts are $8,400;
$9,563; $6,480; and $2,160, respectively. Also includes for Mr. Brooks,
Mr. Heintzman and Ms. Thompson, respectively, $3,495, $2,521 and $2,291
representing various payments, primarily life insurance policy premiums.
The officer's families are the beneficiaries of these policies.
(4) Adjusted for effect of 1996 2-for-1 stock split.
STOCK INCENTIVE PLAN
Bancorp has a stock option plan under which options may be granted to
officers, other key employees of the Banks, and non-employee directors. Key
employees are those persons who, in the judgement of the Compensation
Committee, are mainly responsible for the success of the Banks. Options under
this plan are granted at the fair market value of Bancorp's Common Stock at
the time of the grant.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table summarizes options granted during fiscal 1997 to
the executive officers named in the Summary Compensation Table, and the value of
the options held by such persons at the end of 1997.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Number of % of Appreciation for
Securities Total Option Term(2)
Underlying Options Exercise ------------------------------
Options Granted Price Expiration Option Term(2)
Name Granted in 1997 Per Share Date 5% 10%
- ---- ----------- ------- --------- ---------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
David H. Brooks 2,000(1) 9.52% $29.00 1/3/2007 $ 36,476 92,438
David P. Heintzman 2,000(1) 9.52% 29.00 1/3/2007 36,476 92,438
Kathy C. Thompson 1,000(1) 4.76% 29.00 1/3/2007 18,238 46,219
All Shareholders 3,271,480 n/a n/a n/a $59,665,252 $151,204,534
</TABLE>
(1) These options were granted in January, 1997 and became exercisable six
months following the grant date.
(2) All shareholders are shown for comparison purposes only. The potential
realizable value to all shareholders is the aggregate net gain for all
shareholders, assuming a hypothetical ten-year option granted at
$29.00 per share in January, 1997, if the price of Bancorp stock
increases at the assumed annual rates shown in the table. There can be
no assurance that Bancorp's Stock will perform at the assumed annual
rates shown in the table. Bancorp neither makes or endorses any
prediction as to future stock performance. The potential realizable
value of stock price appreciation for the option term for all
executive officers of Bancorp at 5% is $91,190 and at 10% is $231,095,
which represents .15% of the total potential realizable value for all
shareholders at 5% and 10%.
12
<PAGE>
The following table shows, as to the individuals included in the Summary
Compensation Table, information as to aggregate options exercised in 1997 and
December 31, 1997 year end option values.
AGGREGATED OPTIONS EXERCISED IN 1997 AND 1997 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES ACQUIRED VALUE OPTIONS AT IN THE MONEY OPTIONS AT
NAME ON EXERCISE REALIZED DECEMBER 31, 1997 DECEMBER 31,1997
---- --------------- -------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
David H. Brooks - $- 25,848 1,992 $779,538 $58,085
David P. Heintzman - - 21,492 1,992 586,691 58,085
Kathy C. Thompson - - 15,400 1,992 364,980 51,320
</TABLE>
SENIOR OFFICER SECURITY PLAN
The Kentucky Bank has established a Senior Officer Security Plan (the
"Security Plan") for a select group of management and highly compensated
officers who contribute materially to the continued growth, development and
future business success of the Kentucky Bank. Life insurance owned and
paid for by the Kentucky Bank has been purchased on each covered officer.
The Security Plan is designed so that if the assumptions made as to
mortality experience, policy dividends and other factors are realized, the
Kentucky Bank will recover both the cost of benefits and after tax costs of
the plan. The amount of benefits to be received under the Security Plan
was determined by projecting each participant's current salary amount to
that at his/her retirement date. His/her expected social security benefits
and expected benefits under the defined contribution plans were also
estimated. The Security Plan supplemental retirement benefit amount was
determined to be the amount necessary to bring total retirement payments to
an approximate 75% of his/her projected salary at retirement age.
Under the Security Plan, the following individuals listed in the
Summary Compensation Table at page 11 will receive the following annual
supplemental retirement benefits at their normal retirement age of 65:
David H Brooks, $84,000 each year for 15 years
David P. Heintzman, $136,500 each year for 15 years
Kathy C. Thompson, $82,000 each year for 15 years
In addition, there are pre-retirement death and disability benefits
provided for Mr. Brooks in the Security Plan.
13
<PAGE>
SENIOR EXECUTIVE SEVERANCE AGREEMENT
The Kentucky Bank has established a Senior Executive Severance
Agreement (the "Severance Agreement") for certain senior officers,
including the Executive Officers, of the Kentucky Bank. Bancorp and the
Kentucky Bank have concluded it to be in the best interests of Bancorp, its
Shareholders and the Kentucky Bank to take reasonable steps to help assure
key executives of the Kentucky Bank that they will be treated fairly in the
event of a tender offer or takeover bid, or an actual change of control.
It is important, should Bancorp receive take over or acquisition proposals
from third parties, that Bancorp be able to call upon the key executives of
the Kentucky Bank for their advice and assessment of whether such proposals
are in the best interests of shareholders, free of the influences of their
personal employment situations. This severance agreement was not entered
into because of any belief by management that a change in control of
Bancorp was imminent.
The Severance Agreement provides that, in the event (1) an executive
is forced to resign following a change in control of Bancorp or (2) an
executive voluntarily terminates employment with the Kentucky Bank for up
to three years following a change in control, the Kentucky Bank will pay
the executive a severance payment equal to 299 percent of the executive's
annual salary. Should voluntary termination occur between 24 and 36 months
following the change in control, the executive will receive only 2/3 of the
severance payment. Furthermore, if the executive is 58 years old or more
at the date of the severance payment, the amount of the payment is reduced.
As the executive approaches retirement age of 65 years, the severance
payment decreases proportionately to zero at age 65. The severance
agreement also provides that the Kentucky Bank pay legal fees and expenses
incurred in contesting any termination or enforcing the severance
agreement.
In the event of receipt of severance payments by an executive officer,
the executive officer, for a period of eighteen months will not solicit
customers of the Kentucky Bank, divert from the Kentucky Bank any customer
of the Kentucky Bank or solicit for employment any employee of the Kentucky
Bank.
DIRECTOR COMPENSATION
Directors of Bancorp receive no compensation for attendance at
regular or special meetings of the board if the meetings are held
immediately before or after a regular or special meeting of the Board of
Directors of the Kentucky Bank. However, Bancorp's directors are paid $600
for each meeting of Bancorp's Board of Directors attended if the meeting is
not held immediately before or after a meeting of the Board of
Directors of the Kentucky Bank. Bancorp's directors, who are also
directors of the Kentucky Bank, are paid $600 for each Kentucky Bank board
meeting attended. Non-employee directors receive an annual retainer of
$1,200.
Non-employee directors of Bancorp and the Kentucky Bank who are
members of the various committees of the respective Boards of Directors are
also paid the following fees: $200 per meeting attended of Bancorp's Audit
Committee and the Kentucky Bank's Compensation, Loan and Trust Committees.
Beginning in 1995, non-employee directors receive options to purchase
1,000 shares of Bancorp Common Stock. These options are granted at the
fair market value of Bancorp Common Stock at the time of the grant.
Directors of the Indiana Bank are not compensated for attendance at
meetings of the Board of Directors of the Indiana Bank.
14
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following performance graph compares the performance of Bancorp Common
Stock to the NASDAQ U.S. index and to the NASDAQ Banking index for Bancorp's
last five fiscal years. The graph assumes the value of the investment in Bancorp
Common Stock and in each index was $100 at December 31, 1992, and that all
dividends were reinvested.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
S.Y. Bancorp, Inc. 100.00 138.30 173.84 249.95 352.86 517.01
NASDAQ U.S. Index 100.00 114.71 112.13 158.65 195.13 238.35
NASDAQ Banking Index 100.00 113.96 113.63 169.24 223.63 372.66
</TABLE>
15
<PAGE>
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The Kentucky Bank has had, and expects to have in the future, banking
transactions in the ordinary course of business with certain directors and
officers of Bancorp and the Banks and their associates, as well as with
corporations or organizations with which they are connected as directors,
officers, shareholders or partners, on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons. In the opinion of management of Bancorp and
the Banks, such transactions do not involve more than the normal risk of
collectibility or present other unfavorable features.
At December 31, 1997, loans to directors and officers of Bancorp and the
Banks and their associates totaled $2,602,000, equaling 7.1% of the Bancorp's
consolidated stockholders' equity.
During 1997, Bancorp and the Banks purchased property damage and other
insurance through Accordia of Louisville/ReagerHarris, Inc., a general insurance
agency, for which net premiums aggregating $157,000 were paid to Accordia of
Louisville/ReagerHarris, Inc. Net commissions earned by Accordia of
Louisville/ReagerHarris, Inc., on account of such insurance totaled $12,800 in
1997. Mr. James E. Carrico, a director of Bancorp and the Kentucky Bank, is a
shareholder, director and President ReagerHarris, dba Accordia of Kentucky.
ITEM 2. APPROVAL OF THE AMENDMENT OF
THE ARTICLES OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
The Board of Directors has recommended that Article VI of Bancorp's
Articles of Incorporation be amended to increase the number of authorized shares
of Common Stock from 5,000,000 to 10,000,000 shares, subject to approval by
shareholders at the Annual Meeting. The additional authorized shares will be
available for stock dividends, splits, options, public or private issuances of
Common Stock, and other general corporate purposes. When required for such
purposes, such shares will be issued on such terms as the Board of Directors
determines to be in the best interests of Bancorp without further action by the
shareholders, unless such action is then required by applicable law or the rules
of any stock exchange on which Bancorp's securities may be listed. Some of
these potential uses may decrease certain per share financial measures for a
period of time and may diminish a shareholder's percentage of voting power in
Bancorp. Holders of Common Stock have no preemptive rights to subscribe to any
shares of stock in Bancorp. Other than management considering the advisability
of a stock split within the next year, there are no current plans, arrangements
or understandings for these additional authorized shares of Common Stock.
The proposed increase in the authorized number of shares of Common
Stock could be construed as having an anti-takeover effect, although the
amendment to increase the authorized Common Stock was not proposed for that
purpose. Under certain circumstances, such shares could be used to create
impediments to or to frustrate persons seeking to effect a takeover or otherwise
gain control of Bancorp. Such shares could, for example, be privately placed
with purchasers who might side with the Board of Directors in opposing a hostile
takeover bid. Alternatively, such shares could be used in connection with a
shareholder rights plan. Bancorp has no such plan, however, nor any present
intention of adopting one.
16
<PAGE>
Also, the amendment to increase the authorized Common Stock might be
considered as having the effect of discouraging an attempt by another person or
entity, through the acquisition of a substantial number of shares of Bancorp's
Common Stock, to acquire control of Bancorp with a view to imposing a merger,
sale of all or any part of Bancorp's assets or a similar transaction since the
issuance of new shares could be used to dilute the stock ownership of any such
person or entity. As indicated above, the Board of Directors does not have any
present intent to issue any shares of Common Stock primarily for anti-takeover
purposes.
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock present or represented at the annual Meeting and entitled
to vote on the proposal is required for approval of the proposed amendment. All
directors and officers of Bancorp are expected to vote in favor of the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE
PROPOSED INCREASE IN AUTHORIZED COMMON STOCK.
