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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1999 1-13661
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
(502) 582-2571
INCORPORATED IN KENTUCKY I.R.S. NO. 61-1137529
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class: Name of each exchange on which registered:
Common stock, no par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES_X__ NO_____
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of registrant's voting stock (Common Stock, no par
value) held by non-affiliates of the registrant as of February 25, 2000, was
$113,216,000.
The number of shares of registrant's Common Stock, no par value, outstanding as
of February 25, 2000, was 6,639,046.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement related to Registrant's
Annual Meeting of Stockholders to be held on April 26, 2000 (the "Proxy
Statement"), are incorporated by reference into Part III of this Form 10-K.
S.Y. BANCORP, INC.
FORM 10-K
INDEX
PAGE
----
PART I:
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II:
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 54
PART III:
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners
and Management 54
Item 13. Certain Relationships and Related Transactions 55
PART IV:
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 55
SIGNATURES 57
PART I
ITEM 1. BUSINESS
S. Y. Bancorp, Inc. ("Bancorp"), was incorporated in 1988 and is a Kentucky
corporation headquartered in Louisville, Kentucky. Bancorp is a bank holding
company registered with, and subject to supervision regulation and examination
by the Board of Governors of the Federal Reserve System. Bancorp has one
subsidiary, Stock Yards Bank & Trust Company. The subsidiary is wholly owned and
is a state chartered bank. Bancorp conducts no active business operations;
accordingly, the business of Bancorp is substantially the same as that of its
subsidiary bank.
STOCK YARDS BANK & TRUST COMPANY
Stock Yards Bank & Trust Company ("the Bank") was originally chartered in 1904.
In 1972, the Bank was granted full trust powers. In 1989, the Bank began to
branch and thereby expand its retail business. The Bank's historical market
niche has been providing commercial loans to small and mid-size companies. The
Bank's staff focuses on establishing and maintaining long term relationships
with customers. The Bank engages in a wide range of commercial and personal
banking activities, including checking, savings and time deposit accounts;
making of commercial, industrial, real estate, and consumer loans; issuance of
letter of credit; and rental of safe deposit boxes. The Bank also provides a
wide range of personal and corporate trust services. The Bank operates a
mortgage company as a division of the Bank. This division originates residential
mortgage loans and sells the loans in the secondary market. The mortgage
division provides customers with a variety of options for home mortgages,
including VA and FHA financing. The Bank offers full service brokerage products
through an affiliation with a third party. In addition, the Bank offers Visa
credit card services through an agreement with a non-affiliated bank. Customers
of the Bank have access to automatic teller machines through a regional network.
The Bank actively competes with other local and regional commercial banks and
financial services institutions such as credit unions, savings and loans
associations, insurance companies, brokerage companies, finance companies and
mutual funds. Many banks and other financial services institutions with which
the Bank competes have capital and resources substantially in excess of the
Bank. Many of these competitors have broader geographic markets, higher lending
limits, sell broader product lines and make more effective use of advertising
than can the Bank. While primarily serving Jefferson County, Kentucky, the Bank
also serves customers residing in the adjacent Kentucky counties of Oldham,
Shelby and Bullitt and in southern Indiana. Via a 1996 acquisition, Bancorp
established banking operations in southern Indiana, a part of the Louisville,
Kentucky metropolitan area. Factors affecting the Bank's ability to compete
effectively include pricing, product availability, and service.
The Bank has fourteen banking centers including the main office. Some of these
locations are owned while others are leased. See "ITEM 2. PROPERTIES."
At December 31, 1999, the Bank had 316 full-time equivalent employees. Employees
are not subject to a collective bargaining agreement. Bancorp and the Bank
consider their relationships with employees to be good.
See Note 20 to Bancorp's consolidated financial statements for the year ended
December 31, 1999 (page 53 herein) for information relating to the Bank's
business segments.
3
SUPERVISION AND REGULATION
Bank holding companies and commercial banks are extensively regulated under both
federal and state law. Any change in applicable law or regulation may have a
material effect on the business and prospects of Bancorp and the Bank.
Bancorp, as a registered bank holding company, is subject to the supervision of
and regulation by the Federal Reserve Board under the Bank Holding Company Act
of 1956. In addition, Bancorp is subject to the provisions of Kentucky's banking
laws regulating bank acquisitions and certain activities of controlling bank
shareholders.
The Bank is subject to the supervision of and regular examination by the Federal
Deposit Insurance Corporation and the Kentucky Department of Financial
Institutions. The Federal Deposit Insurance Corporation insures the deposits of
the bank to the current maximum of $100,000 per depositor.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("the
1994 Act") removed state law barriers to interstate bank acquisitions and
permits the consolidation of interstate banking operations. Under the 1994 Act,
adequately capitalized and managed bank holding companies may acquire banks in
any state, subject to Community Reinvestment Act compliance, compliance with
federal and state antitrust laws and deposit concentration limits, and subject
to any state laws restricting the transaction. Kentucky banks are also permitted
to acquire a branch in another state if permitted by law of the other state.
Kentucky currently does not permit de novo branching by out-of-state banks into
Kentucky, and it does not permit an out-of-state bank to acquire a bank in
Kentucky that has been in existence less than five years.
In November 1999, the Gramm-Leach-Bliley Act ("the 1999 Act") to repeal the
Depression-era barrier between commercial and investment banking established
by the Glass-Steagall act, as well as the prohibition on the mixing of
banking and insurance established by the Bank Holding Company Act of 1956 was
signed into law. The 1999 Act will allow for affiliations among banks,
securities firms and insurance companies by means of a financial holding
company ("FHC"). The effective date for these new affiliation powers is 120
days from the date of enactment. Before that effective date the various
regulatory agencies are expected to issue related regulations implementing
the requirements of the new law. In most cases the creation of an FHC is a
simple election and notice to the Federal Reserve Board. The 1999 Act
requires that, at the time of establishment of an FHC, all depository
institutions within that corporate group must be "well managed" and "well
capitalized" and must have received a rating of "satisfactory" or better
under its most recent Community Reinvestment Act examination. Further,
non-banking financial firms (for example an insurance company or securities
firm) may establish an FHC and acquire a depository institution. While the
distinction between banks and non-banking financial firms has been blurring
over recent years, the 1999 Act will make it less cumbersome for banks to
offer services "financial in nature" but beyond traditional banking
activities. Likewise, non-banking financial firms may find it easier to offer
services which have, heretofore, been provided primarily by depository
institutions.
4
ITEM 2. PROPERTIES
The principal offices of Bancorp and the Bank are located at 1040 East Main
Street, Louisville, Kentucky. Adjacent to the main location there are also a
drive-through facility and the Bank's operations center. In addition to the main
office complex, the Bank owned six branch properties at December 31, 1999 (one
of which is located on leased land). The Bank also leased seven branch
facilities. Of the fourteen banking locations, twelve are located in Louisville
and two are located in nearby southern Indiana. See Notes 5 and 15 to Bancorp's
consolidated financial statements for the year ended December 31, 1999, for
additional information relating to amounts invested in premises, equipment and
lease commitments.
ITEM 3. LEGAL PROCEEDINGS
See Note 15 to Bancorp's consolidated financial statements for the year ended
December 31, 1999, for information relating to legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names and ages (as of December 31, 1999) of all
current executive officers of Bancorp. Each executive officer is appointed by
the Bancorp's Board of Directors to serve at the pleasure of the Board. There is
no arrangement or understanding between any executive officer of Bancorp and any
other person(s) pursuant to which he/she was or is to be selected as an officer.
Name and Age Position and offices
of Executive Officer with Bancorp
-------------------- ------------------------------------
David H. Brooks Chairman and Chief Executive Officer
Age 57 and Director
David P. Heintzman President and Director
Age 40
Kathy C. Thompson Executive Vice President and Director
Age 38
Phillip S. Smith Executive Vice President
Age 42
Gregory A. Hoeck Executive Vice President
Age 49
Nancy B. Davis Executive Vice President, Secretary, Treasurer and
Age 44 Chief Financial Officer
Mr. Brooks was appointed Chairman and Chief Executive Officer of Bancorp and the
Bank in 1993. Prior thereto, he was President of Bancorp and the Bank.
