Stock Yards Bancorp 10Q 2003 Q1 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


For the quarterly period ended March 31, 2003

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from to .

Commission file number 1-13661

S. Y. BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky		61-1137529
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1040 East Main Street, Louisville, Kentucky, 40206
(Address of principal executive offices)
(Zip Code)

(502) 582-2571
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports 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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý No o

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 – 6,756,598

shares issued and outstanding at May 8, 2003

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The following consolidated financial statements of S.Y. Bancorp, Inc. and subsidiaries, Stock Yards Bank & Trust Company and S.Y. Bancorp Capital Trust I, are submitted herewith:

	–	Unaudited Consolidated Balance Sheets March 31, 2003 and December 31, 2002

	–	Unaudited Consolidated Statements of Income for the three months ended March 31, 2003 and 2002

	–	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002

	–	Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2003

	–	Unaudited Consolidated Statement of Comprehensive Income for the three months ended March 31, 2003 and 2002

		Notes to Unaudited Consolidated Financial Statements

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Balance Sheets

March 31, 2003 and December 31, 2002

(In thousands, except share data)

	March 31, 2003		December 31, 2002
Assets
Cash and due from banks	$	33,027	34,918
Federal funds sold	53,427		4,582
Mortgage loans held for sale	16,452		27,534
Securities available for sale (amortized cost $97,376 in 2003 and $114,046 in 2002)	100,741		117,760
Securities held to maturity (approximate fair value $7,789 in 2003 and $9,859 in 2002)	7,370		9,373

Loans	835,519		818,573
Less allowance for loan losses	11,999		11,705
Net loans	823,520		806,868

Premises and equipment, net	22,839		22,021
Accrued interest receivable and other assets	16,915		16,624

Total assets	$	1,074,291	1,039,680

Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	142,859	131,505
Interest bearing	753,829		729,582
Total deposits	896,688		861,087

Securities sold under agreements to repurchase and federal funds purchased	50,874		52,659
Other short-term borrowings	56		2,657
Accrued interest payable and other liabilities	16,847		16,970
Long-term debt	210		240
Long-term debt - trust preferred securities	20,000		20,000
Total liabilities	984,675		953,613
Stockholders’ equity:
Common stock, no par value; 10,000,000 shares authorized; 6,754,618 and 6,716,531 shares issued and outstanding in 2003 and 2002, respectively	5,985		5,858
Surplus	15,359		14,889
Retained earnings	66,264		63,081
Accumulated other comprehensive income	2,008		2,239
Total stockholders’ equity	89,616		86,067

Total liabilities and stockholders’ equity	$	1,074,291	1,039,680

See accompanying notes to unaudited consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income

For the three months ended March 31, 2003 and 2002

(In thousands, except share and per share data)

	2003		2002
Interest income:
Loans	$	13,557	14,160
Federal funds sold	95		66
Mortgage loans held for sale	216		85
Securities - taxable	882		845
Securities - tax-exempt	261		298
Total interest income	15,011		15,454
Interest expense:
Deposits	4,017		5,005
Securities sold under agreements to repurchase and federal funds purchased	167		278
Other short-term borrowings	2		9
Long-term debt	2		3
Long-term debt - trust preferred securities	450		450
Total interest expense	4,638		5,745
Net interest income	10,373		9,709
Provision for loan losses	700		900
Net interest income after provision for loan losses	9,673		8,809
Non-interest income:
Investment management and trust services	2,026		2,042
Service charges on deposit accounts	1,899		1,670
Bankcard transaction revenue	248		188
Gains on sales of mortgage loans held for sale	942		381
Brokerage commissions and fees	264		323
Other	475		444
Total non-interest income	5,854		5,048
Non-interest expenses:
Salaries and employee benefits	5,575		4,831
Net occupancy expense	572		478
Data processing expense	868		702
Furniture and equipment expense	232		233
State bank taxes	278		205
Other	1,899		1,883
Total non-interest expenses	9,424		8,332
Income before income taxes	6,103		5,525
Income tax expense	1,974		1,822

Net income	$	4,129	3,703

Net income per share:
Basic	$	0.61	0.55
Diluted	$	0.59	0.53
Average common shares outstanding
Basic	6,737,105		6,690,135
Diluted	6,967,460		6,943,826

See accompanying notes to unaudited consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

