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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1998 1-13661
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
(502) 582-2571
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INCORPORATED IN KENTUCKY I.R.S. NO. 61-1137529
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class: Name of each exchange on which registered:
Common stock, no par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes__X__ No_____
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of registrant's voting stock (Common Stock, no par
value) held by non-affiliates of the registrant as of February 26, 1999, was
$130,389,000.
The number of shares of registrant's Common Stock, no par value, outstanding as
of February 26, 1999, was 6,645,562.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement related to Registrant's
Annual Meeting of Stockholders to be held on April 20, 1999 (the "Proxy
Statement"), are incorporated by reference into Part III of this Form 10-K.
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S.Y. BANCORP, INC.
FORM 10-K
INDEX
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PAGE
<S> <C>
PART I:
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II:
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 56
PART III:
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners and Management 56
Item 13. Certain Relationships and Related Transactions 57
PART IV:
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57
SIGNATURES 59
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
S. Y. Bancorp, Inc. ("Bancorp"), a Kentucky corporation headquartered in
Louisville, Kentucky, is a bank holding company registered with, and subject to
supervision, regulation and examination by the Board of Governors of the Federal
Reserve System. Bancorp has one subsidiary. The subsidiary is wholly owned and
is a state chartered bank. Bancorp conducts no active business operations;
accordingly, the business of Bancorp is substantially the same as that of its
subsidiary bank.
STOCK YARDS BANK & TRUST COMPANY
Stock Yards Bank & Trust Company ("the Bank") was originally chartered and began
operations as a state bank under the name "Stockyards Bank" in 1904. In 1972,
the Bank was granted full trust powers and changed its name to "Stock Yards Bank
& Trust Company." The Bank's historical market niche has been providing
commercial loans to small and mid-size companies. As an offshoot of these
commercial relationships the Bank also provides banking services to the owners
and employees of these businesses. In 1989, the Bank began to branch and thereby
expand its retail business. The Bank's staff focuses on establishing and
maintaining long term relationships with customers. The Bank engages in a wide
range of commercial and personal banking activities, including the usual
acceptance of deposits for checking, savings and time deposit accounts; making
of secured and unsecured loans; issuance of letters of credit; and rental of
safe deposit boxes. The Bank's lending services include the making of
commercial, industrial, real estate, and consumer loans. The Bank operates a
mortgage company as a division of the Bank. This division originates residential
mortgage loans and sells the loans in the secondary market. The mortgage
division provides customers with a variety of options for home mortgages,
including VA and FHA financing. The Bank provides a wide range of personal and
corporate trust services. Assets under management in the investment management
and trust department totaled approximately $770,000,000 at December 31, 1998.
The Bank offers full service brokerage products through an affiliation with
Raymond James, Inc. In addition, the Bank offers Visa credit card services
through an agreement with a non-affiliated bank. Customers of the Bank have
access to automatic teller machines through a regional network.
The Bank actively competes on the local and regional levels with other
commercial banks and financial institutions for deposits, loans, trust accounts,
and other financial services. Many banks and other financial institutions with
which the Bank competes have capital and resources substantially in excess of
the Bank. While primarily serving Jefferson County, Kentucky, the Bank also
serves customers residing in the adjacent Kentucky counties of Oldham, Shelby
and Bullitt and in southern Indiana.
The Bank has twelve banking centers including the main office. Some of these
locations are owned while others are leased. See "ITEM 2. PROPERTIES."
In 1996, Bancorp acquired the Austin State Bank in Scott County, Indiana. This
acquisition has allowed Bancorp to establish banking operations in southern
Indiana, a natural part of the Louisville, Kentucky metropolitan area. This bank
had been in operation since 1909 and was family owned until the acquisition by
Bancorp. Until the change of ownership, the bank offered very limited lending
products, as well as checking and savings accounts. The Indiana branches offer
the same products as the Louisville/Jefferson County branches. In May, 1998, the
Indiana Bank was merged with Stock Yards Bank & Trust Company (Kentucky).
At December 31, 1998, the Bank had 275 full-time equivalent employees. Employees
are not subject to a collective bargaining agreement. Bancorp and the Bank
consider their relationships with employees to be good.
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SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition and
prospects of Bancorp and its subsidiary can be materially affected not only by
management decisions and general economic conditions but also by legislative and
governmental actions of Congress and the various federal and state regulatory
agencies with jurisdiction over Bancorp and the Bank, such as the Federal
Reserve Bank ("FRB"), Federal Deposit Insurance Corporation ("FDIC") and the
Kentucky and Indiana Departments of Financial Institutions. The effect of
applicable statutes, regulations and policies can be significant, cannot be
predicted with a high degree of certainty, and can change over time.
Bank holding companies and banks are subject to enforcement actions by their
regulators for statutory and regulatory violations and safety and soundness
considerations. In addition to compliance with statutory and regulatory
limitations and requirements concerning financial, managerial and operating
matters, regulated financial institutions such as Bancorp and the Bank must file
periodic and other reports and information with their regulators and are subject
to examination by each of their regulators.
The statutory requirements applicable to, and regulatory supervision of, bank
holding companies and banks have increased significantly and have undergone
substantial change in recent years. These changes are embodied in, among others,
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), enacted in August 1989, the Federal Insurance Corporation
Improvement Act of 1991 ("FDICIA"), enacted in December 1991, the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Community
Development Act") and the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "IBBEA"), the last two of which were enacted in
September 1994, and the regulations promulgated thereunder. Many of the
regulations promulgated pursuant to FDICIA have only recently been finalized,
and the provisions of the Community Development Act and IBBEA are still being
implemented. As a result, the impact of these new laws on Bancorp and the Bank
cannot be predicted with certainty.
Legislation may be introduced from time to time that could, if enacted, have
significant impact on the operations of Bancorp and its subsidiary. Congress is
considering legislation to broaden the powers of bank holding companies and
permit other financial service companies to own banks. Legislation also has been
introduced in the Congress to restructure the federal bank regulatory system.
Although the Secretary of Treasury of the United States and the Chairman of the
FRB have previously expressed support for restructuring the federal bank
regulatory system, there can be no certainty as to the effect, if any, that such
legislation would have on the regulation of Bancorp or the Bank.
The following discussions and other references to and descriptions of the
regulation of financial institutions and their parent holding companies
contained herein are not intended to constitute and do not purport to be a
complete statement of all legal restrictions and requirements applicable to
Bancorp and the Bank. All such descriptions are qualified in their entirety by
reference to applicable statutes, regulations and policies.
Regulation of Bank Holding Companies
Bancorp is a bank holding company registered under the Bank Holding Company Act
of 1956, as amended. As such, Bancorp is subject to regulation, supervision and
examination by the FRB. The business and affairs of Bancorp are regulated in a
variety of ways, including limitations on acquiring control of other banks and
bank holding companies, limitations on activities and investments, regulatory
capital requirements and limitations on payment of dividends. In addition, it is
the FRB's policy that a bank holding company is expected to act as a source of
financial strength to banks that it owns or controls and, as a result, the FRB
could require Bancorp to commit resources to support the Bank in circumstances
in which Bancorp might not do so absent the FRB's policy.
Federal Reserve examiners assign a formal supervisory rating to the adequacy of
a bank holding company's and its member bank's risk management processes,
including internal controls. The emphasis on sound risk management processes
4
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and strong internal controls reflects the Federal Reserve's view that proper
risk management is critical to the conduct of safe and sound banking activities.
The FRB has adopted minimum risk-based capital standards for bank holding
companies. The FRB requires bank holding companies to maintain certain minimum
ratios of capital to total risk-adjusted assets. A bank holding company must
meet two risk-based capital standards, a "core" or "Tier 1" capital requirement
and a total capital requirement. The current regulations require that a bank
holding company maintain Tier 1 capital equal to 4% of risk-adjusted assets and
total capital equal to 8% of risk-adjusted assets, at least one-half of which
must be Tier 1 capital. Tier 1 capital consists of common stockholders' equity,
qualifying noncumulative perpetual preferred stock, qualifying cumulative
perpetual preferred stock (up to 25% of total Tier 1 capital), and minority
interests in the equity accounts of consolidated subsidiaries. Core capital
excludes goodwill and certain other intangible assets.
Total capital represents the sum of Tier 1 capital plus "Tier 2" capital, less
certain deductions. Tier 2 or "supplementary" capital consists, subject to
certain limitations, of the allowance for loan and lease losses, perpetual
preferred stock, hybrid capital instruments, perpetual debt, mandatory
convertible debt securities, term subordinated debt, and intermediate term
preferred stock. In determining total capital, a bank holding company must
deduct its investments in unconsolidated banking and finance subsidiaries and,
as determined by the FRB on a case by case basis, other designated subsidiaries
or associated companies; reciprocal holdings of certain securities of banking
organizations; and other deductions required by regulation or determined by the
FRB on a case by case basis.
The FRB also has established a minimum leverage ratio requirement for bank
holding companies. The leverage ratio, which is defined as Tier 1 capital
divided by average quarterly assets (net of allowance for losses and goodwill),
is 3% for banking organizations that do not anticipate significant growth and
that have well-diversified risk, excellent asset quality, high liquidity and
good earnings. Banking organizations, however, generally are expected to operate
well above these minimum risk-based ratios and are expected to have ratios of at
least 100 to 200 basis points above the stated minimum, depending upon their
particular condition and growth plans. Higher capital ratios could be required
if warranted by the particular circumstances or risk profile of a given banking
organization. The FRB has not advised Bancorp of any specific minimum Tier 1
leverage ratio applicable to it.
As of December 31, 1998, Bancorp had Tier 1 and total risk-based capital ratios
of 9.50% and 10.82%, respectively, and a Tier 1 leverage ratio of 7.31%.
The failure of a bank holding company to meet its risk-weighted capital ratios
may result in supervisory action, as well as an inability to obtain approval of
any regulatory applications and, potentially, increased frequency of
examination. The nature and intensity of the supervisory action will depend upon
the level of noncompliance.
Risk-based capital ratios which focus principally on broad categories of credit
risk are only one indicator of the overall financial health of a bank
organization. They do not incorporate other factors that can affect Bancorp's
financial condition, such as overall interest rate risk exposure, liquidity,
funding and market risks, the quality and level of earnings, investment or loan
portfolio concentrations, the quality of loans and investments, the
effectiveness of loan and investment policies and management's ability to
monitor and control financial and operating risks.
Regulation of the Bank
The Bank is state chartered and subject to regulation, supervision and
examination by the Kentucky Department of Financial Institutions. The deposit
accounts of the Bank are insured up to applicable limits by the FDIC's Bank
Insurance Fund (the "BIF"). Thus, the Bank is also subject to regulation,
supervision and examination by the FDIC. In certain instances, the statutes
administered and regulations promulgated by certain of these agencies are more
stringent than those of other agencies with jurisdiction. In these instances,
the Bank must comply with the more stringent restrictions, prohibitions or
requirements.
5
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The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, the
Bank's capital ratios, payment of dividends, liquidity requirements, the nature
and amount of the investments that the Bank may make, transactions with
affiliates, community and consumer lending, internal policies and controls,
reporting by and examination of the Bank and changes in control of the Bank. The
federal bank regulators have recently adopted an interest rate risk component to
the risk-based capital requirements to assess the exposure of banks to declines
in the economic value of the bank's capital due to changes in interest rates.
FDIC regulations establish three minimum capital standards for insured state
banks. The Bank's capital ratios are computed in a manner substantially similar
to the manner in which bank holding company capital ratios are determined. The
FDIC capital requirements are minimum requirements and higher levels of capital
will be required if warranted by the particular circumstances or risk profile of
an individual bank.