Mr. Heintzman was appointed President of Bancorp and the Bank in 1993. Prior
thereto, he served as Treasurer and Chief Financial Officer of Bancorp and
Executive Vice President of the Bank.
Ms. Thompson was appointed Executive Vice President of Bancorp and the Bank in
1996. She joined the Bank in 1992 as Senior Vice President and is Manager of the
Investment Management and Trust Department.
Mr. Smith was appointed Executive Vice President of the Bank in 1996. Prior
thereto, he was Senior Vice President of the Bank. He is primarily responsible
for the commercial lending area of the Bank.
Mr. Hoeck joined the Bank as Executive Vice President in 1998. He is primarily
responsible for the retail and marketing areas of the Bank. Prior to joining the
Bank, Mr. Hoeck was an Executive Vice President for PNC Bank and the Retail
Market Manager for the Kentucky and Indiana markets.
Ms. Davis was appointed Executive Vice President of Bancorp and the Bank in
1999. Prior thereto, she was Senior Vice President of Bancorp and the Bank. She
was appointed Chief Financial Officer of Bancorp in 1993.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Bancorp's common stock is traded on the American Stock Exchange under the ticker
symbol SYI. The table below sets forth the quarterly high and low market prices
of Bancorp's common stock and dividends declared per share. The payment of
dividends by the Bank to Bancorp is subject to the restriction described in note
14 to the consolidated financial statements. On December 31, 1999, Bancorp had
750 shareholders of record.
1999 1998
------------------------------ -----------------------------
Cash Dividends Cash Dividends
Quarter High Low Declared High Low Declared
- ------- ---- --- -------- ---- --- --------
First $ 27.50 $23.00 $ .08 $ 20.75 $ 19.38 $ .06
Second 25.13 22.00 .08 28.00 21.00 .07
Third 25.25 22.00 .08 24.32 22.57 .08
Fourth 24.38 21.50 .09 25.25 21.38 .08
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31
-----------------------
(Dollars in thousands except per share data) 1999 1998 1997 1996 1995
- -------------------------------------------- ---- ---- ---- ---- ----
Net interest income $ 27,470 $ 23,294 $ 19,723 $ 16,538 $ 14,609
Provision for loan losses 1,635 1,600 1,000 800 1,260
Net income 9,706 8,218 6,534 5,179 4,056
PER SHARE DATA
Net income, basic $ 1.46 $ 1.25 $ 1.00 $ .79 $ .63
Net income, diluted 1.41 1.21 .96 .77 .61
Cash dividends declared .33 .28 .24 .20 .18
AVERAGE BALANCES
Stockholders' equity $ 48,052 $ 40,691 $ 34,174 $ 29,675 $ 25,964
Assets 637,276 540,696 437,037 352,977 295,892
Long-term debt 2,100 2,100 2,259 1,171 607
RATIOS
Return on average assets 1.52% 1.52% 1.50% 1.47% 1.37%
Return on average stockholders' equity 20.20 20.20 19.12 17.45 15.62
Average stockholders' equity to average assets 7.54 7.53 7.82 8.41 8.77
Per share information has been adjusted to reflect stock splits and stock
dividends.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to provide information as to the analysis of
the consolidated financial condition and results of operations of S.Y. Bancorp,
Inc. (Bancorp) and its wholly-owned subsidiary, Stock Yards Bank & Trust Company
(the Bank). Bancorp, incorporated in 1988, has no active business operations.
Thus Bancorp's business is substantially the same as that of the Bank. The Bank
has operated continuously since it opened in 1904. The Bank conducted business
at one location for 85 years and then began branching. At December 31, 1999, the
Bank had fourteen locations. The combined effect of added convenience with the
Bank's focus on flexible, attentive customer service has been key to the Bank's
growth and profitability. The wide range of services added by the wealth
management group (investment management and trust, private banking, and
brokerage) and by the mortgage department helps support the corporate philosophy
of capitalizing on full service customer relationships.
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 the 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' customers; other risks detailed in Bancorp's
filings with the Securities and Exchange Commission, all of which are difficult
to predict and many of which are beyond the control of Bancorp.
This discussion should be read in conjunction with Bancorp's consolidated
financial statements and accompanying notes and other schedules presented
elsewhere in this report.
RESULTS OF OPERATIONS
Net income was $9,706,000 or $1.41 per share on a diluted basis in 1999. This
compares to $8,218,000 or $1.21 per share in 1998 and $6,534,000 or $.96 per
share in 1997. The increase in 1999 net income was attributable to growth in
both net interest income and non-interest income which was partially offset by
increased non-interest expenses. Earnings include a 18.3% increase in fully
taxable equivalent net interest income and a 11.0% increase in non-interest
income. Fees for investment management and trust services, service charges on
deposit accounts, and other non-interest income increased for the year.
Partially offsetting these increases, gains on sales of mortgage loans available
for sale and gains on sales of securities available for sale decreased in 1999.
Non-interest expenses increased 14.8%. Non-interest expenses increased in all
categories reflective of continued expansion of the banking center network.
The following paragraphs provide a more detailed analysis of the significant
factors affecting operating results.
NET INTEREST INCOME
Net interest income, the most significant component of Bancorp's earnings, is
total interest income less total interest expense. Net interest spread is the
difference between the taxable equivalent rate earned on average interest
earning assets and the rate expensed on average interest bearing liabilities.
Net interest margin represents net interest income on a taxable equivalent basis
as a percentage of average 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. 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. The discussion that follows is based on tax equivalent interest
data.
8
Comparative information regarding net interest income is provided in the table
below.
(Dollars in thousands) 1999 1998 1997 1999/98 Change 1998/97 Change
- ---------------------- ---- ---- ---- -------------- --------------
Net interest income $ 27,839 $ 23,541 $ 19,899 16.7% 18.3%
Net interest spread 4.03% 3.94% 4.06% 9bp (12bp)
Net interest margin 4.72% 4.71% 4.89% 1bp (18bp)
Average earning assets $ 590,011 $ 499,598 $ 407,089 18.1% 22.7%
Prime rate at year end 8.50% 8.00% 8.50% 50bp (50bp)
Average prime rate 8.44% 8.35% 8.00% 9bp 35bp
bp = basis point = 1/100 of a percent
Prime rate is included above to provide a general indication of the interest
rate environment in which the Bank operates. The Bank's variable rate loans are
indexed to prime rate and reprice as the prime rate changes.
ASSET / LIABILITY MANAGEMENT AND INTEREST RATE RISK
Managing interest rate risk is fundamental for the financial services industry.
The primary objective of interest rate risk management is to neutralize effects
of interest rate changes on net income. By using both on and off-balance sheet
financial instruments, Bank management evaluates interest rate sensitivity while
attempting to optimize net interest income within the constraints of prudent
capital adequacy, liquidity needs, market opportunities and customer
requirements.
Bancorp uses an earnings simulation model to measure and evaluate the impact of
changing interest rates on earnings. The simulation model is designed to reflect
the dynamics of all interest earning assets, interest bearing liabilities, and
off-balance sheet financial instruments, combining factors affecting rate
sensitivity into a one year forecast. By forecasting management's estimate of
the most likely rate environment and adjusting those rates up and down the model
can reveal approximate interest rate risk exposure. The December 31, 1999
simulation analysis indicates that an increase in interest rates would have a
positive effect on net interest income, and a decrease in interest rates would
have a negative effect on net interest income.
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Net Income Diluted EPS
(Dollars in thousands except per share information) Income Change Change Change
- ------------------------------------------------------------------------------------------------------------------------------------
Increase 200 bp $ 912 $ 598 $ 0.09
Increase 100bp 357 238 0.03
Decrease 100 bp (743) (478) (0.07)
Decrease 200 bp (1,306) (861) (0.13)
To assist in achieving a desired level of interest rate sensitivity, management
entered into an off-balance sheet interest rate collar which was designed to
mitigate the effect of a drop in interest rates. Derivative financial
instruments can be a cost and capital efficient method of modifying interest
rate risk sensitivity. See note 16 to the consolidated financial statements.