For the three months ended March 31, 2003 and 2002

(In thousands)

	2003			2002
Operating activities:
Net income	$	4,129		3,703
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	700			900
Depreciation, amortization and accretion, net	643			483
Gains on sales of mortgage loans held for sale	(942		)	(381	)
Origination of mortgage loans held for sale	(106,649		)	(23,335	)
Proceeds from sale of mortgage loans held for sale	118,673			31,434
Gain on the sale of other real estate	(5		)	(12	)
Income tax benefit of stock options exercised	286			38
Increase in accrued interest receivable and other assets	(1,066		)	(1,931	)
(Decrease) increase in accrued interest payable and other liabilities	(129		)	792
Net cash provided by operating activities	15,640			11,691
Investing activities:
Net increase in federal funds sold	(48,845		)	(42,089	)
Purchases of securities available for sale	(12,638		)	(19,526	)
Proceeds from maturities of securities available for sale	29,274			907
Proceeds from maturities of securities held to maturity	2,008			1,965
Net increase in loans	(16,818		)	(1,017	)
Purchases of premises and equipment	(1,432		)	(735	)
Proceeds from sales of other real estate	364			75
Net cash used by investing activities	(48,087		)	(60,420	)
Financing activities:
Net increase in deposits	35,601			80,294
Net decrease in securities sold under agreements to repurchase and federal funds purchased	(1,785		)	(23,031	)
Net decrease in other short-term borrowings	(2,601		)	(709	)
Repayment of long term debt	(30		)	—
Issuance of common stock for options and dividend reinvestment plan	352			507
Common stock repurchases	(41		)	—
Cash dividends paid	(940		)	(801	)
Net cash provided by financing activities	30,556			56,260
Net (decrease) increase in cash and cash equivalents	(1,891		)	7,531
Cash and cash equivalents at beginning of period	34,918			29,803
Cash and cash equivalents at end of period	$	33,027		37,334
Supplemental cash flow information:
Income tax payments	$	—		—
Cash paid for interest	$	4,720		5,750

See accompanying notes to unaudited consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For the three months ended March 31, 2003

(In thousands, except share and per share data)

	Common Stock					Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Number of Shares		Amount

Balance December 31, 2002	6,716,531		$	5,858		$	14,889		$	63,081		$	2,239		$	86,067

Net income	—		—			—			4,129			—			4,129

Change in other comprehensive income (loss), net of tax	—		—			—			—			(231		)	(231		)

Shares issued for stock options exercised and dividend reinvestment plan	39,300		131			507			—			—			638

Cash dividends declared, $0.14 per share	—		—			—			(946		)	—			(946		)

Shares repurchased	(1,213	)	(4		)	(37		)	—			—			(41		)

Balance March 31, 2003	6,754,618		$	5,985		$	15,359		$	66,264		$	2,008		$	89,616

See accompanying notes to unaudited consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Comprehensive Income

For the three months ended March 31, 2003 and 2002

(In thousands)

	2003			2002

Net income	$	4,129		3,703
Other comprehensive loss, net of tax:
Unrealized holding loss on securities available for sale arising during the period	(231		)	(307	)
Less reclassification adjustment for gains included in net income	—			—

Other comprehensive loss	(231		)	(307	)

Comprehensive income	$	3,898		3,396

See accompanying notes to unaudited consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARIES

Notes to Unaudited 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 accounting principles generally accepted in the United States of America for complete financial statements. The consolidated financial statements of S.Y. Bancorp, Inc. (Bancorp) and its subsidiaries 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 unaudited consolidated financial statements include the accounts of S.Y. Bancorp, Inc. and its wholly-owned subsidiaries, Stock Yards Bank & Trust Company and S.Y. Bancorp Capital Trust I. 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, 2002 included in S.Y. Bancorp, Inc.’s Annual Report on Form 10-K for the year then ended.

Interim results for the quarter ended March 31, 2003 are not necessarily indicative of the results for the entire year.

Stock-Based Compensation

Bancorp measures compensation cost for stock-based compensation plans as the difference between the exercise price of the options granted and the fair market value of Bancorp’s stock at the grant date. Bancorp discloses proforma net income and earnings per share in the notes to its consolidated financial statements as if compensation was measured at the date of grant based on the fair value of the award and recognized over the service period.

