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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR COMMISSION FILE NUMBER
ENDED 1-13661
DECEMBER 31, 1997
S.Y. BANCORP, INC.
1040 EAST MAIN STREET
LOUISVILLE, KENTUCKY 40206
(502) 582-2571
INCORPORATED IN I.R.S. NO.
KENTUCKY 61-1137529
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class: Name of each exchange on which
Common stock, no par value registered:
American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 Registrant's
knowledge, in a definitive proxy statement incorporated by reference in Part III
of this Form 10-K.
Registrant 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 and has
been subject to such filing requirements for the past 90 days.
The aggregate market value of registrant's voting stock (Common Stock, no
par value) held by non-affiliates of the registrant as of February 27, 1998, was
$100,376,000.
The number of shares of registrant's Common Stock, no par value, outstanding
as of February 27, 1998, was 3,290,082.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement related to Registrant's
Annual Meeting of Stockholders to be held on April 22, 1998 (the "Proxy
Statement"), are incorporated by reference into Part III of this Form 10-K.
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S.Y. BANCORP, INC.
FORM 10-K
INDEX
PAGE
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PART I:
Item 1. Business................................................................................. 3
Item 2. Properties............................................................................... 7
Item 3. Legal Proceedings........................................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders...................................... 8
PART II:
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters..................... 8
Item 6. Selected Financial Data.................................................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 9
Item 7a. Quantitative and Qualitative Disclosures About Market Risk............................... 23
Item 8. Financial Statements and Supplementary Data.............................................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 45
PART III:
Item 10. Directors and Executive Officers of the Registrant....................................... 45
Item 11. Executive Compensation................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 45
Item 13. Certain Relationships and Related Transactions........................................... 45
PART IV:
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 45
SIGNATURES................................................................................................. 48
2
PART I
ITEM 1. BUSINESS
S. Y. Bancorp, Inc. ("Bancorp"), a Kentucky corporation headquartered in
Louisville, Kentucky, 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 two subsidiaries. Both are wholly owned and are
state chartered banks. Bancorp conducts no active business operations;
accordingly, the business of Bancorp is substantially the same as that of its
subsidiary banks.
STOCK YARDS BANK & TRUST COMPANY (KENTUCKY)
Stock Yards Bank & Trust Company (the Kentucky Bank) was originally
chartered and began operations as a state bank under the name "Stockyards Bank"
in 1904. In 1972, the Kentucky Bank was granted full trust powers and changed
its name to "Stock Yards Bank & Trust Company." The Kentucky Bank's historical
market niche has been providing commercial loans to small and mid-size
companies. As an offshoot of these commercial relationships the Kentucky Bank
also provides banking services to the owners and employees of these businesses.
In 1989, the Bank began to branch and thereby expand its retail business. The
Kentucky Bank's staff focuses on establishing and maintaining long term
relationships with customers. The Kentucky Bank engages in a wide range of
commercial and personal banking activities, including the usual acceptance of
deposits for checking, savings and time deposit accounts; making of secured and
unsecured loans; issuance of letters of credit; and rental of safe deposit
boxes. The Kentucky Bank's lending services include the making of commercial,
industrial, real estate, consumer and guaranteed student loans. Interest and
fees on consumer, real estate and commercial loans constitute the largest
contribution to the Kentucky Bank's operating revenues. In addition, the
Kentucky Bank offers Visa credit card services through an agreement with a
non-affiliated bank. Customers of the Kentucky Bank have access to automatic
teller machines through a regional network. The Kentucky 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 Kentucky Bank provides a wide range of
personal and corporate trust services. Assets under management in the investment
management and trust department totaled approximately $630,000,000 at December
31, 1997. In 1996 the Kentucky Bank began offering full service brokerage
products through an affiliation with Robert Thomas Securities, Inc.
The Kentucky Bank actively competes on the local and regional levels with
other commercial banks and financial institutions for all types of deposits,
loans, trust accounts, and provides financial and other services. Many of the
banks and other financial institutions with which this bank competes have
capital and resources substantially in excess of the capital and resources of
the Kentucky Bank. While primarily serving Jefferson County, Kentucky, the
Kentucky Bank also serves customers residing in the adjacent Kentucky counties
of Oldham, Shelby and Bullitt and in southern Indiana.
The Kentucky Bank has nine banking centers including the main office. Some
of these locations are owned while others are leased. See "ITEM 2. PROPERTIES."
STOCK YARDS BANK & TRUST COMPANY (INDIANA)
In 1996, Bancorp acquired the Austin State Bank in Scott County, Indiana
(the Indiana Bank). This acquisition has allowed Bancorp to establish banking
operations in southern Indiana, a natural part of the Louisville, Kentucky
metropolitan area. This bank has been in operation since 1909 and was family
owned until the acquisition by Bancorp. Until the change of ownership, the bank
offered very limited lending products, as well as checking and savings accounts.
The Indiana Bank now offers the same products as the Kentucky Bank. While the
name of this bank has been changed to Stock Yards Bank & Trust Company, the bank
has retained its Indiana charter. Management continues to evaluate the benefits
of operating the Indiana Bank as a branch of the Kentucky Bank rather than as a
subsidiary of Bancorp. The Indiana Bank
3
opened a branch in Clarksville, Indiana in 1997. The Indiana Bank has two
banking centers including the main office. See "Item 2, Properties."
At December 31, 1997, the Banks had 250 full-time equivalent employees.
Employees are not subject to a collective bargaining agreement. Bancorp and the
Banks consider their relationships with employees to be good.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition and
prospects of Bancorp and its subsidiaries can be materially affected not only by
management decisions and general economic conditions but also by legislative and
governmental actions of Congress and the various federal and state regulatory
agencies with jurisdiction over Bancorp and the Banks, such as the Federal
Reserve Bank ("FRB"), Federal Deposit Insurance Corporation ("FDIC") and the
Kentucky and Indiana Departments of Financial Institutions. The effect of
applicable statutes, regulations and policies can be significant, cannot be
predicted with a high degree of certainty, and can change over time.
Bank holding companies and banks are subject to enforcement actions by their
regulators for statutory and regulatory violations and safety and soundness
considerations. In addition to compliance with statutory and regulatory
limitations and requirements concerning financial, managerial and operating
matters, regulated financial institutions such as Bancorp and the Banks must
file periodic and other reports and information with their regulators and are
subject to examination by each of their regulators.
The statutory requirements applicable to, and regulatory supervision of,
bank holding companies and banks have increased significantly and have undergone
substantial change in recent years. These changes are embodied in, among others,
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), enacted in August 1989, the Federal Insurance Corporation
Improvement Act of 1991 ("FDICIA"), enacted in December 1991, the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Community
Development Act") and the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "IBBEA"), the last two of which were enacted in
September 1994, and the regulations promulgated thereunder. Many of the
regulations promulgated pursuant to FDICIA have only recently been finalized,
and the provisions of the Community Development Act and IBBEA are still being
implemented. As a result, the impact of these new laws on Bancorp and the Banks
cannot be predicted with certainty.
Legislation may be introduced from time to time that could, if enacted, have
significant impact on the operations of Bancorp and its subsidiaries. Congress
is considering legislation to broaden the powers of bank holding companies and
permit other financial service companies to own banks. Legislation also has been
introduced in the Congress to restructure the federal bank regulatory system.
Although the Secretary of Treasury of the United States and the Chairman of the
FRB have previously expressed support for restructuring the federal bank
regulatory system, there can be no certainty as to the effect, if any, that such
legislation would have on the regulation of Bancorp or the Banks.
The following discussions and other references to and descriptions of the
regulation of financial institutions and their parent holding companies
contained herein are not intended to constitute and do not purport to be a
complete statement of all legal restrictions and requirements applicable to
Bancorp and the Banks. All such descriptions are qualified in their entirety by
reference to applicable statutes, regulations and policies.
