FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 17262
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S.Y. BANCORP, INC.
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kentucky 61-1137529
- ------------------------------ ---------------------------
(State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
1040 East Main Street, Louisville, Kentucky, 40206
- ------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(502)582-2571
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, no par value - 6,669,061
shares issued and outstanding at August 2, 1999
<PAGE>
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
The following consolidated financial statements of S.Y. Bancorp,
Inc. and Subsidiary, Stock Yards Bank & Trust Company, are submitted
herewith:
-- Unaudited Consolidated Balance Sheets
June 30, 1998 and December 31, 1998
-- Unaudited Consolidated Statements of Income
for the three months ended June 30, 1999 and 1998
-- Unaudited Consolidated Statements of Income
for the six months ended June 30, 1999 and 1998
-- Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998
-- Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 1999
-- Unaudited Consolidated Statement of Comprehensive Income
for the six months ended June 30, 1999
-- Notes to Unaudited Consolidated Financial Statements
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1999 (Unaudited) and December 31, 1998
June 30, 1999 December 31, 1998
------------- -----------------
(In thousands, except share data)
Assets
Cash and due from banks $ 28,758 $ 21,661
Federal funds sold 19,000 7,000
Mortgage loans held for sale 7,179 9,791
Securities available for sale (amortized
cost $51,602 in 1999 and $71,367 in 1998) 50,424 72,071
Securities held to maturity (approximate
market value $24,166 in 1999 and $28,404
in 1998) 24,145 27,746
Loans 486,507 448,286
Allowance for loan losses 7,253 6,666
------- -------
Net loans 479,254 441,620
Premises and equipment 16,546 15,619
Accrued interest receivable and other assets 15,682 14,280
------- -------
Total Assets $640,988 $609,788
======= =======
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 89,696 $ 85,133
Interest bearing 453,697 432,479
------- -------
Total deposits 543,393 517,612
Securities sold under agreements
to repurchase and federal funds purchased 38,216 38,529
Short-term borrowings 2,780 859
Accrued interest payable and
other liabilities 7,192 6,745
Long-term debt 2,100 2,100
------- -------
Total Liabilities 593,681 565,845
------- -------
Stockholders' equity
Common stock, no par value; 10,000,000
shares authorized; 6,662,879 and
6,580,164 shares issued and outstanding
in 1999 and 1998, respectively 5,679 5,535
Surplus 14,914 14,075
Retained earnings 27,491 23,868
Accumulated other comprehensive income
(losses) ( 777) 465
------- -------
Total Stockholders' Equity 47,307 43,943
------- -------
Total Liabilities and Stockholders' Equity $640,988 $609,788
======= =======
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
For the three months ended June 30, 1999 and 1998
1999 1998
---- ----
(In thousands, except share and per share data)
Interest income
Loans $10,303 $9,386
Federal funds sold 335 178
Mortgage loans held for sale 78 138
U.S. Treasury and Federal agencies 935 796
Obligations of states and political
subdivisions 195 120
------ ------
Total interest income 11,846 10,618
------ ------
Interest expense
Deposits 4,728 4,719
Securities sold under agreements
to repurchase and federal funds purchased 429 134
Short-term borrowings 19 26
Long-term debt 35 39
------ ------
Total interest expense 5,211 4,918
------ ------
Net interest income 6,635 5,700
Provision for loan losses 300 350
------ ------
Net interest income after
provision for loan losses 6,335 5,350
------ ------
Non-interest income
Investment management and trust services 1,370 1,238
Service charges on deposit accounts 887 735
Gains on sales of mortgage loans held for sale 379 529
Other 599 339
------ ------
Total non-interest income 3,235 2,841
------ ------
Non-interest expenses
Salaries and employee benefits 3,438 2,976
Net occupancy expense 403 342
Furniture and equipment expense 563 491
Other 1,574 1,344
------ ------
Total non-interest expenses 5,978 5,153
------ ------
Income before income taxes 3,592 3,038