The following table provides information about Bancorp's 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), the table presents information
regarding the most likely withdrawal behaviors. This information is based on
Bancorp's historical experience and management's judgments. For interest rate
collars, the table presents notional amounts. Notional amounts are used to
calculate the contractual payments to be exchanged under the contracts.
9
Bancorp's interest bearing liabilities slightly exceed its interest earning
assets on a cumulative repricing basis through one year. This position, which is
termed a negative interest sensitivity gap, generally allows for a positive
impact on net interest income in periods of declining interest rates and a
negative impact on net interest income during periods of rising interest rates.
In Bancorp's case, during periods of changing rates, variable rate loans reprice
immediately. While deposit rates will respond, they will not change as quickly
nor as drastically. Bancorp's interest rate risk management strategy includes
monitoring the mix of variable rate loans and fixed rate loans, which at
December 31, 1999 were approximately 30% and 70%, respectively. Management is
aware, however, that it will be necessary to re-negotiate rates on some of the
fixed rate loans if the prime rate drops.
As interest rates change in the market, rates earned on assets do not
necessarily move identically with rates paid on liabilities.
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term investments
Federal funds sold (variable rate) $ 6,000 - - - - - $ 6,000 $ 6,000
Average interest rate 6.06% - - - - - 6.06%
Loans held for sale (fixed rate) $ 2,608 - - - - - $ 2,608 $ 2,608
Average interest rate 7.42% - - - - - 7.42%
Securities
Fixed rate $ 11,591 $ 12,101 $ 9,074 $ 9,651 $ 19,881 $ 21,933 $ 84,231 $ 84,006
Average interest rate 6.60% 6.57% 6.79% 6.24% 5.74% 6.36% 6.43%
Loans
Fixed rate $ 55,453 $ 49,522 $ 52,070 $ 50,093 $ 60,645 $108,048 $375,831 $369,354
Average interest rate 8.71% 8.65% 8.76% 8.55% 8.29% 8.29% 8.40%
Variable rate $ 73,865 $ 17,829 $ 7,589 $ 4,706 $ 5,674 $ 61,364 $171,027 $171,027
Average interest rate 8.92% 8.93% 8.83% 8.89% 8.90% 8.74% 8.85%
Deposits
Non-interest bearing checking $ 13,346 $ 13,346 $ 13,346 $ 13,346 $ 13,346 $ 22,245 $ 88,975 $ 88,975
Average interest rate - - - - - - -
Savings and interest
bearing checking $ 28,918 $ 28,918 $ 28,918 $ 28,918 $ 28,918 $ 48,199 $192,789 $192,789
Average interest rate 2.99% 2.99% 2.99% 2.99% 2.99% 2.99% 2.99%
Time deposits (fixed rate) $199,948 $ 57,701 $ 11,052 $ 10,311 $ 5,159 $ 4,027 $288,198 $288,570
Average interest rate 5.18% 5.28% 5.65% 5.51% 5.47% 5.80% 5.20%
Federal funds purchased,
securities sold under agreements
to repurchase and other
short-term borrowings
(variable rate) $ 57,409 - - - - - $ 57,409 $ 57,409
Average interest rate 4.75% - - - - - 4.75%
Long term debt (variable rate) $ - - - - - $ 2,100 $ 2,100 $ 2,100
Average interest rate -% - - - - 7.75% 7.75%
Interest rate collars
Notional amount $100,000 - - - - - $100,000 $ (298)
Cap strike rate 8.37% - - - - - - -
Floor strike rate 7.63% - - - - - - -
10
The following table presents the increases in net interest income due to
changes in volume and rate computed on a tax equivalent basis and indicates
how net interest income in 1999 and 1998 was impacted by volume increases and
the lower average interest rate environment. The tax equivalent adjustments
are based on a 35% tax rate. The change in interest due to both rate and
volume has been allocated to the change due to volume and change due to rate
in proportion to the relationship of the absolute dollar amounts of the
change in each.
TAXABLE EQUIVALENT RATE/VOLUME ANALYSIS
1999/1998 1998/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Net Due to Net Due to
Change Rate Volume Change Rate Volume
(Dollars In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 5,193 $(1,771) $ 6,965 $ 7,173 $ (470) $ 7,643
Federal funds sold 69 13 56 90 (40) 130
Mortgage loans held for sale (182) (9) (174) 241 (5) 246
Securities
Taxable 312 (73) 385 (164) (163) (1)
Tax-exempt 382 (34) 416 264 81 183
-------- -------- -------- -------- -------- --------
TOTAL INTEREST INCOME 5,774 (1,874) 7,648 7,604 (597) 8,201
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE
Deposits
Interest bearing demand deposits 852 (58) 910 1,102 269 833
Savings deposits (25) (122) 97 (9) (60) 51
Money market deposits 36 (49) 85 (170) (39) (131)
Time deposits (166) (1,190) 1,024 2,907 (21) 2,928
Securities sold under
agreements to repurchase and
federal funds purchased 810 (76) 886 153 (48) 201
Other short-term borrowings (24) (14) (10) (7) 17 (24)
Long-term debt (7) (7) - (14) (2) (12)
-------- -------- -------- -------- -------- --------
TOTAL INTEREST EXPENSE 1,476 (1,516) 2,992 3,962 116 3,846
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 4,298 $ (358) $ 4,656 $ 3,642 $ (713) $ 4,355
======== ======== ======== ======== ======== ========
11
PROVISION FOR LOAN LOSSES
In determining the provision for loan losses charged to expense, management
considers many factors. Among these are the quality of the loan portfolio,
previous loss experience, the size and composition of the loan portfolio and an
assessment of the impact of current economic conditions on borrowers' ability to
pay. The provision for loan losses is summarized below.
- --------------------------------------------------------------------------------
(Dollars In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Provision for loan losses $ 1,635 $ 1,600 $ 1,000
Allowance to loans at year end 1.34% 1.49% 1.60%
Allowance to average loans for year 1.49% 1.61% 1.80%
========= ========= =========
The Bank's charge-off history has been below the levels of its peers and the
loan portfolio is diversified with no significant concentrations of credit.
Geographically, most loans are extended to borrowers in the Louisville, Kentucky
metropolitan area. The adequacy of the allowance is monitored on an ongoing
basis and it is the opinion of management that the balance of the allowance for
loan losses at December 31, 1999, is adequate to absorb losses inherent in the
loan portfolio as of this date. See "Financial Condition-Allowance for Loan
Losses" on page 19.
NON-INTEREST INCOME AND NON-INTEREST EXPENSES
The following table provides a comparison of the components of non-interest
income and expenses for 1999, 1998 and 1997. The table shows the dollar and
percentage charge from 1998 to 1999 and from 1997 to 1998. Below the table is a
discussion of significant charges and trends.
- ------------------------------------------------------------------------------------------------------------------------------------
1999/98 1998/97
(Dollars In thousands) 1999 1998 1997 Change % Change %
- ------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Investment management and trust services $ 5,194 $ 4,573 $ 3,332 $ 621 13.6 % $ 1,241 37.2 %
Service charges on deposit accounts 3,484 2,886 1,936 598 20.7 950 49.1
Gains on sales of mortgage loans held for sale 1,511 2,047 1,077 (536) (26.2) 970 90.1
Gains on sales of securities available for sale 100 341 80 (241) (70.7) 261 326.3
Other 2,331 1,525 1,000 806 52.9 525 52.5
------- ------- ------- ------- ------ ------- -------
$12,620 $11,372 $ 7,425 $ 1,248 11.0 % $ 3,947 53.2 %
======= ======= ======= ======= ====== ======= =======
NON-INTEREST EXPENSES
Salaries and benefits $13,750 $11,660 $ 9,846 $ 2,090 17.9 % $ 1,814 18.4 %
Net occupancy expense 1,711 1,407 1,121 304 21.6 286 25.5
Furniture and equipment expense 2,282 2,009 1,633 273 13.6 376 23.0
Other 6,388 5,943 4,141 445 7.5 1,802 43.5
------- ------- ------- ------- ------ ------- -------
$24,131 $21,019 $16,741 $ 3,112 14.8 % $ 4,278 25.6 %
======= ======= ======= ======= ====== ======= =======
The largest component of non-interest income is income from investment managment
and trust services. This area of the bank continues to grow through attraction
of new business, customer retention and market appreciation. At December 31,
1999 assets under managment totaled $914 million compared to $770 million at
December 31, 1998 and $632 million as of December 31, 1997. Included in these
totals are the assets of the Bank's investment portfolio. These amounts were $76
million at year end 1999, $100 million at year end 1998, and $60 million at year
end 1997. Growth in the department's assets include both personal and employee
benefit accounts.