INFORMATION CONCERNING INDEPENDENT PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP has been engaged to audit the consolidated
financial statements of Bancorp for the past eight years. Management intends
to recommend that KPMG Peat Marwick LLP be engaged to perform the independent
audit of Bancorp's consolidated financial statements for the year ending
December 31, 1998, and it is anticipated that such recommendation will be
followed by Bancorp's Board of Directors.
Representatives of KPMG Peat Marwick LLP will be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do
so and are expected to be available to respond to appropriate questions.
SUBMISSION OF SHAREHOLDER PROPOSALS
Any proposals by shareholders intended to be presented at Bancorp's 1999
Annual Meeting of shareholders must be received by Bancorp at its principal
executive offices by November 20, 1998, to be included in Bancorp's Proxy
Statement and form of proxy for the 1999 Annual Meeting. The Board of Directors
will decide, subject to the rules of the Securities and Exchange Commission,
whether such proposals are appropriate for inclusion in the proxy statement and
form of proxy.
In addition, Bancorp's Bylaws impose certain advance notice requirements on
a shareholder nominating a director or submitting a proposal to an Annual
Meeting. Such notice must be submitted to the secretary of Bancorp no earlier
than 90, nor later than 60, days before an Annual Meeting, and must contain the
information prescribed by the Bylaws, copies of which are available from the
secretary. These requirements apply even if the shareholder does not desire to
have his or her nomination or proposal included in Bancorp's proxy statement.
17
<PAGE>
OTHER MATTERS
The officers and directors of Bancorp do not know of any matters to be
presented for shareholder approval at the Annual Meeting other than those
described in this Proxy Statement. If any other matters should come before the
Annual Meeting, the Board of Directors intends that the persons named in the
enclosed form of proxy, or their substitutes, will vote such proxy in accordance
with their best judgment on such matters.
By Order Of The Board Of Directors
/s/ David H. Brooks
--------------------------------------
David H. Brooks
Chairman and Chief Executive Officer
S.Y. Bancorp, Inc.
Louisville, Kentucky
March 18, 1998
18
<PAGE>
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
PROXY FOR HOLDERS OF COMMON STOCK
ANNUAL MEETING OF SHAREHOLDERS - APRIL 22, 1998
The undersigned hereby appoints David H. Brooks and David P. Heintzman, or
either of them, attorneys with power of substitution and revocation to each, to
vote any and all shares of Common Stock of S.Y. Bancorp, Inc. ("Bancorp") held
of record by the undersigned, in the name and as the proxy of the undersigned,
at the Annual Meeting of shareholders of Bancorp (the "Annual Meeting") to be
held at Stock Yards Bank & Trust Company's Exchange Building dining room, 1048
East Main Street, Louisville, Kentucky 40202, on April 22, 1998, at 10:00 a.m.,
Eastern Time, or any adjournment thereof, hereby revoking any prior proxies to
vote said stock, upon the following proposals more fully described in the Notice
of and Proxy Statement for the meeting (receipt of which is hereby
acknowledged):
(1) FOR [ ] AGAINST [ ] ABSTAIN [ ] a proposal to approve the
action of the Board of Directors fixing the number of directors
at fifteen (15) and electing at the Annual Meeting four (4) directors.
(2) ELECTION OF DIRECTORS - Nominees are: David H. Brooks;
Carl T. Fischer, Jr.; Stanley A. Gall, M.D.; Henry A. Meyer.
Mark [ ] FOR ALL nominees listed above
One Box [ ] FOR ALL nominees listed above EXCEPT the following:
Only [ ] WITHHOLD authority to vote for ALL nominees listed above
(3) FOR [ ] AGAINST [ ] ABSTAIN [ ] a proposal amending the Articles of
Incorporation to increase the number of authorized shares of
Common Stock from 5,000,000 to 10,000,000.
(4) In their discretion on such other business as may properly come before the
Annual Meeting or any adjournment thereof.
THIS PROXY, PROPERLY SIGNED AND DATED, WILL BE VOTED AS DIRECTED, BUT IF
NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL
STATED. IF ANY OTHER BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL
BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT
TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT
THE MEETING.
Date: __________________________,1998 _____________________________________
_____________________________________
(Signatures)
Should the above signed be present and elect to vote at the Annual
Meeting of Shareholders or at any adjournment thereof and after notification
to the Secretary of the Corporation at the Meeting of the shareholder's
decision to terminate this proxy, then the power of said attorneys and
proxies shall be deemed terminated and of no further force and effect.
The above signed acknowledges receipt from the Corporation, prior to the
execution of this proxy, of the Notice of the Annual Meeting of Shareholders,
a proxy statement for the Annual Meeting of Shareholders, and an Annual
Report to Shareholders.
Please sign exactly as your name appears on this proxy card. When
signing as attorney, executor, administrator, trustee or guardian, please
give your full title. If shares are held jointly, only one signature is
required but each holder should sign, if possible.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
<PAGE>
S.Y. BANCORP, INC.
ANNUAL FINANCIAL STATEMENTS
AND REVIEW OF OPERATIONS
1997
ANNUAL FINANCIAL STATEMENTS AND REVIEW OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C>
Page
Selected Consolidated Financial Data 2
Market for Registrant's Common Stock and Related Stockholder Matters 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 3
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Changes in Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Report of Independent Auditors 40
Management's Report on Consolidated Financial Statements 41
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 19,723 $ 16,538 $ 14,609 $ 12,338 $ 9,811
Provision for loan losses 1,000 800 1,260 1,000 820
Net income 6,534 5,179 4,056 3,101 2,515
PER SHARE DATA
Net income, basic $ 1.99 $ 1.58 $ 1.25 $ .96 $ .78
Net income, diluted 1.92 1.54 1.22 .94 .77
Cash dividends declared .48 .40 .36 .29 .21
AVERAGES
Stockholders' equity $ 34,174 $ 29,675 $ 25,964 $ 23,320 $ 21,011
Assets 437,037 352,977 295,892 253,139 236,015
Long-term debt 2,259 1,171 607 617 617
RATIOS
Average stockholders' equity to
average assets 7.82% 8.41% 8.77% 9.21% 8.90%
Return on average stockholders' equity 19.12 17.45 15.62 13.30 11.97
Return on average assets 1.50 1.47 1.37 1.23 1.07
</TABLE>
Per share information has been adjusted to reflect stock splits and stock
dividends.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Bancorp's common stock is traded on the American Stock Exchange under the ticker
symbol SYI. The table below sets forth the quarterly high and low market prices
of Bancorp's common stock, and dividends declared per share. The payment of
dividends by the Banks to Bancorp is subject to the restriction described in
note 15 to the consolidated financial statements. On December 31, 1997, Bancorp
had 768 shareholders of record. The information below has been adjusted to
reflect the August, 1996 2-for-1 stock split.
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------
Cash Dividends Cash Dividends
Quarter High Low Declared High Low Declared
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $ 34.25 $ 29.50 $ .12 $ 25.50 $ 21.25 $ .10
Second 38.00 31.00 .12 28.75 25.00 .10
Third 43.75 36.00 .12 34.50 24.63 .10
Fourth 50.50 39.75 .12 34.50 27.25 .10
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this discussion is to provide information as to the analysis of
the consolidated financial condition and results of operations of S.Y. Bancorp,
Inc. (Bancorp) and its wholly-owned subsidiaries, Stock Yards Bank & Trust
Company, a Kentucky Bank, and Stock Yards Bank & Trust Company, an Indiana Bank
(the Banks). This discussion should be read in conjunction with Bancorp's
consolidated financial statements and accompanying notes and other schedules
presented elsewhere in this report.
ACQUISITION
In October, 1996, Bancorp completed the acquisition of the Indiana Bank. Bancorp
purchased 100% of the common stock of the Indiana Bank for a total purchase
price of $2,803,000 including acquisition costs of $128,000. The acquisition was
accounted for as a purchase. Results of operations of the Indiana Bank
subsequent to the acquisition date are included in the consolidated statements
of income, changes in stockholders' equity and cash flows.
Goodwill related to the acquisition of $1,041,000 is being amortized over
fifteen years. Amortization of goodwill decreased net income by $69,000 in 1997
and $12,000 in 1996. Goodwill amortization is expected to decrease net income by
$69,000 per year for the remainder of the amortization period.
Management's primary intent in this acquisition was to be able to establish
banking operations in southern Indiana. Clarksville, Jeffersonville and New
Albany are a natural part of Bancorp's market. The Indiana Bank established a
branch in Clarksville during 1997.
RESULTS OF OPERATIONS
Net income was $6,534,000 or $1.92 per share on a diluted basis in 1997. This
compares to $5,179,000 or $1.54 per share and $4,056,000 or $1.22 per share in
1996 and 1995, respectively. The increase in 1997 earnings was attributable to
several factors, the most notable of which were net interest income and
non-interest income growth. Earnings include a 18.9% increase in fully taxable
equivalent net interest income and a 32.6% increase in non-interest income. All
components of non-interest income increased. Partially offsetting the overall
income increases were increases in non-interest expenses of 22.1%.
Non-interest expenses increased in all categories. These increases are primarily
related to continued expansion of Bancorp's banking center network.
The following paragraphs provide a more detailed analysis of the significant
factors affecting operating results.
NET INTEREST INCOME
Net interest income, the most significant component of Bancorp's earnings, is
total interest income less total interest expense. Net interest spread is the
difference between the taxable equivalent rate earned on average interest
earning assets and the rate expensed on average interest bearing liabilities.
Net interest margin represents net interest income on a taxable equivalent basis
as a percentage of average earning assets. Net interest margin is affected by
both the interest rate spread and the level of non-interest bearing sources of
funds, primarily consisting of demand deposits and stockholders' equity. The
level of net interest income is determined by the mix and volume of interest
earning assets, interest bearing deposits and borrowed funds, and by changes in
interest rates. The discussion that follows is based on tax equivalent interest
data.
Net interest income was $19,899,000, $16,732,000 and $14,783,000 for 1997, 1996
and 1995, respectively. This represents a 18.9% increase for 1997 over 1996 and
a 13.2% increase for 1996 over 1995. These improvements in net interest income
resulted from an increase in average earning assets offset by a slight decline
in net interest spread. Average earning assets increased $75,737,000 to
$407,089,000 in 1997 and increased $53,885,000 to $331,352,000 in 1996.
3
<PAGE>
Net interest spread and net interest margin were 4.06% and 4.89%, respectively,
in 1997 and 4.16% and 5.05%, respectively in 1996. The Banks' prime lending rate
was 8.50% and 8.25% at December 31, 1997 and 1996, respectively. It did not
change during 1997. Average rates earned on earning assets decreased 13 basis
points, and average rates paid on interest bearing liabilities decreased 3 basis
points when comparing 1997 to 1996.