4
REGULATION OF BANK HOLDING COMPANIES
Bancorp is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. As such, Bancorp is subject to regulation, supervision
and examination by the FRB. The business and affairs of Bancorp are regulated in
a variety of ways, including limitations on acquiring control of other banks and
bank holding companies, limitations on activities and investments, regulatory
capital requirements and limitations on payment of dividends. In addition, it is
the FRB's policy that a bank holding company is expected to act as a source of
financial strength to banks that it owns or controls and, as a result, the FRB
could require Bancorp to commit resources to support the Banks in circumstances
in which Bancorp might not do so absent the FRB's policy.
Federal Reserve examiners began in 1996 to assign a formal supervisory
rating to the adequacy of a bank holding company's and its member bank's risk
management processes, including internal controls. The emphasis on sound risk
management processes and strong internal controls reflects the Federal Reserve's
view that proper risk management is critical to the conduct of safe and sound
banking activities.
CAPITAL REQUIREMENTS
The FRB has adopted minimum risk-based capital standards for bank holding
companies. The FRB requires bank holding companies to maintain certain minimum
ratios of risk-weighted capital to total risk-adjusted assets. A bank holding
company must meet two risk-based capital standards, a "core" or "Tier 1" capital
requirement and a total capital requirement. The current regulations require
that a bank holding company maintain Tier 1 capital equal to 4% of risk-adjusted
assets and total capital equal to 8% of risk-adjusted assets, at least one-half
of which must be Tier 1 capital. Tier 1 capital consists of common stockholders'
equity; qualifying noncumulative perpetual preferred stock; qualifying
cumulative perpetual preferred stock (up to 25% of total Tier 1 capital); and
minority interests in the equity accounts of consolidated subsidiaries. Core
capital excludes goodwill and certain other intangible assets.
Total capital represents the sum of Tier 1 capital plus "Tier 2" capital,
less certain deductions. Tier 2 or "supplementary" capital consists, subject to
certain limitations, of the allowance for loan and lease losses; perpetual
preferred stock; hybrid capital instruments; perpetual debt; mandatory
convertible debt securities; term subordinated debt; and intermediate term
preferred stock. In determining total capital, a bank holding company must
deduct its investments in unconsolidated banking and finance subsidiaries and,
as determined by the FRB on a case by case basis, other designated subsidiaries
or associated companies; reciprocal holdings of certain securities of banking
organizations; and other deductions required by regulation or determined by the
FRB on a case by case basis.
The FRB also has established a minimum leverage ratio requirement for bank
holding companies. The leverage ratio, which is defined as Tier 1 capital
divided by average quarterly assets (net of allowance for losses and goodwill),
is 3% for banking organizations that do not anticipate significant growth and
that have well-diversified risk, excellent asset quality, high liquidity and
good earnings. Banking organizations, however, generally are expected to operate
well above these minimum risk-based ratios and are expected to have ratios of at
least 100 to 200 basis points above the stated minimum, depending upon their
particular condition and growth plans. Higher capital ratios could be required
if warranted by the particular circumstances or risk profile of a given banking
organization. The FRB has not advised Bancorp of any specific minimum Tier 1
leverage ratio applicable to it.
As of December 31, 1997, Bancorp had Tier 1 and total risk-based capital
ratios of 9.70% and 11.04%, respectively, and a Tier 1 leverage ratio of 7.57%.
The failure of a bank holding company to meet its risk-weighted capital
ratios may result in supervisory action, as well as an inability to obtain
approval of any regulatory applications and, potentially, increased frequency of
examination. The nature and intensity of the supervisory action will depend upon
the level of noncompliance.
5
Risk-based capital ratios which focus principally on broad categories of
credit risk are only one indicator of the overall financial health of a bank
organization. They do not incorporate other factors that can affect Bancorp's
financial condition, such as overall interest rate risk exposure, liquidity,
funding and market risks, the quality and level of earnings, investment or loan
portfolio concentrations, the quality of loans and investments, the
effectiveness of loan and investment policies and management's ability to
monitor and control financial and operating risks.
REGULATION OF BANKS
The Banks are state chartered and subject to regulation, supervision and
examination by the Kentucky and Indiana Departments of Financial Institutions,
respectively. The deposit accounts of the Banks are insured up to applicable
limits by the FDIC's Bank Insurance Fund (the "BIF"). Thus, the Banks are also
subject to regulation, supervision and examination by the FDIC. In certain
instances, the statutes administered and regulations promulgated by certain of
these agencies are more stringent than those of other agencies with
jurisdiction. In these instances, the Banks must comply with the more stringent
restrictions, prohibitions or requirements.
The business and affairs of the Banks are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, the
Banks' capital ratios, payment of dividends, liquidity requirements, the nature
and amount of the investments that the Banks may make, transactions with
affiliates, community and consumer lending, internal policies and controls,
reporting by and examination of the Banks and changes in control of the Banks.
The federal bank regulators have recently adopted an interest rate risk
component to the risk capital requirements to assess the exposure of banks to
declines in the economic value of the bank's capital due to changes in interest
rates.
CAPITAL REQUIREMENTS
FDIC regulations establish three minimum capital standards for insured state
banks. The Banks' capital ratios are computed in a manner substantially similar
to the manner in which bank holding company capital ratios are determined. The
FDIC capital requirements are minimum requirements and higher levels of capital
will be required if warranted by the particular circumstances or risk profile of
an individual bank.
FDICIA provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized". Under regulations adopted by the federal banking regulators,
a bank is considered "well capitalized" if it has a total risk-based capital
ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater,
has a leverage ratio of 5% or greater and is not subject to any order or written
directive to meet and maintain a specific capital level. An "adequately
capitalized" bank is defined as one that has a total risk-based capital ratio of
8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, has a
leverage ratio of 4% or greater (or 3% or greater in the case of a bank with the
highest composite regulatory examination rating that is not experiencing or
anticipating significant growth) and does not meet the definition of a well
capitalized bank. A bank would be considered "undercapitalized" if it has a
total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital
ratio of less than 4% or a leverage ratio of less than 4% (or 3% in the case of
a bank with the highest composite regulatory examination rating that is not
experiencing or anticipating significant growth); "significantly
undercapitalized" if the bank has a total risk-based capital ratio of less than
6%, a Tier 1 risk-based capital ratio of less than 3% or a leverage ratio of
less than 3%; and "critically undercapitalized" if the bank has a ratio of
tangible equity to total assets of equal to or less than 2%. The appropriate
federal banking regulator may downgrade a bank to the next lower category if the
regulator determines after notice and opportunity for hearing or response, that
the bank is in an unsafe or unsound
6
condition or that the bank has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam.
As of December 31, 1997, the Banks qualified as "well capitalized." The
Kentucky Bank had total risk-based capital ratio of 10.94%, Tier 1 risk-based
capital ratio of 9.60% and leverage ratio of 7.70%. The Indiana Bank had total
risk-based capital ratio of 30.14%, Tier 1 risk-based capital ratio of 30.08%
and leverage ratio of 12.33%.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include a prohibition on capital distributions by the institution
if, after making the distribution, it would be undercapitalized; prohibition on
payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching or new lines of business; requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; requiring the holding
company to divest the institution or other non-banking subsidiaries; prohibiting
the holding company from making any distributions without FRB approval;
prohibiting the payment of principal or interest on subordinated debt; and,
ultimately, appointing a receiver for the institution.
ITEM 2. PROPERTIES
The principal offices of Bancorp and the Kentucky Bank are located at 1040
East Main Street, Louisville, Kentucky, in a two story building containing
approximately 28,000 square feet. Adjacent to the main location there are also a
drive-through facility, an operations center containing approximately 40,000
square feet, a garage of approximately 5,000 square feet, and parking for
approximately 100 customers and employees. The Kentucky Bank also owns land and
buildings at 4016 Poplar Level Road, 4537 Outer Loop and 2811 Hurstbourne
parkway which are used as branch facilities. The Indiana Bank's main office
contains approximately 1,500 square feet and is located at 275 Highway 31 North,
Austin, Indiana. Properties owned by the Banks are not presently encumbered.