Growth in service charges on deposit accounts is primarily due to increased
account volumes. Secondarily, rates for service charges are reviewed annually
and were increased in early 1999 and 1998. Growth in deposit account volume has
occurred from new banking locations and in reaction to discontent arising from
larger bank mergers and resultant changes.
12
The Bank operates a mortgage banking company as a division of the Bank. This
division originates residential mortgage loans and sells the loans in the
secondary market. The division offers conventional, VA and FHA financing as well
as a program for low income first time home buyers. Loans are made for both
purchase and refinancing of homes. Virtually all loans originated by the
mortgage banking company are sold in the secondary market with servicing rights
released. Interest rates on conventional mortgage loans directly impact the
volume of business transacted by the mortgage banking division. Favorable rates
in 1998 and early 1999 stimulated home buying and refinancing, however,
beginning in the second quarter of 1999, rising rates resulted in lower levels
of activity, particularly refinancing. The mortage company began origination and
sale of sub-prime loans in 1998. This activity contributed $212,000 to the gains
on sales of mortgage loans in 1999 and $98,000 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 retains none of these
sub-prime loans in its portfolio.
Significant changes in other non-interest income in 1999 as compared to 1998 and
1998 as compared to 1997 were largely due to the following factors.
- --------------------------------------------------------------------------------
(Dollars In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Title services fees $314 $252 $ -
Check card income 408 236 121
Full service brokerage fees 491 286 221
ATM surcharge 108 - -
==== ==== ====
As the Bank has marketed debit card more actively, corresponding check card
income has increased. Similarly, to further build full service relationships
with customers, the Bank has increased its staff of full service brokers to
three, and fee income has increased as the overall volume of business has grown.
Finally, in 1999 the Bank began surcharging non customers when they use a Stock
Yards Bank ATM.
Salaries and benefits are the largest component of non-interest expenses.
Increases in personnel expense arose in part from regular salary increases.
Officer increases are effective January 1 and non-officer increases are
effective on each individual's anniversary date. Also, the Bank continues to add
employees to support growth. At December 31, 1999, the Bank had 316 full-time
equivalent employees compared to 275 at the same date in 1998 and 250 for 1997.
There are no significant obligations for post-retirement or post-employment
benefits.
Net occupancy expenses have increased as the Bank has added banking centers.
During 1999, the Bank opened two locations; during 1998 the Bank opened one. At
December 31, 1999 the Bank had fourteen banking center locations including the
main office. Furniture and equipment expenses have increased with the addition
of banking centers. Further, the Bank continues to update computer equipment and
software as technology advances. Costs of capital asset additions flow through
the statement of income, over the lives of the assets, in the form of
depreciation expense.
Other non-interest expenses have increased from numerous factors and reflect the
Bank's growth. Among costs which increased significantly were courier and
delivery, communications and supplies.
INCOME TAXES
A three year comparison of income tax expense and effective tax rate follows.
- --------------------------------------------------------------------------------
(Dollars In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Income tax expense $4,618 $3,829 $2,873
Effective tax rate 32.2 % 31.8 % 30.5 %
====== ====== ======
13
FINANCIAL CONDITION
EARNING ASSETS AND INTEREST BEARING LIABILITIES
The following table presents summary information with regard to Bancorp's
financial condition.
- --------------------------------------------------------------------------------------------------------------------
1999/98 1998/97
(Dollars In thousands) 1999 1998 1997 Change % Change %
- --------------------------------------------------------------------------------------------------------------------
Average earning assets $590,011 $499,598 $407,089 $ 90,413 18.1 % $ 92,509 22.7 %
Average interest bearing liabilities 493,866 417,574 335,007 76,292 18.3 82,567 24.6
Average total assets 637,276 540,696 437,037 96,580 17.9 103,659 23.7
Total year end assets 689,815 609,788 478,597 80,027 13.1 131,191 27.4
======== ======== ======== ======== ====== ======== ======
The Bank has experienced significant growth over the last several years. Growth
of average earning assets occurred primarily in the area of loans. Loan demand
continued to be strong during 1999. From year end 1998 to year end 1999,
commercial and industrial loans increased 12.5%. Construction and development
loans increased 15.3%. Real estate mortgage loans increased 25.6%. Consumer
loans increased 26.9%. Partially offsetting growth in loans was a decrease in
investment securities.
The increase in average interest bearing liabilities from 1998 to 1999 occurred
in all categories. Interest bearing demand deposits showed the largest growth.
With rising interest rates, depositors chose shorter term accounts. Typically,
balances will shift more toward time deposits when depositors perceive rates to
have reached the top of the cycle. Another area of significant growth in 1998
was securities sold under agreements to repurchase. Commercial depositors have
the opportunity to enter into a sweep agreement whereby excess demand deposit
balances are transferred to a separate account. This balance is used to purchase
securities sold under agreements to repurchase. In the fourth quarter of 1999,
the Bank accepted up to $20 million in public funds from the Jefferson County,
Kentucky Sheriff. These funds were generated from the collection of property
taxes and were withdrawn from the Bank during January 2000. During 1998 the Bank
increased its emphasis on these sweep services. Also during 1998, "sweep"
accounts that had been invested in off balance sheet vehicles through a third
party were converted to securities sold under agreements to repurchase.
14
AVERAGE BALANCES AND INTEREST RATES - TAXABLE EQUIVALENT BASIS
YEAR 1999 YEAR 1998 YEAR 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in thousands) Balances Interest Rate Balances Interest Rate Balances Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Federal funds sold $ 14,795 $ 781 5.28% $ 13,736 $ 712 5.18% $ 11,131 $ 622 5.59%
Mortgage loans held for sale 5,141 368 7.14 7,577 550 7.26 4,181 309 7.39
Securities
Taxable 59,860 3,640 6.08 53,552 3,328 6.21 53,567 3,492 6.52
Tax exempt 18,114 1,197 6.61 11,798 815 6.91 9,048 551 6.09
Loans, net of unearned income 492,101 42,907 8.72 412,935 37,714 9.13 329,162 30,541 9.28
------- ------ ---- ------- ------ ---- ------- ------ ----
TOTAL EARNING ASSETS 590,011 48,893 8.29 499,598 43,119 8.63 407,089 35,515 8.72
------ ---- ------ ---- ------ ----
Less allowance for loan losses 7,172 6,401 5,530
------- ------- -------
582,839 493,197 401,559
NON-EARNING ASSETS
Cash and due from banks 23,996 20,975 15,899
Premises and equipment 16,454 14,823 12,051
Accrued interest receivable and
other assets 13,987 11,701 7,528
TOTAL ASSETS $637,276 $540,696 $ 437,037
-------- -------- ---------
INTEREST BEARING LIABILITIES
Deposits
Interest bearing demand deposits $110,049 $ 3,222 2.93% $ 78,995 $ 2,370 3.00% 50,137 $1,268 2.53%
Savings deposits 28,345 740 2.61 24,953 765 3.07 23,352 774 3.31
Money market deposits 45,789 1,478 3.23 43,191 1,442 3.34 47,138 1,612 3.42
Time deposits 266,544 13,694 5.14 247,503 13,860 5.60 195,209 10,953 5.61
Securities sold under
agreements to repurchase
and federal funds purchased 39,231 1,692 4.31 18,813 882 4.69 14,408 729 5.06
Other short-term borrowings 1,808 82 4.54 2,019 106 5.25 2,504 113 4.51
Long-term debt 2,100 146 6.95 2,100 153 7.29 2,259 167 7.39
------- ------ ---- ------- ------ ---- ------- ------ ----
TOTAL INTEREST BEARING LIABILITIES 493,866 21,054 4.26 417,574 19,578 4.69 335,007 15,616 4.66
------ ---- ------ ---- ------ ----
NON-INTEREST BEARING LIABILITIES
Non-interest bearing demand deposits 87,609 75,332 63,857
Accrued interest payable and
other liabilities 7,749 7,099 3,999
------- ------- -------
TOTAL LIABILITIES 589,224 500,005 402,863
STOCKHOLDERS' EQUITY 48,052 40,691 34,174
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $637,276 $540,696 $ 437,037
======== ======== =========
NET INTEREST INCOME $ 27,839 $ 23,541 $19,899
======== ======== =======
NET INTEREST SPREAD 4.03% 3.94% 4.06%
==== ==== ====
NET INTEREST MARGIN 4.72% 4.71% 4.89%
==== ==== ====
15
Securities
The primary purpose of the securities portfolio is to provide another source of
interest income as well as liquidity management. In managing the composition of
the balance sheet, Bancorp seeks a balance among earnings sources and credit and
liquidity considerations.
