FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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
- ------------------------------- ----------------------------
(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 N
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, no par value - 6,669,059
shares issued and outstanding at November 3, 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
September 30, 1999 and December 31, 1998
-- Unaudited Consolidated Statements of Income
for the three months ended September 30, 1999 and 1998
-- Unaudited Consolidated Statements of Income
for the nine months ended September 30, 1999 and 1998
-- Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998
-- Unaudited Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 1999
-- Unaudited Consolidated Statement of Comprehensive Income
for the nine months ended September 30, 1999
-- Notes to Unaudited Consolidated Financial Statements
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
September 30, 1999 December 31, 1998
------------------ -----------------
(In thousands, except share data)
Assets
Cash and due from banks $ 24,984 $ 21,661
Federal funds sold - 7,000
Mortgage loans held for sale 4,184 9,791
Securities available for sale (amortized
cost $55,509 in 1999 and $71,367 in 1998) 54,371 72,071
Securities held to maturity (approximate market
value $22,924 in 1999 and $28,404 in 1998) 22,897 27,746
Loans 517,087 448,286
Allowance for loan losses 7,274 6,666
------- -------
Net loans 509,813 441,620
Premises and equipment 16,491 15,619
Accrued interest receivable and other assets 14,698 14,280
------- -------
Total assets $647,438 $609,788
======= =======
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 92,826 $ 85,133
Interest bearing 462,441 432,479
------- -------
Total deposits 555,267 517,612
Securities sold under agreements
to repurchase and federal funds purchased 29,173 38,529
Short-term borrowings 2,866 859
Accrued interest payable and
other liabilities 8,484 6,745
Long-term debt 2,100 2,100
------- -------
Total liabilities 597,890 565,845
------- -------
Stockholders' equity
Common stock, no par value; 10,000,000
shares authorized; 6,669,059 and
6,580,164 shares issued and outstanding
in 1999 and 1998, respectively 5,700 5,535
Surplus 15,040 14,075
Retained earnings 29,551 23,868
Accumulated other comprehensive income (loss) ( 743) 465
------- -------
Total stockholders' equity 49,548 43,943
------- -------
Total liabilities and stockholders' equity $647,438 $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 September 30, 1999 and 1998
1999 1998
---- ----
(In thousands, except share and per share data)
Interest income
Loans $11,017 $9,629
Federal funds sold 148 273
Mortgage loans held for sale 109 157
U.S. Treasury and Federal agencies 892 775
Obligations of states and political
subdivisions 211 169
------ ------
Total interest income 12,377 11,003
------ ------
Interest expense
Deposits 4,817 4,830
Securities sold under agreements
to repurchase and federal funds purchased 363 226
Short-term borrowings 20 27
Long-term debt 36 39
------ ------
Total interest expense 5,236 5,122
------ ------
Net interest income 7,141 5,881
Provision for loan losses 300 375
------ ------
Net interest income after
provision for loan losses 6,841 5,506
------ ------
Non-interest income
Investment management and trust services 1,309 1,148
Service charges on deposit accounts 896 788
Gains on sales of mortgage loans held for sale 377 556
Gains on sales of securities available for sale - 157
Other 644 483
------ ------
Total non-interest income 3,226 3,132
------ -----
Non-interest expenses
Salaries and employee benefits 3,511 2,973
Net occupancy expense 449 386
Furniture and equipment expense 598 579
Other 1,669 1,471
------ ------
Total non-interest expenses 6,227 5,409
------ ------
Income before income taxes 3,840 3,229
Income tax expense 1,246 1,048
------ ------
Net income $ 2,594 $ 2,181
====== ======
Net income per share
Basic $ .39 $ .33
====== ======
Diluted $ .38 $ .32
====== ======
Average common shares
Basic 6,668,368 6,593,144
========= =========
Diluted 6,874,624 6,850,728
========= =========
See accompanying notes to unaudited consolidated financial statements.
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
For the nine months ended September 30, 1999 and 1998
1999 1998
---- ----
(In thousands, except share and per share data)
Interest income
Loans $31,224 $27,800
Federal funds sold 619 540
Mortgage loans held for sale 313 391
U.S. Treasury and Federal agencies 2,775 2,376
Obligations of states and political
subdivisions 601 405
------ ------
Total interest income 35,532 31,512
------ ------
Interest expense
Deposits 14,025 13,789
Securities sold under agreements
to repurchase and federal funds purchased 1,202 510
Short-term borrowings 56 83
Long-term debt 107 117
------ ------
Total interest expense 15,390 14,499
------ ------
Net interest income 20,142 17,013
Provision for loan losses 1,160 1,025
------ ------
Net interest income after
provision for loan losses 18,982 15,988
------ ------
Non-interest income
Investment management and trust services 3,927 3,446
Service charges on deposit accounts 2,563 2,078
Gains on sales of mortgage loans held for sale 1,248 1,441
Gains on sales of securities available for sale 100 341
Other 1,654 1,095
------ ------
Total non-interest income 9,492 8,401
------ ------
Non-interest expenses
Salaries and employee benefits 10,088 8,506
Net occupancy expense 1,258 1,037
Furniture and equipment expense 1,685 1,474
Other 4,668 4,314
------ ------
Total non-interest expenses 17,699 15,331
------ ------
Income before income taxes 10,775 9,058
Income tax expense 3,494 2,918
------ ------
Net income $ 7,281 $ 6,140
====== ======
Net income per share
Basic $ 1.09 $ .94
====== ======
Diluted $ 1.06 $ .90
====== ======
Average common shares
Basic 6,649,903 6,586,120
========= =========
Diluted 6,869,025 6,830,930
========= =========
See accompanying notes to unaudited consolidated financial statements.