At December 31, 1997, the Kentucky Bank leased the following branch
facilities in Louisville, Kentucky:
South Fifth Street--approximately 10,000 square feet;
Lexington Road--approximately 6,000 square feet;
Shelbyville Road--approximately 3,000 square feet;
Dixie Highway--approximately 7,200 square feet with 3,600 feet
sub-leased.
At December 31, 1997, the Indiana Bank leased the following branch facility
in Clarksville, Indiana:
Highway 131--approximately 5,500 square feet.
See Notes 6 and 16 to Bancorp's consolidated financial statements for the
year ended December 31, 1997, for additional information relating to amounts
invested in premises, equipment and lease commitments.
ITEM 3. LEGAL PROCEEDINGS
See Note 16 to Bancorp's consolidated financial statements for the year
ended December 31, 1997, for information relating to legal proceedings.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, and ages (as of December 31, 1997) of
all current executive officers of Bancorp and all persons who it is anticipated
will be chosen as executive officers at the organization meeting of Bancorp's
Board of Directors following the 1998 Annual Meeting of Shareholders of Bancorp
to be held on April 22, 1998. 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 POSITION AND OFFICES
EXECUTIVE OFFICER WITH BANCORP
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David H. Brooks Chairman and Chief Executive Officer and Director
Age 55
David P. Heintzman President and Director
Age 38
Kathy C. Thompson Executive Vice President, Secretary and Director
Age 36
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 Banks to Bancorp is subject to the restriction described in
note 15 to the consolidated financial statements. On December 31, 1997, Bancorp
had 768 shareholders of record. The information below has been adjusted to
reflect the August, 1996 2-for-1 stock split.
1997 1996
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CASH CASH
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW DECLARED HIGH LOW DECLARED
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
First......................... $ 34.25 $ 29.50 $ .12 $ 25.50 $ 21.25 $ .10
Second........................ 38.00 31.00 .12 28.75 25.00 .10
Third......................... 43.75 36.00 .12 34.50 24.63 .10
Fourth........................ 50.50 39.75 .12 34.50 27.25 .10
8
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31
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1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Net interest income....................................... $ 19,723 $ 16,538 $ 14,609 $ 12,338 $ 9,811
Provision for loan losses................................. 1,000 800 1,260 1,000 820
Net income................................................ 6,534 5,179 4,056 3,101 2,515
PER SHARE DATA
Net income, basic......................................... $ 1.99 $ 1.58 $ 1.25 $ .96 $ .78
Net income, diluted....................................... 1.92 1.54 1.22 .94 .77
Cash dividends declared................................... .48 .40 .36 .29 .21
AVERAGES
Stockholders' equity...................................... $ 34,174 $ 29,675 $ 25,964 $ 23,320 $ 21,011
Assets.................................................... 437,037 352,977 295,892 253,139 236,015
Long-term debt............................................ 2,259 1,171 607 617 617
RATIOS
Average stockholders' equity to average assets............ 7.82% 8.41% 8.77% 9.21% 8.90%
Return on average stockholders' equity.................... 19.12 17.45 15.62 13.30 11.97
Return on average assets.................................. 1.50 1.47 1.37 1.23 1.07
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 subsidiaries, Stock Yards Bank &
Trust Company, a Kentucky Bank, and Stock Yards Bank & Trust Company, an Indiana
Bank (the Banks). This discussion should be read in conjunction with Bancorp's
consolidated financial statements and accompanying notes and other schedules
presented elsewhere in this report.
ACQUISITION
In October, 1996, Bancorp completed the acquisition of the Indiana Bank.
Bancorp purchased 100% of the common stock of the Indiana Bank for a total
purchase price of $2,803,000 including acquisition costs of $128,000. The
acquisition was accounted for as a purchase. Results of operations of the
Indiana Bank subsequent to the acquisition date are included in the consolidated
statements of income, changes in stockholders' equity and cash flows.
Goodwill related to the acquisition of $1,041,000 is being amortized over
fifteen years. Amortization of goodwill decreased net income by $69,000 in 1997
and $12,000 in 1996. Goodwill is expected to decrease net income by $69,000 per
year for the remainder of the amortization period.
Management's primary intent in this acquisition was to be able to establish
banking operations in southern Indiana. Clarksville, Jeffersonville and New
Albany are a natural part of Bancorp's market. The Indiana Bank established a
branch in Clarksville during 1997.
RESULTS OF OPERATIONS
Net income was $6,534,000 or $1.92 per share on a diluted basis in 1997.
This compares to $5,179,000 or $1.54 per share and $4,056,000 or $1.22 per share
in 1996 and 1995, respectively. The increase in 1997
9
earnings was attributable to several factors, the most notable of which were net
interest income and non-interest income growth. Earnings include a 18.9%
increase in fully taxable equivalent net interest income and a 32.6% increase in
non-interest income. All components of non-interest income increased. Partially
offsetting the overall income increases were increases in non-interest expenses
of 22.1%. Non-interest expenses increased in all categories. These increases are
primarily related to continued expansion of Bancorp's 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.
Net interest income was $19,899,000, $16,732,000 and $14,783,000 for 1997,
1996 and 1995, respectively. This represents a 18.9% increase for 1997 over 1996
and a 13.2% increase for 1996 over 1995. These improvements in net interest
income resulted from an increase in average earning assets offset by a slight
decline in net interest spread. Average earning assets increased $75,737,000 to
$407,089,000 in 1997 and increased $53,885,000 to $331,352,000 in 1996.
Net interest spread and net interest margin were 4.06% and 4.89%,
respectively, in 1997 and 4.16% and 5.05%, respectively in 1996. The Banks'
prime lending rate was 8.50% and 8.25% at December 31, 1997 and 1996,
respectively. It did not change during 1997. Average rates earned on earning
assets decreased 13 basis points, and average rates paid on interest bearing
liabilities decreased 3 basis points when comparing 1997 to 1996.
10
The following table provides information about Bancorp's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For loans, securities and liabilities with
contractual maturities, the table presents principal cash flows and weighted
average interest rates as well as Bancorp's experience of the impact of interest
rate fluctuations on the prepayment of mortgage-backed securities. For deposits
that have no contractual maturity (non interest bearing checking, interest
bearing checking and savings), 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 caps and floors, the
table presents notional amounts. Notional amounts are used to calculate the
contractual payments to be exchanged under the contracts.