The carrying value of securities is summarized as follows:
- ---------------------------------------------------------------------------------------------
DECEMBER 31
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and federal agency obligations $50,115 $67,297 $31,244
Mortgage-backed securities 1,128 -- --
Obligations of states and political subdivisions 9,662 4,774 218
Other 1,928 1,470 1,277
------- ------- -------
$62,833 $73,541 $32,739
======= ======= =======
SECURITIES HELD TO MATURITY
U.S. Treasury and federal agency obligations $ 1,000 $ 2,012 $ 3,864
Mortgage-backed securities 8,486 13,197 16,826
Obligations of states and political subdivisions 11,912 12,537 7,962
------- ------- -------
$21,398 $27,746 $28,652
======= ======= =======
The maturity distribution and weighted average interest rates of debt securities
at December 31, 1999, are as follows:
After one but After five but
Within one year within five years within ten years After ten years
---------------- ------------------ ----------------- --------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------
MONI
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and
federal agency
obligations $ 4,994 5.67% $38,215 5.74% $ 6,906 6.12% $ -- --%
Mortgage-backed
securities 233 6.19 895 6.19 -- -- -- --
Obligations of states
and political
subdivisions -- -- 1,025 4.21 4,908 4.29 3,729 5.17
------- ------- ----- ---- ----- ---- ----- ----
$ 5,227 5.69% $40,135 5.71% $11,814 5.36% $ 3,729 5.17%
======= ==== ======= ==== ======= ==== ======== ====
SECURITIES HELD TO MATURITY
U.S. Treasury and
federal agency
obligations $ 1,000 6.34% $ -- --% $ -- --% $ -- --%
Mortgage-backed
securities 2,995 6.60 5,491 6.60 -- -- -- --
Obligations of states
and political
subdivisions 2,361 5.45 4,132 4.64 5,419 4.42 -- --
----- ---- ----- ---- ----- ---- ---- ----
$ 6,356 6.14% $ 9,623 5.76% $ 5,419 4.42% $ -- --%
======= ==== ======= ==== ======= ==== ======== ====
16
Loan Portfolio
Bancorp's primary source of income is interest on loans. The following table
presents the composition of loans as of the end of the last five years.
December 31
- ---------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Commercial and industrial $ 116,248 $ 103,345 $ 101,030 $ 88,352 $ 81,325
Construction and development 34,760 30,155 21,481 22,518 15,327
Real estate mortgage 349,164 277,994 217,830 166,574 137,618
Consumer 46,686 36,792 29,952 24,104 18,667
--------- --------- --------- -------- --------
$ 546,858 $ 448,286 $ 370,293 $301,548 $252,937
========= ========= ========= ======== ========
The following tables show the amounts of commercial and industrial loans, and
construction and development loans, at December 31, 1999, which, based on
remaining scheduled repayments of principal, are due in the periods indicated.
Also shown are the amounts due after one year classified according to
sensitivity to changes in interest rates.
Maturing
- --------------------------------------------------------------------------------------------------
After one but
Within one within five After five
(In thousands) year years years Total
- ---------------------------------------------------------------------------------------------------
Commercial and industrial $ 31,431 $ 50,185 $ 34,632 $ 116,248
Construction and development 34,760 - - 34,760
======== ========= ========= =========
Interest Sensitivity
- ------------------------------------------------------------------------------------
Fixed Variable
(In thousands) rate rate
- ------------------------------------------------------------------------------------
Due after one but within five years $ 43,161 $ 7,024
Due after five years 11,057 23,575
-------- --------
$ 54,218 $ 30,599
======== ========
17
Nonperforming Loans and Assets
The following table presents information summarizing nonperforming assets,
including nonaccrual loans.
December 31
- --------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Nonaccrual loans $2,770 $2,163 $ 290 $ 854 $1,212
Restructured loans -- -- -- -- --
Loans past due, 90 days or
more and still accruing 1,645 197 682 102 --
------ ------ ------ ------ ------
Nonperforming loans $4,415 $2,360 $ 972 $ 956 $1,212
Foreclosed real estate -- 1,836 -- 275 --
Other foreclosed property 85 58 -- -- --
------ ------ ------ ------ ------
Nonperforming assets $4,500 $4,254 $ 972 $1,231 $1,212
====== ====== ====== ====== ======
Nonperforming loans as a
percentage of total loans .81% .53% .26% .32% .48%
Nonperforming assets as a
percentage of total assets .65% .70% .20% .30% .37%
The threshold at which loans are generally transferred to nonaccrual of interest
status is 90 days past due unless they are well secured and in the process of
collection. Interest income recorded on nonaccrual loans for 1999 totaled $0.
Interest income that would have been recorded if nonaccrual loans were on a
current basis in accordance with their original terms was $175,000.
In addition to the nonperforming loans discussed above, there were loans for
which payments were current or less than 90 days past due where borrowers are
experiencing significant financial difficulties. These loans of approximately
$704,000 are monitored by management and considered in determining the level of
the allowance for loan losses. Management believes these loans do not present
significant exposure to loss. The allowance for loan losses is discussed further
under the heading "Provision for Loan Losses" on page 12.
18
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses has been established to provide for loans which may
not be fully repaid. Loan losses arise primarily from the loan portfolio, but
may also be generated from other sources such as commitments to extend credit,
guarantees, and standby letters of credit. The allowance for loan losses is
increased by provisions charged to expense and decreased by charge-offs, net of
recoveries. Loans are charged off by management when deemed uncollectible;
however, collection efforts continue and future recoveries may occur.
The allowance is maintained at a level considered by management to be adequate
to cover losses that are inherent in the loan portfolio. Factors considered
include past loss experience, general economic conditions, and information about
specific borrower situations including financial position and collateral values.
Estimating inherent loss on any loan is subjective and ultimate losses may vary
from current estimates. Estimates are reviewed periodically and adjustments are
reported in income through the provision for loan losses in the periods in which
they become known. The adequacy of the allowance for loan losses is monitored by
the internal loan review staff and reported quarterly to the Audit Committee of
the Board of Directors. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the adequacy of Bancorp's
allowance for loan losses. Such agencies may require Bancorp to make additional
provisions to the allowance based upon their judgements about information
available to them at the time of their examinations. Management believes that
the allowance for loan losses is adequate to absorb inherent losses on existing
loans that may become uncollectible. See "Results of Operations - Provision for
Loan Losses" on page 12.