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
1999 1998
---- ----
(In thousands)
Operating activities
Net Income $ 7,281 $ 6,140
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,160 1,025
Depreciation, amortization and accretion, net 1,380 1,280
Gains on sales of mortgages held for sale ( 1,248) ( 1,441)
Gains on sales of securities available for sale ( 100) ( 341)
Origination of mortgage loans held for sale ( 75,287) (76,422)
Proceeds from sales of mortgage loans held for sale 82,142 74,644
(Increase) decrease in accrued interest receivable and
other assets ( 731) ( 2,085)
Increase (decrease) in accrued interest payable and
other liabilities 2,052 2,327
------- ------
Net cash provided (used) by operating activities 16,649 5,127
------- ------
Investing activities
Net (increase) decrease in federal funds sold 7,000 ( 4,000)
Purchases of securities available for sale ( 51,694) ( 55,665)
Purchases of securities held to maturity - ( 49,724)
Proceeds from maturities of securities available for sale 61,934 29,308
Proceeds from maturities of securities held to maturity 4,906 48,280
Proceeds from sales of securities available for sale 5,637 11,306
Proceeds from sales of other real estate 895 -
Net (increase) decrease in loans ( 69,353) ( 60,465)
Purchases of premises and equipment ( 2,176) ( 2,337)
------ ------
Net cash provided (used) by investing activities ( 42,851) ( 83,297)
------ ------
Financing activities
Net increase (decrease) in deposits 37,655 69,260
Net increase (decrease) in securities sold under
agreements to repurchase and federal funds purchased ( 9,356) 15,907
Net increase (decrease) in short-term borrowings 2,007 ( 2,807)
Repayments of long-term debt - ( 15)
Issuance of common stock for options and dividend
reinvestment plan 780 477
Cash dividends paid ( 1,561) ( 1,249)
------ ------
Net cash provided (used) by financing activities 29,525 81,573
------ ------
Net increase (decrease) in cash and cash equivalents 3,323 3,403
Cash and cash equivalents at beginning of period 21,661 18,153
------- -------
Cash and cash equivalents at end of period $ 24,984 $ 21,556
======= =======
Income tax payments were $4,775,000 in 1999, and $2,295,000 in 1998.
Cash paid for interest was $15,480,000 in 1999, and $14,621,000 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 nine months ended September 30, 1999
Common Stock Accumulated
------------ Other
Number of Retained Comprehensive
Shares Amount Surplus Earnings Income(Loss) 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 - - - 7,281 - 7,281
Stock options exercised 50,340 102 413 - - 515
Shares issued for 401(k),
dividend reinvestment and
employee stock purchase
plans 25,381 63 552 - - 615
Cash dividends, $.24 per
share - - - (1,598) - (1,598)
Change in other
comprehensive income(loss),
net of tax - - - - (1,208) (1,208)
------- ------ ------ ------ ------- -------
Balance September 30, 1999 6,669,059 $ 5,700 $ 15,040 $ 29,551 $ ( 743) $49,548
========= ====== ======= ====== ======= ======
See accompanying notes to unaudited consolidated financial statements.
S.Y. BANCORP, INC. & SUBSIDIARY
Unaudited Consolidated Statement of Comprehensive Income
For the nine months ended September 30, 1999
1999 1998
---- ----
(In thousands)
Net income $ 7,281 $ 6,140
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising
during the period (1,273) 158
Less reclassification adjustment for gains
included in net income 65 225
----- ----
Other comprehensive income (loss) (1,208) 383
----- ----
Comprehensive income $ 6,073 $ 6,523
===== =====
See accompanying notes to unaudited consolidated financial statements.
S.Y. BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. The consolidated
financial statements of S.Y. Bancorp, Inc. and Subsidiary reflect all
adjustments (consisting only of adjustments of a normal recurring nature)
which are, in the opinion of management, necessary for a fair presentation
of financial condition and results of operations for the interim periods.
The consolidated financial statements include the accounts of S.Y.
Bancorp, Inc. and its wholly owned subsidiary, Stock Yards Bank & Trust
Company. All significant intercompany transactions have been eliminated
in consolidation.
A description of other significant accounting policies is presented in
the notes to the Consolidated Financial Statements for the year ended
December 31, 1998 included in S.Y. Bancorp, Inc.'s Annual Report on Form
10-K for the year then ended.