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
LOANS
Fixed rate.......... $ 45,374 $ 35,235 $ 35,733 $ 39,668 $ 47,354 $ 25,496 $ 228,860 $ 229,304
Average interest
rate.............. 9.24% 8.93% 9.16% 8.86% 8.85% 8.12% 8.89%
Variable rate....... $ 51,292 $ 12,420 $ 5,561 $ 6,424 $ 9,507 $ 56,229 $ 141,433 $ 141,433
Average interest
rate.............. 9.21% 9.00% 9.28% 9.15% 8.97% 9.13% 9.15%
SECURITIES
Fixed rate.......... $ 7,920 $ 9,045 $ 9,817 $ 8,416 $ 9,400 $ 15,516 $ 60,114 $ 60,424
Average interest
rate.............. 5.96% 5.99% 6.12% 6.20% 5.90% 6.37% 6.12%
Federal funds sold
(variable rate)... $ 6,000 -- -- -- -- -- $ 6,000 $ 6,000
Average interest
rate.............. 5.50% -- -- -- -- -- 5.50%
DEPOSITS
Non-interest bearing
checking.......... $ 10,815 $ 10,815 $ 10,815 $ 10,815 $ 10,815 $ 18,028 $ 72,103 $ 72,103
Average interest
rate.............. -- -- -- -- -- -- --
Savings and interest
bearing checking $ 18,975 $ 18,975 $ 18,975 $ 18,975 $ 18,975 $ 31,623 $ 126,498 $ 126,498
Average interest
rate.............. 2.82% 2.82% 2.82% 2.82% 2.82% 2.82% 2.82%
Time deposits (fixed
rate)............. $ 153,349 $ 49,150 $ 8,684 $ 4,637 $ 2,023 $ 1,127 $ 218,970 $ 220,047
Average interest
rate.............. 5.54% 5.91% 6.56% 5.74% 5.82% 6.33% 5.68%
Other short-term
borrowings
(variable rate)... $ 4,483 -- -- -- -- -- $ 4,483 $ 4,483
Average interest
rate.............. 5.30% -- -- -- -- -- 5.30%
Federal funds
purchased and
securities sold
under agreements
to repurchase
(variable rate)... $ 13,684 -- -- -- -- -- $ 13,684 $ 13,684
Average interest
rate.............. 5.42% -- -- -- -- -- 5.42%
Long-term debt
(variable rate)... $ 1,800 -- -- -- -- $ 315 $ 2,115 $ 2,115
Average interest
rate.............. 7.59% -- -- -- -- 7.25% 7.54%
DERIVATIVE FINANCIAL
INSTRUMENTS
Interest rate cap
sold.............. -- $ 50,000 -- -- -- -- $ 50,000 --
Strike rate......... -- 9.00% -- -- -- -- 9.00%
Interest rate floor
purchased......... -- $ 50,000 -- -- -- -- $ 50,000 --
Strike rate......... -- 8.00% -- -- -- -- 8.00%
As interest rates change in the market, rates earned on assets do not
necessarily move identically with rates paid on liabilities. Proper asset and
liability management involves the matching of interest sensitive assets and
liabilities to reduce interest rate risk. The Banks manage interest rate risk by
adjusting the mix of fixed rate loans and securities against longer term fixed
rate time deposits.
11
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 1997 and 1996 was impacted by volume increases and the
lower average interest rate environment. The tax equivalent adjustments are
based on a 34% 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
1997/1996 1996/1995
------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
NET -------------------- NET --------------------
CHANGE RATE VOLUME CHANGE RATE VOLUME
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
INTEREST INCOME
Loans.................................................... $ 5,212 $ 4 $ 5,208 $ 3,291 $ (752) $ 4,043
Federal funds sold....................................... 180 (3) 183 (35) (48) 13
Mortgage loans held for sale............................. (144) (18) (126) 205 (5) 210
Securities
U.S. Treasury and federal agencies..................... 930 (165) 1,095 312 (74) 386
States and political subdivisions...................... 5 (84) 89 131 (10) 141
--------- --------- --------- --------- --------- ---------
TOTAL INTEREST INCOME.................................... 6,183 (266) 6,449 3,904 (889) 4,793
--------- --------- --------- --------- --------- ---------
INTEREST EXPENSE
Deposits
Interest bearing demand deposits....................... 576 141 435 43 (113) 156
Savings deposits....................................... 71 (33) 104 162 (31) 193
Money market deposits.................................. (59) (27) (32) (162) (144) (18)
Time deposits.......................................... 2,238 (179) 2,417 1,960 37 1,923
Securities sold under agreements to repurchase and
federal funds purchased................................ 78 8 70 (56) (50) (6)
Other short-term borrowings.............................. 31 (5) 36 (33) (21) (12)
Long-term debt........................................... 81 1 80 41 -- 41
--------- --------- --------- --------- --------- ---------
TOTAL INTEREST EXPENSE................................... 3,016 (94) 3,110 1,955 (322) 2,277
--------- --------- --------- --------- --------- ---------
NET INTEREST INCOME...................................... $ 3,167 $ (172) $ 3,339 $ 1,949 $ (567) $ 2,516
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
PROVISION FOR LOAN LOSSES
In determining the provision for loan losses charged to expense, management
carefully 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. Responding to these factors, management provided $1,000,000 in 1997.
The provision for loan losses was $800,000 in 1996 and $1,260,000 in 1995. At
December 31, 1997, the allowance for loan losses was 1.60% of year-end loans
compared to 1.71% at December 31, 1996. Charge-off history has been well below
industry averages, and management's evaluations indicated a provision of
$1,000,000 to be sufficient to maintain the allowance for loan losses at an
adequate level.
The Banks' loan portfolios continue to be 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
12
balance of the allowance for loan losses at December 31, 1997, is adequate to
absorb anticipated losses in the loan portfolio as of this date.
NON-INTEREST INCOME AND EXPENSES
Non-interest income increased by 32.6% in 1997 as compared to 1996, and
23.8% in 1996 as compared to 1995.
The largest component of non-interest income is investment management and
trust fee income which increased 38.8% in 1997, 15.1% in 1996 and 38.6% in 1995.
The investment management and trust department has established a reputation of
personalized service and superior investment returns. Assets under management,
through customer retention and attraction of new business, grew to $632 million
as of December 31, 1997 as compared to $470 million as of December 31, 1996.
Growth in the department's assets include both personal and employee benefit
accounts. Furthermore, the department assumed responsibility for managing the
Banks' securities portfolio during 1996. The assets under management reported
above include $60 million of the Banks' investment securities as of December 31,
1997 and $46 million as of December 31, 1996.
Service charges on deposit accounts increased 24.8% over 1996. Growth in
deposit accounts, arising primarily from new banking locations, presented
opportunities for increased fee income in this area. Rates for some deposit
services were raised in the third quarter of 1996; however, the vast majority of
the increase is due to account volume.
The Kentucky Bank operates a mortgage banking company. This department
originates residential mortgage loans and sells the loans in the secondary
market. The department 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. Gains
on sales of mortgage loans were $1,077,000 in 1997 as compared to $1,016,000 and
$736,000 in 1996 and 1995, respectively. Interest rates on conventional mortgage
loans directly impact the volume of business transacted by the mortgage banking
department. Falling rates in 1995 stimulated the volume of loans originated.
With relatively stable interest rates during 1996 and 1997, growth in those
years has been due more to the mortgage company's expanding reputation. Profit
margins in the mortgage banking industry have been shrinking over the last two
to three years making increasing volumes a focus. Also the mortgage company
helps support the corporate philosophy of capitalizing on relationships rather
than single transactions.
Other non-interest income increased in 1997 as compared to 1996 by $403,000
or 67.5% and $137,000 or 29.8% in 1996 compared to 1995. The increases are due
to several contributing factors, the largest of which is the addition of a
brokerage services department during 1996. Brokerage services fees totaled
$226,000 and $65,000 in 1997 and 1996, respectively. Through an account
executive with Robert Thomas Securities, Inc., bank customers have convenient
access to a full service brokerage company. Products available include stocks,
government and corporate bonds, annuities, mutual funds and insurance. Services
include asset management and investment advice. Having these products and
services readily available enables customers to find solutions to most all of
their financial needs in one location.
Total non-interest expenses increased 22.1% in 1997 over 1996, and 15.1% in
1996 over 1995.
Salaries and employee benefits, the largest non-interest expense category,
increased 24.9% in 1997 and 17.7% in 1996. These increases occurred primarily
from regular salary increases and new employees added to support expansion. As
of December 31, 1997, the Banks had 250 full time equivalent employees (FTEs).
As of December 31, 1996, that total was 220 FTEs. Additionally, a performance
incentive program is in place, and increasing earnings have qualified certain
bank employees for incentive compensation. Further, as salary expense increases,
so do corresponding employee benefit expenses. It should be noted there are no
significant obligations for post-retirement or post-employment benefits.