19
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loans outstanding, changes in the
allowance for loan losses arising from loans charged off and recoveries on loans
previously charged off by loan category, and additions to the allowance charged
to expense:
Years ended December 31
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Average loans $492,101 $412,935 $329,162 $273,031 $229,674
======== ======== ======== ======== ========
Balance of allowance for loan
losses at beginning of year $ 6,666 $ 5,921 $ 5,155 $ 4,507 $ 3,649
Loans charged off
Commercial and industrial 644 146 75 107 435
Real estate mortgage 43 54 26 45 13
Consumer 348 735 183 112 82
-------- -------- -------- -------- --------
Total loans charged off 1,035 935 284 264 530
-------- -------- -------- -------- --------
Recoveries of loans
previously charged off
Commercial and industrial 5 14 3 27 95
Real estate mortgage 10 18 9 16 13
Consumer 55 48 38 47 20
-------- -------- -------- -------- --------
Total recoveries 70 80 50 90 128
-------- -------- -------- -------- --------
Net loans charged off 965 855 234 174 402
Additions to allowance
charged to expense 1,635 1,600 1,000 800 1,260
Balance of allowance of
acquired bank at date
of acquisition -- -- -- 22 --
-------- -------- -------- -------- --------
Balance at end of year $ 7,336 $ 6,666 $ 5,921 $ 5,155 $ 4,507
======== ======== ======== ======== ========
Ratio of net charge-offs
during year to average
loans .20% .21% .07% .06% .18%
=== === === === ===
20
The following table sets forth the allocation of the allowance for loan losses
for the loan categories shown. Although specific allocations exist, the entire
allowance is available to absorb losses in any particular loan category.
December 31
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Commercial and industrial $2,743 $2,625 $2,337 $1,913 $2,227
Construction and development 58 51 201 241 108
Real estate mortgage 1,351 1,739 2,034 1,775 964
Consumer 981 921 163 253 148
Unallocated 2,203 1,330 1,186 973 1,060
------ ------ ------ ------ ------
$7,336 $6,666 $5,921 $5,155 $4,507
====== ====== ====== ====== ======
The ratio of loans in each category to total outstanding loans is as follows:
December 31
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Commercial and industrial 21.2% 23.1% 27.3% 29.3% 32.1%
Construction and development 6.4 6.7 5.8 7.5 6.1
Real estate mortgage 63.8 62.0 58.8 55.2 54.4
Consumer 8.6 8.2 8.1 8.0 7.4
----- ----- ----- ----- ------
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Presented below are selected ratios relating to the allowance for loan losses:
Years ended December 31
- ---------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------
Provision for loan losses to average loans .33% .39% .30%
Net charge-offs to average loans .20% .21% .07%
Allowance for loan losses to average loans 1.49% 1.61% 1.80%
Allowance for loan losses to year end loans 1.34% 1.49% 1.60%
Loan loss coverage 16.54X 15.98X 44.47X
21
Deposits
Bancorp's core deposits consist of non-interest and interest-bearing demand
deposits, savings deposits, certificates of deposit under $100,000, certain
certificates of deposit over $100,000 and IRAs. These deposits, along with other
borrowed funds are used by Bancorp to support its asset base. By adjusting rates
offered to depositors, Bancorp is able to influence the amounts of deposits
needed to meet its funding requirements. The average amount of deposits in the
Bank and average rates paid on such deposits for the years indicated are
summarized as follows:
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- --------- --------- -------- ---------- ----------
Non-interest bearing
demand deposits $ 87,609 -% $ 75,332 -% $ 63,857 -%
Interest bearing
demand deposits 110,049 2.93 78,995 3.00 50,137 2.53
Savings deposits 28,345 2.61 24,953 3.07 23,352 3.31
Money market deposits 45,789 3.23 43,191 3.34 47,138 3.42
Time deposits 266,544 5.14 247,503 5.60 195,209 5.61
----------- ======== --------- ======= --------- =======
$ 538,336 $469,974 $ 379,693
=========== ======== =========
Maturities of time deposits of $100,000 or more outstanding at December 31,
1999, are summarized as follows:
- -----------------------------------------------------------------------------------------------------------
(In thousands)
- -----------------------------------------------------------------------------------------------------------
Amount
3 months or less $ 16,168
Over 3 through 6 months 16,153
Over 6 through 12 months 32,306
Over 12 months 18,171
--------
$ 82,798
========
22
Short-Term Borrowings
Federal funds purchased represent overnight borrowings. Repurchase agreements
have maturities of less than one month.
Years ended December 31
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
Securities sold under
agreements to repurchase
Year end balance $53,455 5.24% $33,529 4.15% $11,684 5.15%
Average during year 38,847 4.31 18,527 4.67 12,481 4.95
===== ==== ======
Maximum month end
balance during year 54,974 33,867 12,265
====== ====== ======
Liquidity
The role of liquidity management is to ensure 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 the
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 depositors. Due to the nature of services offered by the Bank,
management prefers to focus on transaction accounts and full service
relationships with customers. 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 liquidity needs on a daily
basis. The deposit base, consisting of consumer and commercial deposits and
large dollar denomination ($100,000 and over) certificates of deposit, is a
source of funds. The majority of these deposits are from long-term customers and
are a stable source of funds. The Bank has no brokered deposits, and has an
insignificant amount of deposits on which the rate paid exceeded the market rate
by more than 50 basis points when the account was established. In addition,
federal funds purchased continue to provide an available source of liquidity,
although this source is seldom needed by the Bank.
Other sources of funds available to meet daily needs include the sales 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. At December 31,
1999 the amount of available credit from the FHLB totaled $128 million. To date,
the Bank has not needed to access this source of funds. Additionally, the Bank
has $100 million available credit through the Federal Reserve Bank. Finally, the
Bank has federal funds purchased lines with correspondent banks totaling $46
million and Bancorp has a $6 million line of credit with a correspondent bank.
Bancorp's liquidity depends primarily on the dividends paid to it as the sole
shareholder of the Bank. As discussed in note 14 to Bancorp's consolidated
financial statements, the Bank may pay up to $13,951,000 in dividends to Bancorp
without regulatory approval subject to the ongoing capital requirements of the
Bank.
23
Capital
Information pertaining to Bancorp's capital balances and ratios follows:
Years ended December 31
- --------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Stockholder's equity $ 50,254 $ 43,943 14.4%
Dividends per share $ .33 $ .28 17.9%
Tier 1 risk-based capital 9.55% 9.50% 5bp
Total risk-based captial 10.86% 10.82% 4bp
Leverage ratio 7.56% 7.31% 25bp
==== ==== ==
The increase in stockholders' equity from 1998 to 1999 was due to the strong
earnings of 1999 coupled with a philosophy to retain approximately 70% to 80% of
earnings in equity.
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 value of both balance sheet and off balance sheet items are adjusted
to reflect credit risks.
Note 18 to the consolidated financial statements provides more details of
regulatory capital requirements as well as capital ratios of the Bank. Bancorp
and the Bank exceed regulatory capital ratios required to be well capitalized.
These ratios for Bancorp and the Bank had decreased over the last several years
as assets grew more quickly than equity. This trend reversed somewhat during
1999 as equity growth began to catch up with asset growth and the Bank assumed a
more liquid balance sheet position in anticipation of the Year 2000 century date
change. Management considers the effects of growth on capital ratios as it
contemplates plans for expansion.
In January, 1999 and August, 1996, the Board of Directors declared 2-for-1 stock
splits to be effected in the form of 100% stock dividends. The new shares were
distributed in February, 1999 and September, 1996, respectively. These capital
changes were made to enhance shareholder value by increasing the number of
shares of Bancorp's stock outstanding and to reduce the per share market price
of the stock. Per share information has been restated to reflect the stock
splits. In November, 1999 Bancorp announced a 200,000 share common stock buy
back program representing approximately 3% of it's common stock. The repurchased
shares may be used for, among other things, issuance of shares for the stock
options or employee stock ownership or purchase plans. The buy back is not being
used to reduce excess capital.
