S Y BANCORP INC - 10-K Annual Report

Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934

S.Y. BANCORP, INC.
1040 East Main Street
Louisville, Kentucky 40206
(502) 582-2571

Title of each class:
Common stock, no par value

Name of each exchange on which registered:
American Stock Exchange

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 28, 2001, was $119,850,000.

The number of shares of registrant's Common Stock, no par value, outstanding as of February 28, 2001, was 6,651,552.

Portions of Registrant's definitive proxy statement related to Registrant's Annual Meeting of Stockholders to be held on April 25, 2001 (the "Proxy Statement"), are incorporated by reference into Part III of this Form 10-K.

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 ("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 letters of credit; and rental of safe deposit boxes. The Bank also provides a wide range of personal 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 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 are substantially larger than the Bank. These larger 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. In a 1996 acquisition, Bancorp established its first southern Indiana branch, thus expanding to another 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 fifteen banking centers including the main office. Some of these locations are owned while others are leased. See "ITEM 2. PROPERTIES."

At December 31, 2000, the Bank had 327 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, 2000 (page 44 herein) for information relating to the Bank's business segments.

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.

The Gramm-Leach-Bliley Act ("the 1999 Act") repealed 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. The 1999 Act allows for affiliations among banks, securities firms and insurance companies by means of a financial holding company ("FHC"). 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 commercial banking activities. Likewise, non-banking financial firms may find it easier to offer services which have, heretofore, been provided primarily by depository institutions.

The principal offices of Bancorp and the Bank are located at 1040 East Main Street, Louisville, Kentucky. Adjacent to the main location is the Bank's operations center. In addition to the main office complex, the Bank owned seven branch properties at December 31, 2000 (one of which is located on leased land). The Bank also leased seven branch facilities. Of the fifteen banking locations, thirteen 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, 2000, for additional information relating to amounts invested in premises, equipment and lease commitments.

See Note 15 to Bancorp's consolidated financial statements for the year ended December 31, 2000, for information relating to legal proceedings.

The following table lists the names and ages (as of December 31, 2000) 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 of Executive Officer		Position and offices with Bancorp
David H. Brooks Age 58		Chairman and Chief Executive Officer and Director
David P. Heintzman Age 41		President and Director
Kathy C. Thompson Age 39		Executive Vice President and Director
Phillip S. Smith Age 43		Executive Vice President
Gregory A. Hoeck Age 50		Executive Vice President
Nancy B. Davis Age 45		Executive Vice President, Secretary, Treasurer and 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.

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, 2000, Bancorp had 777 shareholders of record.

Per share information has been adjusted to reflect stock splits and stock dividends.

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, 2000, the Bank had fifteen 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. 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; 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.

Net income was $11,592,000 or $1.70 per share on a diluted basis in 2000. This compares to $9,706,000 or $1.41 per share in 1999 and $8,218,000 or $1.21 per share in 1998. The increase in 2000 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 13.5% increase in fully taxable equivalent net interest income and a 22.1% 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 2000. Non-interest expenses increased 10.7%. 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, 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.

	2000		1999		1998		2000/1999 Change		1999/1998 Change
	(Dollars in thousands)
Net interest income, tax equivalent basis	$	31,601		$	27,839		$	23,541		13.5	%	18.3	%
Net interest spread		3.72	%		4.03	%		3.94	%	(31	) bp	9	bp
Net interest margin		4.51	%		4.72	%		4.71	%	(21	) bp	1	bp
Average earning assets	$	700,579		$	590,011		$	499,598		18.7	%	18.1	%
Prime rate at year end		9.50	%		8.50	%		8.00	%	100	bp	50	bp
Average prime rate		9.24	%		8.44	%		8.35	%	80	bp	9	bp

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.

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, 2000 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.