13
Net occupancy expense increased 16.4% in 1997 and 6.5% in 1996. Occupancy
expenses have increased as Bancorp has continued its expansion plans. In 1997,
the Kentucky Bank and Indiana Bank each completed the construction of and opened
one banking center. The Kentucky Bank has nine banking center locations
including the main office. All are in the Louisville area. The Indiana Bank has
two locations. Furniture and equipment expense increased 13.6% in 1997 compared
to 1996 and 22.4% in 1996 compared to 1995. Investments in computer technology
have resulted in significant increases over the last several years.
Other non-interest expenses increased 20.6% in 1997 and 9.2% in 1996. The
increase in both years largely related to Bancorp's expansion. Among costs which
increased significantly were delivery, communication and supplies. Management
continues to identify cost containment opportunities where expense reductions
can be made without sacrificing the level of service to customers.
INCOME TAXES
Bancorp had income tax expense of $2,873,000 in 1997 compared to $2,442,000
in 1996 and $1,900,000 in 1995. The effective rates were 30.5%, 32.0% and 31.9%,
respectively. With a statutory tax rate of 34.0%, the effective rates reflect
tax exempt interest income.
FINANCIAL CONDITION
EARNING ASSETS AND INTEREST BEARING LIABILITIES
Total consolidated assets of Bancorp at December 31, 1997 increased 15.2%
over December 31, 1996 to $478,597,000. Average assets for 1997 increased 23.8%
over 1996 to $437,037,000. During 1997, Bancorp increased its net average
earning assets to $72,082,000 from $62,693,000 during 1996.
The growth of average earning assets occurred primarily in the area of
loans. Loan demand continued to increase during 1997. Commercial and industrial
loans increased 14.3%. Construction and development loans decreased 4.6%. Real
estate mortgage loans increased 30.8%. Consumer loans increased 24.3%.
Regarding derivative financial instruments as defined by SFAS No. 119,
"Disclosures About Derivative Financial Instruments and Fair Value of Financial
Instruments," at December 31, 1997 the Kentucky Bank held an interest rate
collar contract as described in the maturity table under the heading "Net
Interest Income." In addition, the Kentucky Bank has, in its portfolio of
securities, FHLMC and FNMA issued collateralized mortgage obligations (CMOs)
with a carrying value of approximately $16,826,000. Management monitors these
securities on an ongoing basis and has determined these not to be high risk.
With respect to the total portfolio of securities held to maturity, market value
exceeded amortized cost at December 31, 1997 by 1.1%. At December 31, 1996,
amortized cost exceeded market value by .4%.
Growth of average interest bearing liabilities occurred in all categories
other than money market deposit accounts. With lower interest rates over the
last three years, some depositors have chosen to shift money market funds to
time deposit accounts. Average time deposits increased 28% in 1997 from the 1996
average. Interest bearing demand deposits increased 55% and savings accounts
averaged 15% higher in 1997 as compared to 1996. Overall, average interest
bearing deposits increased 25% in 1997. Average balances of securities sold
under agreements to repurchase decreased slightly in 1996. 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 then
used to purchase securities sold under agreements to repurchase. Of the total
securities sold under agreements to repurchase and federal funds purchased
caption, the 1997 average balance for federal funds purchased was $1,927,000.
14
AVERAGE BALANCES AND INTEREST RATES--TAXABLE EQUIVALENT BASIS
YEAR 1997 YEAR 1996 YEAR 1995
--------------------------------- --------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCES INTEREST RATE BALANCES INTEREST RATE BALANCES INTEREST RATE
--------- --------- ----------- --------- --------- ----------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
EARNING ASSETS
Federal funds sold......... $ 11,131 $ 622 5.59% $ 7,851 $ 442 5.63% $ 7,635 $ 477 6.25%
Mortgage loans held for
sale..................... 4,181 309 7.39 5,883 453 7.70 3,158 248 7.85
Securities
U.S. Treasury and federal
agencies............... 53,567 3,492 6.52 36,901 2,562 6.94 31,294 2,250 7.12
States and political
subdivisions........... 9,048 551 6.09 7,686 546 7.10 5,706 415 7.27
Loans, net of unearned
income................... 329,162 30,541 9.28 273,031 25,329 9.28 229,674 22,038 9.60
--------- --------- --- --------- --------- --- --------- --------- ---
TOTAL EARNING ASSETS....... 407,089 35,515 8.72 331,352 29,332 8.85 277,467 25,428 9.16
--------- --- --------- --- --------- ---
Less allowance for loan
losses................... 5,530 4,807 4,115
--------- --------- ---------
401,559 326,545 273,352
NON-EARNING ASSETS
Cash and due from banks.... 15,899 11,120 10,721
Premises and equipment..... 12,051 8,529 5,672
Accrued interest receivable
and other assets......... 7,528 6,783 6,147
--------- --------- ---------
TOTAL ASSETS............... $ 437,037 $ 352,977 $ 295,892
--------- --------- ---------
--------- --------- ---------
INTEREST BEARING
LIABILITIES
Deposits
Interest bearing demand
deposits............... $ 50,137 $ 1,268 2.53% $ 32,259 $ 692 2.15% $ 25,471 $ 649 2.55%
Savings deposits......... 23,352 774 3.31 20,251 703 3.47 14,733 541 3.67
Money market deposits.... 47,138 1,612 3.42 48,059 1,671 3.48 48,540 1,833 3.78
Time deposits............ 195,209 10,953 5.61 152,191 8,715 5.73 118,611 6,755 5.70
Securities sold under
agreements to repurchase
and federal funds
purchased................ 14,408 729 5.06 13,023 651 5.00 13,128 707 5.39
Other short-term
borrowings............... 2,504 113 4.51 1,705 82 4.81 1,914 115 6.01
Long-term debt............. 2,259 167 7.39 1,171 86 7.34 607 45 7.41
--------- --------- --- --------- --------- --- --------- --------- ---
TOTAL INTEREST BEARING
LIABILITIES.............. 335,007 15,616 4.66 268,659 12,600 4.69 223,004 10,645 4.77
--------- --- --------- --- --------- ---
NON-INTEREST BEARING
LIABILITIES
Non-interest bearing demand
deposits................. 63,857 51,780 44,340
Accrued interest payable
and other liabilities.... 3,999 2,863 2,584
--------- --------- ---------
TOTAL LIABILITIES.......... 402,863 323,302 269,928
STOCKHOLDERS' EQUITY....... 34,174 29,675 25,964
--------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..... $ 437,037 $ 352,977 $ 295,892
--------- --------- ---------
--------- --------- ---------
NET INTEREST INCOME........ $ 19,899 $ 16,732 $ 14,783
--------- --------- ---------
--------- --------- ---------
NET INTEREST SPREAD........ 4.06% 4.16% 4.39%
--- --- ---
--- --- ---
NET INTEREST MARGIN........ 4.89% 5.05% 5.31%
--- --- ---
--- --- ---
15
SECURITIES
The 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:
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and federal agency obligations............... $ 31,244 $ 19,276 $ 14,399
Mortgage-backed securities................................. -- -- 1,146
Obligations of states and political subdivisions........... 218 165 --
--------- --------- ---------
$ 31,462 $ 19,441 $ 15,545
--------- --------- ---------
--------- --------- ---------
SECURITIES HELD TO MATURITY
U.S. Treasury and federal agency obligations............... $ 3,864 $ 30,100 $ 9,079
Mortgage-backed securities................................. 16,826 18,361 10,046
Obligations of states and political subdivisions........... 7,962 7,618 7,585
--------- --------- ---------
$ 28,652 $ 56,079 $ 26,710
--------- --------- ---------
--------- --------- ---------
The maturity distribution and weighted average interest rates of securities
at December 31, 1997, are as follows:
AFTER ONE BUT AFTER FIVE
WITHIN ONE WITHIN FIVE BUT WITHIN AFTER TEN
YEAR YEARS TEN YEARS YEARS
------------- ------------- ------------- -------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ---- ------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE
FOR SALE
U.S. Treasury and
federal agency
obligations..... $4,269 5.77% $18,422 5.94% $8,553 6.35% $ -- --%
Obligations of
states and
political
subdivisions.... 95 4.50 -- -- 123 4.80 -- --
------- ---- ------- ---- ------- ---- ------- ----
$4,364 5.75% $18,422 5.94% $8,676 6.33% $ -- --%
------- ---- ------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ---- ------- ----
SECURITIES HELD TO
MATURITY
U.S. Treasury and
federal agency
obligations..... $1,839 5.85% $ 2,025 7.13% $ -- --% $ -- --%
Mortgage-backed
securities...... 1,313 6.88 9,818 6.45 4,088 6.49 1,607 6.57
Obligations of
states and
political
subdivisions.... 405 5.70 6,412 5.40 1,145 5.92 -- --
------- ---- ------- ---- ------- ---- ------- ----
$3,557 6.21% $18,255 6.16% $5,233 6.37% $1,607 6.57%
------- ---- ------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ---- ------- ----
16
LOAN PORTFOLIO
Bancorp's primary source of income is interest on loans. The following table
presents the composition of loans at December 31 of the years indicated.