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1999 2000 2001 2002 Thereafter Total Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS
Fixed rate $ 45,374 $ 35,235 $ 35,733 $ 39,668 $ 47,354 $ 25,496 $ 228,860 $ 229,304
Average interest rate 9.24% 8.93% 9.16% 8.86% 8.85% 8.12% 8.89%
Variable rate $ 51,292 $ 12,420 $ 5,561 $ 6,424 $ 9,507 $ 56,229 $ 141,433 $ 141,433
Average interest rate 9.21% 9.00% 9.28% 9.15% 8.97% 9.13% 9.15%
SECURITIES
Fixed rate $ 7,920 $ 9,045 $ 9,817 $ 8,416 $ 9,400 $ 15,516 $ 60,114 $ 60,424
Average interest rate 5.96% 5.99% 6.12% 6.20% 5.90% 6.37% 6.12%
Federal funds sold
(variable rate) $ 6,000 - - - - - $ 6,000 $ 6,000
Average interest rate 5.50% - - - - - 5.50%
DEPOSITS
Non-interest
bearing checking $ 10,815 $ 10,815 $ 10,815 $ 10,815 $ 10,815 $ 18,028 $ 72,103 $ 72,103
Average interest rate - - - - - - -
Savings and interest
bearing checking $ 18,975 $ 18,975 $ 18,975 $ 18,975 $ 18,975 $ 31,623 $ 126,498 $ 126,498
Average interest rate 2.82% 2.82% 2.82% 2.82% 2.82% 2.82% 2.82%
Time deposits (fixed rate) $153,349 $ 49,150 $ 8,684 $ 4,637 $ 2,023 $ 1,127 $ 218,970 $ 220,047
Average interest rate 5.54% 5.91% 6.56% 5.74% 5.82% 6.33% 5.68%
Other short-term borrowings
(variable rate) $ 4,483 - - - - - $ 4,483 $ 4,483
Average interest rate 5.30% - - - - - 5.30%
Federal funds purchased
and securities sold under
agreements to repurchase
(variable rate) $ 13,684 - - - - - $ 13,684 $ 13,684
Average interest rate 5.42% - - - - - 5.42%
Long-term debt
(variable rate) $ 1,800 - - - - $ 315 $ 2,115 $ 2,115
Average interest rate 7.59% - - - - 7.25% 7.54%
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>
4
<PAGE>
As interest rates change in the market, rates earned on assets do not
necessarily move identically with rates paid on liabilities. Proper asset and
liability management involves the matching of interest sensitive assets and
liabilities to reduce interest rate risk. The Banks manage interest rate risk by
adjusting the mix of fixed rate loans and securities against longer term fixed
rate time deposits.
The following table presents the increases in net interest income due to changes
in volume and rate computed on a tax equivalent basis and indicates how net
interest income in 1997 and 1996 was impacted by volume increases and the lower
average interest rate environment. The tax equivalent adjustments are based on a
34% tax rate. The change in interest due to both rate and volume has been
allocated to the change due to volume and change due to rate in proportion to
the relationship of the absolute dollar amounts of the change in each.
TAXABLE EQUIVALENT RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
1997/1996 1996/1995
- -------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Net Due to Net Due to
(In thousands) Change Rate Volume Change Rate Volume
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 5,212 $ 4 $ 5,208 $ 3,291 $ (752) $ 4,043
Federal funds sold 180 (3) 183 (35) (48) 13
Mortgage loans held for sale (144) (18) (126) 205 (5) 210
Securities
U.S. Treasury and federal agencies 930 (165) 1,095 312 (74) 386
States and political subdivisions 5 (84) 89 131 (10) 141
------- ------- ------- ------- ------- -------
TOTAL INTEREST INCOME 6,183 (266) 6,449 3,904 (889) 4,793
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Deposits
Interest bearing demand deposits 576 141 435 43 (113) 156
Savings deposits 71 (33) 104 162 (31) 193
Money market deposits (59) (27) (32) (162) (144) (18)
Time deposits 2,238 (179) 2,417 1,960 37 1,923
Securities sold under agreements
to repurchase and federal
funds purchased 78 8 70 (56) (50) (6)
Other short-term borrowings 31 (5) 36 (33) (21) (12)
Long-term debt 81 1 80 41 - 41
------- ------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE 3,016 (94) 3,110 1,955 (322) 2,277
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 3,167 $ (172) $ 3,339 $ 1,949 $ (567) $ 2,516
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
PROVISION FOR LOAN LOSSES
In determining the provision for loan losses charged to expense, management
carefully considers many factors. Among these are the quality of the loan
portfolio, previous loss experience, the size and composition of the loan
portfolio and an assessment of the impact of current economic conditions on
borrowers. Responding to these factors, management provided $1,000,000 in 1997.
The provision for loan losses was $800,000 in 1996 and $1,260,000 in 1995. At
December 31, 1997, the allowance for loan losses was 1.60% of year-end loans
compared to 1.71% at December 31, 1996. Charge-off history has been well below
industry averages, and management's evaluations indicated a provision of
$1,000,000 to be sufficient to maintain the allowance for loan losses at an
adequate level.
The Banks' loan portfolios continue to be diversified with no significant
concentrations of credit. Geographically, most loans are extended to borrowers
in the Louisville, Kentucky metropolitan area. The adequacy of the allowance is
monitored on an ongoing basis and it is the opinion of management that the
balance of the allowance for loan losses at December 31, 1997, is adequate to
absorb anticipated losses in the loan portfolio as of this date.
NON-INTEREST INCOME AND EXPENSES
Non-interest income increased by 32.6% in 1997 as compared to 1996, and 23.8% in
1996 as compared to 1995.
The largest component of non-interest income is investment management and trust
fee income which increased 38.8% in 1997, 15.1% in 1996 and 38.6% in 1995. The
investment management and trust department has established a reputation of
personalized
5
<PAGE>
service and superior investment returns. Assets under management, through
customer retention and attraction of new business, grew to $632 million as of
December 31, 1997 as compared to $470 million as of December 31, 1996. Growth in
the department's assets include both personal and employee benefit accounts.
Furthermore, the department assumed responsibility for managing the Banks'
securities portfolio during 1996. The assets under management reported above
include $60 million of the Banks' investment securities as of December 31, 1997
and $46 million as of December 31, 1996.
Service charges on deposit accounts increased 24.8% over 1996. Growth in deposit
accounts, arising primarily from new banking locations, presented opportunities
for increased fee income in this area. Rates for some deposit services were
raised in the third quarter of 1996; however, the vast majority of the increase
is due to account volume.
The Kentucky Bank operates a mortgage banking company. This department
originates residential mortgage loans and sells the loans in the secondary
market. The department offers conventional, VA and FHA financing as well as a
program for low income first time home buyers. Loans are made for both purchase
and refinancing of homes. Virtually all loans originated by the mortgage banking
company are sold in the secondary market with servicing rights released. Gains
on sales of mortgage loans were $1,077,000 in 1997 as compared to $1,016,000 and
$736,000 in 1996 and 1995, respectively. Interest rates on conventional mortgage
loans directly impact the volume of business transacted by the mortgage banking
department. Falling rates in 1995 stimulated the volume of loans originated.
With relatively stable interest rates during 1996 and 1997, growth in those
years has been due more to the mortgage company's expanding reputation. Profit
margins in the mortgage banking industry have been shrinking over the last two
to three years making increasing volumes a focus. Also the mortgage company
helps support the corporate philosophy of capitalizing on relationships rather
than single transactions.
Other non-interest income increased in 1997 as compared to 1996 by $403,000 or
67.5% and $137,000 or 29.8% in 1996 compared to 1995. The increases are due to
several contributing factors, the largest of which is the addition of a
brokerage services department during 1996. Brokerage services fees totaled
$226,000 and $65,000 in 1997 and 1996, respectively. Through an account
executive with Robert Thomas Securities, Inc., bank customers have convenient
access to a full service brokerage company. Products available include stocks,
government and corporate bonds, annuities, mutual funds and insurance. Services
include asset management and investment advice. Having these products and
services readily available enables customers to find solutions to most all of
their financial needs in one location.
Total non-interest expenses increased 22.1% in 1997 over 1996, and 15.1% in
1996 over 1995.
Salaries and employee benefits, the largest non-interest expense category,
increased 24.9% in 1997 and 17.7% in 1996. These increases occurred primarily
from regular salary increases and new employees added to support expansion. As
of December 31, 1997, the Banks had 250 full time equivalent employees (FTEs).
As of December 31, 1996, that total was 220 FTEs. Additionally, a performance
incentive program is in place, and increasing earnings have qualified certain
bank employees for incentive compensation. Further, as salary expense increases,
so do corresponding employee benefit expenses. It should be noted there are no
significant obligations for post-retirement or post-employment benefits.
Net occupancy expense increased 16.4% in 1997 and 6.5% in 1996. Occupancy
expenses have increased as Bancorp has continued its expansion plans. In 1997,
the Kentucky Bank and Indiana Bank each completed the construction of and opened
one banking center. The Kentucky Bank has nine banking center locations
including the main office. All are in the Louisville area. The Indiana Bank has
two locations. Furniture and equipment expense increased 13.6% in 1997 compared
to 1996 and 22.4% in 1996 compared to 1995. Investments in computer technology
have resulted in significant increases over the last several years.
Other non-interest expenses increased 20.6% in 1997 and 9.2% in 1996. The
increase in both years largely related to Bancorp's expansion. Among costs which
increased significantly were delivery, communication and supplies. Management
continues to identify cost containment opportunities where expense reductions
can be made without sacrificing the level of service to customers.
INCOME TAXES
Bancorp had income tax expense of $2,873,000 in 1997 compared to $2,442,000 in
1996 and $1,900,000 in 1995. The effective rates were 30.5%, 32.0% and 31.9%,
respectively. With a statutory tax rate of 34.0%, the effective rates reflect
tax exempt interest income.
FINANCIAL CONDITION
EARNING ASSETS AND INTEREST BEARING LIABILITIES
Total consolidated assets of Bancorp at December 31, 1997 increased 15.2% over
December 31, 1996 to $478,597,000. Average assets for 1997 increased 23.8% over
1996 to $437,037,000. During 1997, Bancorp increased its net average earning
assets to $72,082,000 from $62,693,000 during 1996.
The growth of average earning assets occurred primarily in the area of loans.
Loan demand continued to increase during 1997. Commercial and industrial loans
increased 14.3%. Construction and development loans decreased 4.6%. Real estate
mortgage loans increased 30.8%. Consumer loans increased 24.3%.
Regarding derivative financial instruments as defined by SFAS No. 119,
"Disclosures About Derivative Financial Instruments and Fair Value of Financial
Instruments," at December 31, 1997 the Kentucky Bank held an interest rate
collar contract as described in the maturity table under the heading "Net
Interest Income." In addition, the Kentucky Bank has, in its portfolio of
securities,
6
<PAGE>
FHLMC and FNMA issued collateralized mortgage obligations (CMOs) with a carrying
value of approximately $16,826,000. Management monitors these securities on an
ongoing basis and has determined these not to be high risk. With respect to the
total portfolio of securities held to maturity, market value exceeded amortized
cost at December 31, 1997 by 1.1%. At December 31, 1996, amortized cost
exceeded market value by .4%.
Growth of average interest bearing liabilities occurred in all categories other
than money market deposit accounts. With lower interest rates over the last
three years, some depositors have chosen to shift money market funds to time
deposit accounts. Average time deposits increased 28% in 1997 from the 1996
average. Interest bearing demand deposits increased 55% and savings accounts
averaged 15% higher in 1997 as compared to 1996. Overall, average interest
bearing deposits increased 25% in 1997. Average balances of securities sold
under agreements to repurchase decreased slightly in 1996. Commercial depositors
have the opportunity to enter into a sweep agreement whereby excess demand
deposit balances are transferred to a separate account. This balance is then
used to purchase securities sold under agreements to repurchase. Of the total
securities sold under agreements to repurchase and federal funds purchased
caption, the 1997 average balance for federal funds purchased was $1,927,000.
