FORM 10
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 March 31, 1999
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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.
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(Exact name of registrant as specified in its charter)
Kentucky 61-1137529
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(State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
1040 East Main Street, Louisville, Kentucky, 40206
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(Address of principal executive offices)
(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 - 6,655,979
shares issued and outstanding at May 5, 1999
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
March 31, 1998 and December 31, 1998
Unaudited Consolidated Statements of Income
for the three months ended March 31, 1999 and 1998
Unaudited Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998
Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the three months ended March 31, 1999
Unaudited Consolidated Statement of Comprehensive Income for the
three months ended March 31, 1999
Notes to Unaudited Consolidated Financial Statements
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
March 31, 1999 December 31, 1998
-------------- -----------------
(In thousands, except share data)
Assets
Cash and due from banks $ 20,212 $ 21,661
Federal funds sold 15,000 7,000
Mortgage loans held for sale 6,792 9,791
Securities available for sale (amortized
cost $62,597 in 1999 and $71,367 in 1998) 62,726 72,071
Securities held to maturity (approximate market
value $26,437 in 1999 and $28,404 in 1998) 25,995 27,746
Loans 467,447 448,286
Allowance for loan losses 6,985 6,666
------- -------
Net loans 460,462 441,620
Premises and equipment 16,625 15,619
Accrued interest receivable and other assets 14,675 14,280
------- -------
Total Assets $622,487 $609,788
======= =======
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 84,088 $ 85,133
Interest bearing 436,274 432,479
------- -------
Total deposits 520,362 517,612
Securities sold under agreements
to repurchase and federal funds purchased 44,218 38,529
Short-term borrowings 2,309 859
Accrued interest payable and
other liabilities 7,503 6,745
Long-term debt 2,100 2,100
------- -------
Total Liabilities 576,492 565,845
------- -------
Stockholders' equity
Common stock, no par value; 10,000,000
shares authorized; 6,646,362 and
6,580,164 shares issued and outstanding
in 1999 and 1998, respectively 5,624 5,535
Surplus 14,706 14,075
Retained earnings 25,581 23,868
Accumulated other comprehensive income 84 465
------- -------
Total Stockholders' Equity 45,995 43,943
------- -------
Total Liabilities and Stockholders' Equity $622,487 $609,788
======= =======
See accompanying notes to unaudited consolidated financial statements.
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
For the three months ended March 31, 1999 and 1998
1999 1998
---- ----
In thousands, except share and per share data)
Interest income
Loans $9,904 $8,785
Federal funds sold 136 89
Mortgage loans held for sale 126 96
U.S. Treasury and Federal agencies 948 805
Obligations of states and political
subdivisions 195 116
------ ------
Total interest income 11,309 9,891
------ ------
Interest expense
Deposits 4,480 4,240
Securities sold under agreements
to repurchase and federal funds purchased 410 150
Short-term borrowings 17 30
Long-term debt 36 39
------ ------
Total interest expense 4,943 4,459
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Net interest income 6,366 5,432
Provision for loan losses 560 300
------ ------
Net interest income after
provision for loan losses 5,806 5,132
------ ------
Non-interest income
Investment management and trust services 1,248 1,060
Service charges on deposit accounts 780 555
Gains on sales of mortgage loans held for sale 492 323
Gains on sales of securities available for sale 100 184
Other 411 306
------ ------
Total non-interest income 3,031 2,428
------ ------
Non-interest expenses
Salaries and employee benefits 3,139 2,557
Net occupancy expense 406 309
Furniture and equipment expense 524 404
Other 1,425 1,499
------ ------
Total non-interest expenses 5,494 4,769
------ ------
Income before income taxes 3,343 2,791
Income tax expense 1,099 894
------ ------
Net income $ 2,244 $ 1,897
====== ======
Net income per share
Basic $ .34 $ .29
====== ======
Diluted $ .33 $ .28
====== ======
Average common shares
Basic 6,625,752 6,577,944
========= =========
Diluted 6,875,102 6,814,394
========= =========
See accompanying notes to unaudited consolidated financial statements.