FDICIA provides the federal banking regulators with broad power to take "prompt
corrective action" to resolve the problems of undercapitalized institutions. The
extent of the regulators' powers depends on whether the institution in question
is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized". Under
regulations adopted by the federal banking regulators, a bank is considered
"well capitalized" if it has a total risk-based capital ratio of 10% or greater,
has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of
5% or greater and is not subject to any order or written directive to meet and
maintain a specific capital level. An "adequately capitalized" bank is defined
as one that has a total risk-based capital ratio of 8% or greater, has a Tier 1
risk-based capital ratio of 4% or greater, has a leverage ratio of 4% or greater
(or 3% or greater in the case of a bank with the highest composite regulatory
examination rating that is not experiencing or anticipating significant growth)
and does not meet the definition of a well capitalized bank. A bank would be
considered "undercapitalized" if it has a total risk-based capital ratio of less
than 8%, a Tier 1 risk-based capital ratio of less than 4% or a leverage ratio
of less than 4% (or 3% in the case of a bank with the highest composite
regulatory examination rating that is not experiencing or anticipating
significant growth); "significantly undercapitalized" if the bank has a total
risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of
less than 3% or a leverage ratio of less than 3%; and "critically
undercapitalized" if the bank has a ratio of tangible equity to total assets of
equal to or less than 2%. The appropriate federal banking regulator may
downgrade a bank to the next lower category if the regulator determines after
notice and opportunity for hearing or response, that the bank is in an unsafe or
unsound condition or that the bank has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam.
As of December 31, 1998, the Bank qualified as "well capitalized." The Bank had
total risk-based capital ratio of 10.94%, Tier 1 risk-based capital ratio of
9.62% and leverage ratio of 7.39%.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include a prohibition on capital distributions by the institution
if, after making the distribution, it would be undercapitalized; prohibition on
payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching or new lines of business; requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; requiring the holding
company to divest the institution or other non-banking subsidiaries; prohibiting
the holding company from making any distributions without FRB approval;
prohibiting the payment of principal or interest on subordinated debt; and,
ultimately, appointing a receiver for the institution.
6
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ITEM 2. PROPERTIES
The principal offices of Bancorp and the Bank are located at 1040 East Main
Street, Louisville, Kentucky, in a two story building containing approximately
28,000 square feet. Adjacent to the main location there are also a drive-through
facility, an operations center containing approximately 40,000 square feet, a
garage of approximately 5,000 square feet, and parking for approximately 100
customers and employees.
In addition to the main office complex, the Bank owned the following branch
properties at December 31, 1998:
Poplar Level Road - approximately 2,500 square feet;
Outer Loop - approximately 3,700 square feet;
Stony Brook - approximately 5,500 square feet;
Springhurst - approximately 5,500 square feet;
Austin, Indiana - approximately 1,200 square feet;
Rudy Lane (building only) - approximately 6,000 square feet.
At December 31, 1998, the Bank leased the following branch facilities in
Louisville, Kentucky:
South Fifth Street - approximately 10,000 square feet;
St. Matthews - approximately 6,000 square feet;
Middletown - approximately 3,000 square feet;
Dixie Highway - approximately 7,200 square feet with 3,600 feet
sub-leased.
Clarksville, Indiana - approximately 5,500 square feet;
Third & Tenny Streets - approximately 2,200 square feet;
Rudy Lane - land lease;
Blankenbaker Parkway - approximately 2,970 square feet;
Hikes Lane ATM - land lease.
See Notes 6 and 16 to Bancorp's consolidated financial statements for the year
ended December 31, 1998, for additional information relating to amounts invested
in premises, equipment and lease commitments.
ITEM 3. LEGAL PROCEEDINGS
See Note 16 to Bancorp's consolidated financial statements for the year ended
December 31, 1998, for information relating to legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, and ages (as of December 31, 1998) of all
current executive officers of Bancorp. It is anticipated these individuals will
be chosen as executive officers at the organizational meeting of Bancorp's Board
of Directors following the 1999 Annual Meeting of Shareholders of Bancorp to be
held on April 20, 1999. Each executive officer is appointed by the Bancorp's
Board of Directors to serve at the pleasure of the Board. There is no
arrangement or understanding between any executive officer of Bancorp and any
other person(s) pursuant to which he/she was or is to be selected as an officer.
<TABLE>
<CAPTION>
Name and Age Position and offices
of Executive Officer with Bancorp
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<S> <C>
David H. Brooks Chairman and Chief Executive Officer
Age 56 and Director
David P. Heintzman President and Director
Age 39
Kathy C. Thompson Executive Vice President, Secretary and Director
Age 37
Phillip S. Smith Executive Vice President
Age 41
Greg A. Hoeck Executive Vice President
Age 48
Nancy B. Davis Executive Vice President, Treasurer and Chief
Age 43 Financial Officer
</TABLE>
Mr. Brooks was appointed Chairman and Chief Executive Officer of Bancorp and the
Bank in January, 1993. Prior thereto, he was President of Bancorp and the Bank.
Mr. Heintzman was appointed President of Bancorp and the Bank in January, 1993.
Prior thereto he served as Treasurer and Chief Financial Officer of Bancorp and
Executive Vice President of the Bank.
Ms. Thompson was appointed Executive Vice President of Bancorp and the Bank in
January, 1996. She joined the Bank in June, 1992 as Senior Vice President and is
Manager of the Investment Management and Trust Department.
Mr. Smith was appointed Executive Vice President of the Bank in January, 1996.
Prior thereto, he was Senior Vice President of the Bank. He is primarily
responsible for the commercial lending area of the Bank.
Mr. Hoeck joined the Bank as Executive Vice President in May, 1998. He is
primarily responsible for the retail and marketing areas of the Bank. Prior to
joining the Bank, Mr. Hoeck was an Executive Vice President for PNC Bank and the
Retail Market Manager for the Kentucky and Indiana markets.
Ms. Davis was appointed Executive Vice President of Bancorp and the Bank in
February, 1999. Prior thereto she was Senior Vice President of Bancorp and the
Bank. She was appointed Chief Financial Officer of Bancorp in January, 1993.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Bancorp's common stock is traded on the 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 Bank to Bancorp is subject to the restriction described in note
15 to the consolidated financial statements. On December 31, 1998, Bancorp had
751 shareholders of record. The information below has been adjusted to reflect
the February, 1999 2-for-1 stock split.
<TABLE>
<CAPTION>
1998 1997
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Cash Dividends Cash Dividends
Quarter High Low Declared High Low Declared
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $ 20.75 $ 19.38 $ .06 $ 17.13 $ 14.75 $ .06
Second 28.00 21.00 .07 19.00 15.50 .06
Third 24.32 22.57 .08 21.88 18.00 .06
Fourth 25.25 21.38 .08 25.25 19.88 .06
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 23,294 $ 19,723 $ 16,538 $ 14,609 $ 12,338
Provision for loan losses 1,600 1,000 800 1,260 1,000
Net income 8,218 6,534 5,179 4,056 3,101
PER SHARE DATA
Net income, basic $ 1.25 $ 1.00 $ .79 $ .63 $ .48
Net income, diluted 1.21 .96 .77 .61 .47
Cash dividends declared .28 .24 .20 .18 .15
AVERAGES
Stockholders' equity $ 40,691 $ 34,174 $ 29,675 $ 25,964 $ 23,320
Assets 540,696 437,037 352,977 295,892 253,139
Long-term debt 2,100 2,259 1,171 607 617
RATIOS
Return on average assets 1.52% 1.50% 1.47% 1.37% 1.23%
Return on average stockholders' equity 20.20 19.12 17.45 15.62 13.30
Average stockholders' equity to
average assets 7.53 7.82 8.41 8.77 9.21
</TABLE>
Per share information has been adjusted to reflect stock splits and stock
dividends.
9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to provide information as to the analysis of
the consolidated financial condition and results of operations of S.Y. Bancorp,
Inc. (Bancorp) and its wholly-owned subsidiary, Stock Yards Bank & Trust Company
(the Bank). Bancorp, incorporated in 1904, has no active business operations.
Thus Bancorp's business is substantially the same as that of the Bank. The Bank,
chartered in 1904 has operated continuously since that time. The Bank conducted
business at one location for 85 years and then began branching. At December 31,
1998, the Bank had twelve locations with two more scheduled to open in the first
half of 1999. The combined effect of added convenience with the Bank's focus on
flexible, attentive customer service has resulted in exceptional growth and
profitability, especially for the past six years. The wide range of services
added by the wealth management group (investment managment and trust, private
banking, and brokerage) and by the mortgage department helps support the
corporate philosophy of capitalizing on relationships rather than single
transactions.
Bancorp has made and will make certain forward-looking statements in the Annual
Report on Form 10-K and in other contexts. These comments relate to present or
future trends or factors affecting the banking industry and specifically the
operations and products of Bancorp and the Bank. Actual results could differ
materially from those projected. Management undertakes no obligation to release
revisions to these forward-looking statements or reflect events or circumstances
after the date of this report.
This discussion should be read in conjunction with Bancorp's consolidated
financial statements and accompanying notes and other schedules presented
elsewhere in this report.
RESULTS OF OPERATIONS
Net income was $8,218,000 or $1.21 per share on a diluted basis in 1998. This
compares to $6,534,000 or $.96 per share and $5,179,000 or $.77 per share in
1997 and 1996, respectively. The increase in 1998 earnings was attributable to
several factors, the most notable of which were net interest income and
non-interest income growth. Earnings include a 18.3% increase in fully taxable
equivalent net interest income and a 53.2% 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 25.6%. 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 $23,541,000, $19,899,000, and $16,732,000 for 1998,
1997, and 1996, respectively. This represents a 18.3% increase for 1998 over
1997 and a 18.9% increase for 1997 over 1996. These improvements in net interest
income resulted from an increase in average earning assets offset by a decline
in net interest spread. Average earning assets increased $92,509,000 to
$499,598,000 in 1998 and $75,737,000 to $407,089,000 in 1997.
Net interest spread and net interest margin were 3.94% and 4.71%, respectively
in 1998, 4.06% and 4.89%, respectively, in 1997 and 4.16% and 5.05%,
respectively in 1996. The Bank's prime lending rate was 8.00% and 8.50% at
December 31, 1998 and 1997, respectively. It did not change during 1997. Average
rates earned on earning assets decreased 9 basis points, and average rates paid
on interest bearing liabilities increased 3 basis points when comparing 1998 to
1997.
10
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INTEREST RATE SENSITIVITY
The following table provides information about Bancorp's 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 collars, the table presents notional amounts.
Notional amounts are used to calculate the contractual payments to be
exchanged under the contracts.
Bancorp's interest bearing liabilities slightly exceed its interest earning
assets on a cumulative repricing basis through one year. This position, which is
termed a negative interest sensitivity gap, generally allows for a positive
impact on net interest income in periods of declining interest rates and a
negative impact on net interest income during periods of rising interest rates.
In Bancorp's case, during periods of falling rates, variable rate loans reprice
immediately. While deposit rates will respond by dropping, they will not drop as
quickly nor as drastically. Bancorp's interest rate risk management strategy
includes monitoring the mix of variable rate loans and fixed rate loans, which
at December 31, 1998 were 33% and 67%, respectively. Management is aware,
however, that it will be necessary to re-negotiate rates on some of the fixed
rate loans if the prime rate drops.
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 Bank manages interest rate risk by
adjusting the mix of fixed rate loans and securities against longer term fixed
rate time deposits.