Income tax expense 1,149 976
------ ------
Net income $ 2,443 $ 2,062
====== ======
Net income per share
Basic $ .37 $ .32
====== ======
Diluted $ .36 $ .30
------ ------
Average common shares
Basic 6,655,120 6,587,104
========= =========
Diluted 6,872,159 6,852,882
========= =========
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
For the six months ended June 30, 1999 and 1998
1999 1998
---- ----
(In thousands, except share and per share data)
Interest income
Loans $20,207 $18,171
Federal funds sold 471 267
Mortgage loans held for sale 204 234
U.S. Treasury and Federal agencies 1,883 1,601
Obligations of states and political
subdivisions 390 236
------ ------
Total interest income 23,155 20,509
------ ------
Interest expense
Deposits 9,208 8,959
Securities sold under agreements
to repurchase and federal funds purchased 839 284
Short-term borrowings 36 56
Long-term debt 71 78
------ -----
Total interest expense 10,154 9,377
------ -----
Net interest income 13,001 11,132
Provision for loan losses 860 650
------ ------
Net interest income after
provision for loan losses 12,141 10,482
------ ------
Non-interest income
Investment management and trust services 2,618 2,298
Service charges on deposit accounts 1,667 1,290
Gains on sales of mortgage loans held
for sale 871 852
Gains on sales of securities available
for sale 100 184
Other 1,010 645
------ ------
Total non-interest income 6,266 5,269
----- -----
Non-interest expenses
Salaries and employee benefits 6,577 5,533
Net occupancy expense 809 651
Furniture and equipment expense 1,087 895
Other 2,999 2,843
------ ------
Total non-interest expenses 11,472 9,922
------ -----
Income before income taxes 6,935 5,829
Income tax expense 2,248 1,870
------ ------
Net income $ 4,687 $ 3,959
====== ======
Net income per share
Basic $ .71 $ .60
====== ======
Diluted $ .68 $ .58
====== ======
Average common shares
Basic 6,640,517 6,582,548
--------- ---------
Diluted 6,872,647 6,833,742
========= =========
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
For the six months ended June 30, 1999 and 1998
1999 1998
---- ----
(In thousands)
Operating activities
Net Income
Adjustments to reconcile net income to net cash $ 4,687 $ 3,959
provided (used) by operating activities:
Provision for loan losses 860 650
Depreciation, amortization and accretion, net 896 787
Gains on sales of mortgages held for sale ( 871) ( 852)
Gains on sales of securities available for sale ( 100) ( 184)
Origination of mortgage loans held for sale ( 50,817) (48,628)
Proceeds from sales of mortgage loans held
for sale 54,300 48,436
(Increase) decrease in accrued interest receivable
and other assets ( 797) ( 1,140)
Increase (decrease) in accrued interest payable and
other liabilities 760 1,571
------ ------
Net cash provided (used) by operating activities 8,918 ( 4,599)
------ ------
Investing activities
Net (increase) decrease in federal funds sold ( 12,000) 4,000
Purchases of securities available for sale ( 47,690) ( 32,417)
Purchases of securities held to maturity - ( 48,652)
Proceeds from maturities of securities available
for sale 61,864 26,848
Proceeds from maturities of securities held to maturity 3,644 38,283
Proceeds from sales of securities available for sale 5,637 5,031
Net (increase) decrease in loans ( 38,494) ( 47,737)
Purchases of premises and equipment ( 1,777) ( 1,176)
------ ------
Net cash provided (used) by investing activities ( 28,816) ( 55,820)
------ ------
Financing activities
Net increase (decrease) in deposits 25,781 62,738
Net increase (decrease) in securities sold under
agreements to repurchase and federal funds purchased ( 313) ( 4,837)
Net increase (decrease) in short-term borrowings 1,921 516
Repayments of long-term debt - ( 15)
Issuance of common stock for options and dividend
reinvestment plan 633 340
Cash dividends paid ( 1,027) ( 855)
------ ------
Net cash provided (used) by financing activities 26,995 57,887
------ ------
Net increase (decrease) in cash and cash equivalents 7,097 6,666
Cash and cash equivalents at beginning of period 21,661 18,153
------- -------
Cash and cash equivalents at end of period $ 28,758 $ 24,819
------- -------
Income tax payments were $3,375,000 in 1999, and $1,095,000 in 1998.
Cash paid for interest was $10,195,000 in 1999, and $9,498,000 in 1998.