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998
1999 1998
---- ----
(In thousands)
Operating activities
Net Income
Adjustments to reconcile net income to net cash $ 2,244 $ 1,897
provided (used) by operating activities:
Provision for loan losses 560 300
Depreciation, amortization and accretion, net 397 365
Gains on sales of mortgages held for sale ( 492) ( 323)
Gains on sales of securities available for sale ( 100) ( 184)
Origination of mortgage loans held for sale ( 31,162) (21,669)
Proceeds from sales of mortgage loans held for sale 34,653 17,891
(Increase) decrease in accrued interest receivable and
other assets ( 218) ( 157)
Increase (decrease) in accrued interest payable and
other liabilities 1,054 987
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Net cash provided (used) by operating activities 6,936 ( 893)
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Investing activities
Net (increase) decrease in federal funds sold ( 8,000) 2,000
Purchases of securities available for sale ( 42,564) ( 3,097)
Purchases of securities held to maturity - ( 27,315)
Proceeds from maturities of securities available for sale 45,771 1,388
Proceeds from maturities of securities held to maturity 1,773 19,278
Proceeds from sales of securities available for sale 5,667 5,031
Net (increase) decrease in loans ( 19,402) ( 27,708)
Purchases of premises and equipment ( 1,412) ( 451)
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Net cash provided (used) by investing activities ( 18,167) ( 30,874)
------ ------
Financing activities
Net increase (decrease) in deposits 2,750 43,171
Net increase (decrease) in securities sold under
agreements to repurchase and federal funds purchased ( 5,689) ( 2,853)
Net increase (decrease) in short-term borrowings 1,450 295
Issuance of common stock for options and dividend
reinvestment plan 387 206
Cash dividends paid ( 494) ( 394)
Repayments of long-term debt - ( 15)
------ ------
Net cash provided (used) by financing activities 9,782 40,410
------ ------
Net increase (decrease) in cash and cash equivalents ( 1,449) 8,643
Cash and cash equivalents at beginning of period 21,661 18,153
------- -------
Cash and cash equivalents at end of period $ 20,212 $ 26,796
======= =======
Income tax payments were $875,000 in 1999, and $0 in 1998.
Cash paid for interest was $4,925,000 in 1999, and $4,578,000 in 1998.
See accompanying notes to unaudited consolidated financial statements.
S.Y. BANCORP, INC. & SUBSIDIARY
Unaudited Consolidated Statement of Changes in Stockholders' Equity
For the three months ended March 31, 1999
Common Stock Accumulated
------------ Other
Number of Retained Comprehensive
Shares Amount Surplus Earnings Income Total
------------ ------ ------- -------- ------ -----
(In thousands, except share and per share data)
Balance December 31, 1998 6,593,338 $ 5,535 $ 14,075 $ 23,868 $ 465 $ 43,943
Net income - - - 2,244 - 2,244
Stock options exercised 40,360 68 351 - - 419
Shares issued for 401(k)
plan 12,664 21 280 - - 301
Cash dividends, $.08 per
share - - - (531) - (531)
Change in other
comprehensive income,
net of tax - - - - (381) (381)
--------- ------ ------- ------ ----- -----
Balance March 31, 1999 6,646,362 $ 5,624 $ 14,706 $ 25,581 $ 84 $45,995
========= ====== ======= ====== ======= ======
See accompanying notes to unaudited consolidated financial statements.
S.Y. Bancorp, Inc. and Subsidiary
Consolidated Statement of Comprehensive Income
For the three months ended March 31, 1999
(In thousands) 1999 1998
Net income $2,244 $1,897
Other comprehensive income (loss)
net of tax:
Unrealized holding gains (losses)
arising during the period ( 316) 208
Less reclassification adjustment for
gains included in net income 65 ( 121)
---- ----
Other comprehensive income (loss) 381 87
---- ----
Comprehensive income $1,863 $1,984
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See accompanying notes to unaudited financial statements.
S.Y. BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
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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 three months ended March 31, 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
three months ended March 31 follows:
(In thousands) 1999 1998
---- ----
Beginning balance $6,666 $5,921
Provision for loan losses 560 300
Loans charged off ( 251) ( 57)
Recoveries 10 27
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Ending balance $6,985 $6,191
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(3) Net Income per share
--------------------
The following table reflects, for the three months periods ended
March 31, 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). 1999 1998
---- ----
Net income, basic and diluted $ 2,244 $ 1,897
===== =====
Average shares outstanding 6,626 6,578
Effect of dilutive securities 249 236
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Average shares outstanding
including dilutive securities $ 6,875 $ 6,814
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Net income per share, basic $ .34 $ .29
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Net income per share, diluted $ .33 $ .28
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(4) Segments
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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 provide a full range of loan and deposit prducts
to individuals consumers and businesses. Investment management and trust
provides wealth management services including private banking, brokerage, estate
planning and administration, retirement plan management, and custodial or
trustee services. Mortgage banking originates residential loans and sells them,
servicing released, to the secondary market.