AVERAGE BALANCES AND INTEREST RATES - TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
Year 1997 Year 1996 Year 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in thousands) Balances Interest Rate Balances Interest Rate Balances Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal funds sold $ 11,131 $ 622 5.59% $ 7,851 $ 442 5.63% $ 7,635 $ 477 6.25%
Mortgage loans held for sale 4,181 309 7.39 5,883 453 7.70 3,158 248 7.85
Securities
U.S. Treasury and federal agencies 53,567 3,492 6.52 36,901 2,562 6.94 31,294 2,250 7.12
States and political subdivisions 9,048 551 6.09 7,686 546 7.10 5,706 415 7.27
Loans, net of unearned income 329,162 30,541 9.28 273,031 25,329 9.28 229,674 22,038 9.60
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL EARNING ASSETS 407,089 35,515 8.72 331,352 29,332 8.85 277,467 25,428 9.16
Less allowance for loan losses 5,530 ------- ---- 4,807 ------- ---- 4,115 ------- ----
-------- -------- --------
401,559 326,545 273,352
NON-EARNING ASSETS
Cash and due from banks 15,899 11,120 10,721
Premises and equipment 12,051 8,529 5,672
Accrued interest receivable and
other assets 7,528 6,783 6,147
-------- -------- --------
TOTAL ASSETS $437,037 $352,977 $295,892
-------- -------- --------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand deposits $ 50,137 $ 1,268 2.53% $ 32,259 $ 692 2.15% $ 25,471 $ 649 2.55%
Savings deposits 23,352 774 3.31 20,251 703 3.47 14,733 541 3.67
Money market deposits 47,138 1,612 3.42 48,059 1,671 3.48 48,540 1,833 3.78
Time deposits 195,209 10,953 5.61 152,191 8,715 5.73 118,611 6,755 5.70
Securities sold under agreements
to repurchase and federal funds
purchased 14,408 729 5.06 13,023 651 5.00 13,128 707 5.39
Other short-term borrowings 2,504 113 4.51 1,705 82 4.81 1,914 115 6.01
Long-term debt 2,259 167 7.39 1,171 86 7.34 607 45 7.41
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL INTEREST BEARING LIABILITIES 335,007 15,616 4.66 268,659 12,600 4.69 223,004 10,645 4.77
------- ---- ------- ---- ------- ----
NON-INTEREST BEARING LIABILITIES
Non-interest bearing demand deposits 63,857 51,780 44,340
Accrued interest payable and
other liabilities 3,999 2,863 2,584
-------- -------- --------
TOTAL LIABILITIES 402,863 323,302 269,928
STOCKHOLDERS' EQUITY 34,174 29,675 25,964
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $437,037 $352,977 $295,892
NET INTEREST INCOME -------- $ 19,899 -------- $16,732 -------- $14,783
NET INTEREST SPREAD -------- 4.06% ------- 4.16% ------- 4.39%
---- ---- ----
NET INTEREST MARGIN 4.89% 5.05% 5.31%
---- ---- ----
</TABLE>
7
<PAGE>
SECURITIES
The purpose of the securities portfolio is to provide another source of
interest income as well as liquidity management. In managing the composition
of the balance sheet, Bancorp seeks a balance among earnings sources and
credit and liquidity considerations.
The carrying value of securities is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and federal agency
obligations $ 31,244 $ 19,276 $ 14,399
Mortgage-backed securities - - 1,146
Obligations of states and
political subdivisions 218 165 -
------ ------ ------
$ 31,462 $ 19,441 $ 15,545
------ ------ ------
------ ------ ------
SECURITIES HELD TO MATURITY
U.S. Treasury and federal agency
obligations $ 3,864 $ 30,100 $ 9,079
Mortgage-backed securities 16,826 18,361 10,046
Obligations of states and
political subdivisions 7,962 7,618 7,585
------ ------ ------
$ 28,652 $ 56,079 $ 26,710
------ ------ ------
------ ------ ------
</TABLE>
The maturity distribution and weighted average interest rates of securities at
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
After one but After five but
Within one year within five years within ten years After ten years
---------------- ------------------ ----------------- ----------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and
federal agency
obligations $ 4,269 5.77% $ 18,422 5.94% $ 8,553 6.35% $ - -%
Obligations of states
and political
subdivisions 95 4.50 - - 123 4.80 - -
------ ---- ------ ---- ------ ---- ------ ----
$ 4,364 5.75% $ 18,422 5.94% $ 8,676 6.33% $ - -%
------ ---- ------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ---- ------ ----
SECURITIES HELD TO MATURITY
U.S. Treasury and
federal agency
obligations $ 1,839 5.85% $ 2,025 7.13% $ - -% $ - -%
Mortgage-backed
securities 1,313 6.88 9,818 6.45 4,088 6.49 1,607 6.57
Obligations of states
and political
subdivisions 405 5.70 6,412 5.40 1,145 5.92 - -
------ ---- ------ ---- ------ ---- ------ ----
$ 3,557 6.21% $ 18,255 6.16% $ 5,233 6.37% $ 1,607 6.57%
------ ---- ------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ---- ------ ----
</TABLE>
LOAN PORTFOLIO
Bancorp's primary source of income is interest on loans. The following table
presents the composition of loans at December 31 of the years indicated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 101,030 $ 88,352 $ 81,325 $ 79,397 $ 73,953
Construction and development 21,481 22,518 15,327 8,144 7,431
Real estate mortgage 217,830 166,574 137,618 105,207 91,736
Consumer 29,952 24,104 18,667 14,664 14,943
-------- -------- -------- -------- --------
$ 370,293 $ 301,548 $ 252,937 $ 207,412 $ 188,063
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
8
<PAGE>
The following tables show the amounts of commercial and industrial loans, and
construction and development loans, at December 31, 1997, which, based on
remaining scheduled repayments of principal, are due in the periods indicated.
Also shown are the amounts due after one year classified according to
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturing
- -------------------------------------------------------------------------------
After one but
Within one within five After five
(In thousands) year years years Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 27,358 $ 44,823 $ 28,849 $ 101,030
Construction and development 21,481 - - 21,481
------- -------- ------- -------
------- -------- ------- -------
<CAPTION>
Interest Sensitivity
- -------------------------------------------------------------------------------
Fixed Variable
(In thousands) rate rate
- -------------------------------------------------------------------------------
<S> <C> <C>
Due after one but within five years $ 32,579 $ 12,244
Due after five years 5,564 23,285
------- -------
$ 38,143 $ 35,529
------- -------
------- -------
</TABLE>
NONPERFORMING LOANS AND ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming loans, which include nonaccrual loans and restructured loans,
totaled $290,000 and $854,000 at December 31, 1997 and 1996, respectively. The
threshold at which loans are generally transferred to nonaccrual of interest
status is 90 days past due, and at December 31, 1997, there were no accruing
loans which were past due over 90 days which were not well secured and in the
process of collection. Nonperforming loans represent .08% of total loans at year
end 1997 compared to .28% in 1996.
Nonperforming assets include nonperforming loans, other real estate and
repossessed assets. At December 31, 1997 and 1996, nonperforming assets totaled
$290,000 and $1,129,000, respectively. This represents .06% of total assets at
year end 1997 compared to .27% in 1996.
In addition to the nonperforming loans discussed above, there were loans for
which payments were current or less than 90 days past due where borrowers are
experiencing significant financial difficulties. These loans of approximately
$5,275,000 are monitored by management and considered in determining the level
of the allowance for loan losses. Management feels these loans present no
significant loss exposure. The allowance for loan losses is discussed in detail
under the heading "Provision for Loan Losses."
The following table summarizes impaired loans (1997, 1996 and 1995), nonaccrual,
restructured and past due loans. Loans are placed in a nonaccrual income status
when, in the opinion of management, the prospects for recovering both principal
and accrued interest are considered doubtful.
<TABLE>
<CAPTION>
DECEMBER 31
- -------------------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 290 $ 854 $ 1,212 $ 367 $ 158
Restructured loans - - 61 159
---- ---- ----- ---- ----
$ 290 $ 854 $ 1,212 $ 428 $ 317
---- ---- ----- ---- ----
---- ---- ----- ---- ----
</TABLE>
Interest income recorded on nonaccrual loans (cash basis) for 1997 totaled
$2,000. Interest income that would have been recorded if nonaccrual loans were
on a current basis in accordance with their original terms was $25,300.
9
<PAGE>
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses has been established to provide for loans which may
not be repaid in entirety. Loan losses arise primarily from the loan portfolio,
but may also be generated from other sources such as commitments to extend
credit, guarantees, and standby letters of credit. The allowance for loan losses
is increased by provisions charged to expense and decreased by charge-offs, net
of recoveries. Loans are charged off by management when deemed uncollectible;
however, collection efforts continue and future recoveries may occur.
The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated. Factors considered include past
loss experience, general economic conditions, and information about specific
borrower situations including financial position and collateral values.
Estimating the risk of loss and amount of loss on any loan is subjective and
ultimate losses may vary from current estimates. Estimates are reviewed
periodically and adjustments are reported in income through the provision for
loan losses in the periods in which they become known. The adequacy of the
allowance for loan losses is monitored by the internal loan review staff and
reported to management and the Board of Directors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of Bancorp's allowance for loan losses. Such
agencies may require Bancorp to make additional provisions to the allowance
based upon their judgements about information available to them at the time of
their examinations. Management believes that the allowance for loan losses is
adequate to absorb any losses on existing loans that may become uncollectible.
See "Results of Operations - Provision for Loan Losses."
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loans outstanding, changes in the
allowance for loan losses arising from loans charged off and recoveries on
loans previously charged off by loan category, and additions to the allowance
charged to expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans, net of
unearned income $ 329,162 $ 273,031 $ 229,674 $ 190,409 $ 177,629
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Balance of allowance for loan
losses at beginning of year $ 5,155 $ 4,507 $ 3,649 $ 2,752 $ 2,179
Loans charged off
Commercial and industrial 75 107 435 111 82
Real estate mortgage 26 45 13 9 171
Consumer 183 112 82 64 74
-------- -------- -------- -------- --------
Total loans charged off 284 264 530 184 327
-------- -------- -------- -------- --------
Recoveries of loans
previously charged off
Commercial and industrial 3 27 95 16 20
Real estate mortgage 9 16 13 36 12
Consumer 38 47 20 29 48
-------- -------- -------- -------- --------
Total recoveries 50 90 128 81 80
-------- -------- -------- -------- --------
Net loans charged off 234 174 402 103 247
Additions to allowance
charged to expense 1,000 800 1,260 1,000 820
Balance of allowance of
acquired bank at date
of acquisition - 22 - - -
-------- -------- -------- -------- --------
Balance at end of year $ 5,921 $ 5,155 $ 4,507 $ 3,649 $ 2,752
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of net charge-offs
during year to average
loans net of unearned
income .07% .06% .18% .05% .14%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
10
<PAGE>
The following table sets forth the allocation of the allowance for loan losses
for the loan categories shown. Although specific allocations exist, the entire
allowance is available to absorb future losses in any particular loan category.