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. & SUBSIDIARY
Unaudited Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 30, 1999
<TABLE>
Accumulated
<S> Common Stock Other
-----------
Number of Retained Comprehensive
Shares Amount Surplus Earnings Income Total
------ ------ ------- -------- ------ -----
(In thousands, except share
and per share data)
<C> <C> <C> <C>> <C> <C>
Balance December 31, 1998 6,593,338 $ 5,535 $ 14,075 $ 23,868 $ 465 $ 43,943
Net income - - - 4,687 - 4,687
Stock options exercised 49,840 100 410 - - 510
Shares issued for 401(k),
dividend reinvestment and
employee stock purchase
plans 19,701 44 429 - - 473
Cash dividends, $.16 per
share - - - (1,064) - (1,064)
Change in other
comprehensive income,
net of tax - - - - (1,242) (1,242)
------- ------ ------ ------ ------- -------
Balance June 30, 1999 6,662,879 $ 5,679 $ 14,914 $ 27,491 $ ( 777) $47,307
========= ====== ======= ======= ======= ======
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
S.Y. BANCORP, INC. & SUBSIDIARY
Unaudited Consolidated Statement of Comprehensive Income
For the six months ended June 30, 1999
1999 1998
---- ----
(In thousands)
Net income $ 4,687 $ 3,959
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising
during the period (1,307) ( 142)
Less reclassification adjustment for gains
included in net income 65 118
----- ----
Other comprehensive income (loss) (1,242) ( 24)
----- ----
Comprehensive income $ 3,445 $ 3,935
===== =====
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
S.Y. BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. The consolidated
financial statements of S.Y. Bancorp, Inc. and Subsidiary reflect all
adjustments (consisting only of adjustments of a normal recurring nature)
which are, in the opinion of management, necessary for a fair presentation
of financial condition and results of operations for the interim periods.
The consolidated financial statements include the accounts of S.Y.
Bancorp, Inc. and its wholly owned subsidiary, Stock Yards Bank & Trust
Company. All significant intercompany transactions have been eliminated
in consolidation.
A description of other significant accounting policies is presented in
the notes to the Consolidated Financial Statements for the year ended
December 31, 1998 included in S.Y. Bancorp, Inc.'s Annual Report on Form
10-K for the year then ended.
Interim results for the quarter and six months ended June 30, 1999
are not necessarily indicative of the results for the entire year.
(2) Allowance for Loan Losses
-------------------------
An analysis of the changes in the allowance for loan losses for the
six months ended June 30 follows (in thousands):
1999 1998
---- ----
Beginning balance $6,666 $5,921
Provision for loan losses 860 650
Loans charged off ( 296) ( 150)
Recoveries 23 44
----- -----
Ending balance $7,253 $6,465
===== =====
<PAGE>
(3) Net Income per share
--------------------
The following table reflects, for the three and six months periods
ended June 30, the numerators (net income)and denominators (average
shares outstanding) for the basic and diluted net income per share
computations (in thousands except per share data).
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Net income, basic and diluted $ 2,443 $ 2,062 $ 4,687 $ 3,959
===== ===== ===== =====
Average shares outstanding 6,655 6,587 6,641 6,582
Effect of dilutive securities 217 265 232 252
----- ----- ----- -----
Average shares outstanding
including dilutive securities 6,872 6,852 6,873 6,834
===== ===== ===== =====
Net income per share, basic $ .37 $ .32 $ .71 $ .60
===== ===== ===== =====
Net income per share, diluted $ .36 $ .30 $ .68 $ .58
===== ===== ===== =====
<PAGE>
(4) 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' operation if they were independent entities.
Selected financial information by business segment for the three and
six months ended June 30, 1999 and 1998 follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
Net interest income
Commercial and retail banking $ 6,240 $ 5,447 $12,247 $10,675
Investment management and trust 320 186 607 318
Mortgage banking 75 67 147 139
----- ----- ------ ------
Total $ 6,635 $ 5,700 $13,001 $11,132
====== ====== ====== ======
Non-interest income
Commercial and retail banking $ 1,185 $ 989 $ 2,258 $ 1,884
Investment management and trust 1,546 1,214 2,875 2,304
Mortgage banking 504 638 1,133 1,081
----- ------ ----- ------
Total $ 3,235 $ 2,841 $ 6,266 $ 5,269
====== ====== ====== ======
Net income
Commercial and retail banking $ 1,909 $ 1,392 $ 3,491 $ 2,764
Investment management and trust 360 493 902 901
Mortgage banking 174 177 294 294
------ ------ ------ ------
Total $ 2,443 $ 2,062 $ 4,687 $ 3,959
====== ====== ====== ======
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
This item discusses the results of operations for S.Y. Bancorp, Inc.