As permitted by Statement of Financial Accounting Standards (SFAS) No. 148, “ Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” Bancorp will continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock-Based Compensation,” for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.

Bancorp’s as reported and proforma information for the three months ended March 31 follow:

	Three Months Ended March 31
(In thousands, except per share data)	2003		2002

Net income, as reported	$	4,129	$	3,703
Less: stock-based compensation expense determined under fair value method, net of tax	54		42
Proforma net income	$	4,075	$	3,661

Basic EPS:
As reported	$	0.61	$	0.55
Proforma	0.60		0.55
Diluted EPS:
As reported	0.59		0.53
Proforma	0.58		0.53

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	Three Months Ended March 31
Assumptions Used in Option Valuation	2003	2002

Dividend yield	1.52	1.54
Expected volatility	17.15	17.39
Risk free interest rate	5.31	5.02
Expected life of options	7.0	7.0

No options were granted in the first quarter of 2003 or 2002.

(2) Allowance for Loan Losses

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2003 and 2002, follows:

	Three Months Ended March 31
(In thousands)	2003			2002

Beginning balance	$	11,705		10,965
Provision for loan losses	700			900
Loans charged off	(688		)	(694	)
Recoveries	282			42

Total	$	11,999		11,213

(3) Long-term Debt – Trust Preferred Securities

On June 1, 2001, S.Y. Bancorp Capital Trust I (Trust), a Delaware statutory business trust and 100%-owned finance subsidiary of Bancorp, issued $20.0 million of 9.00% Cumulative Trust Preferred Securities (Securities) which will mature on June 30, 2031, but prior redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. Proceeds from issuance of the securities, net of underwriting fees and offering expenses were $18.9 million. The principal asset of the Trust is a $20.0 million subordinated debenture of Bancorp. The subordinated debenture bears interest at the rate of 9.00% and matures June 30, 2031, subject to prior redemption under certain circumstances. Bancorp owns all of the common securities of the Trust.

The Securities, the assets of the Trust, and the common securities issued by the Trust are redeemable in whole or in part on or after June 30, 2006, or at any time in whole, but not in part, from the date of issuance upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations.

The obligations of Bancorp with respect to the issuance of the Securities constitute a full and unconditional guarantee by Bancorp of the Trust’s obligation with respect to the Securities.

Subject to certain exceptions and limitations, Bancorp may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the related Securities and, with certain exceptions, prevent Bancorp from declaring or paying cash distributions on Bancorp’s common stock or debt securities that rank pari passu or junior to the subordinated debenture.

(4) Intangible Assets

Bancorp adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”), effective January 1, 2002. This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Bancorp currently has unamortized goodwill remaining from the acquisition of a bank in southern Indiana in the amount of $682,000. This goodwill is assigned to the commercial and retail banking segment of Bancorp.

(5) Net Income Per Share

The following table reflects, for the three month periods ended March 31, 2003 and 2002, net income (the numerator) and average shares outstanding (the denominator) for the basic and diluted net income per share computations (in thousands except per share data):

	Three Months Ended March 31
	2003		2002

Net income, basic and diluted	$	4,129	3,703

Average shares outstanding	6,737		6,690
Effect of dilutive securities	230		254

Average shares outstanding including dilutive securities	6,967		6,944

Net income per share, basic	$	0.61	0.55
Net income per share, diluted	$	0.59	0.53

(6) 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 brokerage, estate planning and administration, retirement plan management, and custodian or trustee services. Mortgage banking originates residential loans and sells them, but retains no servicing obligation for the loans.

The financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. 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. Principally, all of the net assets of Bancorp are involved in the commercial and retail banking segment.

Selected financial information by business segment for the three months ended March 31, 2003 and 2002 follows:

	Three Months Ended March 31
(In thousands)	2003		2002

Net interest income:
Commercial and retail banking	$	10,167	9,594
Investment management and trust	5		10
Mortgage banking	201		105

Total	$	10,373	9,709

Non-interest income:
Commercial and retail banking	$	2,320	2,191
Investment management and trust	2,329		2,365
Mortgage banking	1,205		492

Total	$	5,854	5,048

Net income:
Commercial and retail banking	$	3,215	3,064
Investment management and trust	611		595
Mortgage banking	303		44

Total	$	4,129	3,703

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 subsidiaries, Stock Yards Bank & Trust Company and S.Y. Bancorp Capital Trust I for the three months ended March 31, 2003 and compares that period with the same period 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 three months of 2003 compared to December 31, 2002. This discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, Bancorp makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.