Interim results for the quarter and nine months ended September
30, 1999 are not necessarily indicative of the results for the entire year.
(2) Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses for the
nine months ended September 30 follows (in thousands):
1999 1998
---- ----
Beginning balance $6,666 $5,921
Provision for loan losses 1,160 1,025
Loans charged off ( 609) ( 326)
Recoveries 57 76
----- -----
Ending balance $7,274 $6,696
===== =====
(3) Net Income per share
The following table reflects, for the three and nine months periods
ended September 30, the numerators (net income)and denominators (average
shares outstanding) for the basic and diluted net income per share
computations (in thousands except per share data).
Three Months Ended Nine Months Ended
September 30 September
1999 1998 1999 1998
---- ---- ---- ----
Net income, basic and diluted $ 2,594 $ 2,181 $ 7,281 $ 6,140
===== ===== ===== =====
Average shares outstanding 6,668 6,593 6,650 6,586
Effect of dilutive securities 207 258 219 245
----- ----- ----- -----
Average shares outstanding
including dilutive securities 6,875 6,851 6,869 6,831
===== ===== ===== =====
Net income per share, basic $ .39 $ .33 $ 1.09 $ .94
===== ===== ===== =====
Net income per share, diluted $ .38 $ .32 $ 1.06 $ .90
===== ===== ===== =====
(4) Segments
The Bank's, and thus Bancorp's, principal activities include commercial
and retail banking, investment management and trust, and mortgage banking.
Commercial and retail banking provides a full range of loans and deposit
products to individual consumers and businesses. Investment management and
trust provides wealth management services including private banking,
brokerage, estate planning and administration, retirement plan management,
and custodian or trustee services. Mortgage banking originates residential
loans and sells them, servicing released, to the secondary market.
The financial information for each business segment reflects that which
is specifically identifiable or allocated based on an internal allocation
method. Allocations have been consistently applied for all periods
presented. The measurement of the performance of the business segments is
based on the management structure of the Bank and is not necessarily
comparable with similar information for any other financial institution.
The information presented is also not necessarily indicative of the
segments' operation if they were independent entities.
Selected financial information by business segment for the three and
nine months ended September 30, 1999 and 1998 follows:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
Net interest income
Commercial and retail banking $ 6,648 $ 5,521 $18,895 $16,196
Investment management and trust 389 246 996 564
Mortgage banking 104 114 251 253
------ ------ ------ ------
Total $ 7,141 $ 5,881 $20,142 $17,013
====== ====== ====== ======
Non-interest income
Commercial and retail banking $ 1,247 $ 1,062 $ 3,505 $ 2,946
Investment management and trust 1,447 1,357 4,322 3,661
Mortgage banking 532 713 1,665 1,794
------ ------ ------ ------
Total $ 3,226 $ 3,132 $ 9,492 $ 8,401
====== ====== ====== ======
Net income
Commercial and retail banking $ 1,713 $ 1,447 $ 5,204 $ 4,211
Investment management and trust 907 472 1,809 1,373
Mortgage banking ( 26) 262 268 556
------ ------ ------ -----
Total $ 2,594 $ 2,181 $ 7,281 $ 6,140
====== ====== ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This item discusses the results of operations for S.Y. Bancorp, Inc.
("Bancorp"), and its subsidiary, Stock Yards Bank & Trust Company for the
three and nine months periods ended September 30, 1999 and compares those
periods with the same periods of the previous year. Unless otherwise
indicated, all references in this discussion to the "Bank" include Bancorp.
In addition, the discussion describes the significant changes in the
financial condition of Bancorp and the Bank that have occurred during the
first half of 1999 compared to December 31, 1998. This discussion should
be read in conjunction with the consolidated financial statements and
accompanying notes presented in Part I, Item 1 of this report.
This report contains forward-looking statements under the Private
Securities Litigation Reform act that involve risks and uncertainties.
Although Bancorp believes the assumptions underlying the forward-looking
statements contained herein are reasonable, any of these assumptions could
be inaccurate. Therefore, there can be no assurance forward-looking
statements included herein will prove to be accurate. Factors that could
cause actual results to differ from results discussed in forward-looking
statements include, but are not limited to: economic conditions both
generally and more specifically in the market in which Bancorp and its
subsidiary operate; competition for Bancorp's customers from other
providers of financial services; government legislation and regulation
which change 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;
material unforeseen complications related to addressing the Year 2000
experienced by Bancorp, its suppliers, customers and governmental agencies;
other risks detailed in Bancorp's filings with the Securities and Exchange
Commission, all of which are difficult to predict and many of which are
beyond the control of Bancorp.
A. RESULTS OF OPERATIONS
Net income of $2,594,000 for the three months ended September 30, 1999
increased $413,000 or 18.9% from $2,181,000 for the comparable 1998 period.
Basic net income per share was $.39 for the third quarter of 1999, an
increase of 18.2% from the $.33 for the same period in 1998. Net income per
share on a diluted basis was $.38 for the third quarter of 1999 compared to
$.32 for the third quarter of 1998. This represents a 18.8% increase.