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial and industrial.................. $ 101,030 $ 88,352 $ 81,325 $ 79,397 $ 73,953
Construction and development............... 21,481 22,518 15,327 8,144 7,431
Real estate mortgage....................... 217,830 166,574 137,618 105,207 91,736
Consumer................................... 29,952 24,104 18,667 14,664 14,943
---------- ---------- ---------- ---------- ----------
$ 370,293 $ 301,548 $ 252,937 $ 207,412 $ 188,063
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
The following tables show the amounts of commercial and industrial loans,
and construction and development loans, at December 31, 1997, 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 AFTER
WITHIN ONE BUT WITHIN FIVE
YEAR FIVE YEARS YEARS TOTAL
----------- ------------ --------- ----------
(IN THOUSANDS)
Commercial and industrial................... $ 27,358 $ 44,823 $ 28,849 $ 101,030
Construction and development................ 21,481 -- -- 21,481
----------- ------------ --------- ----------
----------- ------------ --------- ----------
INTEREST SENSITIVITY
--------------------
FIXED VARIABLE
RATE RATE
--------- ---------
(IN THOUSANDS)
Due after one but within five years..................................... $ 32,579 $ 12,244
Due after five years.................................................... 5,564 23,285
--------- ---------
$ 38,143 $ 35,529
--------- ---------
--------- ---------
NONPERFORMING LOANS AND ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming loans, which include nonaccrual loans and restructured loans,
totaled $290,000 and $854,000 at December 31, 1997 and 1996, respectively. The
threshold at which loans are generally transferred to nonaccrual of interest
status is 90 days past due, and at December 31, 1997, there were no accruing
loans which were past due over 90 days which were not well secured and in the
process of collection. Nonperforming loans represent .08% of total loans at year
end 1997 compared to .28% in 1996.
Nonperforming assets include nonperforming loans, other real estate and
repossessed assets. At December 31, 1997 and 1996, nonperforming assets totaled
$290,000 and $1,129,000, respectively. This represents .06% of total assets at
year end 1997 compared to .27% in 1996.
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
$5,275,000 are monitored by management and considered in determining the level
of the allowance for loan losses. Management feels these loans present no
significant loss exposure. The allowance for loan losses is discussed in detail
under the heading "Provision for Loan Losses."
17
The following table summarizes impaired loans (1997, 1996 and 1995),
nonaccrual, restructured and past due loans. Loans are placed in a nonaccrual
income status when, in the opinion of management, the prospects for recovering
both principal and accrued interest are considered doubtful.
DECEMBER 31
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Nonaccrual loans..................................... $ 290 $ 854 $ 1,212 $ 367 $ 158
Restructured loans................................... -- -- 61 159
--------- --------- --------- --------- ---------
$ 290 $ 854 $ 1,212 $ 428 $ 317
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interest income recorded on nonaccrual loans (cash basis) for 1997 totaled
$2,000. Interest income that would have been recorded if nonaccrual loans were
on a current basis in accordance with their original terms was $25,300.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses has been established to provide for loans which
may not be repaid in entirety. 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 by management at a level considered adequate to
cover losses that are currently anticipated. Factors considered include past
loss experience, general economic conditions, and information about specific
borrower situations including financial position and collateral values.
Estimating the risk of loss and amount of 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 to management and 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 any losses on existing loans that may become uncollectible.
See "Results of Operations--Provision for Loan Losses."
18
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
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Average loans, net of unearned income.... $ 329,162 $ 273,031 $ 229,674 $ 190,409 $ 177,629
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Balance of allowance for loan losses at
beginning of year...................... $ 5,155 $ 4,507 $ 3,649 $ 2,752 $ 2,179
Loans charged off
Commercial and industrial.............. 75 107 435 111 82
Real estate mortgage................... 26 45 13 9 171
Consumer............................... 183 112 82 64 74
------------ ------------ ------------ ------------ ------------
Total loans charged off.............. 284 264 530 184 327
------------ ------------ ------------ ------------ ------------
Recoveries of loans previously charged
off
Commercial and industrial.............. 3 27 95 16 20
Real estate mortgage................... 9 16 13 36 12
Consumer............................... 38 47 20 29 48
------------ ------------ ------------ ------------ ------------
Total recoveries..................... 50 90 128 81 80
------------ ------------ ------------ ------------ ------------
Net loans charged off.................... 234 174 402 103 247
Additions to allowance charged to
expense................................ 1,000 800 1,260 1,000 820
Balance of allowance of acquired bank at
date of acquisition.................... -- 22 -- -- --
------------ ------------ ------------ ------------ ------------
Balance at end of year................... $ 5,921 $ 5,155 $ 4,507 $ 3,649 $ 2,752
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Ratio of net charge-offs during year to
average loans net of unearned income... .07% .06% .18% .05% .14%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
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 future losses in any particular loan
category.
DECEMBER 31
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Commercial and industrial.................... $ 2,337 $ 1,913 $ 2,227 $ 1,679 $ 1,028
Construction and development................. 201 241 108 67 64
Real estate mortgage......................... 2,034 1,775 964 866 782
Consumer..................................... 163 253 148 180 237
Unallocated.................................. 1,186 973 1,060 857 641
--------- --------- --------- --------- ---------
$ 5,921 $ 5,155 $ 4,507 $ 3,649 $ 2,752
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
19
The ratio of loans in each category to total outstanding loans is as
follows:
DECEMBER 31
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Commercial and industrial............... 27.3% 29.3% 32.1% 38.3% 39.3%
Construction and development............ 5.8 7.5 6.1 3.9 4.0
Real estate mortgage.................... 58.8 55.2 54.4 50.7 48.8
Consumer................................ 8.1 8.0 7.4 7.1 7.9
----- ----- ----- ----- -----
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
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Provision for loan losses to average loans .30% .29% .55%
Net charge-offs to average loans.............................. .07% .06% .18%
Allowance for loan losses to average loans.................... 1.80% 1.89% 1.96%
Allowance for loan losses to year end loans................... 1.60% 1.71% 1.78%
Loan loss coverage............................................ 44.47X 39.34X 17.95X
DEPOSITS AND BORROWED FUNDS
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 borrowing money
from the least costly sources and adjusting rates offered to depositors, Bancorp
is able to influence the amounts of deposits and borrowed funds 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
-------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Non-interest bearing demand deposits........ $ 63,857 --% $ 51,780 --% $ 44,340 --%
Interest bearing demand deposits............ 50,137 2.53 32,259 2.15 25,471 2.55
Savings deposits............................ 23,352 3.31 20,251 3.47 14,733 3.67
Money market deposits....................... 47,138 3.42 48,059 3.48 48,540 3.78
Time deposits............................... 195,209 5.61 152,191 5.73 118,611 5.70
---------- ----- ---------- ----- ---------- -----
----- ---------- ----- ---------- -----
$ 379,693 $ 304,540 $ 251,695
---------- ---------- ----------
---------- ---------- ----------
20
Maturities of time deposits of $100,000 or more outstanding at December 31,
1997, are summarized as follows:
AMOUNT
--------------
(IN THOUSANDS)
3 months or less.............................................................. $ 10,195
Over 3 through 6 months....................................................... 8,738
Over 6 through 12 months...................................................... 26,340
Over 12 months................................................................ 13,319
-------
$ 58,592
-------
-------
SHORT-TERM BORROWINGS
Federal funds purchased represent overnight borrowings. Repurchase
agreements have maturities of less than one month.