A component of equity is accumulated other comprehensive income (losses) which
for Bancorp consists of net unrealized gains or losses on securities available
for sale and a minimum pension liability, both net of taxes. Accumulated other
comprehensive losses were $1,351,000 at December 31, 1999 and accumulated other
comprehensive income was $465,000 at December 31, 1998. The resulting $1,816,000
decrease in equity is primarily a reflection of the effect of rising interest
rates on the valuation of the Bank's portfolio of securities available for sale.
Return on Assets and Equity
The following table presents various key financial ratios:
Years ended December 31
- -----------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------
Return on average assets 1.52% 1.52% 1.50%
Return on average stockholders' equity 20.20 20.20 19.12
Dividend pay out ratio, based on basic EPS 22.60 22.40 24.12
Average stockholders' equity to average assets 7.54 7.53 7.82
==== ==== ====
24
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 on 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 Account 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.
QUARTERLY OPERATING RESULTS
Following is a summary of quarterly operating results for 1999 and 1998:
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands,
except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st. Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st. Qtr.
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $12,992 $12,377 $11,846 $11,309 $11,360 $11,003 $10,618 $ 9,891
Interest expense 5,664 5,236 5,211 4,943 5,079 5,122 4,918 4,459
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 7,328 7,141 6,635 6,366 6,281 5,881 5,700 5,432
Provision for loan losses 475 300 300 560 575 375 350 300
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision 6,853 6,841 6,335 5,806 5,706 5,506 5,350 5,132
Non-interest income 3,128 3,226 3,235 3,031 2,971 3,132 2,841 2,428
Non-interest expenses 6,432 6,227 5,978 5,494 5,688 5,409 5,153 4,769
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes 3,549 3,840 3,592 3,343 2,989 3,229 3,038 2,791
Income tax expense 1,124 1,246 1,149 1,099 911 1,048 976 894
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 2,425 $ 2,594 $ 2,443 $ 2,244 $ 2,078 $ 2,181 $ 2,062 $ 1,897
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share $ 0.36 $ 0.39 $ 0.37 $ 0.34 $ 0.32 $ 0.33 $ 0.32 $ 0.29
Diluted earnings per share 0.35 0.38 0.36 0.33 0.31 0.32 0.30 0.28
======= ======= ======= ======= ======= ======= ======= =======
Per share information has been adjusted to reflect the February, 1999 2-for-1
stock split.
25
YEAR 2000
SUMMARY
Challenges and problems anticipated with the Year 2000 (Y2K) received a great
deal of attention during the last several years. As described below, the Bank,
as well as many other businesses and consumers, prepared carefully and
thoroughly for the century date change. Management has noted no Y2K computer
problems which would have and effect on the Bank's financial position or results
of operations. Nor has it noted changes in customer behavior patterns, including
loan demand or repayment abilities. Because preparation for the year 2000 was a
significant event for the Bank, the following discussion is provided.
GENERAL NATURE AND IMPACT OF YEAR 2000 ISSUES
The underlying problem was that many computer systems used only the last two
digits of a year in reading a date. Thus, they could have interpreted dates with
the Year 2000 to be 1900. The concern was that, on January 1, 2000, computer
systems would stop working or generate erroneous data unless these problems were
corrected. In addition to information technology issues, equipment with embedded
micro-controllers might not have functioned properly. Examples of this equipment
would include thermostats, elevators, and electronics with time/date mechanisms.
Many companies incurred significant expenses to remediate anticipated Year 2000
problems.
Banking institutions were near the forefront in addressing Year 2000 issues as
bank regulators began focusing banks' attention on Year 2000 issues earlier than
most businesses. 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.
BANCORP'S GENERAL PLANS AND ACTIONS TO ADDRESS YEAR 2000 ISSUES, INCLUDING
RELATIONSHIPS WITH CUSTOMERS, VENDORS AND OTHERS
Bancorp's management undertook an evaluation of the effects Year 2000 might have
on its information systems and other important aspects of its business. Degrees
of risk were determined for various areas and each system was assigned a
priority for timing of renovation, testing and implementation. Through a
combination of consultations with and certifications from vendors, testing and
contingency planning, management prepared for the century date change.
Two other major areas of evaluation were the Bank's loan customers and fiduciary
relationships arising from the trust department. Borrowers' noncompliance with
Year 2000 issues could adversely affect their ability to service their debt. The
Bank requested written representation from significant loan customers to verify
and document customer Year 2000 readiness. Evaluation of the creditworthiness of
these customers included 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 concluded the
degree of risk of loss to the bank did not warrant a specific Y2K allowance for
loan losses.
Y2K related 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 needed be
able to continue providing timely and accurate services.
26
COST TO ADDRESS BANCORP'S YEAR 2000 ISSUES
Costs to prepare for the Year 2000 included new hardware, software, internal
staff costs and consulting expenses. Bancorp's incremental expense related to
the Year 2000 was approximately $60,000 in 1999, 1998 and 1997. Capital
expenditures were primarily to replace desk top computers which were determined
not be Year 2000 compliant.
IMPACT OF YEAR 2000 ON BANCORP'S RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL
RESOURCES
In addition to the factors mentioned above, management reviewed the liquidity
position and needs of the Bank. Anticipating Year 2000, the Bank prepared to be
more liquid. Concerns included:
- Loan customers with lines of credit experiencing increased cash needs
and, therefore, drawing more on their lines of credit.
- Loan customers making payments more slowly if their cash positions
were tighter.
- Depositors withdrawing higher than average amounts of cash.
In preparing for these concerns, the Bank prepared by having higher than average
levels of cash on hand and additional available credit. See "Liquidity" on page
23.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is included in item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 8 through 11 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Bancorp and report of
independent auditors are included below.
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - years ended December 31, 1999, 1998, and
1997
Consolidated Statements of Changes in Stockholders' Equity - years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Comprehensive Income - years ended December 31, 1999,
1998, and 1997
Consolidated Statements of Cash Flows - years ended December 31, 1999, 1998, and
1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
Management's Report on Consolidated Financial Statements
27
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
- -------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 27,813 $ 21,661
Federal funds sold 6,000 7,000
Mortgage loans held for sale 2,608 9,791
Securities available for sale (amortized cost $64,705
in 1999 and $72,837 in 1998) 62,833 73,541
Securities held to maturity (approximate market
value $21,173 in 1999 and $28,404 in 1998) 21,398 27,746
Loans 546,858 448,286
Allowance for loan losses 7,336 6,666
--------- -------
Net loans 539,522 441,620
Premises and equipment 16,420 15,619
Accrued interest receivable and other assets 13,221 12,810
--------- -------
TOTAL ASSETS $ 689,815 $ 609,788
========= =======
LIABILITIES
Deposits
Non-interest bearing $ 88,975 $ 85,133
Interest bearing 480,987 432,479
--------- -------
Total deposits 569,962 517,612
Securities sold under agreements to repurchase
and federal funds purchased 53,455 38,529
Other short-term borrowings 3,954 859
Accrued interest payable and other liabilities 10,090 6,745
Long-term debt 2,100 2,100
--------- -------
TOTAL LIABILITIES 639,561 565,845
========= =======
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized;
issued and outstanding 6,647,059 in 1999 and
6,593,338 in 1998 5,627 5,535
Surplus 14,602 14,075
Retained earnings 31,376 23,868
Accumulated other comprehensive income (1,351) 465
--------- -------
TOTAL STOCKHOLDERS' EQUITY 50,254 43,943
--------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 689,815 $ 609,788
========= =======
See accompanying notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------
(In thousands, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------
INTEREST INCOME
Loans $42,899 $37,705 $30,523
Federal funds sold 781 712 622
Mortgage loans held for sale 368 550 309
Securities
Taxable 3,640 3,328 3,492
Tax exempt 836 577 393
------- ------- -------
TOTAL INTEREST INCOME 48,524 42,872 35,339
------- ------- -------
INTEREST EXPENSE
Deposits 19,134 18,437 14,607
Securities sold under agreements to repurchase