("Bancorp"), and its subsidiary, Stock Yards Bank & Trust Company for the
three and six months periods ended June 30, 1999 and compares those periods
with the same periods of the previous year. Unless otherwise indicated, all
references in this discussion to the "Bank" include Bancorp. In addition,
the discussion describes the significant changes in the financial condition
of Bancorp and the Bank that have occurred during the first half of 1999
compared to December 31, 1998. This discussion should be read in conjunction
with the consolidated financial statements and accompanying notes presented
in Part I, Item 1 of this report.
This report contains forward-looking statements under the Private
Securities Litigation Reform act that involve risks and uncertainties.
Although Bancorp believes the assumptions underlying the forward-looking
statements contained herein are reasonable, any of these assumptions could
be inaccurate. Therefore, there can be no assurance forward-looking
statements included herein will prove to be accurate. Factors that could
cause actual results to differ from results discussed in forward-looking
statements include, but are not limited to: economic conditions both
generally and more specifically in the market in which Bancorp and its
subsidiary operate; competition for Bancorp's customers from other providers
of financial services; government legislation and regulation which change
form time to time and over which Bancorp has no control; changes in interest
rates; material unforeseen changes in liquidity, results of operations, or
financial condition of Bancorp's customers; material unforeseen complications
related to addressing the Year 2000 experienced by Bancorp, its suppliers,
customers and governmental agencies; other risks detailed in Bancorp's
filings with the Securities and Exchange Commission, all of which are
difficult to predict and many of which are beyond the control of Bancorp.
A. RESULTS OF OPERATIONS
Net income of $2,443,000 for the three months ended June 30, 1999
increased $381,000 or 18.5% from $2,062,000 for the comparable 1998 period.
Basic net income per share was $.37 for the second quarter of 1999, an
increase of 15.6% from the $.32 for the same period in 1998. Net income per
share on a diluted basis was $.36 for the second quarter of 1999 compared to
$.30 for the second quarter of 1998. This represents a 20% increase. Return
on average assets and return on average stockholders' equity were 1.54% and
20.68%, respectively, for the second quarter of 1999, compared to 1.65% and
20.96%, respectively, for the same period in 1998.
Net income of $4,687,000 for the first six months of 1999 increased
$728,000 or 18.4% from the comparable 1998 period. Basic net income per
share was $.71 for the first half of 1999, an increase of 18.3% from the
$.60 for the same period in 1998. Net income per share on a diluted basis
was $.68 for the six months ended June 30, 1999 compared to $.58 for the
same period in 1998. This represents a 17.2% increase. Return on average
assets and return on average stockholder's equity were 1.53% and 20.40%,
respectively for the first half of 1999, compared to 1.56% and 20.65%,
respectively, for the same period of 1998.
<PAGE>
The following paragraphs provide an analysis of the significant
factors affecting operating results and financial condition.
Net Interest Income
- -------------------
In thousands except percentages
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Interest income $ 11,846 $10,618 $23,155 $20,509
Tax equivalent 86 52 173 102
------ ------ ------ ------
Interest income, tax equivalent
basis 11,932 10,670 23,328 20,611
Total interest expense 5,211 4,918 10,154 9,377
------ ------ ------ ------
Net interest income, tax
equivalent basis (1) $ 6,721 $ 5,752 $13,174 $11,234
====== ====== ====== ======
Net interest spread (2),
annualized 3.91% 3.98% 3.96% 4.03%
====== ====== ====== ======
Net interest margin (3),
annualized 4.58% 4.73% 4.64% 4.81%
====== ====== ====== ======
Notes:
(1) Net interest income, the most significant component of the Banks'
earnings, is total interest income less total interest expense. The
level of net interest income is determined by the mix and volume of
interest earning assets, interest bearing deposits and borrowed funds,
and by changes in interest rates.
(2) Net interest spread is the difference between the taxable equivalent
rate earned on interest earning assets less the rate expensed on
interest bearing liabilities.
(3) Net interest margin represents net interest income on a taxable
equivalent basis as a percentage of average interest earning assets
Net interest margin is affected by both the interest rate spread and
the level of non-interest bearing sources of funds, primarily
consisting of demand deposits and stockholders' equity.
Fully taxable equivalent net interest income of $6,721,000 for the
three months ended June 30, 1999 increased $969,000 or 16.8% from
$5,752,000 for the same period last year. Net interest spread and
net interest margin were 3.91% and 4.58%, respectively, for the first quarter
of 1999 and 3.98% and 4.73%, respectively, for the first quarter of 1998.