Return on average assets and return on average stockholders' equity were
1.60% and 21.13%, respectively, for the third quarter of 1999, compared to
1.56% and 20.84%, respectively, for the same period in 1998.
Net income of $7,281,000 for the first nine months of 1999 increased
$1,141,000 or 18.6% from the comparable 1998 period. Basic net income per
share was $1.09 for the first nine months of 1999, an increase of 16.0% from
the $.94 for the same period in 1998. Net income per share on a diluted
basis was $1.06 for the nine months ended September 30, 1999 compared to
$.90 for the same period in 1998. This represents a 17.8% increase. Return
on average assets and return on average stockholder's equity were 1.56% and
20.65%, respectively for the first nine months of 1999, compared to 1.56%
and 20.72%, respectively, for the same period of 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 Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
Interest income $ 12,377 $11,003 $35,532 $31,512
Tax equivalent 93 73 266 174
------ ------ ------ ------
Interest income, tax equivalent
basis 12,470 11,076 35,798 31,686
Total interest expense 5,236 5,122 15,390 14,499
------ ------ ------ ------
Net interest income, tax equivalent
basis (1) $ 7,234 $ 5,954 $20,408 $17,187
====== ====== ====== ======
Net interest spread (2),
annualized 4.12% 3.83% 4.02% 3.96%
====== ====== ====== =====
Net interest margin (3),
annualized 4.82% 4.60% 4.71% 4.73%
====== ====== ====== =====
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 $7,234,000 for the three
months ended September 30, 1999 increased $1,280,000 or 21.5% from
$5,954,000 for the same period last year. Net interest spread and net
interest margin were 4.12% and 4.82%, respectively, for the third quarter
of 1999 and 3.83% and 4.60%, respectively, for the third quarter of 1998.
Fully taxable equivalent net interest income of $20,408,000 for the
nine months ended September 30, 1999 increased $3,221,000 or 18.7% from
$17,187,000 for the same period last year. Net interest spread and net
interest margin were 4.02% and 4.71%, respectively, for the first nine
months of 1999 and 3.96% and 4.73%, respectively, for the first nine
months of 1998.
Average earning assets increased $94,415,000, or 19.5% to
$579,799,000 for the first nine months of 1999 compared to 1998. Average
interest bearing liabilities increased $79,060,000 or 19.4% to $485,744,000
for the first nine months of 1999 compared to 1998.
Interest rate sensitivity has a major impact on the earnings of the
Bank. As interest rates change in the market, rates earned on assets do
not necessarily move identically with rates paid on liabilities. Proper
asset and liability management involves the matching of interest sensitive
assets and liabilities to reduce interest rate risk. Bancorp manages
interest rate risk by making both variable and fixed rate loans. Fixed
rate loans are matched, along with investment securities against longeR
term fixed rate time deposits. The Bank's largest interest earning asset
is loans and approximately one third of the loan portfolio is comprised of
variable rate loans. Variable rate loans re-price immediately with a
change in prime rates. Additionally, during periods of declining interest
rates, some customers with fixed rate loans may refinance to obtain lower
rates on their loans. Deposits, the Bank's largest interest bearing
liability, do not respond as quickly nor as significantly to changes
in market interest rates. At September 30, 1999 Bancorp was asset
sensitive 5.3% through one year based on currently expected repricing dates.
With this position more interest bearing assets re-price within one
year than do interest bearing liabilities. This position is generally
favorable to net interest margin during periods of rising interest
rates and generally unfavorable during periods of falling rates.
Bancorp's management believes it has the ability
to effectively manage the degree of market risk inherent in its interest
sensitive financial instruments.
The following table provides information about Bancorp's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For loans, securities and liabilities with
contractual maturities, the table presents principal cash flows and weighted
average interest rates as well as Bancorp's experience of the impact of
interest rate fluctuations on the prepayment of mortgage-backed securities.
For deposits that have no contractual maturity (non-interest bearing
checking, interest bearing checking and savings), management has estimated
withdrawal activity using a ratable amount over the next six years. This
information is based on Bancorp's historical experience and management's
judgments. For interest rate caps and floors, the table presents notional
amounts. Notional amounts are used to calculate the contractual payments to
be exchanged under the contracts.
