Non-interest Income and Expenses
The following table sets forth the major components of non-interest income and expenses for the three and six months ended June 30, 2001 and 2000.
| | (In thousands) | | Three Months Ended
June 30 | | Six Months Ended
June 30 | |
| | | | 2001 | | 2000 | | 2001 | | 2000 | |
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| | Non-interest income: | | | | | | | | | |
| | Investment management and trust services | | $ | 1,890 | | 1,520 | | 3,580 | | 2,978 | |
| | Service charges on deposit accounts | | 1,802 | | 1,539 | | 3,383 | | 2,523 | |
| | Gains on sales of mortgage loans held for sale | | 477 | | 300 | | 844 | | 553 | |
| | Other | | 682 | | 643 | | 1,414 | | 1,270 | |
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| | Total non-interest income | | $ | 4,851 | | 4,002 | | 9,221 | | 7,324 | |
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| | Non-interest expenses: | | | | | | | | | |
| | Salaries and employee benefits | | 4,301 | | 4,058 | | 8,661 | | 7,881 | |
| | Net occupancy expense | | 446 | | 468 | | 920 | | 905 | |
| | Furniture and equipment expense | | 581 | | 594 | | 1,184 | | 1,197 | |
| | Other | | 2,039 | | 1,795 | | 3,842 | | 3,275 | |
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| | Total non-interest expenses | | $ | 7,367 | | 6,915 | | 14,607 | | 13,258 | |
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Non-interest income increased $849,000, or 21.2%, for the second quarter of 2001, compared to the same period in 2000. Investment management and trust services income increased $370,000 or 24.3% in the second quarter of 2001, as compared to the same period in 2000. Trust assets under management at June 30, 2001 were $1.11 billion as compared to $1.06 billion at December 31, 2000 and $1.03 billion at June 30, 2000. Investment management and trust services income was positively affected by growth in the number accounts and the mix of account types in addition to the growth in assets under management.
Non-interest income increased $1,897,000 or 25.9% for the first half of 2001 compared to the same period of 2000. Investment management and trust services income increased $602,000 or 20.2% in the first half of 2001 as compared to the same period.
Service charges on deposit accounts increased $263,000 or 17.1% in the second quarter of 2001 and $860,000 or 34.1% in the first half of 2001 as compared to the same periods in 2000. Opening new branch offices and promotion of retail accounts have presented opportunities for growth in deposit accounts and increased fee income. Additionally, in March of 2000 the Bank began offering an overdraft service to retail depositors. The service allows checking customers meeting specific criteria to incur overdrafts up to a predetermined limit, generally $500. For each check paid resulting in or increasing an overdraft, the customer pays the standard overdraft charge. During the second quarter and first six months of 2001, these fees totaled approximately $518,000 and $889,910, respectively.
Gains on sales of mortgage loans were $477,000 in the second quarter of 2001 and $844,000 in the first half of 2001 compared to $300,000 and $553,000, respectively, in 2000. The Bank operates a mortgage banking company which originates residential mortgage loans and sells the loans in the secondary market. Favorable interest rates in 2001 have stimulated home buying and refinancing. As interest rates have decreased, mortgage loan volume has increased, resulting in a corresponding increase in revenues.
No gains on sales of securities occurred in 2001 or 2000.
Other non-interest income increased $39,000 or 6.1% in the second quarter of 2001 and $144,000 or 11.3% in the first half of 2001 compared to 2000. Numerous factors contributed to this increase, including (year to date) approximately $60,000 related to recoveries on other real estate owned, $70,000 from check card income, and $71,000 from fees for mortgage loans sold. These increases were partially offset by a decrease in brokerage income during the period.
Non-interest expenses increased $452,000 or 6.5% for the second quarter of 2001 and $1,349,000 or 10.2% year to date 2001 as compared to the same periods in 2000. Salaries and employee benefits increased $243,000, or 6.0%, for the second quarter of 2001 and $780,000 or 9.9% year to date compared to the same periods in 2000. Employees continue to be added to support the Bank’s growth. The Bank had 329 full time equivalent employees as of June 30, 2001 and 321 full time equivalents as of June 30, 2000. These increases also arose in part from regular salary increases. Net occupancy expense decreased $22,000 or 4.7% in the second quarter of 2001 as compared to 2000,while it increased $15,000 or 1.7% on a year to date basis. Furniture and equipment expense was down slightly or $13,000 for the second quarter of 2001 and year to date 2001 compared to 2000. Other non-interest expenses have increased $244,000 or 13.6% in the second quarter of 2001 and $567,000 or 17.3% year to date 2001 as compared to 2000.
Income Taxes
Bancorp had income tax expense of $3,000,000 for the first six months of 2001, compared to $2,610,000 for the same period in 2000. The effective rate for each six month period was 31.9% in 2001 and 32.2% in 2000.
(b) Financial Condition
Total Assets
Total assets increased $33,908,000 from $852,260,000 on December 31, 2000 to $886,168,000 on June 30, 2001. Average assets for the first six months of 2001 were $858,380,000. Total assets at June 30, 2001 increased $132,191,000 from June 30, 2000, representing a 17.5% increase. Since year end, loans have increased approximately $53.7 million; cash and due from banks and federal funds sold decreased $26.8 million; securities available for sale increased $5.5 million, and securities held to maturity decreased $1.8 million. Mortgage loans available for sale increased $3.3 million since the end of 2000.
Non-performing Loans and Assets
Non-performing loans, which included non-accrual loans of $3,531,000 and loans past due over 90 days of $419,000, totaled $3,950,000 at June 30, 2001. Non-performing loans were $2,944,000 at December 31, 2000. This represents .55% of total loans at June 30, 2001 compared to .44% at December 31, 2000.