<PAGE>
Fully taxable equivalent net interest income of $13,174,000 for the six
months ended June 30, 1999 increased $1,940,000 or 17.3% from $11,234,000 for
the same period last year. Net interest spread and net interest margin were
3.96% and 4.64%, respectively, for the first half of 1999 and 4.03% and 4.81%,
respectively, for the first half of 1998.
Average earning assets increased $100,711,000, or 21.4% to $572,034,000
for the first half of 1999 compared to 1998. Average interest bearing
liabilities increased $85,527,000 or 21.6% to $480,774,000 for the first six
months of 1999 compared to 1998.
Interest rate sensitivity has a major impact on the earnings of the Bank.
As interest rates change in the market, rates earned on assets do not
necessarily move identically with rates paid on liabilities. Proper asset
and liability management involves the matching of interest sensitive assets
and liabilities to reduce interest rate risk. Bancorp manages interest rate
risk by making both variable and fixed rate loans. Fixed rate loans are
matched, along with investment securities against longer term fixed rate time
deposits. The Bank's largest interest earning asset is loans and approximately
one third of the loan portfolio is comprised of variable rate loans. Variable
rate loans re-price immediately with a change in prime rates. Additionally,
during periods of declining interest rates, some customers with fixed rate
loans may refinance to obtain lower rates on their loans. Deposits, the
Bank's largest interest bearing liability, do not respond as quickly nor as
significantly to changes in market interest rates. At June 30, 1999 Bancorp
was asset sensitive 3.4% through one year. With this position
more interest bearing assets re-price within one year than do interest
bearing liabilities. This position is generally favorable to net interest
margin during periods of rising interest rates and generally unfavorable
during periods of falling rates. Bancorp's management believes it has the
ability to effectively manage the degree of market risk inherent in its
interest sensitive financial instruments.
The following table provides information about Bancorp's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For loans, securities and liabilities with
contractual maturities, the table presents principal cash flows and weighted
average interest rates as well as Bancorp's experience of the impact of
interest rate fluctuations on the prepayment of mortgage-backed securities.
For deposits that have no contractual maturity (non-interest bearing checking,
interest bearing checking and savings), management has estimated withdrawal
activity using a ratable amount over the next six years. This information
is based on Bancorp's historical experience and management's judgments. For
interest rate caps and floors, the table presents notional amounts. Notional
amounts are used to calculate the contractual payments to be exchanged under
the contracts.
<PAGE>
<TABLE>
<S> For Twelve Month Period Ending
-----------------------------------------------
(Dollars in thousands) 3/31/00 3/31/01 3/31/02 3/31/03 3/31/04 Thereafter Total
------ ------- ------- ------- ------- ---------- -----
<C> <C> <C> <C> <C> <C> <C>
Federal funds sold
(variable rate) $ 19,000 - - - - - $ 19,000
Average interest rate 4.73% - - - - - 4.73%
Loans held for sale
Fixed rate $ 7,179 - - - - - $ 7,179
Average interest rate 6.88% - - - - - 6.88%
Securities
Fixed rate $ 8,549 $ 9,540 $ 9,053 $16,843 $ 8,808 $21,776 $ 74,569
Average interest rate 7.24% 6.66% 6.47% 5.87% 5.46% 5.58% 6.28%
Loans
Fixed rate $ 58,602 $51,527 $49,113 $47,182 $60,825 $58,414 $325,663
Average interest rate 8.80% 8.68% 8.67% 8.72% 8.64% 7.99% 8.52%
Variable rate $ 56,575 $25,158 $11,852 $ 8,356 $ 892 $58,011 $160,844
Average interest rate 8.47% 8.62% 8.26% 7.86% 7.95% 7.33% 8.16%
Deposits
Non-interest
bearing checking $ 13,534 $13,534 $13,534 $13,534 $13,534 $22,026 $ 89,696
Average interest rate - - - - - - -
Savings and interest
bearing checking $ 26,929 $26,929 $26,929 $26,929 $26,929 $44,880 $179,525
Average interest rate 3.04% 3.04% 3.04% 3.04% 3.04% 3.04% 3.04%
Time deposits (fixed rate) $206,095 $40,950 $ 7,824 $ 9,890 $ 5,940 $ 3,473 $274,172
Average interest rate 5.06% 4.99% 5.65% 5.43% 5.42% 4.67% 5.02%
Other short-term borrowings
(variable rate) $ 2,780 - - - - - $ 2,780
Average interest rate 5.74% - - - - - 5.74%
Federal funds purchased
and securities sold under
agreements to repurchase
(variable rate) $ 38,216 - - - - - $ 38,216
Average interest rate 4.17% - - - - - 4.17%
Long-term debt
(variable rate) $ 1,800 - - - - 300 $ 2,100
Average interest rate 6.79% - - - - 6.75% 6.78%
Interest rate collar
Notional amount $ 50,000 $50,000 - - - - $100,000
Cap strike rate 9.00% 7.75% - - - - -
Floor strike rate 8.00% 7.25% - - - - -
</TABLE>
<PAGE>
Provision for Loan Losses
- -------------------------
The allowance for loan losses is based on management's continuing
review of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans, and
such other factors that, in management's judgment, deserve current
recognition in estimating loan losses.