The financial information for each business segment reflects that which is
specifically identifiable or allocated based on an internal allocation method.
Allocations have been consistently applied for all periods presented. The
measurement of the performance of the business segments is based on the
management structure of the Bank and is not necessarily comparable with similar
information for any other financial institution. The information presented is
also not necessarily indicative of the segments' operations if they were
separate entities.
Selected financial information by business segment for the three months ended
March 31, 1999 and 1998 follows:
(In thousands) 1999 1998
Net interest income
Commercial and retail banking $6,007 $5,228
Investment management and trust 287 132
Mortgage banking 72 72
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Total $6,366 $5,432
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Non-interest income
Commercial and retail banking $1,073 $ 895
Investment management and trust 1,329 1,090
Mortgage banking 629 443
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Total $3,031 $2,428
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Net income
Commercial and retail banking $1,582 $1,372
Investment management and trust 542 408
Mortgage banking 120 117
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$2,244 $1,897
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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 months ended March 31, 1999 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 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;
and 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 $2,244,000 for the three months ended March 31, 1999
increased $347,000 or 18.3% from $1,897,000 for the comparable 1998 period.
Basic net income per share was $.34 for the first quarter of 1999, an
increase of 17.2% from the $.29 for the same period in 1998. Net income on
a diluted basis was $.33 for the first quarter of 1999 compared to $.28 for
the first quarter of 1998. This represents a 17.9% increase. Return on
average assets and return on average stockholders' equity were 1.52% and
20.10%, respectively, for the first quarter of 1999, compared to 1.56% and
20.32%, respectively, for the same period in 1998.
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
March 31
--------
1999 1998
---- ----
Interest income $ 11,309 $ 9,891
Tax equivalent 86 50
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Interest income, tax equivalent basis 11,395 9,941
Total interest expense 4,943 4,459
------ ------
Net interest income, tax equivalent basis (1) $ 6,452 $ 5,482
====== ======
Net interest spread (2), annualized 4.02% 4.09%
====== ======
Net interest margin (3), annualized 4.72% 4.89%
====== ======
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 $6,452,000 for the
three months ended March 31, 1999 increased $970,000 or 17.7% from
$5,482,000 for the same period last year. Net interest spread and net
interest margin were 4.02% and 4.72%, respectively, for the first
quarter of 1999 and 4.09%
and 4.89%, respectively, for the first quarter of 1998.
Average earning assets increased $106,044,000, or 23.6% to
$554,716,000 for the first quarter of 1999 compared to 1998. Average
interest bearing liabilities increased $86,880,000 or 23.0% to
$465,269,000 for the first three 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 half of the loan portfolio is comprised of
variable rate loans. Variable rate loans reprice 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 March 31, 1999 Bancorp was slightly liability
sensitive (4.5%) through one year. With this position more interest
bearing liabilities reprice within one year than do interest bearing
assets. This position is generally favorable to net interest margin
during periods of falling interest rates and generally unfavorable during
periods of rising 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.