	Net Interest Income Change		Net Income Change
	(Dollars in thousands except per share information)
Increase 200 bp	6.21	%	10.93	%
Increase 100 bp	3.93		6.88
Decrease 100 bp	(3.95	)	(6.93	)
Decrease 200 bp	(7.93	)	(13.88	)

To assist in achieving a desired level of interest rate sensitivity, management has in the past entered into derivative financial instruments which are designed to mitigate the effect of changes in interest rates. Derivative financial instruments can be a cost and capital efficient method of modifying interest rate risk sensitivity. The Bank had no interest rate contracts at December 31, 2000. See Note 16 to the consolidated financial statements.

The following table presents the increases in net interest income due to changes in rate and volume computed on a tax equivalent basis and indicates how net interest income in 2000 and 1999 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 rate and change due to volume in proportion to the relationship of the absolute dollar amounts of the change in each.

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:

	2000			1999			1998
	(Dollars In thousands)
Provision for loan losses	$	2,840		$	1,635		$	1,600
Allowance to loans at year end		1.40	%		1.34	%		1.49	%
Allowance to average loans for year		1.52	%		1.49	%		1.61	%

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, 2000, is adequate to absorb losses inherent in the loan portfolio as of this date. See "Financial Condition—Allowance for Loan Losses" on page 16.

The following table provides a comparison of the components of non-interest income and expenses for 2000, 1999, and 1998. The table shows the dollar and percentage change from 1999 to 2000 and from 1998 to 1999. Below the table is a discussion of significant changes and trends.

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, 2000 assets under managment totaled $1.056 billion compared to $914 million at December 31, 1999 and $770 million as of December 31, 1998. Included in these totals are the assets of the Bank's investment portfolio. These amounts were

$77 million at year end 2000, $76 million at year end 1999, and $100 million at year end 1998. 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 and a new overdraft service for retail customers. Opening new branch offices and promotion of retail accounts have presented opportunities for growth in deposit accounts and increased fee income. Additionally, in March 2000 the Bank began offering an overdraft service to retail depositors. The service allows checking customers meeting specific criteria to incur overdrafts up to a predetermined limit, generally $500. For each check paid resulting in our increasing an overdraft, the customer pays the standard overdraft chage. These fees totaled approximately $1.4 million for the year.

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 and continuing through 2000, 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 $134,000 to the gains on sales of mortgage loans in 2000 and $212,000 in 1999. 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.

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, 2000, the Bank had 327 full-time equivalent employees compared to 316 at the same date in 1999 and 275 for 1998. 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 late 2000, the Bank opened one location; during 1999 the Bank opened two. At December 31, 2000 the Bank had fifteen 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. Occupancy and furniture and equipment expenses increased at a lower rate in 2000 as a result of general awareness of the need to control non-interest expenses.

Other non-interest expenses have increased from numerous factors and reflect the Bank's growth. Among costs which increased significantly were delivery and communications.

	2000			1999			1998
	(Dollars In thousands)
Income tax expense	$	5,433		$	4,618		$	3,829
Effective tax rate		31.9	%		32.2	%		31.8	%

			Page
Part I:
	Item 1.	Business	3
	Item 2.	Properties	4
	Item 3.	Legal Proceedings	4
	Item 4.	Submission of Matters to a Vote of Security Holders	4
Part II:
	Item 5.	Market for Registrant's Common Stock and Related Stockholder Matters	6
	Item 6.	Selected Financial Data	6
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	6
	Item 7a.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 8.	Financial Statements and Supplementary Data	23
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	48
Part III:
	Item 10.	Directors and Executive Officers of the Registrant	48
	Item 11.	Executive Compensation	48
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	48
	Item 13.	Certain Relationships and Related Transactions	49
Part IV:
	Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	49
Signatures			52

	2000						1999
Quarter	High		Low		Cash Dividends Declared		High		Low		Cash Dividends Declared
First	$	22.50	$	18.63	$	0.09	$	27.50	$	23.00	$	.08
Second		22.75		18.75		0.10		25.13		22.00		.08
Third		22.00		19.00		0.10		25.25		22.00		.08
Fourth		21.50		18.88		0.10		24.38		21.50		.09