11
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total Fair Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments
Federal funds sold (variable rate) $ 7,000 - - - - - $ 7,000 $ 7,000
Average interest rate 4.51% - - - - - 4.51%
Loans held for sale (fixed rate) $ 9,791 - - - - - $ 9,791 $ 9,791
Average interest rate 6.82% - - - - - 6.82%
Securities
Fixed rate $ 38,174 $ 7,073 $ 8,846 $ 10,608 $ 11,418 $ 23,698 $ 99,817 $100,475
Average interest rate 5.71% 6.98% 6.44% 6.34% 6.01% 7.16% 6.42%
Loans
Fixed rate $ 60,298 $ 42,621 $ 44,051 $ 48,203 $ 52,296 $ 49,691 $297,160 $298,801
Average interest rate 8.95% 9.00% 8.83% 8.76% 8.63% 8.03% 8.70%
Variable rate $ 71,867 $ 29,979 $ 9,294 $ 3,331 $ 5,905 $ 30,750 $151,126 $151,126
Average interest rate 8.42% 8.47% 8.43% 8.91% 8.83% 9.26% 9.19%
Deposits
Non-interest bearing checking $ 12,844 $ 12,844 $ 12,844 $ 12,844 $ 12,844 $ 20,913 $ 85,133 $ 85,133
Average interest rate - - - - - - -
Savings and interest
bearing checking $ 26,158 $ 26,158 $ 26,158 $ 26,158 $ 26,158 $ 43,594 $174,384 $174,384
Average interest rate 2.98% 2.98% 2.98% 2.98% 2.98% 2.98% 2.98%
Time deposits (fixed rate) $186,905 $ 51,904 $ 8,009 $ 4,589 $ 3,787 $ 2,901 $258,095 $259,976
Average interest rate 5.18% 5.54% 5.56% 5.69% 5.64% 5.60% 5.34%
Federal funds purchased,
securities sold under agreements
to repurchase and other
short-term borrowings
(variable rate) $ 39,388 - - - - - $ 39,388 $ 39,388
Average interest rate 4.32% - - - - - 4.32%
Long term debt (variable rate) $ 1,800 - - - - $ 300 $ 2,100 $ 2,100
Average interest rate 7.28% - - - - 6.75% 7.20%
Interest rate collars
Carrying amount - $ 61 - - - - $ 61 $ 68
Notional amount $ 50,000 $ 50,000 - - - - $100,000 $ 68
Cap strike rate 9.00% 7.75% - - - - - -
Floor strike rate 8.00% 7.25% - - - - - -
</TABLE>
12
<PAGE>
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 1998 and 1997 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>
1998/1997 1997/1996
- ----------------------------------------------------------------------------------------------------------------------------
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 $ 7,173 $ (470) $ 7,643 $ 5,212 $ 4 $ 5,208
Federal funds sold 90 (40) 130 180 (3) 183
Mortgage loans held for sale 241 (5) 246 (144) (18) (126)
Securities
Taxable (164) (163) (1) 930 (165) 1,095
Tax-exempt 264 81 183 5 (84) 89
------- ------- ------- ------- ------- -------
TOTAL INTEREST INCOME 7,604 (597) 8,201 6,183 (266) 6,449
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Deposits
Interest bearing demand deposits 1,102 269 833 576 141 435
Savings deposits (9) (60) 51 71 (33) 104
Money market deposits (170) (39) (131) (59) (27) (32)
Time deposits 2,907 (21) 2,928 2,238 (179) 2,417
Federal funds purchased and securities
sold under agreements to repurchase 153 (48) 201 78 8 70
Other short-term borrowings (7) 17 (24) 31 (5) 36
Long-term debt (14) (2) (12) 81 1 80
------- ------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE 3,962 116 3,846 3,016 (94) 3,110
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 3,642 $ (713) $ 4,355 $ 3,167 $ (172) $ 3,339
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
13
<PAGE>
PROVISION FOR LOAN LOSSES
In determining the provision for loan losses charged to expense, management
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'
ability to pay. Responding to these factors, the provision for loan losses
was $1,600,000 in 1998, $1,000,000 in 1997 and $800,000 in 1996. At December
31, 1998, the allowance for loan losses was 1.49% of loans compared to 1.60%
at December 31, 1997.
Charge-off history has been well below industry averages. The Bank's loan
portfolio is 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, 1998, is adequate to absorb anticipated losses in the loan
portfolio as of this date.
NON-INTEREST INCOME AND EXPENSES
Non-interest income increased by 53.2% in 1998 as compared to 1997, and 32.6% in
1997 as compared to 1996.
The largest component of non-interest income is investment management and
trust services income which increased 37.2% in 1998, 38.8% in 1997 and 15.1%
in 1996. Assets under management, through customer retention, attraction of
new business and market appreciation, grew to $770 million as of December 31,
1998 as compared to $632 million as of December 31, 1997. Growth in the
department's assets include both personal and employee benefit accounts. The
assets under management reported above include $100 million of the Bank's
securities portfolio as of December 31, 1998 and $60 million as of December
31, 1997.
Service charges on deposit accounts increased 49.1% over 1997. 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 1998; however, the vast majority of the increase is
due to account volume.
The 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 $2,047,000 in 1998, $1,077,000 in 1997
and $1,016,000 in 1996. Interest rates on conventional mortgage loans
directly impact the volume of business transacted by the mortgage banking
department. Falling rates in 1998 stimulated home buying and refinancing.
Additionally, the mortgage company began origination and sale of sub-prime
loans in 1998. The latter contributed $98,000 to the above gains in 1998.
Investors commit to purchase both prime and sub-prime loans when such loans
are originated, subject to verification of certain underwriting criteria.
With relatively stable interest rates during 1996 and 1997, growth in those
years was due more to the mortgage company's expanding reputation. Profit
margins in the mortgage banking industry have been shrinking over the last
several years making increasing volumes a focus.
Other non-interest income increased in 1998 as compared to 1997 by $525,000
or 52.5% and $403,000 or 67.5% in 1997 compared to 1996. The increases are
due to several contributing factors, the largest of which is the addition of
a title services department during 1998. Title services fees totaled $252,000
in 1998. Other significant increases include credit card commisions and
merchant fees of $218,000 in 1998 compared to $143,000 in 1997, and check
card income of $236,000 in 1998 compared to $121,000 in 1997.
Total non-interest expenses increased 25.6% in 1998 over 1997, and 22.1% in
1997 over 1996.
14
<PAGE>
Salaries and employee benefits, the largest non-interest expense category,
increased 18.4% in 1998 and 24.9% in 1997. These increases occurred primarily
from regular salary increases and new employees added to support expansion.
As of December 31, 1998, the Bank had 275 full time equivalent employees
(FTEs). As of December 31, 1997, that total was 250 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.
There are no significant obligations for post-retirement or post-employment
benefits.
Net occupancy expense increased 25.5% in 1998 and 16.4% in 1997. Occupancy
expenses have increased as the Bank has continued its expansion plans. In
1998, the Bank opened one additional banking center. The Bank has twelve
banking center locations including the main office. Furniture and equipment
expense increased 23.0% in 1998 compared to 1997 and 13.6% in 1997 compared
to 1996. Growing facilities and significant investments in computer
technology have resulted in significant increases over the last several years.
Other non-interest expenses increased 43.5% in 1998 and 20.6% in 1997. The
increase in both years largely related to the Bank'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 $3,829,000 in 1998 and $2,873,000 in 1997
compared to $2,442,000 in 1996. The effective rates were 31.8%, 30.5%, and 32.0%
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, 1998 increased 27.4%
over December 31, 1997 to $609,788,000. Average assets for 1998 increased
23.7% over 1997 to $540,696,000. During 1998, Bancorp increased its net
average earning assets to $82,024,000 from $72,082,000 during 1997.
The growth of average earning assets occurred primarily in the area of loans.
Loan demand continued to increase during 1998. Commercial and industrial
loans increased 2.3%. Construction and development loans decreased 40.4%.
Real estate mortgage loans increased 27.6%. Consumer loans increased 22.8%.
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 27% in 1998 from the
1997 average, and 28% in 1997 from the 1996 average. Average interest bearing
demand deposits increased 58% and 55% respectively in 1998 and 1997. Savings
accounts averaged 7% higher in 1998 and 15% higher in 1997 as compared to the
prior year. Overall, average interest bearing deposits increased 25% in 1997.
Average balances of securities sold under agreements to repurchase increased
significantly in 1998. 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 used to purchase securities sold under
agreements to repurchase. Securities sold under agreements to repurchase
averaged $18,527,000 in 1998 as compared to $12,481,000 in 1997. During 1998
the Bank increased its emphasis on these services. Also during 1998, "sweep"
accounts that had been invested in off balance sheet vehicles through a third
party were converted to securities sold under agreements to repurchase.
15
<PAGE>
AVERAGE BALANCES AND INTEREST RATES - TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
YEAR 1998 YEAR 1997 YEAR 1996
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 13,736 $ 712 5.18% $ 11,131 $ 622 5.59% $ 7,851 $ 442 5.63%
Mortgage loans held for sale 7,577 550 7.26 4,181 309 7.39 5,883 453 7.70
Securities
Taxable 53,552 3,328 6.21 53,567 3,492 6.52 36,901 2,562 6.94
Tax exempt 11,798 815 6.91 9,048 551 6.09 7,686 546 7.10
Loans, net of unearned income 412,935 37,714 9.13 329,162 30,541 9.28 273,031 25,329 9.28
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL EARNING ASSETS 499,598 43,119 8.63 407,089 35,515 8.72 331,352 29,332 8.85
------- ---- ------- ---- ------- ----
Less allowance for loan losses 6,401 5,530 4,807
-------- -------- --------
493,197 401,559 326,545
NON-EARNING ASSETS
Cash and due from banks 20,975 15,899 11,120
Premises and equipment 14,823 12,051 8,529
Accrued interest receivable and
other assets 11,701 7,528 6,783
-------- -------- --------
TOTAL ASSETS $540,696 $437,037 $352,977
-------- -------- --------
Interest bearing liabilities
Deposits
Interest bearing demand deposits $ 78,995 $ 2,370 3.00% $ 50,137 $ 1,268 2.53% $ 32,259 $ 692 2.15%
Savings deposits 24,953 765 3.07 23,352 774 3.31 20,251 703 3.47
Money market deposits 43,191 1,442 3.34 47,138 1,612 3.42 48,059 1,671 3.48
Time deposits 247,503 13,860 5.60 195,209 10,953 5.61 152,191 8,715 5.73
Federal funds purchased and securities
sold under agreements to
repurchase 18,813 882 4.69 14,408 729 5.06 13,023 651 5.00
Other short-term borrowings 2,019 106 5.25 2,504 113 4.51 1,705 82 4.81
Long-term debt 2,100 153 7.29 2,259 167 7.39 1,171 86 7.34
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL INTEREST BEARING LIABILITIES 417,574 19,578 4.69 335,007 15,616 4.66 268,659 12,600 4.69
------- ---- ------- ---- ------- ----
NON-INTEREST BEARING LIABILITIES
Non-interest bearing demand deposits 75,332 63,857 51,780
Accrued interest payable and
other liabilities 7,099 3,999 2,863
-------- -------- --------
TOTAL LIABILITIES 500,005 402,863 323,302
STOCKHOLDERS' EQUITY 40,691 34,174 29,675
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $540,696 $437,037 $352,977
-------- -------- --------
-------- -------- --------
NET INTEREST INCOME $23,541 $19,899 $16,732
------- ------- -------
------- ------- -------
NET INTEREST SPREAD 3.94% 4.06% 4.16%
---- ---- ----
---- ---- ----
NET INTEREST MARGIN 4.71% 4.89% 5.05%
---- ---- ----
---- ---- ----
</TABLE>
16
<PAGE>
SECURITIES
The primary 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) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and federal agency obligations $67,297 $31,244 $19,276
Obligations of states and political subdivisions 4,774 218 165
------- ------- -------
$72,071 $31,462 $19,441
------- ------- -------
------- ------- -------
SECURITIES HELD TO MATURITY
U.S. Treasury and federal agency obligations $ 2,012 $ 3,864 $30,100
Mortgage-backed securities 13,197 16,826 18,361
Obligations of states and political subdivisions 12,537 7,962 7,618
------- ------- -------
$27,746 $28,652 $56,079
------- ------- -------
------- ------- -------
</TABLE>
The maturity distribution and weighted average interest rates of securities at
December 31, 1998, 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 $33,501 5.40% $22,547 6.32% $11,249 6.52% $ - -%
Obligations of states and
political subdivisions - - 212 5.67 4,562 4.29 - -
------- ----- ------- ---- ------- ---- ------- -----
$33,501 5.40% $22,759 6.32% $15,811 5.87% $ - -%
------- ----- ------- ---- ------- ---- ------- -----
------- ----- ------- ---- ------- ---- ------- -----
SECURITIES HELD TO MATURITY
U.S. Treasury and federal
agency obligations $ 1,012 7.88% $ 1,000 6.38% $ - -% $ - -%
Mortgage-backed securities 3,467 6.58 7,755 6.33 1,975 6.42 - -
Obligations of states and
political subdivisions 226 6.30 6,884 5.63 5,083 4.37 344 6.00
------- ----- ------- ---- ------- ---- ------- -----
$ 4,705 6.84% $15,639 6.03% $ 7,058 4.95% $ 344 6.00%
------- ----- ------- ---- ------- ---- ------- -----
------- ----- ------- ---- ------- ---- ------- -----
</TABLE>
17
<PAGE>
LOAN PORTFOLIO
Bancorp's primary source of income is interest on loans. The following table
presents the composition of loans as of the end of the last five years.