<TABLE>
<CAPTION>
DECEMBER 31
- ------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 2,337 $ 1,913 $ 2,227 $ 1,679 $ 1,028
Construction and development 201 241 108 67 64
Real estate mortgage 2,034 1,775 964 866 782
Consumer 163 253 148 180 237
Unallocated 1,186 973 1,060 857 641
------ ------ ------ ------ ------
$ 5,921 $ 5,155 $ 4,507 $ 3,649 $ 2,752
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
The ratio of loans in each category to total outstanding loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
- ------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial 27.3% 29.3% 32.1% 38.3% 39.3%
Construction and development 5.8 7.5 6.1 3.9 4.0
Real estate mortgage 58.8 55.2 54.4 50.7 48.8
Consumer 8.1 8.0 7.4 7.1 7.9
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
Presented below are selected ratios relating to the allowance for loan losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses to average loans .30% .29% .55%
Net charge-offs to average loans .07% .06% .18%
Allowance for loan losses to average loans 1.80% 1.89% 1.96%
Allowance for loan losses to year end loans 1.60% 1.71% 1.78%
Loan loss coverage 44.47X 39.34X 17.95X
</TABLE>
11
<PAGE>
DEPOSITS AND BORROWED FUNDS
Bancorp's core deposits consist of non-interest and interest-bearing demand
deposits, savings deposits, certificates of deposit under $100,000, certain
certificates of deposit over $100,000 and IRAs. These deposits, along with other
borrowed funds are used by Bancorp to support its asset base. By borrowing money
from the least costly sources and adjusting rates offered to depositors, Bancorp
is able to influence the amounts of deposits and borrowed funds needed to meet
its funding requirements. The average amount of deposits in the Bank and average
rates paid on such deposits for the years indicated are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- -------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 63,857 -% $ 51,780 -% $ 44,340 -%
Interest bearing
demand deposits 50,137 2.53 32,259 2.15 25,471 2.55
Savings deposits 23,352 3.31 20,251 3.47 14,733 3.67
Money market deposits 47,138 3.42 48,059 3.48 48,540 3.78
Time deposits 195,209 5.61 152,191 5.73 118,611 5.70
-------- ---- -------- ---- -------- ----
---- ---- ----
$ 379,693 $ 304,540 $ 251,695
-------- -------- --------
-------- -------- --------
</TABLE>
Maturities of time deposits of $100,000 or more outstanding at December 31,
1997, are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands)
- -------------------------------------------------------------------------------
AMOUNT
<S> <C>
3 months or less $ 10,195
Over 3 through 6 months 8,738
Over 6 through 12 months 26,340
Over 12 months 13,319
--------
$ 58,592
--------
--------
</TABLE>
12
<PAGE>
SHORT-TERM BORROWINGS
Federal funds purchased represent overnight borrowings. Repurchase agreements
have maturities of less than one month.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Securities sold under
agreements to repurchase
Year end balance $ 11,684 5.15% $ 12,228 4.88% $ 12,349 5.14%
Average during year 12,481 4.95 12,437 4.98 13,128 5.39
Maximum month end
balance during year 12,265 13,289 15,024
</TABLE>
LIQUIDITY
The role of liquidity is to ensure funds are available to meet depositors'
withdrawal and borrowers' credit demands while at the same time maximizing
profitability. This is accomplished by balancing changes in demand for funds
with changes in the supply of those funds. Liquidity to meet the demand is
provided by maturing assets, short-term liquid assets that can be converted to
cash and the ability to attract funds from external sources, principally
depositors. Due to the nature of services offered by the Banks, management
prefers to focus on transaction accounts and full service relationships with
customers. Management believes it has the ability to increase deposits at any
time by offering rates slightly higher than the market rate. The Indiana Bank
has begun to build market share in southern Indiana with the opening of the
Clarksville branch in 1997.
The Banks have a number of sources of funds to meet liquidity needs on a daily
basis. An increase in loans affects liquidity as the repayment of principal and
interest are a daily source of funds. The deposit base, consisting of consumer
and commercial deposits and large dollar denomination ($100,000 and over)
certificates of deposit, is another source of funds. The majority of these
deposits are from long-term customers and are a stable source of funds. The
Banks have no brokered deposits, and have an insignificant amount of deposits on
which the rate paid exceeded the market rate by more than 50 basis points when
the account was established. In addition, federal funds purchased continue to
provide an available source of liquidity, although this source is seldom needed.
Other sources of funds available to meet daily needs include the sales of
securities under agreements to repurchase and funds made available under a
treasury tax and loan note agreement with the federal government. Also, the
Kentucky Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB). As
a member of the FHLB, the Bank has access to credit products of the FHLB. To
date, the Bank has not needed to access this source of funds. Additionally, the
Kentucky Bank has an available line of credit and federal funds purchased lines
with correspondent banks.
Bancorp's liquidity depends primarily on the dividends paid to it as the sole
shareholder of the Banks. As discussed in note 15 to Bancorp's consolidated
financial statements, the Banks may pay up to $8,432,000 in dividends to Bancorp
without regulatory approval.
13
<PAGE>
CAPITAL
At December 31, 1997, stockholders' equity totaled $36,917,000, an increase of
$5,323,000 or 16.8% over 1996. This increase was due to the strong earnings of
1997 coupled with a philosophy to retain approximately 70% to 80% of earnings in
equity. Cash dividends declared were $.48 per share in 1997 and $.40 per share
in 1996.
In August, 1996, the Board of Directors declared a 2-for-1 stock split to be
effected in the form of a 100% stock dividend. The new shares were distributed
in September 1996. In September 1994 and 1993, the Board of Directors declared
10% stock dividends which were distributed in November, 1994 and 1993,
respectively. These capital changes were made to enhance shareholder value by
increasing the shares of Bancorp's stock outstanding and to adjust the market
price of the stock. Per share information has been restated to reflect the stock
split and stock dividends.
Bank holding companies and their subsidiary banks are required by regulators to
meet risk based capital standards. These standards, or ratios, measure the
relationship of capital to a combination of balance sheet and off balance sheet
risks. The value of both balance sheet and off balance sheet items are adjusted
to reflect credit risks.
At December 31, 1997, Bancorp's tier 1 and total risk based capital ratios were
9.7% and 11.0%, respectively. These ratios exceed the 4.0% tier 1 and 8.0% total
risk based capital minimums. A minimum leverage ratio, adopted by the Federal
Reserve Board to assist in the assessment of capital adequacy, supplements the
risk based capital requirements. The minimum leverage ratio is 3.0%; however,
most bank holding companies are required to maintain a minimum in excess of that
amount. Bancorp's leverage ratio at December 31, 1997 was 7.6%. Note 19 to the
consolidated financial statements provides more details of regulatory capital
requirements as well as capital ratios of the Banks. Bancorp and the Banks
exceed regulatory capital ratios required to be well capitalized. However, these
ratios for Bancorp and the Kentucky Bank have decreased over the last several
years as assets have grown more quickly than equity. Management considers the
effects of growth on capital ratios as it contemplates plans for expansion.
The following table presents various key financial ratios:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.50% 1.47% 1.37%
Return on average stockholders' equity 19.12 17.45 15.62
Dividend pay out ratio, based on basic EPS 24.12 25.32 28.80
Average stockholders' equity to average assets 7.82 8.41 8.77
</TABLE>
14
<PAGE>
ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN 1998
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Also, in June 1997, the Financial
Accounting Standards Board issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement requires
reporting of certain information about operating segments. Both statements are
effective in 1998.
YEAR 2000
Bancorp has undertaken a company wide evaluation of the effects Year 2000 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. The Year 2000 project has advanced to the last three phases
and should have Bancorp substantially Year 2000 compliant by mid 1999. The Year
2000 project coordinator and committee reports to the Board of Directors with
regard to the project plan and status. Costs to prepare for the Year 2000
include new hardware and 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. Management is addressing the matter of loan collectibility as it
relates to customers' accounting, manufacturing and other systems. Customers'
non-compliance with Year 2000 issues could adversely affect their ability to
service their debt. Creditworthiness of customers will now include an evaluation
of their compliance with Year 2000 issues.
15
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
- ----------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 18,153 $ 15,348
Federal funds sold 6,000 4,500
Mortgage loans held for sale 5,183 4,362
Securities available for sale (amortized cost $31,019
in 1997 and $19,111 in 1996) 31,462 19,441
Securities held to maturity (approximate market
value $28,962 in 1997 and $56,055 in 1996) 28,652 56,079
Loans 370,293 301,548
Allowance for loan losses 5,921 5,155
-------- --------
Net loans 364,372 296,393
Premises and equipment 13,903 10,079
Accrued interest receivable 2,970 2,299
Other assets 7,902 6,864
-------- --------
TOTAL ASSETS $ 478,597 $ 415,365
-------- --------
-------- --------
LIABILITIES
Deposits
Non-interest bearing $ 72,103 $ 63,627
Interest bearing 345,468 291,624
-------- --------
Total deposits 417,571 355,251
Securities sold under agreements to repurchase
and federal funds purchased 13,684 19,728
Other short-term borrowings 4,483 2,668
Accrued interest payable and other liabilities 3,827 3,427
Long-term debt 2,115 2,697
-------- --------
TOTAL LIABILITIES 441,680 383,771
-------- --------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
issued and outstanding 3,281,971 in 1997
and 3,271,480 in 1996 5,486 5,451
Surplus 13,644 13,390
Retained earnings 17,495 12,535
Net unrealized gains on securities available for sale 292 218
-------- --------
TOTAL STOCKHOLDERS' EQUITY 36,917 31,594
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 478,597 $ 415,365
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------
1997 1996 1995
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 30,523 $ 25,293 $ 21,988
Federal funds sold 622 442 477
Mortgage loans held for sale 309 453 248
U.S. Treasury and federal agencies 3,492 2,562 2,250
Obligations of states and political subdivisions 393 388 291
------ ------ ------
TOTAL INTEREST INCOME 35,339 29,138 25,254
------ ------ ------
INTEREST EXPENSE
Deposits 14,607 11,781 9,778
Securities sold under agreements to repurchase
and federal funds purchased 729 651 707
Other short-term borrowings 113 82 115
Long-term debt 167 86 45
------ ------ ------
TOTAL INTEREST EXPENSE 15,616 12,600 10,645
------ ------ ------
NET INTEREST INCOME 19,723 16,538 14,609
Provision for loan losses 1,000 800 1,260
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,723 15,738 13,349
------ ------ ------
NON-INTEREST INCOME
Investment management and trust services 3,332 2,400 2,086
Service charges on deposit accounts 1,936 1,551 1,241
Gains on sales of securities available for sale 80 35 -
Gains on sales of mortgage loans held for sale 1,077 1,016 736
Other 1,000 597 460
------ ------ ------
TOTAL NON-INTEREST INCOME 7,425 5,599 4,523
------ ------ ------
NON-INTEREST EXPENSES
Salaries and employee benefits 9,846 7,882 6,694
Net occupancy expense 1,121 963 904
Furniture and fixtures expense 1,633 1,438 1,175
Other 4,141 3,433 3,143
------ ------ ------
TOTAL NON-INTEREST EXPENSES 16,741 13,716 11,916
------ ------ ------
INCOME BEFORE INCOME TAXES 9,407 7,621 5,956
Income tax expense 2,873 2,442 1,900
------ ------ ------
NET INCOME $ 6,534 $ 5,179 $ 4,056
------ ------ ------
------ ------ ------
NET INCOME PER SHARE, BASIC $ 1.99 $ 1.58 $ 1.25
------ ------ ------
------ ------ ------
NET INCOME PER SHARE, DILUTED $ 1.92 $ 1.54 $ 1.22
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Common Stock
Net Unrealized
Gains on
Securities
Number Retained Available
of Shares Amount Surplus Earnings for Sale Total