Non-performing assets, which include non-performing loans, other real estate and repossessed assets, totaled $3,950,000 at June 30, 2001 and $3,777,000 at December 31, 2000. This represents .45% of total assets at June 30, 2001 compared to .44% at December 31, 2000.
(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. The Bank has no brokered deposits.
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. 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 $56 million.
Bancorp’s liquidity depends primarily on the dividends paid to it as the sole shareholder of the Bank. At June 30, 2001, the Bank may pay up to $21,375,000 in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank. During the first and second quarters the Bank paid dividends to Bancorp totaling $1,598,000.
(d) Capital Resources
At June 30, 2001, stockholders’ equity totaled $65,914,000, an increase of $5,626,000 since December 31, 2000. One component of equity is accumulated other comprehensive income which for Bancorp consists of net unrealized gains on securities available for sale, and a minimum pension liability adjustment, net of taxes. Accumulated other comprehensive income was $588,000 at June 30, 2001 and $21,000 at December 31, 2000. The change since year end is a reflection of the effect of changing interest rates on the valuation of the Bank’s portfolio of securities available for sale.
Bancorp issued $20.0 million of 9.00% Cumulative Trust Preferred Securities in June 2001. The issue was sold in a public offering. Bancorp used approximately $13.3 million of the net proceeds from this offering to reduce indebtedness outstanding under a line of credit with an unaffiliated bank. The remaining net proceeds will be used for making additional capital contributions to the Bank, for repurchases of common stock, and for general corporate purposes. The trust preferred securities increased Bancorp’s regulatory capital and allow for the continued growth of its banking franchise. The ability to treat these trust preferred securities as regulatory capital under Federal Reserve guidelines, coupled with the Federal income tax deductibility of the related expense, provides Bancorp with a cost-effective form of capital.
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, 2001, Bancorp’s tier 1, total risk based capital and leverage ratios were 12.35%, 13.64% and 9.92%, respectively. These ratios exceed the minimum required by regulators to be well capitalized.
(e) Recently Issued Accounting Pronouncements
In September, 2000, the Financial Accounting Standards Board issued Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” that replaces Statement No. 125. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The standards are based on the consistent application of the financial components approach, where upon after a transfer, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred and derecognizes financial liabilities when extinguished.
This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000.
A transfer of financial assets in which the transferor surrenders control is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. This statement requires that liabilities and derivatives transferred be initially measured at fair value, if practicable. Servicing assets and other retained interests in the transferred assets are to be measured by allocating the previous carrying amount between the assets and retained interest sold, if any, based on their relative fair values are the date of the transfer.
This statement requires the servicing assets and liabilities be subsequently measured by amortization in proportion to and over the period of estimated net servicing income or loss and assessment for asset impairment or increased obligation based on their fair values.
This statement also requires that a liability be derecognized if the debtor pays the creditor and is relieved of its obligation for the liability or the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor.
As Bancorp currently has no servicing assets, management believes there is no impact on the consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement No. 141, “Business Combinations” which supersedes Accounting Principles Board (APB) Opinion No. 16, “Business Combinations.” Statement No. 141 eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interests method is effective for transactions initiated after June 30, 2001. The remaining provisions of Statement No. 141 will be effective for transactions accounted for using the purchase method that are completed after June 30, 2001.
In July 2001, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets” which supersedes APB Opinion No. 17, “Intangible Assets.” Statement No. 142 eliminates the current requirement to amortize goodwill and intangible assets, addresses the amortization of intangible assets with a defined life and addresses impairment testing and recognition for goodwill and intangible assets. Statement No. 142 will apply to goodwill and intangible assets arising from transactions completed before and after the Statement’s effective date. Statement No. 142 is effective for 2002. Management believes the impact of adoption will be immaterial to Bancorp’s consolidated financial statements, as current goodwill and intangible amortization is considered immaterial.
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 25, 2001, 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 4,769,890 shares, and those shares were as follows:
(1) Fixing the number of directors at thirteen (13) and electing at the Annual Meeting three (3) directors:
| | FOR | 4,762,633 |
| | AGAINST | 3,656 |
| | ABSTAIN | 3,601 |
(2) Election of Directors: Bancorp has a staggered Board of Directors. The following individuals were nominated in 2001. All
nominees were elected. The results below reflect cumulative voting.
| | | For | Against | Abstain | Withhold |
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| | David H. Brooks | 14,297,724 | - | - | 11,946 |
| | Carl T. Fischer, Jr. | 14,306,532 | - | - | 3,138 |
| | Stanley A. Gall, M.D. | 14,306,100 | - | - | 3,570 |
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
On June 4, 2001 the registrant filed a Form 8-K announcing the completion of an offering of 9.00% Cumulative Trust Preferred Securities of S.Y. Bancorp Capital Trust I, a finance subsidiary of S.Y. Bancorp, Inc.
On June 11, 2001 the registrant filed a Form 8-K to include certain exhibits relating to the 9.00% Cumulative Trust Preferred Securities of S.Y. Bancorp Capital Trust I and the 9.00% Subordinated Debentures due 2031 of S.Y. Bancorp, Inc., which were issued and sold on June 1,2001.
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. |
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| Date: | August 10, 2001 | By: | /s/ David H. Brooks | |
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| | | | David H. Brooks, Chairman | |
| | | | and Chief Executive Officer | |
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| Date: | August 10, 2001 | By: | /s/ David P. Heintzman | |
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| | | | David P. Heintzman, President | |
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| Date: | August 10, 2001 | By: | /s/ Nancy B. Davis | |
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| | | | Nancy B. Davis, Executive Vice | |
| | | | President, Treasurer and Chief | |
| | | | Financial Officer | |
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