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $103,345 $101,030 $ 88,352 $ 81,325 $ 79,397
Construction and development 30,155 21,481 22,518 15,327 8,144
Real estate mortgage 277,994 217,830 166,574 137,618 105,207
Consumer 36,792 29,952 24,104 18,667 14,664
-------- -------- -------- -------- --------
$448,286 $370,293 $301,548 $252,937 $207,412
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The following tables show the amounts of commercial and industrial loans, and
construction and development loans, at December 31, 1998, 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 $ 34,881 $ 39,649 $ 28,815 $103,345
Construction and development 30,155 - - 30,155
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
- -----------------------------------------------------------------
Fixed Variable
(In thousands) rate rate
- -----------------------------------------------------------------
<S> <C> <C>
Due after one but within five years 35,485 $ 4,164
Due after five years 5,914 22,901
------- -------
$41,399 $27,065
------- -------
------- -------
</TABLE>
18
<PAGE>
NONPERFORMING LOANS AND ASSETS
Nonperforming loans, which include nonaccrual loans and restructured loans,
totaled $2,163,000 and $290,000 at December 31, 1998 and 1997, respectively. The
threshold at which loans are generally transferred to nonaccrual of interest
status is 90 days past due. Nonperforming loans represent .48% of total loans at
year end 1998 compared to .08% in 1997.
Nonperforming assets include nonperforming loans, other real estate and
repossessed assets. At December 31, 1998 and 1997, nonperforming assets totaled
$4,057,000 and $290,000, respectively. This represents .67% of total assets at
year end 1998 compared to .06% in 1997. The increase in nonaccrual loans and
other real estate arose primarily from loans to one obligor. The loans are
secured by real estate. No loss of principal or interest is anticipated.
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
$1,812,000 are monitored by management and considered in determining the level
of the allowance for loan losses. Management believes these loans do not present
significant exposure to loss. The allowance for loan losses is discussed further
under the heading "Provision for Loan Losses."
The following table summarizes nonaccrual, restructured and past due loans.
<TABLE>
<CAPTION>
DECEMBER 31
- ---------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans 2,163 290 854 1,212 367
Restructured loans - - - - 61
Loans past due, 90 days or
more and still accruing - - - - -
----- ---- ---- ----- ----
2,163 290 854 1,212 428
----- ---- ---- ----- ----
----- ---- ---- ----- ----
Interest income recorded on nonaccrual loans for 1998 totaled $93,000. Interest
income that would have been recorded if nonaccrual loans were on a current basis
in accordance with their original terms was $220,000.
</TABLE>
19
<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 at a level considered by management to be
adequate to cover losses that are 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 quarterly to the Audit Committee of 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 anticipated
losses on existing loans that may become uncollectible. See "Results of
Operations - Provision for Loan Losses."
20
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loans outstanding, changes in the
allowance for loan losses arising from loans charged off and recoveries on loans
previously charged off by loan category, and additions to the allowance charged
to expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans $412,935 $329,162 $273,031 $229,674 $190,409
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Balance of allowance for loan
losses at beginning of year $ 5,921 $ 5,155 $ 4,507 $ 3,649 $ 2,752
Loans charged off
Commercial and industrial 146 75 107 435 111
Real estate mortgage 54 26 45 13 9
Consumer 735 183 112 82 64
-------- -------- -------- -------- --------
Total loans charged off 935 284 264 530 184
-------- -------- -------- -------- --------
Recoveries of loans
previously charged off
Commercial and industrial 14 3 27 95 16
Real estate mortgage 18 9 16 13 36
Consumer 48 38 47 20 29
-------- -------- -------- -------- --------
Total recoveries 80 50 90 128 81
-------- -------- -------- -------- --------
Net loans charged off 855 234 174 402 103
Additions to allowance
charged to expense 1,600 1,000 800 1,260 1,000
Balance of allowance of
acquired bank at date
of acquisition - - 22 - -
-------- -------- -------- -------- --------
Balance at end of year $ 6,666 $ 5,921 $ 5,155 $ 4,507 $ 3,649
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of net charge-offs
during year to average
loans .21% .07% .06% .18% .05%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
21
<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) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $2,625 $2,337 $1,913 $2,227 $1,679
Construction and development 51 201 241 108 67
Real estate mortgage 1,739 2,034 1,775 964 866
Consumer 921 163 253 148 180
Unallocated 1,330 1,186 973 1,060 857
------ ------ ------ ------ ------
$6,666 $5,921 $5,155 $4,507 $3,649
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
The ratio of loans in each category to total outstanding loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
- ---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial 23.1% 27.3% 29.3% 32.1% 38.3%
Construction and development 6.7 5.8 7.5 6.1 3.9
Real estate mortgage 62.0 58.8 55.2 54.4 50.7
Consumer 8.2 8.1 8.0 7.4 7.1
----- ----- ----- ----- -----
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
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses to average loans .39% .30% .29%
Net charge-offs to average loans .21% .07% .06%
Allowance for loan losses to average loans 1.61% 1.80% 1.89%
Allowance for loan losses to year end loans 1.49% 1.60% 1.71%
Loan loss coverage 15.98X 44.47X 39.34X
</TABLE>
22
<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) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 75,332 -% $ 63,857 -% $ 51,780 -%
Interest bearing
demand deposits 78,995 3.00 50,137 2.53 32,259 2.15
Savings deposits 24,953 3.07 23,352 3.31 20,251 3.47
Money market deposits 43,191 3.34 47,138 3.42 48,059 3.48
Time deposits 247,503 5.60 195,209 5.61 152,191 5.73
-------- ---- -------- ---- -------- ----
---- ---- ----
$469,974 $379,693 $304,540
-------- -------- --------
-------- -------- --------
</TABLE>
Maturities of time deposits of $100,000 or more outstanding at December 31,
1998, are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------
(In thousands)
- -------------------------------------------------
Amount
<S> <C>
3 months or less $27,156
Over 3 through 6 months 11,338
Over 6 through 12 months 22,676
Over 12 months 15,913
-------
$77,083
-------
-------
</TABLE>
23
<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) 1998 1997 1996
- --------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Securities sold under
agreements to repurchase
Year end balance $33,529 4.15% $11,684 5.15% $12,228 4.88%
Average during year 18,527 4.67 12,481 4.95 12,437 4.98
Maximum month end
balance during year 33,867 12,265 13,289
</TABLE>
LIQUIDITY
The role of liquidity management 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 Bank,
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 Bank has a number of sources of funds to meet liquidity needs on a daily
basis. The deposit base, consisting of consumer and commercial deposits and
large dollar denomination ($100,000 and over) certificates of deposit, is a
source of funds. The majority of these deposits are from long-term customers and
are a stable source of funds. The Bank has no brokered deposits, and has 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 by the Bank.
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 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. At December 31,
1998 the amount of available credit from the FHLB, totaled $91 million. To date,
the Bank has not needed to access this source of funds. Additionally, the Bank
has an available line of credit and federal funds purchased lines with
correspondent banks totaling $38 million.
Bancorp's liquidity depends primarily on the dividends paid to it as the sole
shareholder of the Bank. As discussed in note 15 to Bancorp's consolidated
financial statements, the Bank may pay up to $11,027,000 in dividends to Bancorp
without regulatory approval subject to the ongoing capital requirements of the
Bank.
24
<PAGE>
CAPITAL
In January, 1999 and August, 1996, the Board of Directors declared 2-for-1 stock
splits to be effected in the form of 100% stock dividends. The new shares were
distributed in February, 1999 and September, 1996, respectively. These capital
changes were made to enhance shareholder value by increasing the number of
shares of Bancorp's stock outstanding and to reduce the per share market price
of the stock. Per share information has been restated to reflect the stock
splits.
At December 31, 1998, stockholders' equity totaled $43,943,000, an increase of
$7,026,000 or 19.0% over 1997. This increase was due to the strong earnings of
1998 coupled with a philosophy to retain approximately 70% to 80% of earnings in
equity. Cash dividends declared were $.28 per share in 1998 and $.24 per share
in 1997.
Bank holding companies and their subsidiary banks are required by regulators to
meet risk based capital standards. These standards, or ratios, measure the
relationship of capital to a combination of balance sheet and off balance sheet
risks. The value of both balance sheet and off balance sheet items are adjusted
to reflect credit risks.
At December 31, 1998, Bancorp's tier 1 and total risk based capital ratios were
9.50% and 10.82%, 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, 1998 was 7.31%.
Note 19 to the consolidated financial statements provides more details of
regulatory capital requirements as well as capital ratios of the Bank. Bancorp
and the Bank exceed regulatory capital ratios required to be well capitalized.
These ratios for Bancorp and the 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.
RETURN ON ASSETS AND EQUITY
The following table presents various key financial ratios:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.52% 1.50% 1.47%
Return on average stockholders' equity 20.20 19.12 17.45
Dividend pay out ratio, based on basic EPS 22.40 24.12 25.32
Average stockholders' equity to average assets 7.53 7.82 8.41
</TABLE>
25
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement standardizes the accounting for derivative instruments. Under this
standard, entities are required to carry all derivative instruments in the
balance sheet at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item attributable
to the risk being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.
Bancorp must adopt Statement 133 by January 1, 2000; however, early adoption is
permitted. On adoption, the provisions of Statement 133 must be applied
prospectively. Bancorp has not determined when it will adopt Statement 133 nor
has it determined the impact that Statement 133 will have on its financial
statements. Management believes that such determination will not be meaningful
until closer to the date of initial adoption.
QUARTERLY OPERATING RESULTS
Following is a summary of quarterly operating results for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands,
except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st. Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st. Qtr.
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $11,360 $11,003 $10,618 $9,891 $9,519 $9,050 $8,553 $8,217
Interest expense 5,079 5,122 4,918 4,459 4,263 4,068 3,705 3,580
------- ------- ------- ------ ------ ------ ------ ------
Net interest income 6,281 5,881 5,700 5,432 5,256 4,982 4,848 4,637
Provision for loan losses 575 375 350 300 325 225 225 225
------- ------- ------- ------ ------ ------ ------ ------
Net interest income
after provision 5,706 5,506 5,350 5,132 4,931 4,757 4,623 4,412
Non-interest income 2,971 3,132 2,841 2,428 2,107 1,885 1,853 1,580
Non-interest expenses 5,688 5,409 5,153 4,769 4,880 4,174 3,891 3,796
------- ------- ------- ------ ------ ------ ------ ------
Income before income
taxes 2,989 3,229 3,038 2,791 2,158 2,468 2,585 2,196
Income tax expense 911 1,048 976 894 496 800 864 713
------- ------- ------- ------ ------ ------ ------ ------
Net income $ 2,078 $ 2,181 $ 2,062 $1,897 $1,662 $1,668 $1,721 $1,483
------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------ ------ ------ ------ ------
Basic earnings per share $ 0.32 $ 0.33 $ 0.32 $ 0.29 $ 0.26 $ 0.26 $ 0.26 $ 0.22
Diluted earnings per share 0.31 0.32 0.30 0.28 0.25 0.25 0.25 0.21
------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------ ------ ------ ------ ------
</TABLE>
Per share information has been adjusted to reflect the February, 1999 2-for-1
stock split.
26
<PAGE>
YEAR 2000
GENERAL NATURE AND IMPACT OF YEAR 2000 ISSUES
Challenges and problems anticipated with the Year 2000 (Y2K) have received a
great deal of attention. The underlying problem is that many computer systems
use only the last two digits of a year in reading a date. Thus, they could
interpret dates with the Year 2000 to be 1900. As a result, on January 1, 2000,
computer systems could stop working or generate erroneous data unless these
problems are corrected. In addition to information technology issues, equipment
with embedded micro-controllers may not function properly. Examples of this
equipment would include thermostats, elevators, and electronics with time/date
mechanisms. Some companies have anticipated significant Year 2000 expenses.
Banking institutions have been near the forefront in addressing Year 2000 issues
as bank regulators began focusing banks' attention on Year 2000 issues earlier
than most businesses. The Bank and Bancorp began addressing Y2K issues in mid
1997. Year 2000 issues were first a part of banking regulatory review at Stock
Yards Bank & Trust Company in its November, 1997 examination by the FDIC. The
FDIC has established guidelines that require banking institutions to:
- Ensure ongoing board of director involvement in Year 2000 efforts;
- Adopt a written project plan;
- Renovate mission-critical systems;
- Complete tests of renovated systems by specific deadlines;
- Plan for contingencies; and
- Manage customer risk.