An analysis of the changes in the allowance for loan losses and selected
ratios follow:
Six Months Ended
----------------
June 30
-------
(In thousands except percentages)
1999 1998
---- ----
Balance at January 1 $ 6,666 $ 5,921
Provision for loan losses 860 650
Loan charge-offs, net of recoveries ( 273) ( 106)
------- -------
Balance at June 30 $ 7,253 $ 6,465
======= =======
Average loans, net of unearned income $466,990 $395,608
======= =======
Provision for loan losses to average loans (1) .37% .33%
======= =======
Net loan charge-offs to average loans (1) .12% .05%
======= =======
Allowance for loan losses to average loans 1.55% 1.63%
======= =======
Allowance for loan losses to period-end loans 1.49% 1.55%
======= =======
(1) Amounts annualized
<PAGE>
Non-interest Income and Expenses
- -----------------------------------
The following table sets forth the major components of non-interest
income and expenses for the three months ended June 30, 1999 and 1998.
In thousands
------------
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Non-interest income
Investment management and trust
services $1,370 $1,238 $ 2,618 $2,298
Service charges on deposit
accounts 887 735 1,667 1,290
Gains on sales of mortgage loans
held for sale 379 529 871 852
Gains on sales of securities
available for sale - - 100 184
Other 599 339 1,010 645
----- ----- ----- -----
Total non-interest income $3,235 $2,841 $ 6,266 $5,269
----- ----- ----- -----
Non-interest expenses
Salaries and employee benefits $3,438 $2,976 $ 6,577 $5,533
Net occupancy expense 403 342 809 651
Furniture and equipment expense 563 491 1,087 895
Other 1,574 1,344 2,999 2,843
----- ----- ----- -----
Total non-interest expenses $5,978 $5,153 $11,472 $9,922
===== ===== ====== =====
Non-interest income increased $394,000, or 13.9%, for the second quarter
of 1999, compared to the same period in 1998. Trust income increased $132,000
or 10.7% in the second quarter of 1999, as compared to the same period in 1998.
Non-interest income increased $997,000, or 18.9%, for the first half of 1999,
compared to the same period in 1998. Trust income increased $320,000 or 13.9%
in the first half of 1999, as compared to the same period in 1998 reflecting
the growth in the trust department. Trust assets under management at
June 30, 1999 were $ 822 million as compared to $770 million at
December 31, 1998 and $755 million at June 30, 1998.
<PAGE>
Service charges on deposit accounts increased $152,000 or 20.7% in the
second quarter of 1998 and $377,000 or 29.2% in the first half of 1999 as
compared to the same periods in 1998. Growth in deposit accounts spurred
mainly by the opening of new branch offices has presented opportunities for
increased fee income in this area. Additionally, service charges for
commercial deposit accounts were raised effective January 1, 1999.
Gains on sales of mortgage loans were $379,000 in the second quarter of
1999 compared to $529,000 in 1998 and $871,000 in the first six months of
1999 compared to $852,000 in the same period of 1998. The Bank operates a
mortgage banking company which originates residential mortgage loans and sells
the loans in the secondary market. Favorable interest rates in 1998 and early
1999 stimulated home buying and refinancing; however in the second quarter of
1999, refinancing activity slowed. The mortgage company began origination and
sale of sub-prime loans in 1998. This activity contributed $97,000 to the
above gains in 1999 compared to $33,000 in 1998. Investors commit to
purchase both prime and sub-prime loans when such loans are originated,
subject to verification of certain underwriting criteria. The Bank has no
sub prime loans in its portfolio, and management does not intend to retain
any of these loans in the portfolio.
Gains on sales of securities available for sale during the first quarter
of both 1999 and 1998 occurred as management sold shorter term securities
for intermediate term, higher yielding securities.