and federal funds purchased 1,692 882 729
Other short-term borrowings 82 106 113
Long-term debt 146 153 167
------- ------- -------
TOTAL INTEREST EXPENSE 21,054 19,578 15,616
------- ------- -------
NET INTEREST INCOME 27,470 23,294 19,723
Provision for loan losses 1,635 1,600 1,000
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,835 21,694 18,723
------- ------- -------
NON-INTEREST INCOME
Investment management and trust services 5,194 4,573 3,332
Service charges on deposit accounts 3,484 2,886 1,936
Gains on sales of mortgage loans held for sale 1,511 2,047 1,077
Gains on sales of securities available for sale 100 341 80
Other 2,331 1,525 1,000
------- ------- -------
TOTAL NON-INTEREST INCOME 12,620 11,372 7,425
======= ======= =======
NON-INTEREST EXPENSES
Salaries and employee benefits 13,750 11,660 9,846
Net occupancy expense 1,711 1,407 1,121
Furniture and equipment expense 2,282 2,009 1,633
Other 6,388 5,943 4,141
------- ------- -------
TOTAL NON-INTEREST EXPENSES 24,131 21,019 16,741
======= ======= =======
INCOME BEFORE INCOME TAXES 14,324 12,047 9,407
Income tax expense 4,618 3,829 2,873
------- ------- -------
NET INCOME $ 9,706 $ 8,218 $ 6,534
======= ======= =======
NET INCOME PER SHARE, BASIC $ 1.46 $ 1.25 $ 1.00
======= ======= =======
NET INCOME PER SHARE, DILUTED $ 1.41 $ 1.21 $ .96
======= ======= =======
See accompanying notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated Other
Number Retained Comprehensive
(In thousands, except share data) of Shares Amount Surplus Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 6,542,960 $ 5,451 $ 13,390 $ 12,535 $ 218 $ 31,594
Net income - - - 6,534 - 6,534
Change in other comprehensive
income, net of tax - - - - 74 74
Stock options exercised 11,104 18 87 - - 105
Shares issued for dividend reinvestment
and employee stock purchase plans 9,878 17 167 - - 184
Cash dividends, $ .24 per share - - - (1,574) - (1,574)
---------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1997 6,563,942 5,486 13,644 17,495 292 36,917
Net income - - - 8,218 - 8,218
Change in other comprehensive
income, net of tax - - - - 173 173
Stock options exercised 9,938 16 37 - - 53
Shares issued for dividend reinvestment
and employee stock purchase plans 19,458 33 394 - - 427
Cash dividends, $ .28 per share - - - (1,845) - (1,845)
---------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1998 6,593,338 5,535 14,075 23,868 465 43,943
Net income - - - 9,706 - 9,706
Change in other comprehensive
income, net of tax - - - - (1,816) (1,816)
Stock options exercised 51,340 106 416 - - 522
Shares issued for dividend reinvestment
and employee stock purchase plans 25,381 63 552 - - 615
Cash dividends, $ .33 per share - - - (2,198) - (2,198)
Shares repurchased (23,000) (77) (441) - - (518)
---------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1999 6,647,059 $ 5,627 $ 14,602 $ 31,376 $ (1,351) $ 50,254
========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
NET INCOME $ 9,706 $ 8,218 $ 6,534
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
available for sale
Unrealized holding gains (losses) arising
during the period (1,628) 398 127
Less reclassification adjustment for gains
included in net income 65 225 53
Minimum pension liability adjustment (123) - -
-------- ------- -------
Other comprehensive income (loss) (1,816) 173 74
-------- ------- -------
COMPREHENSIVE INCOME $ 7,890 $ 8,391 $ 6,608
======== ======= =======
See accompanying notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 9,706 $ 8,218 $ 6,534
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 1,635 1,600 1,000
Depreciation, amortization and accretion, net 1,493 1,702 1,360
Provision for deferred income taxes (203) (749) (286)
Gains on sales of securities available for sale (100) (341) (80)
Gains on sales of mortgage loans held for sale (1,511) (2,047) (1,077)
Origination of mortgage loans held for sale (89,097) (110,155) (58,009)
Proceeds from sales of mortgage loans held for sale 97,791 107,594 58,265
(Increase) decrease in accrued interest receivable and other assets (487) (2,623) (1,453)
Increase (decrease) in accrued interest payable and other liablilities 3,371 2,816 366
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,598 6,015 6,620
---------- ---------- ----------
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold 1,000 (1,000) (1,500)
Purchases of securities available for sale (77,492) (111,143) (23,487)
Purchases of securities held to maturity - (49,995) (11,380)
Proceeds from sales of securities available for sale 10,618 11,306 4,026
Proceeds from maturities of securities available for sale 75,016 59,637 6,604
Proceeds from maturities of securities held to maturity 6,391 50,807 39,567
Net increase in loans (99,537) (78,848) (68,979)
Purchases of premises and equipment (2,178) (3,255) (5,096)
Proceeds from sales of other real estate 1,235 - 172
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (84,947) (122,491) (60,073)
---------- ---------- ----------
FINANCING ACTIVITIES
Net increase in deposits 52,350 100,041 62,320
Net increase (decrease) in securities sold under agreements
to repurchase and federal funds purchased 14,926 24,845 (6,044)
Net increase (decrease) in short-term borrowings 3,095 (3,624) 1,815
Proceeds from long-term debt - - 1,800
Repayments of long-term debt - (15) (2,382)
Issuance of common stock 743 480 257
Common stock repurchases (518) - -
Cash dividends paid (2,095) (1,743) (1,508)
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 68,501 119,984 56,258
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,152 3,508 2,805
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,661 18,153 15,348
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,813 $ 21,661 $ 18,153
========== ========== ==========
Income tax payments were $5,915,000 in 1999, $2,803,000 in 1998, and $3,256,000
in 1997. Cash paid for interest was $21,099,000 in 1999, $19,762,000 in 1998,
and $15,767,000 in 1997.
See accompanying notes to consolidated financial statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of S.Y. Bancorp, Inc.
(Bancorp) and its wholly-owned subsidiary, Stock Yards Bank & Trust Company.
Significant intercompany transactions and accounts have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform with
the 1999 presentation.
The Bank is engaged in commercial and retail banking services, trust and
investment management services, and mortgage banking services. Bancorp's market
area is Louisville, Kentucky and surrounding communities including southern
Indiana.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of related revenues and expenses during the reporting
period. Actual results could differ from those estimates.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks.
SECURITIES
Securities which are intended to be held until maturity are carried at amortized
cost. Securities available for sale include securities which may be sold in
response to changes in interest rates, resultant prepayment risk and other
factors related to interest rate and prepayment risk changes. Securities
available for sale are carried at fair value with unrealized gains or losses,
net of tax effect, included in stockholders' equity. Amortization of premiums
and accretion of discounts are recorded using the interest method. Gains or
losses on sales of securities are computed on a specific identification cost
basis.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Gains on sales of mortgage loans are recorded at the time of
funding by an investor at the difference between the sales proceeds and the
loan's carrying value.
LOANS
Loans are stated at the unpaid principal balance less deferred loan fees.
Interest income on loans is recorded on the accrual basis except for those loans
in a nonaccrual income status. Loans are placed in a nonaccrual income status
when the prospects for recovering both principal and accrued interest are
considered doubtful or when a default of principal or interest has existed for
90 days or more unless such a loan is well secured and in the process of
collection. Interest received on nonaccrual loans is generally applied to
principal. Nonaccrual loans are returned to accrual status once principal
recovery is reasonably assured.
33
Loans are classified as impaired when it is probable the Bank will be unable to
collect interest and principal according to the terms of the loan agreement.
These loans are measured based on the present value of future cash flows
discounted at the loans' effective interest rate or at the fair value of the
loans' collateral, if applicable. Generally, impaired loans are also in
nonaccrual of interest status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that adequately provides
for losses inherent in the loan portfolio. Management determines the adequacy of
the allowance based on reviews of individual credits, recent loss experience,
current economic conditions, the risk characteristics of the various loan
categories and such other factors that, in management's judgement, deserve
current recognition in estimating loan losses. The allowance for loan losses is
increased by the provision for loan losses and reduced by net loan charge-offs.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation of premises and equipment is computed using both