The Bank is in compliance with these guidelines. The Bank's Year 2000 project
coordinator and committee report regularly to the Board of Directors as to the
project plan and completion status.
BANCORP'S GENERAL PLANS AND ACTIONS TO ADDRESS YEAR 2000 ISSUES, INCLUDING
RELATIONSHIPS WITH CUSTOMERS, VENDORS AND OTHERS
Bancorp's management has undertaken an evaluation of the effects Year 2000 will
have on its information systems and other important aspects of its business.
Bancorp's program has five phases: awareness, assessment, renovation, validation
and implementation. As a part of the assessment phase, degrees of risk were
determined for various areas. Impact assessment guidelines used are as follows:
Absolutely critical - If these systems were to fail or produce inaccurate
data, it could lead to the failure of the Bank.
Important - Failure of these could significantly impair the Bank's ability
to function at full potential.
Useful - These systems are used regularly but are not deemed to be
critical.
Expendable - These systems could be retired. They are convenient to have,
but the Bank could do without them.
Using the above appraisal guidelines, each system was assigned a priority for
timing of renovation, testing and implementation. Areas deemed to be absolutely
critical are mainly related to computer technology. These include the Bank's
mainframe computer, related software, the Bank's wide area network of computers,
trust and mortgage department hardware and software and wire transfer computer
capabilities. All of the Bank's software is purchased; no programming is
performed in house. Management has received representations from software
vendors with regard to Y2K readiness for these applications. Testing and
contingency planning for these areas are addressed below. Other technology areas
deemed absolutely critical are internet connections and the ATM network. With
regard to our Year 2000 evaluation of non-information technology areas,
management identified general issues similar to those of other businesses and
bank specific issues such as vault doors and security equipment. Non information
technology areas deemed absolutely critical are telephone service and systems,
utilities and vault doors. Through a combination of consultations with and
certifications from vendors and testing of these non-information technology
areas, management does not believe there are any material Y2K risks or
uncertainties presented in these areas.
27
<PAGE>
The Bank's assessment has taken into account whether third parties with whom it
has a material business relationship are or will be Year 2000 compliant.
Management has requested certification as to Y2K readiness from current vendors
and uses Y2K readiness as a part of the criteria for selection of
vendors/products. In addition to obtaining written Y2K certification regarding
equipment and services, the Bank's Y2K plan includes testing of such equipment
and services for Y2K readiness. This testing is complete in many areas and has
not identified any material Y2K risks or uncertainties.
Two other major areas of evaluation are the Bank's loan customers and fiduciary
relationships arising from the trust department. Borrowers' noncompliance with
Year 2000 issues could adversely affect their ability to service their debt. The
Bank has requested written representation from significant loan customers to
verify and document customer Year 2000 readiness. Evaluation of the
creditworthiness of these customers now includes a review of the customer's self
assessment as to compliance with Year 2000 issues. Based upon the responses of
customers, an evaluation of the nature of these customers' businesses and their
states of Y2K readiness, and the collateral held on these loans, management has
concluded the degree of risk of loss to the bank does not warrant a specific Y2K
allowance for loan losses at this time.
The trust department's written business resumption plan and testing have been
completed for the trust accounting systems. Trust system vendors have indicated
they are already Y2K compliant or they are committed to being Y2K compliant by
March, 1999. Y2K relates to the department's fiduciary responsibilities with
regard to the ability of investments to continue to maintain income and
principal payment streams, if applicable. Also, third party paying agents and
processors must be able to continue providing timely and accurate services. The
department has taken measures to identify and mitigate risks and uncertainties
related to Y2K.
Correspondence has been sent to most companies, issuers, and paying agents
related to the Bank's trust accounts. These letters request documentation with
regard to the third party's Year 2000 compliance status. The department will not
authorize investments in companies which have not made reasonably complete Y2K
disclosures. The department may waive this requirement if they can determine
through other channels the target company is not technologically dependent. All
of this will be considered as investment decisions are made regarding current
and future holdings.
TIMETABLE FOR CARRYING OUT YEAR 2000 PLANS
The awareness, assessment and renovation phases of the Company's Year 2000 plan
are essentially complete. Testing has been completed in some areas. Testing for
absolutely critical systems is underway and scheduled to be substantially
completed by the first quarter of 1999. Remaining areas will be tested by June
30, 1999. In addition to testing, the Bank has developed business resumption
plans in the event absolutely critical systems fail despite representations from
vendors and positive test results. These plans should enable the Bank to
function at a level sufficient to serve the majority of customers' needs.
Additionally, management plans to significantly curtail the installation of new
information technology systems after the first quarter of 1999. To ensure the
Bank's ability to respond to customer needs and demands, some significant
information technology additions were accelerated into the last quarter of 1998
and the first quarter of 1999. These scheduling accelerations allow adequate
time to test the new applications for Y2K compliance.
COST TO ADDRESS BANCORP'S YEAR 2000 ISSUES
Costs to prepare for the Year 2000 include new hardware, software, internal
staff costs and consulting expenses. Bancorp's incremental expense related to
the Year 2000 was approximately $60,000 in 1998 and 1997 and management
anticipates incurring a similar amount for 1999. Detailed budgets include
capital expenditures, primarily to replace desk top computers which will not be
Year 2000 compliant. To date, capital expenditures to replace non compliant
equipment have totaled approximately $95,000. Management anticipates spending
another $80,000 in 1999 on capital expenditures.
28
<PAGE>
IMPACT YEAR 2000 EXPENDITURES ARE ANTICIPATED TO HAVE ON BANCORP'S RESULTS OF
OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
In addition to the factors mentioned above, the Bank is considering other
ramifications of the Year 2000. Management reviews the liquidity position and
needs of the Bank on a regular basis. Anticipating Year 2000, the Bank has
prepared to be more liquid. Loan customers with lines of credit may experience
increased cash needs and, therefore, draw more on their lines of credit. Loan
customers may make payments more slowly if their cash positions are tighter.
Depositors may withdraw higher than average amounts of cash. These situations
will require the Bank to have higher than average levels of cash available.
Management has made arrangements with correspondent banks to be able to meet
those needs.
REMAINING RISKS AND UNCERTAINTIES RELATED TO YEAR 2000
As noted above, the Bank has performed or will perform extensive testing of
absolutely critical and important systems and equipment.
Based upon representations received from vendors and other third parties,
management does not anticipate major malfunctions to be identified as a result
of testing. However, in the event there are unidentified problems, the Bank has
developed a business resumption plan. This plan makes arrangements for
alternative means of processing/operation should absolutely critical functions
fail when Y2K arrives. These include manual processing, processing transactions
by personal computer rather than mainframe, and curtailing banking hours and/or
number of locations open. Management's objective is to continue to offer and
process transactions that would be critical to customers. Assumptions used in
the business resumption planning include the satisfactory operation of utilities
and the U.S. Postal Service.
As a result of evaluations and procedures performed to date, management does not
anticipate Year 2000 to materially affect the Bancorp's capital resources,
financial condition or results of operations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is included in item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 11 through 13 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Bancorp and report of
independent auditors are included below.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - years ended December 31, 1998, 1997,
and 1996
Consolidated Statements of Changes in Stockholders' Equity - years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Comprehensive Income - years ended December 31,
1998, 1997, and 1996
Consolidated Statements of Cash Flows - years ended December 31, 1998,
1997, and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Management's Report on Consolidated Financial Statements
29
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 21,661 $ 18,153
Federal funds sold 7,000 6,000
Mortgage loans held for sale 9,791 5,183
Securities available for sale (amortized cost $71,367
in 1998 and $31,019 in 1997) 72,071 31,462
Securities held to maturity (approximate market
value $28,404 in 1998 and $28,962 in 1997) 27,746 28,652
Loans 448,286 370,293
Allowance for loan losses 6,666 5,921
-------- --------
Net loans 441,620 364,372
Premises and equipment 15,619 13,903
Accrued interest receivable and other assets 14,280 10,872
-------- --------
TOTAL ASSETS $609,788 $478,597
-------- --------
-------- --------
LIABILITIES
Deposits
Non-interest bearing $ 85,133 $ 72,103
Interest bearing 432,479 345,468
-------- --------
Total deposits 517,612 417,571
Securities sold under agreements to repurchase
and federal funds purchased 38,529 13,684
Other short-term borrowings 859 4,483
Accrued interest payable and other liabilities 6,745 3,827
Long-term debt 2,100 2,115
-------- --------
TOTAL LIABILITIES 565,845 441,680
-------- --------
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized;
issued and outstanding 6,593,338 in 1998 and
6,563,942 in 1997 5,535 5,486
Surplus 14,075 13,644
Retained earnings 23,868 17,495
Accumulated other comprehensive income 465 292
-------- --------
TOTAL STOCKHOLDERS' EQUITY 43,943 36,917
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $609,788 $478,597
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $37,705 $30,523 $25,293
Federal funds sold 712 622 442
Mortgage loans held for sale 550 309 453
Securities
Taxable 3,328 3,492 2,562
Tax exempt 577 393 388
------- ------- -------
TOTAL INTEREST INCOME 42,872 35,339 29,138
------- ------- -------
INTEREST EXPENSE
Deposits 18,437 14,607 11,781
Securities sold under agreements to repurchase
and federal funds purchased 882 729 651
Other short-term borrowings 106 113 82
Long-term debt 153 167 86
------- ------- -------
TOTAL INTEREST EXPENSE 19,578 15,616 12,600
------- ------- -------
NET INTEREST INCOME 23,294 19,723 16,538
Provision for loan losses 1,600 1,000 800
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,694 18,723 15,738
------- ------- -------
NON-INTEREST INCOME
Investment management and trust services 4,573 3,332 2,400
Service charges on deposit accounts 2,886 1,936 1,551
Gains on sales of mortgage loans held for sale 2,047 1,077 1,016
Gains on sales of securities available for sale 341 80 35
Other 1,525 1,000 597
------- ------- -------
TOTAL NON-INTEREST INCOME 11,372 7,425 5,599
------- ------- -------
NON-INTEREST EXPENSES
Salaries and employee benefits 11,660 9,846 7,882
Net occupancy expense 1,407 1,121 963
Furniture and fixtures expense 2,009 1,633 1,438
Other 5,943 4,141 3,433
------- ------- -------
TOTAL NON-INTEREST EXPENSES 21,019 16,741 13,716
------- ------- -------
INCOME BEFORE INCOME TAXES 12,047 9,407 7,621
Income tax expense 3,829 2,873 2,442
------- ------- -------
NET INCOME $ 8,218 6,534 $ 5,179
------- ------- -------
------- ------- -------
NET INCOME PER SHARE, BASIC $ 1.25 $ 1.00 $ .79
------- ------- -------
------- ------- -------
NET INCOME PER SHARE, DILUTED $ 1.21 $ .96 $ .77
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated Other
Number Retained Comprehensive
(In thousands, except share data) of Shares Amount Surplus Earnings Income Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995
as previously reported 1,627,334 $ 5,423 $ 13,245 $ 8,664 $ 282 $ 27,614
2-for-1 stock split effective February, 1999 1,627,334 - - - - -
--------- --------- --------- --------- ------------- ---------
Balance December 31, 1995 as restated 3,254,668 5,423 13,245 8,664 282 27,614
Net income - - - 5,179 - 5,179
Stock options exercised 16,862 28 145 - - 173
Cash dividends, $ .20 per share - - - (1,308) - (1,308)
Shares issued for 2-for-1 stock split 3,271,430 - - - - -
Change in other comprehensive
income, net of tax - - - - (64) (64)
--------- --------- --------- --------- ------------- ---------
Balance December 31, 1996 6,542,960 5,451 13,390 12,535 218 31,594
Net income - - - 6,534 - 6,534
Stock options exercised 11,104 18 87 - - 105
Shares issued for dividend reinvestment
and employee stock purchase plans 9,878 17 167 - - 184
Cash dividends, $ .24 per share - - - (1,574) - (1,574)
Change in other comprehensive
income, net of tax - - - - 74 74
--------- --------- --------- --------- ------------- ---------
Balance December 31, 1997 6,563,942 5,486 13,644 17,495 292 36,917
Net income - - - 8,218 - 8,218
Stock options exercised 9,938 16 37 - - 53
Shares issued for dividend reinvestment
and employee stock purchase plans 19,458 33 394 - - 427
Cash dividends, $ .28 per share - - - (1,845) - (1,845)
Change in other comprehensive
income, net of tax - - - - 173 173
--------- --------- --------- --------- ------------- ---------
Balance December 31, 1998 6,593,338 $ 5,535 $ 14,075 $ 23,868 $ 465 $ 43,943
--------- --------- --------- --------- ------------- ---------
--------- --------- --------- --------- ------------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 8,218 $ 6,534 $ 5,179
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
available for sale
Unrealized holding gains (losses) arising
during the period 398 127 (41)
Less reclassification adjustment for gains
included in net income 225 53 23
------- ------- -------
Other comprehensive income (loss) 173 74 (64)
------- ------- -------
COMPREHENSIVE INCOME $ 8,391 $ 6,608 $ 5,115
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,218 $ 6,534 $ 5,179
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 1,600 1,000 800
Depreciation, amortization and accretion, net 1,702 1,360 1,097
Provision for deferred income taxes (749) (286) (131)
Gains on sales of securities available for sale (341) (80) (35)
Gains on sales of mortgage loans held for sale (2,047) (1,077) (1,016)
Origination of mortgage loans held for sale (110,155) (58,009) (56,770)
Proceeds from sales of mortgage loans held for sale 107,594 58,265 57,334
(Increase) decrease in accrued interest receivable and other assets (2,816) (1,703) (1,350)
Increase (decrease) in accrued interest payable and other liablilities 2,816 366 947
--------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,822 6,370 6,055
--------- -------- --------
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (1,000) (1,500) (2,000)
Purchases of securities available for sale (110,950) (23,237) (10,031)
Purchases of securities held to maturity (49,995) (11,380) (44,878)
Proceeds from sales of securities available for sale 11,306 4,026 7,018
Proceeds from maturities of securities available for sale 59,637 6,604 3,032
Proceeds from maturities of securities held to maturity 50,807 39,567 15,328
Net increase in loans (78,848) (68,979) (48,620)
Purchases of premises and equipment (3,255) (5,096) (4,154)
Proceeds from sales of other real estate - 172 221
Cash paid in acquisition, net of cash received - - (414)
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (122,298) (59,823) (84,498)
--------- -------- --------
FINANCING ACTIVITIES
Net increase in deposits 100,041 62,320 67,385
Net increase (decrease) in securities sold under agreements
to repurchase and federal funds purchased 24,845 (6,044) 7,379
Net increase (decrease) in short-term borrowings (3,624) 1,815 1,923
Proceeds from long-term debt - 1,800 2,200
Repayments of long-term debt (15) (2,382) (110)
Issuance of common stock 480 257 91
Cash dividends paid (1,743) (1,508) (1,306)
--------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 119,984 56,258 77,562
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,508 2,805 (881)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,153 15,348 16,229
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,661 $ 18,153 $ 15,348
--------- -------- --------
--------- -------- --------
</TABLE>
Income tax payments were $2,803,000 in 1998, $3,256,000 in 1997, and $2,482,000
in 1996. Cash paid for interest was $19,762,000 in 1998, $15,767,000 in 1997,
and $12,577,000 in 1996.