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
------- ------- ------- ------- ------- ---------- -----
Federal funds sold
(variable rate) $ 15,000 - - - - - $ 15,000
Average interest rate 4.51% - - - - - 4.51%
Loans held for sale
Fixed rate $ 6,792 - - - - - $ 6,792
Average interest rate 6.83% - - - - - 6.83%
Securities
Fixed rate $ 25,896 $ 9,671 $ 8,472 $12,147 $14,114 $18,421 $ 88,721
Average interest rate 5.82% 6.66% 6.30% 6.04% 5.53% 5.38% 6.22%
Loans
Fixed rate $ 59,464 $44,213 $43,865 $50,665 $56,725 $49,406 $304,338
Average interest rate 8.80% 8.88% 8.75% 8.72% 8.46% 8.00% 8.70%
Variable rate $ 53,267 $22,790 $14,586 $ 5,230 $ 3,441 $63,795 $163,109
Average interest rate 8.46% 8.47% 8.47% 8.19% 10.21% 8.38% 9.19%
Deposits
Non-interest
bearing checking $ 12,693 $12,693 $12,693 $12,693 $12,693 $20,623 $ 84,088
Average interest rate - - - - - - -
Savings and interest
bearing checking $ 26,369 $26,369 $26,369 $26,369 $26,369 $43,948 $175,793
Average interest rate 2.94% 2.94% 2.94% 2.94% 2.94% 2.94% 2.98%
Time deposits (fixed rate) $195,643 $43,629 $ 8,573 $ 7,026 $ 3,722 $ 1,888 $260,481
Average interest rate 5.12% 5.27% 5.61% 5.55% 5.45% 5.26% 5.14%
Other short-term borrowings
(variable rate) $ 2,309 - - - - - $ 2,309
Average interest rate 2.15% - - - - - 2.15%
Federal funds purchased
and securities sold under
agreements to repurchase
(variable rate) $ 44,218 - - - - - $ 44,218
Average interest rate 4.15% - - - - - 4.15%
Long-term debt
(variable rate) $ 1,800 - - - - $ 300 $ 2,100
Average interest rate 6.59% - - - - 6.75% 6.61%
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% - - - - -
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:
Three months ended
March 31
--------
(In thousands except percentages)
1999 1998
---- ----
Balance at January 1 $ 6,666 $ 5,921
Provision for loan losses 560 300
Loan charge-offs, net of recoveries ( 241) ( 30)
------- -------
Balance at March 31 $ 6,985 $ 6,191
======= =======
Average loans, net of unearned income $445,238 $383,330
======= =======
Provision for loan losses to average loans (1) .49% .31%
======= =======
Net loan charge-offs to average loans (1) .22% .03%
======= =======
Allowance for loan losses to average loans 1.53% 1.62%
======= =======
Allowance for loan losses to period-end loans 1.49% 1.56%
======= =======
(1) Amounts 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, 1999 and 1998.
In thousands
Three Months Ended
March 31
1999 1998
---- ----
Non-interest income
Investment management and trust services $1,248 $1,060
Service charges on deposit accounts 780 555
Gains on sales of mortgage loans held for sale 492 323
Gains on sales of securities available for sale 100 184
Other 411 306
----- -----
Total non-interest income $3,031 $2,428
===== =====
Non-interest expenses
Salaries and employee benefits $3,139 $2,557
Net occupancy expense 406 309
Furniture and equipment expense 524 404
Other 1,425 1,499
----- -----
Total non-interest expenses $5,494 $4,769
===== =====
Non-interest income increased $603,000, or 24.8%, for the first
quarter of 1999, compared to the same period in 1998. Trust income
increased $188,000 or 17.7% in the first quarter of 1999, as compared to
the same period in 1998. Trust assets under management at March 31, 1999
were $780 million as compared to $770 million at December 31, 1998 and
$691 million at March 31, 1998.
Service charges on deposit accounts increased $225,000 or 40.5% in
the first quarter of 1998 as compared to the same period in 1998.
Growth in deposit accounts spurred 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 $492,000 in the first quarter
of 1999 compared to $323,000 in 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 1999 have stimulated home buying and refinancing. Additionally
the mortgage company began origination and sale of sub-prime loans
in 1998. The latter contributed $62,000 to the above gains in 1999
compared to $ 0 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 subprime loans in its
portfolio, and mananagement 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 lower
yielding, shorter term securities for intermediate term, higher
yielding securities.
Other non-interest income increased $105,000 or 34.3% in the first
quarter of 1999 compared to 1998. Numerous factors contribute to this
increase, including $40,000 from full service brokerage, $7,000 from
credit card commissions and merchant fees, $25,000 from check card
income and $68,000 from title service fees.
Non-interest expenses increased $725,000 or 15.2% for the first
quarter of 1999 compared to the same period in 1998. Salaries and
employee benefits increased $582,000, or 22.8%, for the first quarter of
1999 compared to the same period 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 286 full time equivalent
employees as of March 31, 1999 and 248 full time equivalents as of
March 31, 1998. Net occupancy expense increased $97,000 or 31.4% in
the first quarter of 1999 as compared to 1998. Furniture and
equipment expense increased $120,000, or 29.7%, for the first
quarter 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 additions flow through the statement of income as
depreciation expense. Other non-interest expenses have decreased
$74,000 or 4.9% in the first quarter of 1999 as compared to 1998.