(In thousands, except share data)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 1,620,311 $ 5,400 $ 13,137 $ 5,777 $ 21 $ 24,335
Net income - - - 4,056 - 4,056
Stock options exercised 7,023 23 108 - - 131
Cash dividends, $.36 per share - - - (1,169) - (1,169)
Change in net unrealized gains on
securities available for sale - - - - 261 261
--------- --------- --------- --------- --------- ---------
Balance December 31, 1995 1,627,334 5,423 13,245 8,664 282 27,614
Net income - - - 5,179 - 5,179
Stock options exercised 8,431 28 145 - - 173
Cash dividends, $ .40 per share - - - (1,308) - (1,308)
Shares issued for 2-for-1 stock split 1,635,715 - - - - -
Change in net unrealized gains on
securities available for sale - - - - (64) (64)
--------- --------- --------- --------- --------- ---------
Balance December 31, 1996 3,271,480 5,451 13,390 12,535 218 31,594
Net income - - - 6,534 - 6,534
Stock options exercised 5,552 18 87 - - 105
Shares issued for dividend reinvestment
and employee stock purchase plans 4,939 17 167 - - 184
Cash dividends, $ .48 per share - - - (1,574) - (1,574)
Change in net unrealized gains on
securities available for sale - - - - 74 74
--------- --------- --------- --------- --------- ---------
Balance December 31, 1997 3,281,971 $ 5,486 $ 13,644 $ 17,495 $ 292 $ 36,917
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,534 $ 5,179 $ 4,056
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 1,000 800 1,260
Depreciation, amortization and accretion, net 1,360 1,097 819
Provision for deferred income taxes (286) (131) (247)
Gains on sales of securities available for sale (80) (35) -
Gains on sales of mortgage loans held for sale (1,077) (1,016) (736)
Origination of mortgage loans held for sale (58,009) (56,770) (43,922)
Proceeds from sales of mortgage loans held for sale 58,265 57,334 42,783
(Increase) decrease in accrued interest receivable (671) (107) (370)
(Increase) decrease in other assets (1,032) (1,243) (694)
Increase (decrease) in accrued interest payable (151) 23 415
Increase (decrease) in other liabilities 517 924 149
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,370 6,055 3,513
-------- -------- --------
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (1,500) (2,000) 8,000
Purchases of securities available for sale (23,237) (10,031) -
Purchases of securities held to maturity (11,380) (44,878) (36,967)
Proceeds from sales of securities available for sale 4,026 7,018 -
Proceeds from maturities of securities available for sale 6,604 3,032 4,034
Proceeds from maturities of securities held to maturity 39,567 15,328 30,483
Net increase in loans (68,979) (48,620) (46,065)
Purchases of premises and equipment (5,096) (4,154) (2,712)
Proceeds from sales of other real estate 172 221 -
Cash paid in acquisition, net of cash received - (414) -
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (59,823) (84,498) (43,227)
-------- -------- --------
FINANCING ACTIVITIES
Net increase in deposits 62,320 67,385 50,817
Net increase (decrease) in securities sold under
agreements to repurchase and federal funds purchased (6,044) 7,379 (2,134)
Net increase (decrease) in short-term borrowings 1,815 1,923 (2,086)
Proceeds from long-term debt 1,800 2,200 -
Repayments of long-term debt (2,382) (110) -
Issuance of common stock 257 91 99
Cash dividends paid (1,508) (1,306) (1,103)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 56,258 77,562 45,593
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,805 (881) 5,879
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,348 16,229 10,350
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,153 $ 15,348 $ 16,229
-------- -------- --------
-------- -------- --------
</TABLE>
Income tax payments were $3,256,000 in 1997, $2,482,000 in 1996 and $2,266,000
in 1995. Cash paid for interest was $15,767,000 in 1997, $12,577,000 in 1996,
and $10,230,000 in 1995.
See accompanying notes to consolidated financial statements.
19
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation, Nature of Operations and Use of Estimates in the
Financial Statements The consolidated financial statements include the accounts
of S.Y. Bancorp, Inc. (Bancorp) and its wholly-owned subsidiaries, Stock Yards
Bank & Trust Company, a Kentucky Bank and Stock Yards Bank & Trust Company, an
Indiana Bank (the Banks). Significant intercompany transactions and accounts
have been eliminated in consolidation. The Banks engage in commercial and retail
banking services, trust and investment management services, and mortgage banking
services. The Kentucky Bank's offices are located throughout Louisville and
Jefferson County, Kentucky. The Indiana Bank has two offices in southern
Indiana. Bancorp's market area is Louisville and surrounding communities
including southern Indiana.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of related revenues and expenses during the reporting
period. Actual results could differ from those estimates.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, Bancorp considers cash and due from banks
to be cash equivalents.
SECURITIES
Securities which are intended to be held until maturity are carried at amortized
cost. Securities available for sale include securities which may be sold in
response to changes in interest rates, resultant prepayment risk and other
factors related to interest rate and prepayment risk changes. Securities
available for sale are carried at fair value with unrealized gains or losses,
net of tax effect, included in stockholders' equity. Amortization of premiums
and accretion of discounts are recorded using the interest method. Gains or
losses on sales of securities are computed on a specific identification cost
basis.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Gains on sales of mortgage loans are recorded at the time of
funding by an investor at the difference between the sales proceeds and the
loan's carrying value.
LOANS
Loans are stated at the unpaid principal balance net of deferred loan fees.
Interest income on loans is recorded on the accrual basis except for those loans
in a nonaccrual income status. Loans are placed in a nonaccrual income status
when the prospects for recovering both principal and accrued interest are
considered doubtful or when a default of principal or interest has existed for
90 days or more unless such a loan is well secured and in the process of
collection. Interest received on nonaccrual loans is generally applied to
principal. Nonaccrual loans are returned to accrual status once principal
recovery is reasonably assured.
22
<PAGE>
Loans are classified as impaired when it is probable the Bank(s) will be unable
to collect interest and principal according to the terms of the loan agreement.
These loans are measured based on the present value of future cash flows
discounted at the loan's effective interest rate or at the fair value of the
loan's collateral, if applicable. Generally, impaired loans are also in
nonaccrual of interest status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that adequately provides
for potential losses. Management determines the adequacy of the allowance based
on reviews of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and such
other factors that, in management's judgement, deserve current recognition in
estimating loan losses. The allowance for loan losses is increased by the
provision for loan losses and reduced by net loan charge-offs.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation of premises and equipment is computed using both
accelerated and straight-line methods over the estimated useful lives of the
assets. Leasehold improvements are amortized on the straight-line method over
the terms of the related leases or over the useful lives of the improvements,
whichever is shorter.
OTHER ASSETS
Goodwill is included in other assets and is being amortized over 15 years.
Accumulated amortization at December 31, 1997 and 1996 was $8 1,000 and
$12,000, respectively. Bancorp assesses the recoverability of this intangible
asset by determining whether the goodwill balance can be recovered over its
remaining life. Undiscounted future operating cash flows of the acquired
business are considered. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting Bancorp's average cost of funds. Also included in
other assets, when applicable, is real estate acquired in settlement of
loans. Other real estate is carried at the lower of cost or fair value minus
estimated selling costs. Any write-downs to fair value at the date of
acquisition are charged to the allowance for loan losses. Expenses incurred
in maintaining assets, write-downs to reflect subsequent declines in value
and realized gains or losses are reflected in operations for the period.
INCOME TAXES
Bancorp accounts for income taxes using the asset and liability method. The
objective of the asset and liability method is to establish deferred tax assets
and liabilities for temporary differences between the financial reporting and
the tax bases of Bancorp's assets and liabilities at enacted tax rates expected
to be in effect when such amounts are realized or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized as
income in the period that includes the enactment date.
23
<PAGE>
NET INCOME PER SHARE
Effective December 31, 1997, Bancorp adopted SIAS No. 128, "Earnings Per Share",
which requires the computation and disclosure of basic and diluted net income
per share. Prior years' net income per share amounts have been restated to
reflect the adoption of this statement. Basic net income per common share is
determined by dividing net income by the weighted average number of shares of
common stock outstanding. Diluted net income per share is determined by dividing
net income by the weighted average number of shares of common stock outstanding
plus the weighted average number of shares that would be issued upon exercise of
dilutive options assuming proceeds are used to repurchase shares pursuant to the
treasury stock method.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Also in June 1997, the Financial
Accounting Standards Board issued Statement No. 13 1, "Disclosures about
Segments of an Enterprise and Related Information." This statement requires
reporting of certain information about operating segments. Both statements are
effective in 1998.
(2) ACQUISITION
On October 1, 1996, Bancorp completed the acquisition of the Indiana Bank. The
total purchase price was $2,803,000, including acquisition costs of $128,000
which exceeded the fair value of the net assets acquired by $1,041,000. The
acquisition was accounted for as a purchase; accordingly, the results of the
operations of the Indiana Bank prior to the acquisition have not been included
in the accompanying consolidated financial statements.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks are required to maintain an average reserve balance in cash or with
the Federal Reserve Bank relating to customer deposits. At December 31, 1997,
the amount of those required reserve balances was approximately $7,401,000.
24
<PAGE>
(4) SECURITIES
The amortized cost and approximate market value of securities available for sale
as of December 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Approximate
Amortized Unrealized Market
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Treasury and federal agencies $ 30,804 $ 443 $ 3 $31,244
Obligations of states and political subdivisions 215 3 - 218
--------- ------ ---- -------
$ 31,019 $ 446 $ 3 $31,462
--------- ------ ---- -------
DECEMBER 31, 1996
U.S. Treasury and federal agencies $ 18,946 $ 338 $ 8 $19,276
Obligations of states and political subdivisions 165 - - 165
--------- ------ ---- -------
$ 19,111 $ 338 $ 8 $19,441
--------- ------ ---- -------
</TABLE>
The amortized cost and approximate market value of securities held to maturity
as of December 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Approximate
Amortized Unrealized Market
(in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Treasury and federal agencies $ 3,864 $ 33 $ - $ 3,897
Mortgage-backed securities 16,826 176 47 16,955
Obligations of states and political subdivisions 7,962 148 - 8,110
--------- ------ ---- -------
$28,652 $357 $ 47 $28,962
--------- ------ ---- -------
DECEMBER 31, 1996
U.S. Treasury and federal agencies $30,100 $ 44 $ 14 $30,130
Mortgage-backed securities 18,361 102 227 18,236
Obligations of states and political subdivisions 7,618 95 24 7,689
--------- ------ ---- -------
$56,079 $241 $265 $56,055
--------- ------ ---- -------
</TABLE>
25
<PAGE>
In December 1995, Bancorp reassessed the appropriateness of the classification
of securities as permitted under certain transition guidelines for SFAS No. 115.
Accordingly, Bancorp transferred securities with a book value of $15,117,000 and
an unrealized net gain of $370,000 from the held to maturity to the available
for sale category. This transfer increased the equity portion of unrealized gain
on securities available for sale by $244,000.