See accompanying notes to consolidated financial statements.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of S.Y. Bancorp, Inc.
(Bancorp) and its wholly-owned subsidiary, Stock Yards Bank & Trust Company.
Significant intercompany transactions and accounts have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform with
the 1998 presentation.
The Bank is engaged in commercial and retail banking services, trust and
investment management services, and mortgage banking services. Bancorp's market
area is Louisville, Kentucky and surrounding communities including southern
Indiana.
USE OF ESTIMATES
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.
35
<PAGE>
Loans are classified as impaired when it is probable the Bank 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 loan 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 being amortized over 15 years. Bancorp assesses the recoverability
of goodwill by determining whether the carrying value of the asset can be
realized over its remaining projected 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.
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.
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.
36
<PAGE>
NET INCOME PER SHARE
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 ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement standardizes the accounting for derivative instruments. Under this
standard, entities are required to carry all derivative instruments in the
balance sheet at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item attributable
to the risk being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. Accounting for foreign currency hedges is similar to the accounting
for fair value and cash flow hedges. If the derivative instrument is not
designated as a hedge, the gain or loss is recognized in earnings in the period
of change.
Bancorp must adopt Statement 133 by January 1, 2000; however, early adoption is
permitted. On adoption, the provisions of Statement 133 must be applied
prospectively. Bancorp has not determined when it will adopt Statement 133 nor
has it determined the impact that Statement 133 will have on its financial
statements. Management believes that such determination will not be meaningful
until closer to the date of initial adoption.
(2) SUBSEQUENT EVENT
On January 12, 1999 the Board of Directors declared a 2-for-1 stock split to be
effected in the form of a 100% stock dividend. The record date for the stock
split was February 2, 1999 and the distribution date was February 26, 1999. All
share and per share information presented herein has been adjusted to reflect
the stock split.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain an average reserve balance in cash or with the
Federal Reserve Bank relating to customer deposits. At December 31, 1998, the
amount of those required reserve balances was approximately $4,136,000.
37
<PAGE>
(4) SECURITIES
The amortized cost and approximate market value of securities available for sale
as of December 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Approximate
Amortized Unrealized Market
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Treasury and federal agencies $66,613 $ 684 $ - $67,297
Obligations of states and political subdivisions 4,754 26 6 4,774
------- ------- ------- -------
$71,367 $ 710 $ 6 $72,071
------- ------- ------- -------
------- ------- ------- -------
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
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The amortized cost and approximate market value of securities held to maturity
as of December 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Approximate
Amortized Unrealized Market
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Treasury and federal agencies $ 2,012 $ 32 $ - $ 2,044
Mortgage-backed securities 13,197 325 - 13,522
Obligations of states and political subdivisions 12,537 302 $ 1 12,838
------- ------- ------- -------
$27,746 $ 659 $ 1 $28,404
------- ------- ------- -------
------- ------- ------- -------
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
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
38
<PAGE>
A summary of debt securities as of December 31, 1998 based on maturity is
presented below. Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations. For
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 $33,470 $33,501 $ 4,705 $ 4,800
Due after one year
through five years 22,309 22,759 15,639 16,084
Due after five years
through ten years 15,588 15,811 7,058 7,171
Due after ten years - - 344 349
------- ------- ------- -------
$71,367 $72,071 $27,746 $28,404
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Securities with a carrying value of approximately $53,542,000 at December 31,
1998 and $30,943,000 at December 31, 1997 were pledged to secure public deposits
and certain borrowings.
(5) LOANS
The composition of loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------------
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Commercial and industrial $103,345 $101,030
Construction and development 30,155 21,481
Real estate mortgage 277,994 217,830
Consumer 36,792 29,952
-------- --------
$448,286 $370,293
-------- --------
-------- --------
</TABLE>
The Bank's 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 Bank has a diversified loan
portfolio, a customer's ability to honor contracts is reliant upon the economic
stability and geographic region and/or industry in which that customer does
business. Loans outstanding and related unfunded commitments are primarily
concentrated within the Bank's market area which encompasses Louisville,
Kentucky and surrounding communities including southern Indiana.
39
<PAGE>
Information about impaired loans follows:
<TABLE>
<CAPTION>
DECEMBER 31
- --------------------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Principal balance of impaired loans $2,163 $ 290
Impaired loans with a Statement No. 114 valuation allowance - -
Amount of Statement No. 114 valuation allowance - -
Impaired loans with no Statement No. 114 valuation allowance 2,163 290
Average balance of impaired loans for year 1,298 632
----- ------
----- ------
</TABLE>
Interest income on impaired loans (cash basis) was $93,000, $2,000, and $400
in 1998, 1997, and 1996, respectively.
Loans to directors and their associates, including loans to companies for which
directors are principal owners, and executive officers amounted to approximately
$5,215,000 and $2,602,000 at December 31, 1998 and 1997, 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
1998 new loans of $26,864,000 were made to officers and directors and affiliated
companies, repayments amounted to $23,998,000 and charges involving directors
involved a decrease of $253,000.
An analysis of the changes in the allowance for loan losses for the years ended
December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1 $5,921 $5,155 $4,507
Provision for loan losses 1,600 1,000 800
Allowance of acquired
bank at acquisition date - - 22
Loans charged off 935 284 264
Recoveries 80 50 90
------ ------ ------
Net loan charge-offs 855 234 174
------ ------ ------
BALANCE AT DECEMBER 31 $6,666 $5,921 $5,155
------ ------ ------
------ ------ ------
</TABLE>
40
<PAGE>
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31
- -----------------------------------------------------------------------------
(In thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,898 $ 1,433
Buildings and improvements 12,108 11,112
Furniture and equipment 7,998 7,586
Construction in progress 661 167
------- -------
22,665 20,298
Accumulated depreciation and amortization 7,046 6,395
------- -------
$15,619 $13,903
------- -------
------- -------
</TABLE>
(7) INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
APPLICABLE TO OPERATIONS:
Current $ 4,578 $ 3,159 $ 2,573
Deferred (749) (286) (131)
------- ------- -------
Total applicable to operations 3,829 2,873 2,442
CHARGED (CREDITED) TO STOCKHOLDERS' EQUITY:
Unrealized gain (loss) on securities available for sale 88 39 (33)
Stock options exercised - (32) (82)
------- ------- -------
$ 3,917 $ 2,880 $ 2,327
------- ------- -------
------- ------- -------
</TABLE>
An analysis of the difference between the statutory and effective tax rates
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal income tax rate 35.0% 34.0% 34.0%
Tax exempt interest income (1.5) (1.7) (1.3)
Other, net (1.7) (.3) (2.2)
---- ---- ----
31.8% 32.0% 30.5%
---- ---- ----
---- ---- ----
</TABLE>
41
<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) 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for loan losses $2,104 $1,789
Deferred compensation 486 408
Other 330 42
------ ------
TOTAL DEFERRED TAX ASSETS 2,920 2,239
------ ------
DEFERRED TAX LIABILITIES
Property and equipment 270 337
Securities 427 340
------ ------
TOTAL DEFERRED TAX LIABILITIES 697 677
------ ------
NET DEFERRED TAX ASSET $2,223 $1,562
------ ------
------ ------
</TABLE>
No valuation allowance for deferred tax assets was recorded as of December 31,
1998 and 1997 because Bancorp has sufficient prior taxable income to allow for
utilization of the deductible temporary differences within the carryback period.
(8) DEPOSITS
The composition of interest bearing deposits follows:
<TABLE>
<CAPTION>
DECEMBER 31
- ------------------------------------------------------------------------
(In thousands) 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Interest bearing demand $104,297 $ 61,905
Savings 26,692 23,167
Money market 43,394 41,530
Time deposits greater than $100,000 175,131 160,274
Other time deposits 82,965 58,592
-------- --------
$432,479 $345,468
-------- --------
-------- --------
</TABLE>
Interest expense related to certificates of deposit and other time deposits
in denominations of $100,000 or more was $3,801,000, $2,702,000 and
$2,703,000, respectively, for the years ended December 31, 1998, 1997 and
1996.
At December 31, 1998, the scheduled maturities of time deposits were as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(In thousands)
- -----------------------------------------------------------------------
<S> <C>
1999 $186,905
2000 51,904
2001 8,009
2002 4,589
2003 and thereafter 6,689
--------
$258,096
--------
--------
</TABLE>
42
<PAGE>
(9) SECURITIES SOLD 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) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Average balance during the year $18,527 $12,481
Average interest rate during the year 4.67% 4.95%
Maximum month-end balance
during the year $33,867 $12,265
------- -------
------- -------
</TABLE>
(10) LONG-TERM DEBT
During 1997 Bancorp established a $6,000,000 line of credit with a correspondent
bank. The balance outstanding at December 31, 1998 and 1997 was $1,800,000. The
interest rate on the line was 7.2788% at December 31, 1998 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 Bank also has subordinated debentures outstanding amounting to $300,000 and
$315,000 at December 31, 1998 and 1997, respectively which 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 (8.00% at
December 31, 1998.). 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) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, basic and diluted $8,218 $6,534 $5,179
------ ------ ------
------ ------ ------
Average shares outstanding 6,586 6,552 6,534
Effect of dilutive securities 226 240 196
------ ------ ------
Average shares outstanding including
dilutive securities 6,812 6,792 6,730
------ ------ ------
Net income per share, basic $ 1.25 $ 1.00 $ .79
------ ------ ------
------ ------ ------
Net income per share, diluted $ 1.21 $ .96 $ .77
------ ------ ------
------ ------ ------
</TABLE>
43
<PAGE>
On January 12, 1999 the Board of Directors declared a 2-for-1 stock split to be
effected in the form of a 100% stock dividend. The record date for the stock
split was February 2, 1999 and the distribution date of February 26, 1999. Also
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. All share and per share
information presented herein reflects these stock splits.