For Twelve Month Period Ending
------------------------------
(Dollars in thousands) 9/30/00 9/30/01 9/30/02 9/30/03 9/30/04 Thereafter Total
------- ------- ------- ------- ------- ---------- -----
Federal funds sold
(variable rate) $ - - - - - - $ -
Average interest rate - - - - - - -
Loans held for sale
Fixed rate $ 4,184 - - - - - $ 4,184
Average interest rate 7.61% - - - - - 7.61%
Securities
Fixed rate $ 9,415 $ 8,939 $13,874 $11,199 $10,702 $23,139 $ 77,268
Average interest rate 6.93% 6.64% 6.21% 5.74% 5.64% 5.91% 6.23%
Loans
Fixed rate $ 62,334 $49,131 $51,783 $50,735 $60,487 $76,178 $350,648
Average interest rate 8.80% 8.68% 8.65% 8.64% 8.32% 8.00% 8.48%
Variable rate $ 69,328 $41,479 $15,084 $11,194 $ 646 $28,708 $166,439
Average interest rate 8.99% 8.73% 8.68% 8.43% 9.59% 7.39% 8.30%
Deposits
Non-interest
bearing checking $ 14,004 $14,004 $14,004 $14,004 $14,004 $22,806 $ 92,826
Average interest rate - - - - - - -
Savings and interest
bearing checking $ 28,666 $28,666 $28,666 $28,666 $28,666 $47,778 $191,108
Average interest rate 2.98% 2.98% 2.98% 2.98% 2.98% 2.98% 2.98%
Time deposits (fixed rate) $189,125 $52,308 $10,969 $10,790 $ 5,253 $ 2,888 $271,333
Average interest rate 4.96 5.16% 5.68% 5.45% 5.33% 5.38% 5.02%
Other short-term borrowings
(variable rate) $ 2,866 - - - - - $ 2,866
Average interest rate 3.13% - - - - - 3.13%
Federal funds purchased
and securities sold under
agreements to repurchase
(variable rate) $ 29,173 - - - - - $ 29,173
Average interest rate 4.21% - - - - - 4.21%
Long-term debt
(variable rate) $ - - - - - $ 2,100 $ 2,100
Average interest rate - - - - - 7.03% 7.03%
Interest rate collar
Notional amount $100,000 - - - - - $100,000
Cap strike rate 8.38% - - - - - 8.38%
Floor strike rate 7.60% - - - - - 7.60%
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:
Nine Months Ended
September 30
(In thousands except percentages) 1999 1998
---- ----
Balance at January 1 $ 6,666 $ 5,921
Provision for loan losses 1,160 1,025
Loan charge-offs, net of recoveries ( 552) ( 250)
------- -------
Balance at September 30 $ 7,274 $ 6,696
======= =======
Average loans, net of unearned income $479,368 $404,525
======= =======
Provision for loan losses to average loans (1) .32% .35%
======= =======
Net loan charge-offs to average loans (1) .15% .08%
======= =======
Allowance for loan losses to average loans 1.55% 1.66%
======= =======
Allowance for loan losses to period-end loans 1.41% 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 and nine months ended September 30, 1999 and 1998.
Three Months Ended Nine Months Ended
September 30 September 30
In thousands 1999 1998 1999 1998
---- ---- ---- ----
Non-interest income
Investment management and trust
services $1,309 $1,148 3,927 3,446
Service charges on deposit accounts 896 788 2,563 2,078
Gains on sales of mortgage loans
held for sale 377 556 1,248 1,441
Gains on sales of securities
available for sale - 157 100 341
Other 644 483 1,654 1,095
----- ----- ----- ------
Total non-interest income $3,226 $3,132 $ 9,492 $8,401
===== ===== ===== =====
Non-interest expenses
Salaries and employee benefits $3,511 $2,973 $10,088 $8,506
Net occupancy expense 449 386 1,258 1,037
Furniture and equipment expense 598 579 1,685 1,474
Other 1,669 1,471 4,668 4,314
----- ----- ----- -----
Total non-interest expenses $6,227 $5,409 $17,699 $15,331
===== ===== ====== ======
Non-interest income increased $94,000, or 3.0%, for the third quarter of
1999, compared to the same period in 1998. Trust income increased $161,000
or 14.0% in the third quarter of 1999, as compared to the same period in
1998. Non-interest income increased $1,091,000 or 13.0%, for the first
nine months of 1999,compared to the same period in 1998. Trust income
increased $481,000 or 14.0% in the first nine months of 1999, as compared
to the same period in 1998 reflecting the growth in the trust department.
Trust assets under management at September 30, 1999 were $ 828 million as
compared to $770 million at December 31, 1998 and $712 million at
September 30, 1998.
Service charges on deposit accounts increased $108,000 or 13.7% in the
third quarter of 1998 and $485,000 or 23.3% in the first nine months of 1999
as compared to the same periods in 1998. Growth in deposit accounts spurred
mainly by the opening of new branch offices has presented opportunities for
increased fee income in this area. Additionally, service charges for
commercial deposit accounts were raised effective January 1, 1999.
Gains on sales of mortgage loans were $377,000 in the third quarter
of 1999 compared to $556,000 in 1998 and $1,248,000 in the first nine months
of 1999 compared to $1,441,000 in the same period of 1998. The Bank operates
a mortgage banking company which originates residential mortgage loans and
sells the loans in the secondary market. Favorable interest rates in 1998
and early 1999 stimulated home buying and refinancing; however in the second
quarter of 1999, refinancing activity slowed. The mortgage company began
origination and sale of sub-prime loans in 1998. This activity contributed
$143,000 to the above gains in 1999 compared to $70,000 in 1998. Investors
commit to purchase both prime and sub-prime loans when such loans are
originated, subject to verification of certain underwriting criteria. The
Bank has no sub prime loans in its portfolio, and management does not intend
to retain any of these loans in the portfolio.