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
Securities sold under agreements to repurchase
Year end balance................................ $ 11,684 5.15% $ 12,228 4.88% $ 12,349 5.14%
Average during year............................. 12,481 4.95 12,437 4.98 13,128 5.39
Maximum month end balance during year........... 12,265 13,289 15,024
LIQUIDITY
The role of liquidity 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 Banks, 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 Indiana Bank
has begun to build market share in southern Indiana with the opening of the
Clarksville branch in 1997.
The Banks have a number of sources of funds to meet liquidity needs on a
daily basis. An increase in loans affects liquidity as the repayment of
principal and interest are a daily source of funds. The deposit base, consisting
of consumer and commercial deposits and large dollar denomination ($100,000 and
over) certificates of deposit, is another source of funds. The majority of these
deposits are from long-term customers and are a stable source of funds. The
Banks have no brokered deposits, and have 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.
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
Kentucky Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB). As
a member of the FHLB, the Bank has access to credit products of the FHLB. To
date, the
21
Bank has not needed to access this source of funds. Additionally, the Kentucky
Bank has an available line of credit and federal funds purchased lines with
correspondent banks.
Bancorp's liquidity depends primarily on the dividends paid to it as the
sole shareholder of the Banks. As discussed in note 15 to Bancorp's consolidated
financial statements, the Banks may pay up to $8,432,000 in dividends to Bancorp
without regulatory approval.
CAPITAL
At December 31, 1997, stockholders' equity totaled $36,917,000, an increase
of $5,323,000 or 16.8% over 1996. This increase was due to the strong earnings
of 1997 coupled with a philosophy to retain approximately 70% to 80% of earnings
in equity. Cash dividends declared were $.48 per share in 1997 and $.40 per
share in 1996.
In August, 1996, the Board of Directors declared a 2-for-1 stock split to be
effected in the form of a 100% stock dividend. The new shares were distributed
in September 1996. In September 1994 and 1993, the Board of Directors declared
10% stock dividends which were distributed in November, 1994 and 1993,
respectively. These capital changes were made to enhance shareholder value by
increasing the shares of Bancorp's stock outstanding and to adjust the market
price of the stock. Per share information has been restated to reflect the stock
split and stock dividends.
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.
At December 31, 1997, Bancorp's tier 1 and total risk based capital ratios
were 9.7% and 11.0%, respectively. These ratios exceed the 4.0% tier 1 and 8.0%
total risk based capital minimums. A minimum leverage ratio, adopted by the
Federal Reserve Board to assist in the assessment of capital adequacy,
supplements the risk based capital requirements. The minimum leverage ratio is
3.0%; however, most bank holding companies are required to maintain a minimum in
excess of that amount. Bancorp's leverage ratio at December 31, 1997 was 7.6%.
Note 19 to the consolidated financial statements provides more details of
regulatory capital requirements as well as capital ratios of the Banks. Bancorp
and the Banks exceed regulatory capital ratios required to be well capitalized.
However, these ratios for Bancorp and the Kentucky Bank have decreased over the
last several years as assets have grown more quickly than equity. Management
considers the effects of growth on capital ratios as it contemplates plans for
expansion.
The following table presents various key financial ratios:
YEARS ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Return on average assets...................................... 1.50% 1.47% 1.37%
Return on average stockholders' equity........................ 19.12 17.45 15.62
Dividend pay out ratio, based on basic EPS.................... 24.12 25.32 28.80
Average stockholders' equity to average assets................ 7.82 8.41 8.77
ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN 1998
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Also, in June 1997, the Financial
Accounting Standards Board issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement requires reporting of
certain information about operating segments. Both statements are effective in
1998.
22
YEAR 2000
Bancorp has undertaken a company wide evaluation of the effects Year 2000
will have on its information system and other important aspects of its business.
Bancorp's program has five phases: awareness, assessment, renovation, validation
and implementation. The Year 2000 project has advanced to the last three phases
and should have Bancorp substantially Year 2000 compliant by mid 1999. The Year
2000 project coordinator and committee reports to the Board of Directors with
regard to the project plan and status. Costs to prepare for the Year 2000
include new hardware and software, internal staff costs and some consulting.
Because Bancorp has made recent large investments in upgrades of hardware and
software, management does not anticipate significant incremental information
systems costs related to the Year 2000. Bancorp recorded expense related to the
Year 2000 of $60,000 in 1997 and management anticipates incurring a similar
total for 1998. Management is addressing the matter of loan collectibility as it
relates to customers' accounting, manufacturing and other systems. Customers'
non compliance with Year 2000 issues could adversely affect their ability to
service their debt. Creditworthiness of customers will now include an evaluation
of their compliance with Year 2000 issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is included in item 7, "Managements
Discussion and Analysis of Financial Condition and Results of Operation" on
pages 9 and 10 of Form10-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, 1997 and 1996
Consolidated Statements of Income--years ended December 31, 1997, 1996, and
1995
Consolidated Statements of Changes in Stockholders' Equity--years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows--years ended December 31, 1997, 1996,
and 1995 Notes to Consolidated Financial Statements
Report of Independent Auditors
Management's Report on Consolidated Financial Statements
23
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks................................... $ 18,153 $ 15,348
Federal funds sold........................................ 6,000 4,500
Mortgage loans held for sale.............................. 5,183 4,362
Securities available for sale (amortized cost $31,019 in
1997 and $19,111 in 1996)............................... 31,462 19,441
Securities held to maturity (approximate market value
$28,962 in 1997 and $56,055 in 1996).................... 28,652 56,079
Loans..................................................... 370,293 301,548
Allowance for loan losses................................. 5,921 5,155
------------ ------------
Net loans................................................. 364,372 296,393
Premises and equipment.................................... 13,903 10,079
Accrued interest receivable............................... 2,970 2,299
Other assets.............................................. 7,902 6,864
------------ ------------
TOTAL ASSETS.............................................. $ 478,597 $ 415,365
------------ ------------
------------ ------------
LIABILITIES
Deposits
Non-interest bearing.................................... $ 72,103 $ 63,627
Interest bearing........................................ 345,468 291,624
------------ ------------
Total deposits............................................ 417,571 355,251
Securities sold under agreements to repurchase and federal
funds purchased......................................... 13,684 19,728
Other short-term borrowings............................... 4,483 2,668
Accrued interest payable and other liabilities............ 3,827 3,427
Long-term debt............................................ 2,115 2,697
------------ ------------
TOTAL LIABILITIES......................................... 441,680 383,771
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
issued and outstanding 3,281,971 in 1997 and 3,271,480
in 1996................................................. 5,486 5,451
Surplus................................................... 13,644 13,390
Retained earnings......................................... 17,495 12,535
Net unrealized gains on securities available for sale..... 292 218
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................................ 36,917 31,594
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $ 478,597 $ 415,365
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
INTEREST INCOME
Loans............................................................................ $ 30,523 $ 25,293 $ 21,988
Federal funds sold............................................................... 622 442 477
Mortgage loans held for sale..................................................... 309 453 248
U.S. Treasury and federal agencies............................................... 3,492 2,562 2,250
Obligations of states and political subdivisions................................. 393 388 291
--------- --------- ---------
TOTAL INTEREST INCOME............................................................ 35,339 29,138 25,254
--------- --------- ---------
INTEREST EXPENSE