(12) ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Bank has an agreement with the Federal Home Loan Bank of Cincinnati (FHLB)
which enables the 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 Bank has the following defined contribution plans: employee stock ownership
plan, money purchase plan and deferred income (401(k)) profit sharing plan. The
plans are available to all employees meeting certain eligibility requirements.
Expenses of the plans for 1998, 1997, and 1996 were $847,000, $702,000, and
$553,000, respectively. Contributions are made in accordance with the terms of
the plans.
The Bank also sponsors an unfunded, non-qualified, defined benefit retirement
plan for certain key officers. At December 31, 1998 and 1997 the accumulated
benefit obligations for the plan were $1,543,000 and $1,369,000, respectively.
Expenses of the plan were $132,000 in 1998, $130,000 in 1997, and $160,000 in
1996.
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 non-employee directors to purchase up to
320,000 shares of common stock. Under this plan, 16,600 shares were available as
of December 31, 1998 for future grant. Bancorp also has an older stock option
plan under which all options have been granted. Options granted which do not
vest immediately are subject to a vesting schedule of 20% per year. The options
granted at an exercise price of $.861 per share were granted below market value
of the Company's common stock at the grant date and do not expire. All other
options were granted at an exercise price equal to the market value of common
stock at the time of grant and expire ten years after the grant date.
44
<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, 1995 377,092 $ 5.61
Exercised in 1996 (33,624) 2.22
------- ------
Outstanding at December 31, 1996 343,468 5.94
Granted in 1997 43,000 14.50
Exercised in 1997 (11,104) 6.68
Forfeited in 1997 (7,800) 7.25
------- ------
Outstanding at December 31, 1997 367,564 6.91
Granted in 1998 44,000 20.50
Exercised in 1998 (9,938) 5.62
Forfeited in 1998 (5,622) 11.16
------- ------
Outstanding at December 31, 1998 396,004 $ 8.43
------- ------
------- ------
</TABLE>
The weighted average fair values of options granted in 1998 and 1997 were $5.70
and $3.91, respectively.
Options outstanding at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Option price per share Expiration Shares Options exercisable
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ .861 none 63,760 63,760
4.339 2001 5,824 5,824
6.421 2004 50,720 40,576
7.250 2005 150,000 90,000
8.375 2006 42,400 25,440
14.500 2007 40,300 17,660
20.500 2008 43,000 8,000
------- -------
396,004 251,260
------- -------
------- -------
</TABLE>
45
<PAGE>
Bancorp applies the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its stock
option 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. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", Bancorp's proforma net income and income per share would have
been as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $8,218 $6,534 $5,179
Net income proforma 8,036 6,352 5,056
Income per share, basic as reported 1.25 1.00 .79
Income per share, basic proforma 1.22 .98 .78
Income per share, diluted as reported 1.21 .96 .77
Income per share, diluted proforma 1.18 .94 .77
------ ------ ------
------ ------ ------
</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 were
dividend yields of 1.51% and 1.56%; expected volatility of 16.68% and 16.11%;
risk free interest rates of 5.75% and 5.86%, in 1998 and 1997 respectively; and
expected lives of 7 years.
(15) DIVIDEND RESTRICTION
Bancorp's principal source of funds is dividends received from the Bank. 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 Bank
available for payment of dividends without regulatory approval were
approximately $11,027,000.
(16) COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1998, the Bank 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 $111,106,000, including standby letters of
credit of $11,398,000, represent normal banking transactions, and no significant
losses are anticipated to result therefrom. The Bank's exposure to credit loss
in the event of nonperformance by the other party to these commitments is
represented by the contractual amount of these instruments. The Bank uses the
same credit and collateral policies in making commitments and conditional
guarantees as for on-balance sheet instruments.
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 Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank 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.
46
<PAGE>
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support private borrowing
arrangements.
The Bank leases certain facilities and improvements under non-cancelable
operating leases. Future minimum lease commitments for these leases are
$600,000 in 1999, $565,000 in 2000, $566,000 in 2001, $567,000 in 2002,
$527,000 in 2003 and $2,766,000 in the aggregate thereafter. Rent expense,
net of sublease income, was $429,000 in 1998, $306,000 in 1997, and $329,000
in 1996.
Also, as of December 31, 1998 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.
(17) INTEREST RATE CONTRACTS
Bancorp uses interst rate collars to hedge its interest rate risk on variable
rate loans. Under these agreements, Bancorp is the payer when the average
prime rate exceeds cap strike rates and the counterparty is the payer when
the prime rate declines below floor strike rates as set forth in the
agreements. The notional amount of the interest rate collars represents an
agreed upon amount on which the calculation of interest payments is based,
and is significantly greater that the amount at risk. Although Bancorp is
exposed to credit risk in the event of nonperformance by the counterparties
to the agreements, this risk is minimized by dealing with counterparties
having high credit ratings. The cost of replacing contracts in an unrealized
gain position represents the measure of credit risk.
Net receipts or payments under the collars are recognized as adjustments to
interest income on loans. The collars had an inmaterial effect on Bancorp's
results of operations during 1998 and 1997.
A summary of Bancorp's interest rate collars follows:
<TABLE>
<CAPTION>
Strike Rates
Contract Maturity Notional -------------------
Date Date Amount Cap Floor
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 1997 December 1999 $50,000 9.00% 8.00%
December 1998 July 2000 50,000 7.75 7.25
</TABLE>
47
<PAGE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments at December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $ 28,661 $ 28,661 $ 24,153 $ 24,153
Mortgage loans held for sale 9,791 9,791 5,183 5,183
Securities 99,817 100,475 60,114 60,424
Loans 448,286 449,927 370,293 370,737
FINANCIAL LIABILITIES
Deposits $517,612 $519,493 $417,571 $418,648
Short-term borrowings 39,388 39,388 18,167 18,167
Long-term debt 2,100 2,100 2,115 2,115
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit - - - -
Standby letters of credit - (171) - (150)
Interest rate collars (61) 68 - -
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Management used 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 future cash flows using
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-rate 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.
48
<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 are 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.
49
<PAGE>
(19) REGULATORY MATTERS
The Bank is 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
published regulatory guidelines. The Bank's 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, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 1998 and 1997, the most recent notifications from the Bank's
primary regulator categorized the Bank as well capitalized under the regulatory
framework. To be categorized as well capitalized, the Bank must maintain a total
risk-based capital ratio of at least 10%; a Tier 1 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 Bank's capital ratios at December 31, 1998 and
1997 follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------
Actual Actual
(Dollars in thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total risk-based capital (1)
Consolidated $ 48,506 10.82% $ 40,596 11.04%
Bank 48,931 10.94 41,403 11.26
Tier 1 risk-based capital (1)
Consolidated 42,587 9.50 35,666 9.70
Bank 43,025 9.62 36,547 9.94
Leverage (2)
Consolidated 42,587 7.31 35,666 7.57
Bank 43,025 7.39 36,547 7.85
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
(1) Ratio is computed in relation to risk-weighted assets.
(2) Ratio is computed in relation to average assets.
50
<PAGE>
(20) S.Y. BANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
- ---------------------------------------------------------------------------
(In thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary bank $ 726 $ 346
Investment in and receivable from subsidiary bank 46,031 38,086
Other assets 967 1,072
------- -------
TOTAL ASSETS $47,724 $39,504
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 1,981 $ 787
Long-term debt 1,800 1,800
Stockholders' equity 43,943 36,917
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $47,724 $39,504
------- -------
------- -------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Income - Dividends from subsidiary bank $1,977 $2,046 $1,458
Expenses 257 187 130
------ ------ ------
Income before income taxes and
equity in undistributed net
income of subsidiaries 1,720 1,859 1,328
Income tax benefit 88 64 44
------ ------ ------
Income before equity in
undistributed net income
of subsidiaries 1,808 1,923 1,372
Equity in undistributed net
income of subsidiaries 6,410 4,611 3,807
------ ------ ------
NET INCOME $8,218 $6,534 $5,179
------ ------ ------
------ ------ ------
</TABLE>
51
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,218 $ 6,534 $ 5,179
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of subsidiary (6,410) (4,611) (3,807)
(Increase) decrease in receivable from subsidiary (1,361) 24 (135)
(Increase) decrease in other assets 2 (411) (13)
Increase in other liabilities 1,194 190 142
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,643 1,726 1,366
------- ------- -------
INVESTING ACTIVITIES
Acquisition of subsidiary - -
FINANCING ACTIVITIES
Proceeds from long-term debt - 1,800 2,200
Repayments of long-term debt - (2,090) (110)
Issuance of common stock 480 257 91
Cash dividends paid (1,743) (1,508) (1,306)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,263) (1,541) 875
------- ------- -------
NET INCREASE (DECREASE) IN CASH 380 185 (562)
CASH AT BEGINNING OF YEAR 346 161 723
------- ------- -------
CASH AT END OF YEAR $ 726 $ 346 $ 161
------- ------- -------
------- ------- -------
</TABLE>
52
<PAGE>
(21) SEGMENTS
The Bank's, and thus Bancorp's principal activities include commercial and
retail banking, investment management and trust, and mortgage banking.
Commercial and retail banking provides a full range of loans and deposit
products to individual consumers and businesses. Investment management and trust
provides wealth management services including private banking, brokerage, estate
planning and administration, retirement plan management, and custodian or
trustee services. Mortgage banking originates residential loans and sells them,
servicing released, to the secondary market.
The financial information for each business segment reflects that which is
specifically identifiable or allocated based on an internal allocation method.
Allocations have been consistently applied for all periods presented. The
measurement of the performance of the business segments is based on the
management structure of the Bank and is not necessarily comparable with similar
information for any other financial institution. The information presented is
also not necessarily indicative of the segments' operations if they were
independent entities.
Selected financial information by business segment for each of the three years
ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST INCOME
Commercial and retail banking $22,123 $19,241 $16,100
Investment management and trust 835 278 67
Mortgage banking 336 204 371
------- ------- -------
Total $23,294 $19,723 $16,538
------- ------- -------
------- ------- -------
NON-INTEREST INCOME
Commercial and retail banking $ 3,922 $ 2,647 $ 1,993
Investment management and trust 4,882 3,564 2,465
Mortgage banking 2,568 1,214 1,141
------- ------- -------
Total $11,372 $ 7,425 $ 5,599
------- ------- -------
------- ------- -------
NET INCOME
Commercial and retail banking $ 5,929 $ 5,344 $ 4,545
Investment management and trust 1,527 989 440
Mortgage banking 762 201 194
------- ------- -------
Total $ 8,218 $ 6,534 $ 5,179
------- ------- -------
------- ------- -------
</TABLE>
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
S.Y. BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of S.Y. Bancorp,
Inc. (Bancorp) and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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 subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Louisville, Kentucky
January 22, 1999
54
<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 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
Executive Vice President
and Chief Financial Officer
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and executive officers of Bancorp is
incorporated herein by reference to the discussion under the heading, "ELECTION
OF DIRECTORS," on pages 4 through 8 and Section 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE on page 8 of Bancorp's Proxy Statement for the 1999 Annual
Meeting of Shareholders and the section captioned EXECUTIVE OFFICERS OF THE
REGISTRANT on page 8 of this Form 10-K.