	Years ended December 31
	2000			1999			1998			1997			1996
	(Dollars in thousands except per share data)
Net interest income	$	31,154		$	27,470		$	23,294		$	19,723		$	16,538
Provision for loan losses		2,840			1,635			1,600			1,000			800
Net income		11,592			9,706			8,218			6,534			5,179
Per share data
Net income, basic	$	1.75		$	1.46		$	1.25		$	1.00		$	.79
Net income, diluted		1.70			1.41			1.21			.96			.77
Cash dividends declared		0.39			.33			.28			.24			.20
Average balances
Stockholders' equity	$	54,656		$	48,052		$	40,691		$	34,174		$	29,675
Assets		747,816			637,276			540,696			437,037			352,977
Long-term debt		2,100			2,100			2,100			2,259			1,171
Ratios
Return on average assets		1.55	%		1.52	%		1.52	%		1.50	%		1.47	%
Return on average stockholders' equity		21.21			20.20			20.20			19.12			17.45
Average stockholders' equity to average assets		7.31			7.54			7.53			7.82			8.41

		2000/1999									1999/1998
					Increase (Decrease) Due to									Increase (Decrease) Due to
		Net Change			Increase (Decrease) Due to						Net Change			Increase (Decrease) Due to
		Net Change			Rate			Volume			Net Change			Rate			Volume
		(In Thousands)
Interest income
Loans		$	12,429		$	1,570		$	10,859		$	5,194		$	(1,771	)	$	6,965
Federal funds sold			(340	)		208			(548	)		69			13			56
Mortgage loans held for sale			(184	)		48			(232	)		(183	)		(9	)		(174	)
Securities
	Taxable		(234	)		(252	)		18			312			(73	)		385
	Tax-exempt		270			206			64			382			(34	)		416

Total interest income			11,941			1,780			10,161			5,774			(1,874	)		7,648

Interest expense
Deposits
	Interest bearing demand deposits		906			376			530			852			(58	)		910
	Savings deposits		(47	)		(39	)		(8	)		(25	)		(122	)		97
	Money market deposits		549			282			267			36			(49	)		85
	Time deposits		5,839			2,322			3,517			(166	)		(1,190	)		1,024
Securities sold under agreements to repurchase and federal funds purchased			844			468			376			810			(76	)		886
Other short-term borrowings			69			40			29			(24	)		(14	)		(10	)
Long-term debt			19			19			—			(7	)		(7	)		—

Total interest expense			8,179			3,468			4,711			1,476			(1,516	)		2,992

Net interest income		$	3,762		$	(1,688	)	$	5,450		$	4,298		$	(358	)	$	4,656

							2000/1999					1999/1998
	2000		1999		1998		Change			%		Change			%
	(Dollars In thousands)
Non-interest income
Investment management and trust services	$	6,327	$	5,194	$	4,573	$	1,133		21.8	%	$	621		13.6	%
Service charges on deposit accounts		5,528		3,484		2,886		2,044		58.7			598		20.7
Gains on sales of mortgage loans held for sale		1,043		1,511		2,047		(468	)	(31.0	)		(536	)	(26.2	)
Gains on sales of securities available for sale		—		100		341		(100	)	(100.0	)		(241	)	(70.7	)
Other		2,517		2,331		1,525		186		8.0			806		52.9

	$	15,415	$	12,620	$	11,372	$	2,795		22.1	%	$	1,248		11.0	%

Non-interest expenses
Salaries and employee benefits	$	15,559	$	13,750	$	11,660	$	1,809		13.2		$	2,090		17.9	%
Net occupancy expense		1,800		1,711		1,407		89		5.2			304		21.6
Furniture and equipment expense		2,309		2,282		2,009		27		1.2			273		13.6
Other		7,036		6,388		5,943		648		10.1			445		7.5

	$	26,704	$	24,131	$	21,019	$	2,573		10.7	%	$	3,112		14.8	%