During the first quarter of 1998, the Bank incurred significant
expenses in conjunction with a large advertising campaign.
Income Taxes
------------
Bancorp had income tax expense of $1,099,000 for the first three
months of 1999, compared to $894,000 for the same period in 1998. The
effective rate was 32.9% in 1999 and 32.0% in 1998.
B. FINANCIAL CONDITION
Total Assets
------------
Total assets increased $12,699,000 from December 31, 1998 to
March 31, 1999. Average assets for the first three months of 1999 were
$598,827,000. Total assets at March 31, 1999 increased $100,683,000 from
March 31, 1998, representing a 19.3% increase. Since year end, loans have
increased approximately $19.2 million; cash and due from banks and federal
funds sold increased $6.6 million; securities available for sale decreased
$9.3 million, and securities held to maturity decreased $1.8 million.
Mortgage loans available for sale decreased $3.0 million.
Nonperforming Loans and Assets
------------------------------
Nonperforming loans, which include non-accrual and loans past due over
90 days, totaled $1,954,000 at March 31, 1999 and $2,163,000 at
December 31, 1998. This represents .42% of total loans at March 31, 1999
compared to .48% at December 31, 1998.
Nonperforming assets, which include non-performing loans, other real
estate and repossessed assets, totaled $3,609,000 at March 31, 1999 and
$4,057,000 at December 31, 1998. The Company had no other real estate
at either date. This represents .58% of total assets at March 31, 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.
The Bank has not brokered deposits and has an insignificant amount of
deposits on which the rate paid exceeded the market rate by more than
50 basis points at the time the accounts were opended. In addition,
federal funds purchased continue to be an available source of funds.
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. Additionally the Bank has an available line
of credit and federal funds purchased lines with correspondent banks
totaling $38 million.
To date, the Bank has not needed to access this source of funds.
Bancorp's liquidity depends primarily on the dividends paid to it as
sole shareholder of the Bank. At March 31, 1999, the Bank may pay up to
$12,753,000 in dividends to Bancorp without regulatory approval subject to
the ongoing capital requirements of the Bank.
D. CAPITAL RESOURCES
At March 31, 1999, stockholders' equity totaled $45,995,000, an
increase of $2,052,000 since December 31, 1998. One component of equity is
accumulated other comprehensive income which for Bancorp consists solely
of net unrealized gains on securities available for sale, net of taxes.
Accumulated other comprehensive income was $84,000 at March 31, 1999 and
$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 March 31, 1999, Bancorp's tier 1 total risk based capital and
leverage ratios were 9.66%, 10.98% and 7.52%, respectively. These ratios
exceed the minimum required by regulators to be well capitalized. Capital
ratios of the Bank and the consolidated entity have decreased slowly over
the past several years; however the trend reversed slightly in the fourth
quarter of 1998 and the first quarter 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. Management monitors this situation
and plans to maintain capital ratios within well capitalized
parameters.
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.
Bancorp must adopt Statement 133 by January 1, 2000; however, early
adoption is permitted. On adoption, the provisions of Statement 133 must
be applied prospectively. Bancorp has not determined when it will adopt
Statement 133 nor has it determined the impact that Statement 133 will have
on its financial statements. Management believes that such determination
will not be meaningful until closer to the date of initial adoption.
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.
The Bank is in compliance with these guidelines. The Bank's Year 2000
project coordinator and committee report regularly to the Board of
Directors as to the project plan and completion status.
Bancorp's General Plans and Actions to Address Year 2000 Issues Including
-------------------------------------------------------------------------
Relationships with Customers, Vendors and Others
------------------------------------------------
Bancorp's management has undertaken an evaluation of the effects Year
2000 will have on its information systems and other important aspects of
its business. Bancorp's program has five phases: awareness, assessment,
renovation, validation and implementation. As a part of the assessment
phase, degrees of risk were determined for various areas. Impact
assessment guidelines used are as follows:
Absolutely critical - If these systems were to fail or produce
inaccurate data, it could lead to the failure of the Bank.