A summary of debt securities as of December 31, 1997 based on maturity is
presented below. Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations. Therefore, in
the case of mortgage-backed securities, the expected remaining life is reflected
rather than contractual maturities.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Approximate Amortized Approximate
(In thousands) Cost Market Value Cost Market Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ 4,357 $ 4,364 $ 3,557 $ 3,565
Due after one year
through five years 18,158 18,422 18,255 18,561
Due after five years
through ten years 8,504 8,676 5,233 5,242
Due after ten years - - 1,607 1,594
-------- -------- -------- --------
</TABLE>
Securities with a carrying value of approximately $30,943,000 at December 31,
1997 and $27,117,000 at December 31, 1996 were pledged to secure public deposits
and certain borrowings.
(5) LOANS
<TABLE>
<CAPTION>
The composition of loans as of December 31, 1997 and 1996 follows:
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial and industrial $101,030 $ 88,352
Construction and development 21,481 22,518
Real estate mortgage 217,830 166,574
Consumer 29,952 24,104
-------- --------
$370,293 $301,548
-------- --------
</TABLE>
The Banks' credit exposure is diversified with secured and unsecured loans to
individuals, small businesses and corporations. No specific industry
concentration exceeds 10% of loans. While the Banks have diversified loan
portfolios, a customer's ability to honor contracts is reliant upon the economic
stability and geographic region and/or industry in which that customer does
business. Loans outstanding and related unfunded commitments are primarily
concentrated within the Banks' market area which encompasses Louisville,
Kentucky and surrounding communities including southern Indiana.
26
<PAGE>
Information about impaired loans follows:
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Principal balance of impaired loans $ 290 $ 854
Impaired loans with a Statement No. 114 valuation allowance - 4
Amount of Statement No. 114 valuation allowance - 4
Impaired loans with no Statement No. 114 valuation allowance 290 850
Average balance of impaired loans for year 632 1,025
----- -----
</TABLE>
Interest income on impaired loans (cash basis) was $2,000, $400 and $71,000, in
1997, 1996 and 1995, respectively.
Loans to directors and their associates, including loans to companies for which
directors are principal owners, and executive officers amounted to approximately
$2,602,000 and $1,824,000 at December 31, 1997 and 1996, respectively. These
loans were made on substantially the same terms, and interest rates and
collateral, as those prevailing at the same time for other customers. During
1997 new loans of $4,412,000 were made to officers and directors and affiliated
companies, repayments amounted to $3,634,000.
An analysis of the changes in the allowance for loan losses for the years ended
December 31, 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1 $ 5,155 $ 4,507 $ 3,649
Provision for loan losses 1,000 800 1,260
Allowance of acquired
bank at acquisition date - 22 -
------- ------- -------
6,155 5,329 4,909
------- ------- -------
Loans charged off 284 264 530
Recoveries 50 90 128
------- ------- -------
Net loan charge-offs 234 174 402
------- ------- -------
BALANCE AT DECEMBER 31 $ 5,921 $ 5,155 $ 4,507
------- ------- -------
------- ------- -------
</TABLE>
27
<PAGE>
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,433 $ 1,433
Buildings and improvements 11,112 6,214
Furniture and equipment 7,586 5,849
Construction in progress 167 2,100
------- -------
20,298 15,596
Accumulated depreciation and amortization 6,395 5,517
------- -------
$13,903 $10,079
------- -------
------- -------
</TABLE>
(7) INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
APPLICABLE TO OPERATIONS:
Current $ 3,159 $ 2,573 $ 2,147
Deferred (286) (131) (247)
------- ------- -------
Total applicable to operations 2,873 2,442 1,900
CHARGED (CREDITED) TO STOCKHOLDERS' EQUITY:
Unrealized gain (loss) on securities available for sale 39 (33) 134
Stock options exercised (32) (82) (32)
------- ------- -------
$ 2,880 $ 2,327 $ 2,002
------- ------- -------
------- ------- -------
An analysis of the difference between the statutory and effective tax rates follows:
YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal income tax rate 34.0 % 34.0 % 34.0 %
Tax exempt interest income (1.3) (1.7) (1.9)
Other, net (2.2) (.3) (.2)
------- ------- -------
30.5 % 32.0% 31.9%
------- ------- -------
------- ------- -------
</TABLE>
28
<PAGE>
The effects of temporary differences that gave rise to significant portions of
the deferred tax assets and deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for loan losses $ 1,789 $ 1,526
Deferred compensation 408 351
Other 42 42
------- -------
TOTAL DEFERRED TAX ASSETS 2,239 1,919
------- -------
DEFERRED TAX LIABILITIES
Property and equipment 337 347
Securities 340 257
------- -------
TOTAL DEFERRED TAX LIABILITIES 677 604
------- -------
NET DEFERRED TAX ASSETS $ 1,562 $ 1,315
------- -------
------- -------
</TABLE>
No valuation allowance for deferred tax assets was recorded as of December 31,
1997 and 1996 because Bancorp and the Banks have had sufficient taxable income
to allow for utilization of the future deductible amounts within the carry-back
period.
(8) DEPOSITS
Included in deposits are certificates of deposit and other time deposits in
denominations of $100,000 or more in the amounts of $58,592,000 and $44,545,000
at December 31, 1997 and 1996, respectively. Interest expense related to
certificates of deposit and other time deposits in denominations of $100,000 or
more was $2,702,000, $2,703,000 and $1,545,000, respectively, for the years
ended December 31, 1997, 1996 and 1995.
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 142,184
1999 41,352
2000 3,200
2001 2,710
2002 and thereafter 2,243
---------
$ 191,689
---------
---------
</TABLE>
29
<PAGE>
(9) SECURITIES BORROWED UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date. Information concerning securities sold
under agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Average balance during the year $ 12,481 $ 12,437
Average interest rate during the year 4.95% 4.98%
Maximum month-end balance
during the year $ 12,265 $ 13,289
-------- --------
-------- --------
</TABLE>
(10) LONG-TERM DEBT
In connection with its 1996 acquisition of the Indiana Bank, Bancorp borrowed
$2,200,000 of which $2,090,000 was outstanding at December 31, 1996. This note
was paid in full during 1997. During 1997 Bancorp established a $6,000,000 line
of credit with a correspondent bank. The balance on this loan at December 31,
1997 was $1,800,000. The interest rate on the line was 7.5875% at December 31,
1997 and is indexed to LIBOR with payments due quarterly. The terms of the note
include a number of financial and general covenants, including capital and
return on asset requirements as well as restrictions on additional long term
debt, future mergers and significant dispositions without the consent of the
lender. The note is renewable on an annual basis.
The Kentucky Bank also has subordinated debentures outstanding amounting to
$315,000 and $607,000 at December 31, 1997 and 1996, respectively. These are due
in October 2049. Interest on these debentures is at a variable rate equal to one
percent less than the Bank's prime rate adjusted annually on January 1. The
Bank's prime rate was 8.25% at December 31, 1997. The debentures are
subordinated to the claims of creditors and depositors of the Bank and are
subject to redemption by the Bank at the principal amount outstanding, upon the
earlier of the death of the registered owners, or an event of default by the
registered owners with respect to loans from the Bank.
(11) NET INCOME PER SHARE AND COMMON STOCK DIVIDENDS
The following table reflects the numerators (net income) and denominators
(average shares outstanding) for the basic and diluted net income per share
computations:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, basic and diluted $6,534 $5,179 $4,056
------ ------ ------
------ ------ ------
Average shares outstanding 3,276 3,267 3,247
Effect of dilutive securities 120 98 76
------ ------ ------
Average shares outstanding including
dilutive securities 3,396 3,365 3,323
------ ------ ------
------ ------ ------
Net income per share, basic $ 1.99 $ 1.58 $ 1.25
------ ------ ------
------ ------ ------
Net income per share, diluted $ 1.92 $ 1.54 $ 1.22
------ ------ ------
------ ------ ------
</TABLE>
30
<PAGE>
In August 1996, the Board of Directors declared a 2-for-1 stock split to be
effected in the form of a 100% stock dividend. The split resulted in the
issuance of 1,635,715 shares of common stock in September 1996. All per share
information herein reflects the adjusted number of common shares outstanding.
(12) ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Kentucky Bank has an agreement with the Federal Home Loan Bank of Cincinnati
(FHLB) which enables this Bank to borrow under terms to be established at the
time of the advance. Advances from the FHLB would be collateralized by certain
first mortgage loans under a blanket mortgage collateral agreement and FHLB
stock. The Bank has not taken any advances under this agreement.
(13) EMPLOYEE BENEFIT PLANS
The Banks have an employee stock ownership plan, a money purchase plan and a
deferred income (401 (k)) profit sharing plan. The plans are defined
contribution plans and are available to all employees meeting certain
eligibility requirements. Expenses of the plans for 1997, 1996 and 1995 were
$702,000, $553,000 and $457,000, respectively. Contributions are made in
accordance with the terms of the plans.
The Kentucky Bank also sponsors an unfunded, non-qualified, defined benefit
retirement plan for certain key officers. At December 31, 1997 and 1996 the
accumulated benefit obligation for this plan was $1,369,000 and $1,334,000,
respectively. Expenses of the plan were $130,000 in 1997, $160,000 in 1996,
$71,000 in 1995.
Obligations for other post-retirement and post-employment benefits are not
significant.
(14) STOCK OPTIONS
In 1995 shareholders approved a stock incentive plan which provides for granting
of options to Bank employees and nonemployee directors to purchase up to 160,000
shares of common stock. Under this plan, options for 130,700 shares were granted
in 1995 and 1997 leaving 29,300 shares available for future grant. Bancorp also
has a stock option plan under which all options have been granted. Any options
granted which do not vest immediately are subject to a vesting schedule of 20%
per year. The options granted at $1.722 per share were granted below market
value of common stock at time of grant and do not expire. All other options were
granted at the market value of common stock at the time of grant and expire ten
years after the date of grant.
31
<PAGE>
Activity with respect to outstanding options follows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE
(IN THOUSANDS) SHARES PRICE PER SHARE
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994 93,392 $ 6.27
Granted in 1995 109,200 14.92
Exercised in 1995 (14,046) 7.04
-------
Outstanding at December 31, 1995 188,546 11.22
Exercised in 1996 (16,812) 4.43
-------
Outstanding at December 31, 1996 171,734 11.88
Granted in 1997 21,500 29.00
Exercised in 1997 (5,552) 13.36
Forfeited in 1997 (3,900) 14.50
-------
Outstanding at December 31, 1997 183,782 13.81
------- -------
------- -------
</TABLE>
The weighted average fair value of options granted in 1997 and 1995 was $7.81
and $8.51, respectively.
Options outstanding at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Option price per share Expiration Shares Options exercisable
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1.722 none 31,880 31,880
7.715 1998 2,904 2,904
8.677 2001 3,238 3,238
12.841 2004 25,360 15,216
14.500 2005 77,400 56,880
16.750 2005 22,000 8,800
29.000 2007 21,000 6,000
------- -------
183,782 124,918
------- -------
------- -------
</TABLE>
32
<PAGE>
Bancorp applies the provisions of APB Opinion No. 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock options granted at the market value of common stock at
the time of grant. Had compensation cost for Bancorp's stock-based compensation
plans been determined consistent with SFAS No. 123, Bancorp's net income and
income per share would have been as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $ 6,534 $ 5,179 $ 4,056
Net income proforma 6,395 5,056 3,933
Income per share, basic as reported 1.99 1.58 1.25
Income per share, basic proforma 1.95 1.55 1.21
Income per share, diluted as reported 1.92 1.54 1.22
Income per share, diluted proforma 1.88 1.54 1.21
-------- -------- --------
-------- -------- --------
</TABLE>
The fair value of each option grant is estimated as of the date of grant using
the Black-Scholes option pricing model. Assumptions used for grants in 1997 and
1995 were dividend yield of 1.56% and 1.78%; expected volatility of 16.11% and
16.40%; risk free interest rate of 6.25% and 5.70%; and expected life of 7 years
and 8 years, respectively.