Other non-interest income increased $260,000 or 76.7% in the second
quarter of 1999 and $365,000 or 56.6% in the first six months of 1999
compared to the same periods in 1998. Numerous factors contribute to this
increase, including (year to date) $131,000 from full service brokerage,
$62,000 from check card income and $48,000 from title service fees.
Non-interest expenses increased $825,000 or 16.0% for the second quarter
and $1,550,000 or 15.6% for the first half of 1999 compared to the same
periods in 1998. Salaries and employee benefits increased $462,000, or 15.5%,
for the second quarter and $1,044,000 or 18.9% for the first six months of
1999 compared to the same periods in 1998. These increases arose in part
from regular salary increases. Also, employees continue to be added to
support the Bank's growth. The Bank had 314 full time equivalent employees
as of June 30, 1999 and 265 full time equivalents as of June 30, 1998. Net
occupancy expense increased $61,000 or 17.8% in the second quarter of 1999
and $158,000 or 24.3% for the first half of 1999 as compared to 1998.
Furniture and equipment expense increased $72,000, or 14.7%, for the second
quarter and $192,000 or 21.5% for the first six months of 1999 compared to
1998. These increases are largely due to the addition of new banking
centers. Additionally, the Bank continues to update computer equipment and
software as technology advances. These capital asset additions flow through
the statement of income as depreciation expense. Other non-interest expenses
have increased $230,000 or 17.1% in the second quarter and $156,000 or 5.5%
for the first half of 1999 as compared to 1998. These increases arise from
numerous factors and reflect the Bank's growth.
<PAGE>
Income Taxes
- ------------
Bancorp had income tax expense of $2,248,000 for the first six months
of 1999, compared to $1,870,000 for the same period in 1998. The effective
rate was 32.4% in 1999 and 32.1% in 1998.
B. FINANCIAL CONDITION
Total Assets
------------
Total assets increased $31,200,000 from December 31, 1998 to June 30,
1999. Average assets for the first six months of 1999 were $617,112,000.
Total assets at June 30, 1999 increased $98,998,000 from June 30, 1998,
representing an 18.3% increase. Since year end, loans have increased
approximately $38.2 million; cash and due from banks and federal funds sold
increased $19.1 million; securities available for sale decreased $21.6
million, and securities held to maturity decreased $3.6 million. Mortgage
loans available for sale decreased $2.6 million.
Nonperforming Loans and Assets
------------------------------
Nonperforming loans, which include non-accrual and loans past due over
90 days, totaled $1,979,000 at June 30, 1999 and $2,163,000 at December 31,
1998. This represents .41% of total loans at June 30, 1999 compared to .48%
at December 31, 1998.
Nonperforming assets, which include non-performing loans, other real
estate and repossessed assets, totaled $3,571,000 at June 30, 1999 and
$4,057,000 at December 31, 1998. This represents .56% of total assets at
June 30, 1999 compared to .67% at December 31, 1998.
C. LIQUIDITY
The role of liquidity is to ensure that funds are available to meet
depositors' withdrawal and borrowers' credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in
demand for funds with changes in the supply of those funds. Liquidity to
meet demand is provided by maturing assets, short-term liquid assets that
can be converted to cash, and the ability to attract funds from external
sources - principally deposits. 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 its liquidity needs
on a daily basis. The deposit base, consisting of relatively stable
consumer and commercial deposits, and large denomination ($100,000 and over)
certificates of deposit, is a source of funds. The majority of these
deposits are from long term customers and are a stable source of funds.
<PAGE>
Other sources of funds available to meet daily needs include the sale
of securities under agreements to repurchase and funds made available under
a treasury tax and loan note agreement with the federal government. Also,
the Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB). As
a member of the FHLB, the Bank has access to credit products of the FHLB.
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. At March 31, 1999, the Bank may pay up to
$14,685,000 in dividends to Bancorp without regulatory approval subject to
the ongoing capital requirements of the Bank.
D. CAPITAL RESOURCES
At June 30, 1999, stockholders' equity totaled $47,307,000, an increase
of $3,364,000 since December 31, 1998 due primarily to retained net income.
One component of equity is accumulated other comprehensive income (losses)
which for Bancorp consists solely of net unrealized gains or losses on
securities available for sale, net of taxes. Accumulated other comprehensive
losses were $777,000 at June 30, 1999 and accumulated other comprehensive
income was $465,000 at December 31, 1998.