Gains on sales of securities available for sale in both 1999 and 1998
occurred as management sold shorter term securities for intermediate term,
higher yielding securities.
Other non-interest income increased $161,000 or 33.3% in the third
quarter of 1999 and $559,000 or 51.1% in the first nine months of 1999
compared to the same periods in 1998. Numerous factors contribute to this
increase, including (year to date) $157,000 from full service brokerage,
$123,000 from check card income and $85,000 from title service fees.
Non-interest expenses increased $818,000 or 15.1% for the third quarter
and $2,368,000 or 15.4% for the first nine months of 1999 compared to the
same periods in 1998. Salaries and employee benefits increased $538,000, or
18.1%, for the third quarter and $1,582,000 or 18.6% for the first nine
months of 1999 compared to the same periods in 1998. These increases arose
in part from regular salary increases. Also, employees continue to be added
to support the Bank's growth. The Bank had 312 full time equivalent
employees as of September 30, 1999 and 267 full time equivalents as of
September 30, 1998. Net occupancy expense increased $63,000 or 16.3% in
the third quarter of 1999 and $211,000 or 21.3% for the first nine months
of 1999 as compared to 1998. Furniture and equipment expense increased
$19,000, or 3.3%, for the third quarter and $211,000 or 14.3% for
the first nine months of 1999 compared to 1998. These increases are
largely due to the addition of new banking centers. Additionally,
the Bank continues to update computer equipment andsoftware as technology
advances. These capital asset additions flow through
the statement of income as depreciation expense. Other non-interest expenses
have increased $198,000 or 13.5% in the third quarter and $354,000 or 8.2%
for the first nine months of 1999 as compared to 1998. These increases arise
from numerous factors and reflect the Bank's growth.
Income Taxes
Bancorp had income tax expense of $3,494,000 for the first nine months
of 1999, compared to $2,918,000 for the same period in 1998. The effective
rate was 32.4% in 1999 and 32.2% in 1998.
B. FINANCIAL CONDITION
Total Assets
Total assets increased $37,650,000 from December 31, 1998 to
September 30, 1999. Average assets for the first nine months of 1999 were
$625,676,000. Total assets at September 30, 1999 increased $78,418,000
from September 30, 1998, representing a 13.8% increase. Since year end,
loans have increased approximately $68.8 million; cash and due from banks
and federal funds sold decreased $3.7 million; securities available for sale
decreased $17.7 million, and securities held to maturity decreased $4.8
million. Mortgage loans available for sale decreased $5.6 million.
Nonperforming Loans and Assets
Nonperforming loans, which include non-accrual and loans past due over
90 days, totaled $2,851,000 at September 30, 1999 and $2,163,000 at
December 31, 1998. This represents .55% of total loans at September 30, 1999
compared to .48% at December 31, 1998.
Nonperforming assets, which include non-performing loans, other real
estate and repossessed assets, totaled $3,134,000 at September 30, 1999
and $4,057,000 at December 31, 1998. This represents .48% of total assets
at September 30, 1999 compared to .67% at December 31, 1998.
C. LIQUIDITY
The role of liquidity is to ensure that funds are available to meet
depositors' withdrawal and borrowers' credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in
demand for funds with changes in the supply of those funds. Liquidity to
meet demand is provided by maturing assets, short-term liquid assets that
can be converted to cash, and the ability to attract funds from external
sources - principally deposits. Management believes it has the ability to
increase deposits at any time by offering rates slightly higher than the
market rate.
The Bank has a number of sources of funds to meet its liquidity needs
on a daily basis. The deposit base, consisting of relatively stable
consumer and commercial deposits, and large denomination ($100,000 and over)
certificates of deposit, is a source of funds. The majority of these
deposits are from long term customers and are a stable source of funds.
Other sources of funds available to meet daily needs include the sale
of securities under agreements to repurchase and funds made available under
a treasury tax and loan note agreement with the federal government. Also,
the Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB).
As a member of the FHLB, the Bank has access to credit products of the FHLB.
To date, the Bank has not needed to access this source of funds.
Additionally, the Bank has an available line of credit and federal funds
purchased lines with correspondent banks totaling $38 million.
Bancorp's liquidity depends primarily on the dividends paid to it as
the sole shareholder of the Bank. At September 30, 1999, the Bank may pay
up to $16,741,000 in dividends to Bancorp without regulatory approval
subject to the ongoing capital requirements of the Bank.
D. CAPITAL RESOURCES
At September 30, 1999, stockholders' equity totaled $49,548,000, an
increase of $5,606,000 since December 31, 1998 due primarily to retained
net income. One component of equity is accumulated other comprehensive
income (losses) which for Bancorp consists solely of net unrealized gains
or losses on securities available for sale, net of taxes. Accumulated other
comprehensive losses were $743,000 at September 30, 1999 and accumulated
other comprehensive income was $465,000 at December 31, 1998.