Important - Failure of these could significantly impair the Bank's
ability to function at full potential.
Useful - These systems are used regularly but are not deemed to be
critical.
Expendable - These systems could be retired. They are convenient to
have, but the Bank could do without them.
Using the above appraisal guidelines, each system was assigned a
priority for timing of renovation, testing and implementation. Areas
deemed to be absolutely critical are mainly related to computer
technology. These include the Bank's mainframe computer, related
software, the Bank's wide area network of computers, trust and mortgage
department hardware and software and wire transfer computer capabilities.
All of the Bank's software is purchased; no programming is performed in
house. Management has received representations from software vendors
with regard to Y2K readiness for these applications. Testing and
contingency planning for these areas are addressed below. Other
technology areas deemed absolutely critical are internet connections and
the ATM network. With regard to our Year 2000 evaluation of non-
information technology areas, management identified general issues
similar to those of other businesses and bank specific issues such as
vault doors and security equipment. Non information technology areas
deemed absolutely critical are telephone service and systems, utilities
and vault doors. Through a combination of consultations with and
certifications from vendors and testing of these non-information
technology areas, management does not believe there are any material
Y2K risks or uncertainties presented in these areas.
The Bank's assessment has taken into account whether third parties
with whom it has a material business relationship are or will be Year 2000
compliant. Management has requested certification as to Y2K readiness
from current vendors and uses Y2K readiness as a part of the criteria for
selection of vendors/products. In addition to obtaining written Y2K
certification regarding equipment and services, the Bank's Y2K plan
includes testing of such equipment and services for Y2K readiness. This
testing is complete in many areas and has not identified any material Y2K
risks or uncertainties.
Two other major areas of evaluation are the Bank's loan customers and
fiduciary relationships arising from the trust department. 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 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. 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 most
areas. Testing for absolutely critical systems has been substantially
completed. Remaining areas will be tested by June 30, 1999. In addition
to testing, the Bank has developed business resumption plans in the event
absolutely critical systems fail despite representations from vendors and
positive test results. These plans should enable the Bank to function at
a level sufficient to serve the majority of customers' needs. Additionally,
management will significantly curtail 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 quarter of 1999. These scheduling accelerations
allow adequate time to test the new applications for Y2K compliance.
Cost to Address Bancorp's Year 2000 Issues
------------------------------------------
Costs to prepare for the Year 2000 include new hardware, software,
internal staff costs and consulting expenses. Bancorp's incremental
expense related to the Year 2000 was approximately $60,000 in 1998 and
1997 and management anticipates incurring a similar amount for 1999
(Approximately $15,000 in the first quarter 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
$95,000. Management anticipates spending another $125,000 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
heir cash positions are tighter. Depositors may withdraw higher than
average amounts of cash. These situations will require the Bank to have
higher than average levels of cash available. Management has made
arrangements with correspondent banks to be able to meet those needs.
Remaining Risks and Uncertainties Related to Year 2000
------------------------------------------------------
As noted above, the Bank has performed or will perform extensive
testing of absolutely critical and important systems and equipment.
Based upon representations received from vendors and other third
parties, management does not anticipate major malfunctions to be
identified as a result of testing. However, in the event there are
unidentified problems, the Bank has developed a business resumption plan.
This plan makes arrangements for alternative means of processing/operation
should absolutely critical functions fail when Y2K arrives. These include
manual processing, processing transactions by personal computer rather than
mainframe, and curtailing banking hours and/or number of locations open.
Management's objective is to continue to offer and process transactions
that would be critical to customers. Assumptions used in the business
resumption planning include the satisfactory operation of utilities and
the U.S. Postal Service.
As a result of evaluations and procedures performed to date,
management does not anticipate Year 2000 to materially affect the
Bancorp's capital resources, financial condition or results of operations.
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
---------------------------------------------------
None
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 March 31, 1999.
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 7, 1999 By: /s/ David H. Brooks
----------------------------
David H. Brooks, Chairman
and Chief Executive Officer
Date: May 7, 1999 By: /s/ David P. Heintzman
----------------------------
David P. Heintzman, President
Date: May 7, 1999 By: /s/ Nancy B. Davis
----------------------------
Nancy B. Davis, Executive
Vice President, Treasurer
and Chief Financial Officer