(15) DIVIDEND RESTRICTION
Bancorp's principal source of funds is dividends received from the Banks. Under
applicable banking laws, bank regulatory authorities must approve the
declaration of dividends in any year if such dividends are in an amount in
excess of the sum of net income of that year and retained earnings of the
preceding two years. At January 1, 1998, the retained earnings of the Banks
available for payment of dividends without regulatory approval were
approximately $8,432,000.
(16) COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1997, the Banks had various commitments and contingent
liabilities outstanding which arose in the normal course of business, such as
standby letters of credit and commitments to extend credit, which are properly
not reflected in the consolidated financial statements. In management's opinion,
commitments to extend credit of $86,887,000, including standby letters of credit
of $10,021,000 represent normal banking transactions, and no significant losses
are anticipated to result therefrom. The Banks' exposure to credit loss in the
event of nonperformance by the other party to these commitments is represented
by the contractual amount of these instruments. The Banks use the same credit
and collateral policies in making commitments and conditional guarantees as for
on-balance sheet instruments. Market risk arises on fixed rate commitments if
interest rates move adversely subsequent to the extension of the commitment.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Banks evaluate each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Banks upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and income-producing commercial properties.
33
<PAGE>
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Banks to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support private borrowing
arrangements.
Also, as of December 31, 1997 there were various pending legal actions and
proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate result of these legal
actions and proceedings will not have a material adverse effect on the
consolidated financial position or results of operations of Bancorp.
The Kentucky Bank leases certain facilities and improvements under
non-cancelable operating leases. Future minimum lease commitments for these
leases are $505,000 in 1998, $461,000 in 1999, $424,000 in 2000, $424,000 in
2001, $425,000 in 2002 and $2,069,000 in the aggregate thereafter. Rent expense,
net of sublease income, was $306,000 in 1997, $329,000 in 1996 and $446,000 in
1995.
(17) FINANCIAL INSTRUMENTS - INTEREST RATE CONTRACTS
Bancorp manages its exposure to market risk, in part, by using interest rate
contracts to modify the existing rate characteristics of its variable rate loan
portfolio. The notional amount of the interest rate contract represents an
agreed upon amount on which calculations of interest payments to be exchanged
are based. The notional amount is significantly greater than the amount at risk.
The cost of replacing contracts in an unrealized gain position is the
measurement of credit risk. Bancorp's contracts are with a counterparty with
high credit ratings and, as of December 31, 1997, the counterparty is expected
to meet its obligations.
At December 31, 1997, Bancorp had entered into an interest rate collar contract
with notional amounts totaling $100 million which matures in December, 1999.
Under this contract, the Kentucky Bank sold an interest rate cap on prime at 9%
on $50 million of loans and bought an interest rate floor on prime at 8% on $50
million of loans. If the monthly average of the prime interest rate exceeds 9%
for any month in the contract, the Bank would pay the counterparty the
difference between the monthly average prime rate and 9%. Conversely, if the
monthly average of prime declines below 8%, the Bank would receive from the
counterparty the difference between the monthly average prime rate and 8%. Net
receipts or payments under the contracts are recognized as adjustments to
interest income on loans. This contract had no effect on interest income in
1997.
At December 31, 1996, Bancorp had entered into an interest rate swap contract
with a notional amount totaling $20 million. The contract had a two year
maturity; however, it was terminated during 1997. Under the contract, Bancorp
received or paid the difference between the floating prime rate and rates stated
in the contract. Net receipts or payments under the contract were recognized as
adjustments to interest income on loans. The contract increased interest income
by $48,000 in 1997 and $74,000 in 1996.
34
<PAGE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
The estimated fair values of Bancorp's financial instruments at December 31 are as follows:
1997 1996
- -----------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $ 24,153 $ 24,153 $ 19,848 $ 19,848
Securities 60,114 60,424 75,520 75,496
Loans 364,372 364,816 296,393 299,325
FINANCIAL LIABILITIES
Deposits $ 417,571 $ 418,648 $ 355,251 $ 356,618
Short-term borrowings 18,167 18,167 22,396 22,396
Long-term debt 2,115 2,115 2,697 2,697
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit - - - -
Standby letters of credit - 150 - 160
Interest rate contracts - - - 99
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value.
CASH, SHORT-TERM INVESTMENTS AND SHORT-TERM BORROWINGS
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
SECURITIES
For securities, fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated
using quoted market prices for similar securities or dealer quotes.
LOANS
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSITS
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the
rates currently offered for deposits of similar remaining maturities.
LONG-TERM DEBT
Rates currently available to Bancorp for debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
35
<PAGE>
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair values of commitments to extend credit are estimated using fees
currently charged to enter into similar agreements and the creditworthiness of
the customers. The fair values of standby letters of credit are based on fees
currently charged for similar agreements or the estimated cost to terminate them
or otherwise settle the obligations with the counterparties at the reporting
date.
INTEREST RATE CONTRACTS
The fair value of interest rate contracts the estimated amount, based on
market quotes, that Bancorp would receive to terminate the agreement at the
reporting date, considering interest rates and the remaining term of the
agreement.
LIMITATIONS
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of Bancorp's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
36
<PAGE>
(19) REGULATORY MATTERS
The Banks are subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly discretionary, actions by regulators.
If undertaken, these measures could have a direct material effect on a bank's
financial statements. Under capital adequacy guidelines, a bank must meet
specific capital guidelines that involve quantitative measures of a bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Banks' capital amounts and classification
are also subject to qualitative judgements by the regulators about components,
risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require banks to maintain minimum amounts and ratios of total and Tier I capital
to risk weighted assets and Tier I capital to average assets. Management
believes, as of December 31, 1997, that both Banks meet all capital adequacy
requirements to which they are subject.
As of December 1997 and 1996, the most recent notifications from each Bank's
primary regulator categorized the Banks as well capitalized under the
regulatory framework. To be categorized as well capitalized, the Banks must
maintain a total risk-based capital ratio of at least 10%; a Tier I ratio of
at least 6%; and a leverage ratio of at least 5%. There are no conditions or
events since those notifications that management believes have changed the
institutions' categories.
A summary of Bancorp's and the Banks' capital ratios at December 31, 1997 and
1996 follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
Actual Actual
- --------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total risk-based capital (1)
Consolidated $40,596 11.04% $ 34,833 11.27%
Kentucky Bank 39,569 10.94 34,557 11.26
Indiana Bank 1,834 30.14 1,777 76.46
Tier I risk-based capital (1)
Consolidated 35,666 9.70 30,345 9.82
Kentucky Bank 34,717 9.60 30,099 9.81
Indiana Bank 1,830 30.08 1,766 75.99
Leverage (2)
Consolidated 35,666 7.57 30,345 7.90
Kentucky Bank 34,717 7.70 30,099 7.86
Indiana Bank 1,830 12.33 1,766 23.10
------- ----- -------- -----
------- ----- -------- -----
</TABLE>
(1) Ratio is computed in relation to risk-weighted assets.
(2) Ratio is computed in relation to average assets.
37
<PAGE>
(20) S.Y. BANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary bank $ 346 $ 161
Investment in subsidiary banks 37,798 33,113
Dividend receivable 394 327
Other assets 966 680
-------- --------
TOTAL ASSETS $ 39,504 $ 34,281
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 394 $ 327
Other liabilities 393 270
Long-term debt 1,800 2,090
Stockholders' equity 36,917 31,594
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,504 $ 34,281
-------- --------
-------- --------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income - Dividends from subsidiary bank $ 2,046 $ 1,458 $ 1,169
Expenses 187 130 83
------- -------- -------
Income before income taxes and
equity in undistributed net
income of subsidiaries 1,859 1,328 1,086
Income tax benefit 64 44 28
------- -------- -------
Income before equity in
undistributed net income
of subsidiaries 1,923 1,372 1,114
Equity in undistributed net
income of subsidiaries 4,611 3,807 2,942
------- -------- -------
NET INCOME $ 6,534 $ 5,179 $ 4,056
------- -------- -------
------- -------- -------
</TABLE>
38
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,534 $ 5,179 $ 4,056
Adjustment to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of subsidiaries (4,611) (3,807) (2,942)
Increase in dividend receivable (67) (2) (66)
Increase in other assets (320) (146) (154)
Increase in other liabilities 190 142 128
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,726 1,366 1,022
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of subsidiary - (2,803) -
Issuance of common stock 257 91 99
Cash dividends paid (1,508) (1,306) (1,103)
Proceeds from long-term debt 1,800 2,200 -
Repayments of long-term debt (2,090) (110) -
-------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,541) (1,928) (1,004)
-------- ------- -------
NET INCREASE (DECREASE) IN CASH 185 (562) 18
CASH AT BEGINNING OF YEAR 161 723 705
-------- ------- -------
CASH AT END OF YEAR $ 346 $ 161 $ 723
-------- ------- -------
-------- ------- -------
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
S.Y. BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of S.Y. Bancorp,
Inc. (Bancorp) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of
Bancorp's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of S.Y. Bancorp, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
January 23, 1998
Louisville, Kentucky
40
<PAGE>
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements and other financial data were
prepared by the management of S.Y. Bancorp, Inc. (Bancorp), which has the
responsibility for the integrity of the information presented. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and, as such, include amounts that are the best estimates
and judgments of management with consideration given to materiality.
Management is further responsible for maintaining a system of internal controls
designed to provide reasonable assurance that the books and records reflect the
transactions of Bancorp and that its established policies and procedures are
carefully followed. Management believes that Bancorp's system, taken as a whole,
provides reasonable assurance that transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization, and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Management also seeks to assure the objectivity and integrity of Bancorp's
financial data by the careful selection and training of qualified personnel, an
internal audit function and organizational arrangements that provide an
appropriate division of responsibility.
Bancorp's independent auditors, KPMG Peat Marwick LLP, have audited the
consolidated financial statements. Their audit was conducted in accordance with
generally accepted auditing standards, which provide for consideration of
Bancorp's internal controls to the extent necessary to determine the nature,
timing, and extent of their audit tests.
The Board of Directors pursues its oversight role for the consolidated financial
statements through the Audit Committee. The Audit Committee meets periodically
and privately with management, the internal auditor, and the independent
auditors to review matters relating to financial reporting, the internal control
systems, and the scope and results of audit efforts. The internal and
independent auditors have unrestricted access to the Audit Committee, with and
without the presence of management, to discuss accounting, auditing, and
financial reporting matters. The Audit Committee also recommends the appointment
of the independent auditors to the Board of Directors.
/s/David H. Brooks
David H. Brooks
Chairman and Chief Executive Officer
/s/David P. Heintzman
David P. Heintzman
President
/s/Nancy B. Davis
Nancy B. Davis
Senior Vice President
and Chief Financial Officer
41