Deposits......................................................................... 14,607 11,781 9,778
Securities sold under agreements to repurchase and federal funds purchased....... 729 651 707
Other short-term borrowings...................................................... 113 82 115
Long-term debt................................................................... 167 86 45
--------- --------- ---------
TOTAL INTEREST EXPENSE........................................................... 15,616 12,600 10,645
--------- --------- ---------
NET INTEREST INCOME.............................................................. 19,723 16,538 14,609
Provision for loan losses........................................................ 1,000 800 1,260
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.............................. 18,723 15,738 13,349
--------- --------- ---------
NON-INTEREST INCOME
Investment management and trust services......................................... 3,332 2,400 2,086
Service charges on deposit accounts.............................................. 1,936 1,551 1,241
Gains on sales of securities available for sale.................................. 80 35 --
Gains on sales of mortgage loans held for sale................................... 1,077 1,016 736
Other............................................................................ 1,000 597 460
--------- --------- ---------
TOTAL NON-INTEREST INCOME........................................................ 7,425 5,599 4,523
--------- --------- ---------
NON-INTEREST EXPENSES
Salaries and employee benefits................................................... 9,846 7,882 6,694
Net occupancy expense............................................................ 1,121 963 904
Furniture and fixtures expense................................................... 1,633 1,438 1,175
Other............................................................................ 4,141 3,433 3,143
--------- --------- ---------
TOTAL NON-INTEREST EXPENSES...................................................... 16,741 13,716 11,916
--------- --------- ---------
INCOME BEFORE INCOME TAXES....................................................... 9,407 7,621 5,956
Income tax expense............................................................... 2,873 2,442 1,900
--------- --------- ---------
NET INCOME....................................................................... $ 6,534 $ 5,179 $ 4,056
--------- --------- ---------
--------- --------- ---------
NET INCOME PER SHARE, BASIC...................................................... $ 1.99 $ 1.58 $ 1.25
--------- --------- ---------
--------- --------- ---------
NET INCOME PER SHARE, DILUTED.................................................... $ 1.92 $ 1.54 $ 1.22
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------
COMMON STOCK
--------------------- NET UNREALIZED GAINS
NUMBER OF RETAINED ON SECURITIES
SHARES AMOUNT SURPLUS EARNINGS AVAILABLE FOR SALE TOTAL
---------- --------- --------- --------- --------------------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance December 31, 1994............. 1,620,311 $ 5,400 $ 13,137 $ 5,777 $ 21 $ 24,335
Net income............................ -- -- -- 4,056 -- 4,056
Stock options exercised............... 7,023 23 108 -- -- 131
Cash dividends, $.36 per share........ -- -- -- (1,169) -- (1,169)
Change in net unrealized gains on
securities available for sale....... -- -- -- -- 261 261
---------- --------- --------- --------- ----- ---------
Balance December 31, 1995............. 1,627,334 5,423 13,245 8,664 282 27,614
Net income............................ -- -- -- 5,179 -- 5,179
Stock options exercised............... 8,431 28 145 -- -- 173
Cash dividends, $.40 per share........ -- -- -- (1,308) -- (1,308)
Shares issued for 2-for-1 stock
split............................... 1,635,715 -- -- -- -- --
Change in net unrealized gains on
securities available for sale....... -- -- -- -- (64) (64)
---------- --------- --------- --------- ----- ---------
Balance December 31, 1996............. 3,271,480 5,451 13,390 12,535 218 31,594
Net income............................ -- -- -- 6,534 -- 6,534
Stock options exercised............... 5,552 18 87 -- -- 105
Shares issued for dividend
reinvestment and employee stock
purchase plans...................... 4,939 17 167 -- -- 184
Cash dividends, $.48 per share........ -- -- -- (1,574) -- (1,574)
Change in net unrealized gains on
securities available for sale....... -- -- -- -- 74 74
---------- --------- --------- --------- ----- ---------
Balance December 31, 1997............. 3,281,971 $ 5,486 $ 13,644 $ 17,495 $ 292 $ 36,917
---------- --------- --------- --------- ----- ---------
---------- --------- --------- --------- ----- ---------
See accompanying notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................................... $ 6,534 $ 5,179 $ 4,056
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for loan losses................................................... 1,000 800 1,260
Depreciation, amortization and accretion, net............................... 1,360 1,097 819
Provision for deferred income taxes......................................... (286) (131) (247)
Gains on sales of securities available for sale............................. (80) (35) --
Gains on sales of mortgage loans held for sale.............................. (1,077) (1,016) (736)
Origination of mortgage loans held for sale................................. (58,009) (56,770) (43,922)
Proceeds from sales of mortgage loans held for sale......................... 58,265 57,334 42,783
(Increase) decrease in accrued interest receivable.......................... (671) (107) (370)
(Increase) decrease in other assets......................................... (1,032) (1,243) (694)
Increase (decrease) in accrued interest payable............................. (151) 23 415
Increase (decrease) in other liabilities.................................... 517 924 149
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... 6,370 6,055 3,513
---------- ---------- ----------
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold................................. (1,500) (2,000) 8,000
Purchases of securities available for sale.................................... (23,237) (10,031) --
Purchases of securities held to maturity...................................... (11,380) (44,878) (36,967)
Proceeds from sales of securities available for sale.......................... 4,026 7,018 --
Proceeds from maturities of securities available for sale..................... 6,604 3,032 4,034
Proceeds from maturities of securities held to maturity....................... 39,567 15,328 30,483
Net increase in loans......................................................... (68,979) (48,620) (46,065)
Purchases of premises and equipment........................................... (5,096) (4,154) (2,712)
Proceeds from sales of other real estate...................................... 172 221 --
Cash paid in acquisition, net of cash received................................ -- (414) --
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES......................................... (59,823) (84,498) (43,227)
---------- ---------- ----------
FINANCING ACTIVITIES
Net increase in deposits...................................................... 62,320 67,385 50,817
Net increase (decrease) in securities sold under agreements to repurchase and
federal funds purchased...................................................... (6,044) 7,379 (2,134)
Net increase (decrease) in short-term borrowings.............................. 1,815 1,923 (2,086)
Proceeds from long-term debt.................................................. 1,800 2,200 --
Repayments of long-term debt.................................................. (2,382) (110) --
Issuance of common stock...................................................... 257 91 99
Cash dividends paid........................................................... (1,508) (1,306) (1,103)
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................................... 56,258 77,562 45,593
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 2,805 (881) 5,879
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 15,348 16,229 10,350
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................................... $ 18,153 $ 15,348 $ 16,229
---------- ---------- ----------
---------- ---------- ----------
Income tax payments were $3,256,000 in 1997, $2,482,000 in 1996 and $2,266,000
in 1995. Cash paid for interest was $15,767,000 in 1997, $12,577,000 in 1996,
and $10,230,000 in 1995. See accompanying notes to consolidated financial
statements.
27
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION, NATURE OF OPERATIONS AND USE OF ESTIMATES IN THE
FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of S.Y. Bancorp,
Inc. (Bancorp) and its wholly-owned subsidiaries, Stock Yards Bank & Trust
Company, a Kentucky Bank and Stock Yards Bank & Trust Company, an Indiana Bank
(the Banks). Significant intercompany transactions and accounts have been
eliminated in consolidation. The Banks engage in commercial and retail banking
services, trust and investment management services, and mortgage banking
services. The Kentucky Bank's offices are located throughout Louisville and
Jefferson County, Kentucky. The Indiana Bank has two offices in southern
Indiana. Bancorp's market area is Louisville and surrounding communities
including southern Indiana.
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, Bancorp considers cash and due from
banks to be cash equivalents.
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