We have identified the accounting policy related to the allowance for loan losses and the related provision for loan losses as critical to the understanding of Bancorp’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. The impact and any associated risks related to these policies on our business operations are discussed in the “Provision for Loan Losses” section below.

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. 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 subsidiaries operate; competition for Bancorp’s customers from other providers of financial services; government legislation and regulation which change from 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; 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 $4,129,000 for the three months ended March 31, 2003 increased $426,000 or 11.5% from $3,703,000 for the comparable 2002 period. Basic net income per share was $0.61 for the first quarter of 2003, an increase of 10.9% from the $0.55 for the same period in 2002. Net income on a diluted basis was $0.59 for the first quarter of 2003 compared to $0.53 for the first quarter of 2002, an 11.3% increase. Return on average assets and return on average stockholders’ equity were 1.60% and 18.92%, respectively, for the first quarter of 2003, compared to 1.58% and 20.35%, respectively, for the same period in 2002.

The following paragraphs provide a more detailed analysis of the significant factors affecting operating results and financial condition.

Net Interest Income

	Three Months Ended March 31
(Dollars in thousands)	2003			2002

Interest income	$	15,011		15,454
Tax equivalent adjustment	174			159

Interest income, tax equivalent basis	15,185			15,613

Total interest expense	4,638			5,745

Net interest income, tax equivalent basis(1)	$	10,547		9,868

Net interest spread(2), annualized	3.91		%	4.00	%
Net interest margin(3), annualized	4.33		%	4.49	%

Notes:

(1) Net interest income, the most significant component of the Bank’s earnings, is total interest income less total interest expense. The level of net interest income is determined by the mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and by changes in interest rates.

(2) Net interest spread is the difference between the taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.

(3) Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity.

Fully taxable equivalent net interest income of $10,547,000 for the three months ended March 31, 2003 increased $679,000 or 6.9% from $9,868,000 when compared to the same period last year. Net interest spread and net interest margin were 3.91% and 4.33%, respectively, for the first quarter of 2003 and 4.00% and 4.49%, respectively, for the first quarter of 2002. The decrease in net interest spread and margin can be attributed to the falling rates on interest earning assets that were partially offset by falling rates on interest bearing liabilities. Assuming no further decreases in interest rates by the Federal Reserve during the remainder of 2003, management expects some contraction in Bancorp’s net interest margin as interest earning assets continue to reprice at lower rates more quickly than interest bearing liabilities.

Average earning assets increased $96,838,000, or 10.9% to $988,270,000 for the first quarter of 2003 compared to 2002, reflecting growth in both loans and securities. Average interest bearing liabilities increased $60,313,000 or 8.0% to $810,357,000 for the first quarter of 2003 compared to 2002 primarily due to increases in interest bearing deposits.

Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By using both on and off-balance sheet financial instruments, Bank management evaluates interest rate sensitivity while attempting to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.

Bancorp uses an earnings simulation model to measure and evaluate the impact of changing interest rates on earnings. The simulation model is designed to reflect the dynamics of all interest earning assets, interest bearing liabilities and off-balance sheet financial instruments, combining factors affecting rate sensitivity into a one year forecast. By forecasting management’s estimate of the most likely rate environment and adjusting those rates up and down the model can reveal approximate interest rate risk exposure. The March 31, 2003 simulation analysis indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in interest rates would have a negative effect on net interest income.

Interest Rate Simulation Sensitivity Analysis

	Net Interest Income Change		Net Income Change

Increase 200bp	10.86	%	19.70	%
Increase 100bp	5.44		9.88
Decrease 100bp	(5.76	)	(10.44	)
Decrease 200bp	(12.72	)	(23.07	)

Provision for Loan Losses

In determining the provision for loan losses, 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. The decrease in the provision for the quarter, as compared to the same period in the prior year, can be attributed to the overall risk profile of the loan portfolio. Other factors affecting the decreased provision include the fall in net charge-offs and the decline in non-performing loans from the same period in 2002.