Bank holding companies and their subsidiary banks are required by
regulators to meet risk based capital standards. These standards, or ratios,
measure the relationship of capital to a combination of balance-sheet and
off-balance sheet risks. The values of both balance sheet and off-balance
sheet items are adjusted to reflect credit risks.
At September 30, 1999, Bancorp's tier 1, total risk based capital and
leverage ratios were 9.65%, 10.96% and 7.58%, respectively. These ratios
exceed the minimum required by regulators to be well capitalized (6%, 10%
and 5%, respectively). Capital ratios of the Bank and the consolidated
entity have decreased over the past several years; however the trend reversed
slightly in the fourth quarter of 1998 and the first half of 1999. The
decline in capital ratios has occurred with the rapid expansion of the Bank,
when assets have increased faster than capital has grown.
E. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement standardizes the accounting for derivative instruments. Under
this standard, entities are required to carry all derivative instruments in
the balance sheet at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of
a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reason for
holding it. If certain conditions are met, entities may elect to designate
a derivative instrument as a hedge of exposures to changes in fair values,
cash flows, or foreign currencies. If the hedged exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain
on the hedged item attributable to the risk being hedged. If the hedged
exposure is a cash flow exposure, the effective portion of the gain or
loss on the derivative instrument is reported initially as a component of
other comprehensive income and subsequently reclassified into earnings when
the forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness as well as the ineffective portion of the
gain or loss is reported in earnings immediately. Accounting for foreign
currency hedges is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the
gain or loss is recognized in earnings in the period of change.
During 1999, the Financial Accounting Standards Board issued Statement
No. 137 which delays the effective date of Statement 133 until
January 1, 2001; however, early adoption is permitted. On adoption, the
provisions of Statement 133 must be applied prospectively. Bancorp has not
determined when it will adopt Statement 133 nor has it determined the impact
that Statement 133 will have on its financial statements. Management
believes that such determination will not be meaningful until closer to the
date of initial adoption.
F. YEAR 2000
General Nature And Impact Of Year 2000 Issues
Challenges and problems anticipated with the Year 2000 (Y2K) have
received a great deal of attention. The underlying problem is that many
computer systems use only the last two digits of a year in reading a date.
Thus, they could interpret dates with the Year 2000 to be 1900. As a result,
on January 1, 2000, computer systems could stop working or generate erroneous
data unless these problems are corrected. In addition to information
technology issues, equipment with embedded micro-controllers may not function
properly. Examples of this equipment would include thermostats, elevators,
and electronics with time/date mechanisms. Some companies have anticipated
significant Year 2000 expenses.
Banking institutions have been near the forefront in addressing
Year 2000 issues as bank regulators began focusing banks' attention
on Year 2000 issues earlier than most businesses. The Bank and
Bancorp began addressing Y2K issues in mid 1997. Year 2000 issues
were first a part of banking regulatory review at Stock Yards
Bank & Trust Company in its November, 1997 examination
by the FDIC. The FDIC has established guidelines that require banking
institutions to:
Ensure ongoing board of director involvement in Year 2000 efforts;
Adopt a written project plan;
Renovate mission-critical systems;
Complete tests of renovated systems by specific deadlines;
Plan for contingencies; and
Manage customer risk.
Management believes the Bank is in compliance with these guidelines.
The Bank's Year 2000 project coordinator and committee report regularly to
the Board of Directors as to the project plan and completion status.
Bancorp's general plans and actions to address Year 2000 issues, including
relationships with customers, vendors and others
Bancorp's management has undertaken an evaluation of the effects
Year 2000 will have on its information systems and other important aspects
of its business. Bancorp's program has five phases: awareness, assessment,
renovation, validation and implementation. As a part of the assessment
phase, degrees of risk were determined for various areas. Impact assessment
guidelines used are as follows:
Absolutely critical - If these systems were to fail or produce
inaccurate data, it could lead to the failure of the Bank.
Important - Failure of these could significantly impair the Bank's ability
to function at full potential.
Useful - These systems are used regularly but are not deemed to be
critical.
Expendable - These systems could be retired. They are convenient to have,
but the Bank could do without them.
Using the above appraisal guidelines, each system was assigned a
priority for timing of renovation, testing and implementation.
Areas deemed to be absolutely critical are mainly related to computer
technology. These include the Bank's mainframe computer, related
software, the Bank's wide area network of computers, trust and
mortgage department hardware and software and wire
transfer computer capabilities. All of the Bank's software is purchased; no
programming is performed in house. Management has received representations
from all vendors with regard to Y2K readiness for these applications.
Testing and contingency planning for these areas are addressed below. Other
technology areas deemed absolutely critical are internet connections and the
ATM network. With regard to our Year 2000 evaluation of non-information
technology areas, management identified general issues similar to those of
other businesses and bank specific issues such as vault doors and security
equipment. Non information technology areas deemed absolutely critical are
telephone service and systems, utilities and vault doors. Through a
combination of consultations with and certifications from vendors and testing
of these non-information technology areas, management believes there are no
material Y2K risks or uncertainties presented in these areas.