Bank holding companies and their subsidiary banks are required by
regulators to meet risk based capital standards. These standards, or ratios,
measure the relationship of capital to a combination of balance-sheet and
off-balance sheet risks. The values of both balance sheet and off-balance
sheet items are adjusted to reflect credit risks.
At June 30, 1999, Bancorp's tier 1, total risk based capital and leverage
ratios were 9.55%, 10.87% and 7.30%, respectively. These ratios exceed the
minimum required by regulators to be well capitalized (6%, 10% and 5%,
respectively). Capital ratios of the Bank and the consolidated entity have
decreased over the past several years; however the trend reversed slightly
in the fourth quarter of 1998 and the first half of 1999. The decline in
capital ratios has occurred with the rapid expansion of the Bank, when
assets have increased faster than capital has grown.
E. 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.
<PAGE>
During 1999, the Financial Accounting Standards Board issued Statement
No. 137 which delays the effective date of Statement 133 until January 1, 2001;
however, early adoption is permitted. On adoption, the provisions of
Statement 133 must be applied prospectively. Bancorp has not determined when
it will adopt Statement 133 nor has it determined the impact that Statement
133 will have on its financial statements. Management believes that such
determination will not be meaningful until closer to the date of initial
adoption.
F. YEAR 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 guide lines 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.
Management believes 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.
<PAGE>
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 all 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 believes there
are no material Y2K risks or uncertainties presented in these areas.
The Bank's assessment has taken into account whether third parties with
whom it has a material business relationship are or will be Year 2000
compliant. 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 virtually all 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. Borrower's
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
<PAGE>
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 Y2K compliant. 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 companies, issuers, and paying agents
with significant relationships to the Bank's trust accounts. These letters
request documentation with regard to the third party's Year 2000 compliance
status. In instances where the Bank's trust department has the authority to
make investment decisions, the department will not authorize investments in
companies which have not made reasonable 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 all
areas. In addition to testing, the Bank has developed business resumption
plans in the event absolutely critical systems fail despite representations
from vendors and favorable test results. These plans should enable the Bank
to function at a level sufficient to serve the majority of customers' needs.
Additionally, management has significantly curtailed the installation of new
information technology systems for the remainder 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 half of 1999. These scheduling accelerations allow
adequate time to test the new applications for Y2K compliance.
<PAGE>
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 (approximately
$30,000 has been expensed in the first half of 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 $115,000. Management
anticipates spending another $105,000 in the remainder of 1999 on capital
expenditures.
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 and believes these arrangements will
enable the Bank to meet Y2K liquidity needs.
Remaining risks and uncertainties related to Year 2000
- ------------------------------------------------------
As noted above, the Bank has performed extensive testing of absolutely
critical and important systems and equipment.
Based upon testing and 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.
<PAGE>
Part II - Other Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Information required by this item is include in Item 2,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 20, 1999, at the Annual Meeting of Shareholders of S.Y.
Bancorp, Inc., the following matters were submitted to a vote of
shareholders. Represented in person or by proxy were 5,331,251
shares, and those shares were as follows.
(1) Fixing the number of directors at fifteen (15) and electing at the
Annual Meeting four (4) directors:
FOR 5,296,081
AGAINST 30,695
ABSTAIN 4,475
(2) Election of Directors: Bancorp has a staggered Board of Directors.
The following individuals were nominated in 1999. All nominees
were elected. The results below reflect cumulative voting.
FOR AGAINST ABSTAIN WITHHOLD
Charles R. Edinger, III 21,250,472 - - 74,532
David P. Heintzman 21,250,472 - - 74,532
Norman Tasman 21,496,672 - - 74,532
Kathy C. Thompson 21,250,472 - - 74,532
(3) Proposal to approve amendment to the 1995 Stock Incentive Plan:
FOR 3,955,845
AGAINST 139,829
ABSTAIN 27,006
NON VOTE 1,208,571
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Reports on Form 8-K
The registrant was not required to file a Form 8-K for any of the
three months ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
S.Y. BANCORP, INC.
Date: August, 1999 By: /s/ David H. Brooks
--------------------
David H. Brooks, Chairman
and Chief Executive Officer
Date: August, 1999 By: /s/ David P. Heintzman
-----------------------
David P. Heintzman, President
Date: August, 1999 By: /s/ Nancy B. Davis
-------------------
Nancy B. Davis, Executive Vice
President, Treasurer and Chief
Financial Officer
<PAGE>
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