An analysis of the changes in the allowance for loan losses and thus, the provision for loan losses follows:

	Three Months Ended March 31
(Dollars in thousands)	2003			2002

Balance at the beginning of the period	$	11,705		10,965
Provision for loan losses	700			900
Loan charge-offs, net of recoveries	(406		)	(652	)

Balance at the end of the period	$	11,999		11,213

Average loans, net of unearned income	$	832,979		776,978

Provision for loan losses to average loans(1)	0.08		%	0.12	%

Net loan charge-offs to average loans(1)	0.05		%	0.08	%

Allowance for loan losses to average loans	1.44		%	1.44	%
Allowance for loan losses to period-end loans	1.44		%	1.44	%

(1) Amounts not annualized

Non-interest Income and Expenses

The following table sets forth the major components of non-interest income and expenses for the three months ended March 31, 2003 and 2002.

	Three Months Ended March 31
(In thousands)	2003		2002

Non-interest income:
Investment management and trust services	$	2,026	2,042
Service charges on deposit accounts	1,899		1,670
Bankcard transaction revenue	248		188
Gains on sales of mortgage loans held for sale	942		381
Brokerage commissions and fees	264		323
Other	475		444

Total non-interest income	$	5,854	5,048

Non-interest expenses:
Salaries and employee benefits	5,575		4,831
Net occupancy expense	572		478
Data processing expense	868		702
Furniture and equipment expense	232		233
State bank taxes	278		205
Other	1,899		1,883

Total non-interest expenses	$	9,424	8,332

Non-interest income increased $806,000, or 16.0%, for the first quarter of 2003, compared to the same period in 2002.

Investment management and trust services income decreased $16,000 or 0.8% in the first quarter of 2003, as compared to the same period in 2002. Trust assets under management at March 31, 2003 were $1.15 billion, which approximated December 31, 2002 and compared to $1.22 billion at March 31, 2002. Trust assets are expressed in terms of market value. While negative equity markets have affected total trust assets over the past year, the addition of new accounts and a favorable mix of account assets have helped offset these decreases.

Service charges on deposit accounts increased $229,000 or 13.7% in the first quarter of 2003 as compared to the same period in 2002. Growth in service charges on deposit accounts is primarily due to increased account volumes. Continued growth in our existing markets and promotion of retail accounts have presented opportunities for growth in deposit accounts and increased fee income. The rates on service charges on deposit accounts were increased late in the first quarter of 2003. While this had little impact on the first quarter results, it should have a meaningful impact for the rest of 2003.

Bankcard transaction revenue increase $60,000 or 31.9% in the first quarter of 2003 as compared to the same period in 2002. This source of revenue continues to increase significantly as more and more customers utilize this electronic payment source. These revenues should continue to grow as the use of this convenient service becomes more popular with our customers.

Gains on sales of mortgage loans were $942,000 in the first quarter of 2003 compared to $381,000 in 2002. The Bank operates a mortgage banking company, which originates residential mortgage loans and sells the loans in the secondary market. As long term interest rates continued to remain at or near historically low levels during the first quarter of 2003, refinancing activity was strong. With this increased level of activity, gains on sales of loans increased commensurately.

Brokerage commissions and fees decreased $59,000 or 18.3% compared to the same period in 2002. Underperformance of the overall equity markets has affected our level of brokerage commissions, as customers remain cautious regarding their invested balances. Despite this difficult environment, the brokerage team looks forward to opportunities presented by any improvement in the performance of the equity markets.

Other non-interest income increased $31,000 or 7.0% in the first quarter of 2003 compared to 2002. Numerous factors contributed to this increase, but it was primarily the result of various fee income related to the mortgage company.

Non-interest expenses increased $1,092,000 or 13.1% for the first quarter of 2003 as compared to the same period in 2002. Salaries and employee benefits increased $744,000, or 15.4%, for the first quarter of 2003 compared to the same period in 2002. This increase arose in part from regular salary increases and employees continue to be added to support the Bank’s growth. The Bank had 372 full time equivalent employees as of March 31, 2003 and 350 full time equivalents as of March 31, 2002. Net occupancy expense increased $94,000 or 19.7% in the first quarter of 2003 as compared to 2002. Most of this increase is due to the opening of new facilities and periodic maintenance related to existing properties. Data processing expense increased $166,000 or 23.6% from the same period in 2002 as the Company continued to invest in upgraded equipment to improve its infrastructure and support current and anticipated growth. Furniture and equipment expense was flat for the first quarter of 2003 compared to 2002. Other non-interest expenses increased $16,000 or 0.9% in the first quarter of 2003 as compared to 2002. There were no factors that were individually significant in the change of other non-interest expenses.