Information regarding principal occupation of directors of Bancorp follows:
David H. Brooks- Chairman and Chief Executive Officer, S.Y. Bancorp, Inc. and
Stock Yards Bank & Trust Company;
James E. Carrico- President, Acordia of Kentucky;
Jack M. Crowner- Owner, Jack Crowner & Associates;
Charles R. Edinger, III- Vice President, J. Edinger & Son, Inc.;
Carl T. Fischer, Jr.- Farmer and Horse Breeder;
Stanley A. Gall, M.D.- Professor and Chairman, Department of Obstetrics and
Gynecology, University of Louisville;
David P. Heintzman- President, S.Y. Bancorp, Inc. and Stock Yards Bank & Trust
Company;
Leonard Kaufman- Retired Chairman and Chief Executive Officer, S.Y. Bancorp,
Inc. and Stock Yards Bank & Trust Company;
George R. Keller- Founder, Tumbleweed Mexican Food, Inc.;
Bruce P. Madison- Vice President and Treasurer, Plumbers Supply Company, Inc.;
Henry A. Meyer- President, Henry Fruechtenicht Co., Inc., Vice Chairman, S.Y.
Bancorp, Inc.;
Norman Tasman- President, Secretary and Treasurer, Tasman Industries, Inc. and
President, Tasman Hide Processing, Inc.;
Kathy C. Thompson- Executive Vice President and Secretary, S.Y. Bancorp, Inc.
and Executive Vice President, Stock Yards Bank & Trust Company;
Bertrand A. Trompeter- Retired, John F. Trompeter Co., Inc.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of Bancorp's executive officers and
directors is incorporated herein by reference to the discussion under the
heading, "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" on pages 10 through
14 of Bancorp's Proxy Statement for the 1999 Annual Meeting of Shareholders.
Information appearing under the headings "REPORT OF COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION" on pages 9 and 10 and "Shareholder Return Performance
Graph" in the section entitled "COMPENSATION OF EXECUTIVE OFFICERS AND
DIRECTORS" contained on page 14 in Bancorp's Proxy Statement for the 1999 Annual
Meeting of Shareholders shall not be deemed to be incorporated by reference in
this report, notwithstanding any general statement contained herein
incorporating portions of such Proxy Statement by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
discussion under the headings, "ELECTION OF DIRECTORS" on pages 4 through 8 and
"PRINCIPAL HOLDERS OF BANCORP'S COMMON STOCK," on pages 3 and 4 of Bancorp's
Proxy Statement for the 1999 Annual Meeting of Shareholders.
56
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
discussion under the heading, "TRANSACTIONS WITH MANAGEMENT AND OTHERS," on page
15 of Bancorp's Proxy Statement for the 1999 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are included on pages 30 through 54
of this Form 10-K:
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity - years
ended December 31, 1998, 1997, and 1996
Consolidated Statements of Comprehensive Income - years ended December
31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - years ended December 31, 1998,
1997, and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a) 2. List of Financial Statement Schedules
Schedules to the consolidated financial statements of Bancorp are
omitted since they are either not required under the related
instructions, are inapplicable, or the required information is shown in
the consolidated financial statements or notes thereto.
(a) 3. List of Exhibits
3.1 Articles of Incorporation of Bancorp filed with the Secretary of
State of Kentucky on January 12, 1988. Exhibit 3 to Registration
Statement on Form S-4 of Bancorp, File No. 33-22517, is
incorporated by reference herein.
3.2 Articles of Amendment to the Articles of Incorporation of Bancorp
filed with the Secretary of State of Kentucky on May 8, 1989.
Exhibit 19 to Annual Report on Form 10-K for the year ended
December 31, 1989, of Bancorp is incorporated by reference
herein.
3.3 Articles of Amendment to the Articles of Incorporation of Bancorp
filed with the Secretary of State of Kentucky on June 30, 1994.
Exhibit 3.3 to Annual Report on Form 10-K for the year ended
December 31, 1994, of Bancorp is incorporated by reference
herein.
3.4 Articles of Amendment to the Articles of Incorporation of Bancorp
filed with the Secretary of State of Kentucky on April 29, 1998.
3.5 Bylaws of Bancorp, as amended, currently in effect. Exhibit 3.4
to Annual Report on Form 10-K for the year ended December 31,
1994, of Bancorp is incorporated by reference herein.
10.1* S.Y. Bancorp, Inc. Stock Option Plan as amended. Exhibit 4 to
Registration Statement on Form S-8 of Bancorp, File No. 33-25885,
is incorporated by reference herein.
10.2* Stock Yards Bank & Trust Company Senior Officers Security Plan
adopted December 23, 1980. Exhibit 10 to Annual Report on Form
10-K for the year ended December 31, 1988, of Bancorp is
incorporated by reference herein.
10.3* Form of Indemnification agreement between Stock Yards Bank &
Trust Company, S.Y. Bancorp, Inc. and each member of the Board of
Directors. Exhibit 10.3 to the Annual Report on Form 10-K for the
year ended December 31, 1994, of Bancorp is incorporated by
reference herein.
10.4* Senior Executive Severance Agreement executed in July, 1994
between Stock Yards Bank & Trust
57
<PAGE>
Company and David H. Brooks. Exhibit 10.4 to the Annual Report on
Form 10-K for the year ended December 31, 1994, of Bancorp is
incorporated by reference herein.
10.5* Senior Executive Severance Agreement executed in July 1994
between Stock Yards Bank & Trust Company and David P. Heintzman.
Exhibit 10.5 to the Annual Report on Form 10-K for the year ended
December 31,1994, of Bancorp is incorporated by reference herein.
10.6* Senior Executive Severance Agreement executed in July, 1994
between Stock Yards Bank & Trust Company and Kathy C. Thompson.
Exhibit 10.6 to the Annual Report on Form 10-K for the year ended
December 31, 1994, of Bancorp is incorporated by reference
herein.
10.7* S.Y. Bancorp, Inc. 1995 Stock Incentive Plan. Exhibit 10.7 to the
Annual Report on Form 10-K for the year ended December 31, 1995,
of Bancorp is incorporated by reference herein.
10.8* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
Company and David H. Brooks. Exhibit 10.8 to the Annual Report on
form 10-K for the year ended December 31, 1996 is incorporated by
reference herein.
10.9* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
Company and David P. Heintzman. Exhibit 10.9 to the Annual Report
on form 10-K for the year ended December 31, 1996 is incorporated
by reference herein.
10.10* Amendment Number One to the Senior Executive Severance Agreement
executed in February, 1997 between Stock Yards Bank & Trust
company and Kathy C. Thompson. Exhibit 10.10 to the Annual Report
on form 10-K for the year ended December 31, 1996 is incorporated
by reference herein.
10.11* Senior Executive Severance Agreement, as amended, executed in
February, 1997 between Stock Yards Bank & Trust Company and Nancy
B. Davis. Exhibit 10.11 to the Annual Report on form 10-K for the
year ended December 31, 1996 is incorporated by reference herein.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
* Indicates matters related to executive compensation.
Copies of the foregoing Exhibits will be furnished to others upon request and
payment of Bancorp's reasonable expenses in furnishing the exhibits.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed in response to Item 14(a) 3 are filed as a
part of this report.
(d) Financial Statement Schedules
None
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 9, 1999 S.Y. BANCORP, INC.
BY: /s/ David H. Brooks
------------------------------
David H. Brooks
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ David H. Brooks Chairman and Chief Executive Officer March 9, 1999
- ----------------------------- and Director (principal executive officer)
David H. Brooks
/s/ David P. Heintzman President and Director March 9, 1999
- -----------------------------
David P. Heintzman
/s/ Nancy B. Davis Executive Vice President, Treasurer and March 9, 1999
- ----------------------------- Chief Financial Officer (principal finan-
Nancy B. Davis cial and accounting officer)
/s/ James E. Carrico Director March 9, 1999
- -----------------------------
James E. Carrico
/s/ Jack M. Crowner Director March 9, 1999
- -----------------------------
Jack M. Crowner
/s/ Charles R. Edinger, III Director March 9, 1999
- -----------------------------
Charles R. Edinger, III
/s/ Carl T. Fischer, Jr. Director March 9, 1999
- -----------------------------
Carl T. Fischer, Jr.
/s/ Stanley A. Gall Director March 9, 1999
- -----------------------------
Stanley A. Gall, M.D.
/s/ Leonard Kaufman Director March 9, 1999
- -----------------------------
Leonard Kaufman
/s/ George R. Keller Director March 9, 1999
- -----------------------------
George R. Keller
59
<PAGE>
/s/ Bruce P. Madison Director March 9, 1999
- -----------------------------
Bruce P. Madison
/s/ Henry A. Meyer Director March 9, 1999
- -----------------------------
Henry A. Meyer
/s/ Norman Tasman Director March 9, 1999
- -----------------------------
Norman Tasman
/s/ Kathy C. Thompson Executive Vice President, Secretary March 9, 1999
- ----------------------------- and Director
Kathy C. Thompson
/s/ Bertrand A. Trompeter Director March 9, 1999
- -----------------------------
Bertrand A. Trompeter
</TABLE>
60
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF S.Y. BANCORP, INC.
Pursuant to the applicable provisions of the Kentucky Business Corporation
Act, S.Y. BANCORP, INC., a Kentucky corporation (the "Company"), hereby adopts
the following Articles of Amendment to its Articles of Incorporation:
FIRST: The name of the corporation is S.Y. Bancorp, Inc.
SECOND: At a meeting of the Board of Directors of the Company duly called
and held on February 10, 1998, at which a quorum was present and acting
throughout, the following resolution was adopted setting forth and declaring the
advisability of a proposed amendment to the Articles of Incorporation of the
Company:
WHEREAS, the Board of Directors of the Corporation deems it to be
advisable and in the best interests of the Corporation and its
shareholders to amend the Articles of Incorporation (the "Articles") to
increase the number of authorized shares of common stock which the
Corporation may issue from time to time for its lawful corporate
purposes.
NOW, THEREFORE, BE IT RESOLVED that the Articles of the Corporation be
amended by revising Article VI thereof so that, as amended, such
Article shall provide in its entirety as follows:
ARTICLE VI
CAPITAL STOCK
"The total number of shares which may be issued by the
Corporation is ten million (10,000,000) shares of Common Stock having
no par value. Every shareholder is entitled to one vote per share and
may vote same as provided by law."
<PAGE>
THIRD: Pursuant to the aforesaid resolution of the Board of Directors, the
foregoing amendment was presented to the shareholders of the Company for their
consideration and vote at the annual meeting of shareholders duly called and
held on April 22, 1998. There were 3,290,082 outstanding shares of common stock
of the Company entitled to vote at such annual meeting, and the holder of each
share was entitled to cast one vote on the foregoing amendment. There were
2,756,775 shares of common stock indisputably represented at the annual meeting
in person or by proxy. A total of 2,695,654 undisputed votes were cast by the
holders of common stock for the proposed amendment, which was sufficient for its
approval by the holders of the outstanding common shares, and the amendment was
duly adopted by the shareholders.
FOURTH: The amendment does not provide for an exchange, reclassification
or cancellation of issued shares of stock of the Company.
IN TESTIMONY WHEREOF, these Articles of Amendment have been executed on
behalf of the undersigned corporation, by and through its duly authorized
officer, this 28th day of April, 1998.
S.Y. BANCORP, INC.
By: /s/ David P. Heintzman
------------------------------
David P. Heintzman, President
THIS INSTRUMENT PREPARED BY:
/s/ C. Craig Bradley, Jr.
- ---------------------------
<PAGE>
C. Craig Bradley, Jr.
STITES & HARBISON
400 W. Market Street, Suite 1800
Louisville, Kentucky 40202-3352
<PAGE>
S.Y. Bancorp Subsidiary
Stock Yards Bank & Trust Company, a Kentucky Banking Corporation
1040 East Main Street
Louisville, KY 40206
<PAGE>
Exhibit 23
Consent of Independent Auditors
The Board of Directors
S.Y. Bancorp, Inc.
We consent to incorporation by reference in registration statements Numbers
33-25885, 33-96740 and 33-96742 on Form S-8 and 33-96744 on Form S-3 of S.Y.
Bancorp, Inc. of our report dated January 22, 1999, relating to the
consolidated balance sheets of S.Y. Bancorp, Inc, and subsidiary as of
December 31, 1998 and 1997, and the related consolidated statements of
income, changes in stockholders' equity, comprehensive income, and cash flows
for each of the years in the three-year period ended December 31, 1998, which
report appears in the 1998 annual report on Form 10-K of S.Y. Bancorp, Inc.
(Signature)
KPMG LLP
Louisville, Kentucky
March 17, 1999
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