The Bank's assessment has taken into account whether third parties with
whom it has a material business relationship are or will be Year 2000
compliant. Management has requested certification as to Y2K readiness from
current vendors and uses Y2K readiness as a part of the criteria for
selection of vendors/products. In addition to obtaining written Y2K
certification regarding equipment and services, the Bank's Y2K plan
includes testing of such equipment and services for Y2K readiness. This
testing is complete in virtually all areas and has not identified any
material Y2K risks or uncertainties.
Two other major areas of evaluation are the Bank's loan customers and
fiduciary relationships arising from the trust department. Borrower's
noncompliance with Year 2000 issues could adversely affect their ability
to service their debt. The Bank has requested written representation from
significant loan customers to verify and document customer Year 2000
readiness. Evaluation of the creditworthiness of these customers now
includes a review of the customer's self assessment as to compliance with
Year 2000 issues. Based upon the responses of customers, an evaluation of
the nature of these customers' businesses and their states of Y2K readiness,
and the collateral held on these loans, management has concluded the degree
of risk of loss to the bank does not warrant a specific Y2K allowance for
loan losses at this time.
The trust department's written business resumption plan and testing have
been completed for the trust accounting systems. Trust system vendors have
indicated they are Y2K compliant. Y2K relates to the department's fiduciary
responsibilities with regard to the ability of investments to continue to
maintain income and principal payment streams, if applicable. Also, third
party paying agents and processors must be able to continue providing timely
and accurate services. The department has taken measures to identify and
mitigate risks and uncertainties related to Y2K.
Correspondence has been sent to companies, issuers, and paying agents
with significant relationships to the Bank's trust accounts. These letters
request documentation with regard to the third party's Year 2000 compliance
status. In instances where the Bank's trust department has the authority
to make investment decisions, the department will not authorize investments
in companies which have not made reasonable Y2K disclosures. The department
may waive this requirement if they can determine through other channels the
target company is not technologically dependent. All of this will be
considered as investment decisions are made regarding current and future
holdings.
Timetable for carrying out Year 2000 plans
The awareness, assessment and renovation phases of the Company's
Year 2000 plan are essentially complete. Testing has been completed
in all areas. In addition to testing, the Bank has developed business
resumption plans in the event absolutely critical systems fail despite
representations from vendors and favorable test results. These plans
should enable the Bank to function at a level sufficient to serve the
majority of customers' needs. Additionally, management has significantly
curtailed the installation of new information technology systems for
the remainder of 1999. To ensure the Bank's ability to respond to
customer needs and demands, significant information technology
additions were accelerated into the last quarter of 1998 and the
first half of 1999. These scheduling accelerations have
allowed 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
$45,000 has been expensed in the first nine months 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 $133,000.
Management anticipates spending another $50,000 in the remainder of 1999 on
capital expenditures.
Impact Year 2000 expenditures are anticipated to have on Bancorp's results of
operations, liquidity and capital resources
In addition to the factors mentioned above, the Bank is considering
other ramifications of the Year 2000. Management reviews the liquidity
position and needs of the Bank on a regular basis. Anticipating
Year 2000, the Bank has prepared to be more liquid. Loan customers
with lines of credit may experience increased cash needs and, therefore,
draw more on their lines of credit. Loan customers may make payments more
slowly if their cash positions are tighter. Depositors may withdraw
higher than average amounts of cash. These situations will require
the Bank to have higher than average levels of cash available.
Management has made arrangements with correspondent banks and believes
these arrangements will enable the Bank to
meet Y2K liquidity needs.
Remaining risks and uncertainties related to Year 2000
As noted above, the Bank has performed extensive testing of absolutely
critical and important systems and equipment.
Based upon testing and representations received from vendors and other
third parties, management does not anticipate major malfunctions to be
identified as a result of testing. However, in the event there are
unidentified problems, the Bank has developed a business resumption plan.
This plan makes arrangements for alternative means of processing/operation
should absolutely critical functions fail when Y2K arrives. These include
manual processing, processing transactions by personal computer rather than
mainframe, and curtailing banking hours and/or number of locations open.
Management's objective is to continue to offer and process transactions that
would be critical to customers. Assumptions used in the business resumption
planning include the satisfactory operation of utilities and the U.S. Postal
Service.
As a result of evaluations and procedures performed to date, management
does not anticipate Year 2000 to materially affect the Bancorp's capital
resources, financial condition or results of operations.
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 September 30, 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: November, 1999 By: /s/ David H. Brooks
----------------------------
David H. Brooks, Chairman
and Chief Executive Officer
Date: November, 1999 By: /s/ David P. Heintzman
----------------------------
David P. Heintzman, President
Date: November, 1999 By: /s/ Nancy B. Davis
----------------------------
Nancy B. Davis, Executive
Vice President, Treasurer and
Chief Financial Officer