Income Taxes

Bancorp had income tax expense of $1,974,000 for the first three months of 2003, compared to $1,822,000 for the same period in 2002. The effective rate for each three month period was 32.3% in 2003 and 33.0% in 2002.

(b) Financial Condition

Balance Sheet

Total assets increased $34,611,000 from $1,039,680,000 on December 31, 2002 to $1,074,291,000 on March 31, 2003. Average assets for the first three months of 2002 were $1,044,163,000. Total assets at March 31, 2003 increased $76,512,000 from March 31, 2002, representing a 7.7% increase. Total liabilities increased $31,062,000 from $953,613,000 on December 31, 2002 to $984,675,000 on March 31, 2003. Average liabilities for the first three months of 2003 were $955,668,000. Total liabilities at March 31, 2003 increased $61,716,000 from March 31, 2002, representing a 6.7% increase.

Since year end, federal funds sold have increased $48,845,000 and loans increased $16,946,000. These increases were funded primarily through the $35,601,000 increase in deposits and the $17,019,000 decrease in securities available for sale. Loan growth continues to be disappointing, as the lack of a meaningful rebound in business activity has presented fewer opportunities for new business. The Company continues to grow its deposit base and has positioned its commercial lending group to take advantage of a positive change in the overall business environment.

Non-performing Loans and Assets

Non-performing loans totaled $5,686,000 at March 31, 2003, which included non-accrual loans of $4,347,000 and loans past due over 90 days of $1,339,000. Non-performing loans were $5,594,000 at December 31, 2002. This represents 0.68% of total loans at March 31, 2003 and December 31, 2002.

Non-performing assets, which include non-performing loans, other real estate and repossessed assets, if any, totaled $6,167,000 at March 31, 2003 and $5,992,000 at December 31, 2002. This represents 0.57% of total assets at March 31, 2003 compared to 0.58% at December 31, 2002.

(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 available federal funds purchased lines with correspondent banks totaling $58 million.

Bancorp’s liquidity depends primarily on the dividends paid to it as the sole shareholder of the Bank. At March 31, 2003, the Bank may pay up to $32,173,000 in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.

(d) Capital Resources

At March 31, 2003, stockholders’ equity totaled $89,616,000, an increase of $3,549,000 since December 31, 2002. Accumulated other comprehensive income that for Bancorp consists of net unrealized gains on securities available for sale and a minimum pension liability adjustment, both of which are net of taxes, was $2,008,000 at March 31, 2003 and $2,239,000 at December 31, 2002. The change in other comprehensive income since year end is a reflection of the effect of changes in interest rates on the valuation of the portfolio in combination with any changes in the make-up of the portfolio holdings.

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 were and 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 March 31, 2003, Bancorp’s tier 1, total risk based capital and leverage ratios were 13.09%, 14.36% and 10.05%, respectively, compared to 13.19%, 14.48%, and 9.81% as of December 31, 2002. These ratios exceed the minimum required by regulators to be well capitalized.

(e) Recently Issued Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement requires that a liability for costs associated with an exit or disposal activity to be recognized when incurred rather than at the date commitment to an exit or disposal plan. This Statement replaces Emerging Issues Task Force 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this Statement did not have a material effect on Bancorp’s consolidated financial statements.

In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.” This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of SFAS No. 141, “Business Combinations.” SFAS No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with SFAS No. 141 and the related intangibles accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72, “Accounting or Certain Acquisitions of Banking or Thrift Institutions,” which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved “troubled” institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. SFAS No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of SFAS No. 72. The adoption of this Statement did not have a material effect on the Bancorp’s consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 expands disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 applies to most types of guarantees except for, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, and guarantees of a company’s own future performance. Historically, the guarantor has not recorded guarantees until it was probable that a payment would be required under the guarantee. The new accounting requirements now require a guarantor to record a liability at its fair value at the time the guarantee is made. Certain guarantees are subject to the disclosure requirements of FIN 45, but not to its recognition provisions. These guarantees include, but are not limited to, guarantees treated as derivatives under SFAS No. 133, guarantees that are considered contingent consideration in a business combination, and guarantees issued between parent corporations and their subsidiaries or between entities under common control. The new disclosure requirements require a guarantor to disclose the following about each guarantee: the overall details of the guarantee, the maximum, potential amount of future payments that could be required, the carrying amount of the guarantor’s obligation under the guarantee, the fair value of the liability included in the statement of financial position, and the nature and extent of recourse provisions and collateral related to the guarantee and the extent of any potential amounts that the guarantor may, recover from third parties as a result of payments made under the guarantee. The new accounting requirements are to be applied prospectively to any guarantees issued or modified after December 31, 2002. The new disclosure requirements are applicable to all guarantees covered by this Interpretation, no matter when issued, and are effective for interim or annual financial statements for periods ending after December 15, 2002. The adoption of this FIN 45 did not have a material effect on Bancorp’s consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 requires more frequent and prominent disclosures in the financial statements about the effects of stock-based compensation. It also provides alternative methods for voluntary transition to the expense recognition method of

accounting for stock options. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002 and are included in Footnote 1 in the notes to Bancorp’s 2002 audited consolidated financial statements. As permitted by SFAS No. 148, Bancorp will continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock-Based Compensation,” for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.

On January 17, 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements.” This interpretation addresses the consolidation by business enterprises of variable interest entities to which the normal conditions for consolidation do not apply, due to the entities’ lack of voting interest or lack of control through ownership of a voting interest. The Interpretation requires that an enterprise review its degree of involvement in a variable interest entity to determine if it is the primary beneficiary. Certain disclosures about the variable interest entity and the enterprise’s involvement are required by both the primary beneficiary and by enterprise that has a significant interest in a variable interest entity. Enterprises with variable interests in variable interest entities created after January 31, 2003, must apply the provisions of the Interpretation to those entities no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. If it reasonably possible that an enterprise will consolidate or disclose information about the variable interest entity when this Interpretation becomes effective, the enterprise must make similar disclosures in all financial statements issued after January 31, 2003, regardless of the date on which the variable interest entity was created. This Interpretation is not expected to have a material effect on Bancorp’s consolidated financial statements.

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. Controls and Procedures

Bancorp maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on their evaluation of Bancorp’s disclosure controls and procedures which took place within 90 days prior to the filing date of this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that Bancorp is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

Bancorp also maintains a system of internal controls designed to provide reasonable assurance that: transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary (1) to permit preparation of financial statements in conformity with generally accepted accounting principles in the United States of America, and (2) 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 existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Since the date of the most recent evaluation of Bancorp’s disclosure controls and procedures by the Chief Executive and Chief Financial Officers, there have been no significant changes in Bancorp’s internal controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The following exhibit is furnished as a part of this report:

Exhibit Number		Description of Exhibit

99		Certifications pursuant to 18 U.S.C. Section 1350

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: May 12, 2003	By:	/s/ David H. Brooks
		David H. Brooks, Chairman
		and Chief Executive Officer

Date: May 12, 2003	By:	/s/ David P. Heintzman
		David P. Heintzman, President

Date: May 12, 2003	By:	/s/ Nancy B. Davis
		Nancy B. Davis, Executive Vice
		President, Treasurer and Chief
		Financial Officer

CERTIFICATION

I, David H. Brooks, Chairman and Chief Executive Officer of S.Y. Bancorp, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of S.Y. Bancorp, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 12, 2003	By:	/s/ David H. Brooks
		David H. Brooks, Chairman and Chief Executive Officer

CERTIFICATION

I, David P. Heintzman, President of S.Y. Bancorp, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of S.Y. Bancorp, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 12, 2003	By:	/s/ David P. Heintzman
		David P. Heintzman, President

CERTIFICATION

I, Nancy B. Davis, Executive Vice President, Treasurer and Chief Financial Officer of S.Y. Bancorp, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of S.Y. Bancorp, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 12, 2003	By:	/s/ Nancy B. Davis
		Nancy B. Davis, Executive Vice
		President, Treasurer and Chief
		Financial Officer

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Stock Yards Bancorp (SYBT) 10-Q2003 Q1 Quarterly report

Content analysis

1040 East Main Street, Louisville, Kentucky, 40206

Net Interest Income

Interest Rate Simulation Sensitivity Analysis